What will the world look like when the present emergency has passed? The safest prediction is that the post-crisis financial sector will be downsized and more heavily regulated, nationally and internationally. The financial sector as a whole, which peaked at 40 percent of corporate profits in the United States in 2006, may shrink as much as 50 percent in the aftermath of the emergency.
We can also comfortably wager that government subsidies will rule the day. State capitalism, in one form or another, has always existed in Europe and the industrial nations of East Asia. Now, state capitalism with American characteristics may emerge from the de facto nationalization of the U.S. automobile industry and perhaps other sectors that need to be rescued as the wave of deleveraging works its way through the economy.
A generation hence, global industry is likely to be as heavily subsidized as global agriculture. In the 20th century, the agricultural subsidies of the United States and European Union inspired by memories of the Great Depression produced lakes of milk and mountains of butter. In our day, the industrial subsidies of the industrial great powers of North America, Europe, and Asia inspired by memories of the Great Recession will produce cascades of cars and avalanches of aircraft. The glut of subsidized manufactured goods will grow worse over time, as 21st-century manufacturing, like 20th-century agriculture, becomes ever more productive and capital-intensive.
Next up: the unexpected triumph of the classic modern welfare state. Before last September, it was widely assumed in developed countries that public pensions, universal healthcare, and other forms of social insurance were doomed by their costs in a world of graying populations or by their inefficiency compared with privatized alternatives. What a difference the collapse of the world economy can make. Millions of affluent people who thought of themselves as part of a new “investor class” have lost vast amounts in the stock market. Slowly, they are realizing that they will depend more, not less, on public pensions like Social Security in the United States.
And privatization of public pensions? Forget about it. For a generation or two to come, until the memory of the present emergency fades, nobody who wants to be taken seriously will argue that money should be diverted from public pensions into the stock market. Any new savings systems will be so heavily regulated in the interest of minimizing risk that they will be public in all but name.
Meanwhile, countries that staked too much on export-oriented growth, such as China, now realize that they must balance their economies by increasing consumption and reducing private savings. But their citizens will not spend more freely until well-developed public safety nets that provide healthcare, unemployment insurance, and retirement income make it unnecessary to hoard money. Look for developing countries such as China to expand social insurance programs as they try to shift toward consumption-driven growth. Milton Friedman will be rolling over in his grave.
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Before the crash of 2008, it was widely thought that the growing number of middle-class consumers in China, India, and the rest of the developing world would drive up the prices of energy, food, and raw materials. The collapse of global demand has not discredited that prediction; it has only postponed its realization. Whether recovery comes in two years or 10, the global economy will rebound, and demand-driven increases in commodity prices will then return with a vengeance.
Combined with the glut in manufactured goods created by industrial subsidies, this will create a world in which factory products are relatively cheap while food and raw materials are relatively expensive. The beneficiaries are likely to be countries blessed by nature with irreplaceable resources and rich and productive agriculture. The United States falls into both categories.
Even in the unlikely event that greens manage to outlaw nuclear power and coal-powered utilities, the country has substantial amounts of uranium, as well as vast reserves of coal, natural gas, and oil deposits, that high prices would make worth recovering. And U.S. agriculture is not only the most efficient on the planet, but also the best situated. According to scientists, global warming is likely to help rather than hurt rain-fed agriculture in the American breadbasket.
The new future will mark the revenge of the farmers against the city slickers, and not only because of the bonanza that awaits agriculture and extractive industries.
New York, London, and other financial centers were heavily dependent on financial-sector profits. Throw in the technology-driven collapse of the publishing and broadcast industries headquartered in such places, and those cities are likely to suffer devastating blows. Capitals of both politics and commerce, such as Paris and Tokyo, will adjust the best in the new state-capitalist world. Purely commercial centers such as New York and Frankfurt will suffer the most. Without the obscenely rich investment bankers and the legions of well-paid retainers who supported their lifestyles, formerly flourishing parts of these former financial capitals may become as derelict as Detroit or the crumbling industrial towns of northern Britain and Germany’s Ruhr region.
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