Hardship provides would-be dictators with fodder
JOSEPH STIGLITZ for Project Syndicate
Khalil Bendib / OtherWords.org
Economics
has been called the dismal science, and 2023 will vindicate that moniker. We
are at the mercy of two cataclysms that are simply beyond our control. The
first is the Covid-19 pandemic, which continues to threaten us with new, more
deadly, contagious, or vaccine-resistant variants. The pandemic has been
managed especially poorly by China, owing mainly to its failure to inoculate
its citizens with more effective (Western-made) mRNA vaccines.
The
second cataclysm is Russia’s war of aggression in Ukraine. The conflict shows
no end in sight, and could escalate or produce even greater spillover effects.
Either way, more disturbances to energy and food prices are all but assured.
And, as if these problems weren’t vexing enough, there is ample reason to worry
that the response from policymakers will make a bad situation worse.
Most
importantly, the US Federal Reserve may raise interest rates too far and too fast.
Today’s inflation is largely driven by supply shortages, some
of which are already in the process of being resolved. Raising interest rates
therefore might be counterproductive. It will not produce more food, oil, or
gas, but it will make it more difficult to mobilize investments that would help
alleviate the supply shortages.
Monetary tightening also could lead to a global slowdown. In fact, that outcome is highly anticipated, and some commentators, having convinced themselves that combating inflation requires economic pain, have been effectively cheering on the recession. The quicker and deeper, the better, they argue. They seem not to have considered that the cure may be worse than the disease.
The global tremors from the Fed’s tightening could already be felt heading into winter. The United States is engaged in a twenty-first-century beggar-thy-neighbor policy.
While a stronger dollar tempers inflation
in the US, it does so by weakening other currencies and increasing inflation
elsewhere. To mitigate these foreign-exchange effects, even countries with weak
economies are being forced to raise
interest rates, which is weakening their economies further. Higher interest
rates, depreciated currencies, and a global slowdown have already pushed dozens of countries to the edge of
default.
Higher
interest rates and energy prices will also push many firms toward bankruptcy,
too. There have already been some dramatic examples of this, as with the now-nationalized German
utility Uniper. And even if companies don’t seek bankruptcy protection, both
firms and households will feel the stress of tighter financial and credit
conditions. Not surprisingly, 14 years of
ultra-low interest rates have left many countries, firms, and households
overindebted.
The
past year’s massive changes in interest rates and exchange rates imply multiple
hidden risks—as demonstrated by the near-collapse of
British pension funds in late September and early October. Mismatches of
maturities and exchange rates are a hallmark of under-regulated economies, and
they have become even more prevalent with the growth of non-transparent
derivatives.
These economic travails will, of course, fall hardest on the most vulnerable countries, providing even more fertile ground for populist demagogues to sow the seeds of resentment and discontent.
There was a global sigh of relief when Luiz Inácio Lula da Silva defeated Jair Bolsonaro in Brazil’s presidential election. But let us not forget that Bolsonaro got almost 50% of the votes and still controls Brazil’s Congress.
Across every dimension, including the economy, the greatest threat to well-being today is political. Over half the world’s population lives under authoritarian regimes.
Even in the US, one of
the two major parties has become a personality cult that increasingly rejects
democracy and continues to lie about the outcome of the 2020
election. Its modus operandi is to attack the press, science, and institutions
of higher learning, while pumping as much mis- and disinformation into the
culture as it can.
The
aim, apparently, is to roll back much of the progress of the past 250 years.
Gone is the optimism that prevailed at the end of the Cold War, when Francis Fukuyama could herald “the end of history,” by which he meant the
disappearance of any serious challenger to the liberal-democratic model.
To be sure, there is still a positive agenda that could forestall a descent into atavism and despair. But in many countries, political polarization and gridlock have pushed such an agenda out of reach.
With better-functioning political systems, we could have moved much faster to increase production and supply, mitigating the inflationary pressures our economies now confront. After a half-century of telling farmers not to produce as much as they could, both Europe and the US could have told them to produce more.
The US could have provided childcare—so that more women could
enter the labor force, alleviating the alleged labor shortages—and Europe could
have moved more quickly to reform its energy markets and prevent a spike in
electricity prices.
Countries
around the world could have levied windfall-profit taxes in ways that might
actually have encouraged investment and tempered prices, using the proceeds to
protect the vulnerable and to make public investments in economic resilience.
As an international community, we could have adopted the Covid-19 intellectual-property waiver, thereby reducing
the magnitude of vaccine apartheid and the resentment that it fuels, as well as
mitigating the risk of dangerous new mutations.
All
told, an optimist would say that our glass is about one-eighth full. A select
few countries have made some progress on this agenda, and for that we should be
grateful. But almost 80 years after Friedrich von Hayek wrote The Road to Serfdom, we are still living with the legacy
of the extremist policies that he and Milton Friedman pushed into the
mainstream. Those ideas have put us on a truly dangerous course: the road to a
twenty-first-century version of fascism.
©
2021 Project Syndicate
Joseph E.
Stiglitz is a Nobel laureate economist at Columbia University.
His most recent book is "Measuring What Counts: The Global
Movement for Well-Being" (2019). Among his many other books, he
is the author of "The Price of Inequality: How
Today's Divided Society Endangers Our Future" (2013), "Globalization and Its Discontents"
(2003), "Free Fall: America, Free Markets,
and the Sinking of the World Economy" (2010), and (with
co-author Linda Bilmes) "The Three Trillion Dollar War: The True Costs of the Iraq
Conflict" (2008). He received the Nobel Prize in Economics in
2001 for research on the economics of information.