One of the most striking features of our current global economic morass is that many Third World economies are weathering the crisis rather well, while the supposed leaders of the world economy (the United States, the European Union, the Japanese) are in deep trouble that looks to get deeper. This is a complete reversal of the situation in the 1980s, when many Third World countries faced a major debt crisis and were forced into austerity, deregulation and privatization under the so-called “Washington Consensus.” The result was ten years of stagnation, decline, and political crisis that Latin Americans call “The Lost Decade.”
The Western Powers (acting through their instrument, the International Monetary Fund, or IMF) forced these measures on the Third World while largely failing to adhere to the prescription themselves. The United States, for example, cut taxes while increasing government expenditures massively during the Reagan years. While the Third World stagnated, the West lived relatively well—on borrowed money.
Now, after a quarter-century, the tide has turned. Latin American and other Third World leaders have increasingly wised up about the Washington Consensus, and about the defects of previous economic policies that made them vulnerable to IMF pressure. They are doing a much better job of keeping their fiscal houses in order, and at the same time are actively managing their economies in ways that the IMF would have found unacceptable. Brazil, Mexico, even Argentina are prospering. Sub-Saharan Africa has the fastest growth rate of all the major regions. India strides the world stage as a major economic power.
Meanwhile, in the West, decades of deregulation have produced a severe financial crisis and global recession in which several European countries (Greece, Portugal, Ireland, and most recently Italy) are close to default on their debts because they simply lack the means to pay. And they are being forced, like Mexico or Argentina in the 1980s, to adopt stringent austerity measures that are sure to worsen the recession, not only in those countries, but also across Europe and the world.
The United States also teeters on the edge of default, but not because it is truly insolvent. Rather, what we have in this country is the steady erosion of the Keynesian consensus on macroeconomic management, and its replacement, ironically, by the kind of free-market, minimal regulation orthodoxy that created Latin America’s Lost Decade. Instead of spending to stimulate a weak economy, the current prescription is to cut government spending at all levels. The same orientation is on display in Great Britain and Germany.
The current impasse over the debt ceiling in the United States reveals that both parties have accepted the principle that we need to cut government spending now, even in the face of a very weak and precarious economic recovery. The only difference is that the Democrats insist on small tax increases on big businesses and higher incomes, while the Republicans vow never to accept any sort of tax increase, even if dwarfed by cuts in spending that the Democrats have already accepted. Many Tea Party adherents reject increasing the debt limit at all, and refuse to listen to the warnings of economists and business leaders that they are risking a conflagration. Three-quarters of a century of economic experience are being cast away.
The doomsday predictions are right: if the Republican Tea Partiers succeed in blocking an increase in the debt ceiling, they will trigger a massive crisis that will throw not only the United States, but the whole world back into recession. As weak and precarious as the recovery has been since the current recession bottomed out in 2008, there is no reason to think that we will easily dig ourselves out if we are thrown again into the pit.