The Great Depression was a turning point in global economic history. Even though it started in America, with the development and then the collapse of a financial bubble on Wall Street, it marked a shift in economic leadership from Britain to the United States. For the next 50 years, Britain continued to decline and even the victory in World War II served to weaken its economy and undermine its global position.
The COVID-19 crisis began in China but it is the United States that has been ravaged by it most severely. Record numbers of new daily infections of 130,000 were registered, symbolically enough, around the presidential election, and deaths are now routinely surpassing 1,000, returning to levels last seen in early summer, before medical professionals learned to handle the disease.
While the country remains a leader in technology and health sciences, the failure of managing the pandemic has been uniquely political. Worse, the president of the United States spent the month of October shuttling around the country, holding rallies that violated his own administration’s safety guidelines and spreading the virus among his most ardent followers.
The lack of political will to deal with the pandemic is doubly dangerous. Medical or technological breakdowns can be fixed given the political will, whereas the American experience of the past nine months shows that science is powerless against the incompetence, ignorance, and malice of political leaders.
America’s disastrous response to the pandemic will have major consequences. It has greatly exacerbated the reputational damage which the Trump Administration has inflicted on America over the past four years. While the virus remains out of control, the economy can’t return to health and will continue to rot, with high levels of unemployment and a hampered service sector. Fiscal and monetary policy will remain massively loose, sucking in global savings and undermining the dollar and the US Treasuries market over the long term.
In China, meanwhile, where the disease originated, it has been handled efficiently and the economy has largely recovered. Just like the Depression, this year’s sharp economic crisis may mark the passage of economic leadership — this time, from the United States to China. Worse, this process, if it happens, will be accompanied by the breakdown of the global economic system and the tearing up of established commercial ties and supply chains, which will make the world a lot poorer.
It will be especially damaging for the United States which has long been living above its means, benefiting from its position as a guarantor of the global economic system and the dollar’s reserve status.
The question is whether this scenario can be avoided and Washington can reestablish its leadership role.
Economic crises are not just major disasters but also great opportunities to effect political change. Thus, Adolf Hitler took advantage of the Depression to strangle the imperfect Weimar democracy and establish his dictatorship.
Nobel Prize-winning economist Milton Friedman wrote a famous critique of the US Federal Reserve’s early response to the 1929 financial crisis. His contended that the Fed should have opened financial spigots and let the free market sort out the landscape. That would have avoided the Depression and obviated the need for Franklin Roosevelt’s New Deal which Friedman regarded as damaging meddling in the economy by the government.
But Friedman actually missed the whole point. Roosevelt availed himself of the opportunity offered by the economic crisis to build the world’s first social democratic system, thus laying the foundation for America’s prosperity in the postwar decades.
Friedman’s critique came very much post-factum but it influenced Ben Bernanke who was in charge of the Fed during the worst global financial crisis since the Depression, which broke out in 2008. Bernanke drowned the financial crisis in liquidity — just as Friedman had advised — and another depression was avoided.
That was a good thing. The bad thing was that Barack Obama, unlike FDR, let a good crisis go to waste. He had a political mandate after the 2008 election to effect root and branch reform of the dog-eat-dog economic system. He limited himself to cosmetic adjustments. As a result, the Great Recession allowed highly educated globalized coastal elites to prosper while dealing a heavy economic blow to blue-collar workers, especially to men.
His timidity probably stemmed from the fear of appearing a left-wing radical and an angry Black man, but that didn’t shield him from resentment, including completely spurious accusations of socialism and even communism, and a wave of racism that is still sweeping the country as the losers of the Obama economic recovery feel forgotten and alienated.
The Republicans, whom FDR, if he had been in Obama’s shoes, would have stomped into the ground after George W. Bush’s disastrous second term, were able to rally. They weaponized the discontent of the white lower-middle and working class in the “fly-over country” and turned their anger against the elites and the outsiders.
In this regard, Trump’s comparison with Hitler is apt. He too manages to pull the right strings for his followers, to promise them a country for which they long and to give them a target to blame for their problems. As with Hitler, his appeal is lost on those who are outside the cult.
The COVID-19 economic crisis has not yet run its course. There may be additional, even more, severe problems since the pandemic lockdown hit an overheated, bubble-prone, poorly balanced economy. But the shape of the recovery is already clear. It is going to be even more uneven and skewed toward the rich, the superrich, and the upper-middle class. The poor — including the current Republican base — will bear the brunt of job and income losses.
The US economy needs not another stimulus handout — even though it will certainly come in handy in the short run — but another FDR-style reform program if America is to have any chance to retain its economic leadership and preserve the current dollar-based global financial system. Some of the measures have been included in Joe Biden’s election platform, but more is needed to close the income gap, to return some of the funds to the Treasury that have been transferred to private hands over the past forty years, to give labor a measure of job and social security, to reduce racist police violence, etc.
In effect, the incoming Administration will face the crucial challenge of giving large swaths of the American population a stake both in the American economy and in the political system. As the emergence of someone like Trump has shown, unless this challenge is met, the United States of America will collapse within a decade.
Can this be achieved?
The government in Washington is likely to remain divided and the Republicans are already limbering up to stall Democratic initiatives the way they did during the Obama Administration and during the past two years.
Even more important, the Democrats themselves are too centrist, too timid, and too impotent — as well as too old. It remains to be seen whether a consummate, ruthless FDR-style fighter will emerge in the Biden Administration to take on both the task at hand and those who will inevitably stand in its way.
