Recent political developments, including the defeat of incumbent governments in France and Greece, suggest that the public’s tolerance for economic policies that do not reduce unemployment has collapsed. Indeed, given the alarming economic and employment situation in many countries today, with no prospect of recovery on the horizon, further political turmoil is likely unless policymakers change course accordingly.
The economic crisis has wiped out more than 50 million jobs after years of weak, job-poor growth and increasing inequality in the world’s rich countries.
Since 2007, employment rates have risen in only six of the 36 advanced economies, while youth unemployment has increased in a large majority of both established and emerging markets.
In the near term, the global crisis is likely to become worse as many governments, especially in advanced economies, prioritize fiscal austerity and tough labor-market reforms, even as such measures undermine livelihoods, incomes, and the social fabric.
Meanwhile, despite quantitative easing, many companies have limited access to credit, depressing investment and reducing job creation. Easy credit before the crisis encouraged over-investment in those sectors, such as housing, that were thought to be profitable. It is no surprise that the resulting excess capacity now discourages private investment in the real economy.
With inequality and unemployment higher, and incomes and domestic markets shrinking, everyone hopes to recover by exporting — an obviously impossible solution. Developing countries, long encouraged or even compelled to export and otherwise embrace globalization, have been abruptly told to switch course: to produce for the domestic market and to import more. The irony is that this advice comes after much of their former productive capacity has disappeared.
However, having suffered currency and capital-account crises with greater openness, many emerging-market economies still feel compelled to accumulate huge reserves to protect themselves in the face of greater global financial volatility. While financial globalization has not enhanced growth, it has exacerbated volatility and instability. Meanwhile, national “policy space” for economic recovery has shrunk since the crisis.
Public investment and basic social protection can help to turn this around, by creating millions of jobs. However, despite strong evidence to the contrary, the presumption that public investment crowds out private capital continues to discourage government-led economic recovery efforts.
Historically, in fact, most advanced economies have lived with far higher fiscal deficits than they have today, and not only during wartime. Such deficits have financed strong, sustained, and inclusive growth not only in their own economies, but also abroad — as with the US’ Marshall Plan, so central to European post-war reconstruction and recovery.
Now, because governments’ deployment of overwhelming financial resources to save selected private institutions deemed too big to fail caused sovereign debt to increase dramatically, officials have imposed fiscal austerity in deference to bond-market demands. Meanwhile, eurozone countries are constrained not only by this fiscal fetish, but also by their lack of exchange rate flexibility.
Moreover, multilateral cooperation for global recovery has been disappointing since 2009 — the year of the G20’s London and Pittsburgh summits, including the Global Jobs Pact, on which there has been little meaningful progress since. As a result, the past three years have witnessed little movement toward developing and implementing a strategy for strong, sustained, and inclusive recovery. Instead, we have seen creeping protectionism, and not only on the trade front.