7
Where Do We Go from Here?
TO UNDERSTAND THE MISMATCH between perception and reality about what global economic governance has accomplished since 2008, it is worth thinking about the role that the Troubled Assets Relief Program played in addressing the financial crisis in the United States.1 In September 2008, global financial markets were reeling and the US economy was approaching freefall. The Federal Reserve and US Treasury Department had tried an array of conventional and unconventional tools to prop up the US economy, to little avail. Concerned about eroding political legitimacy, Fed chairman Benjamin Bernanke and Treasury secretary Henry Paulson decided their only option was to go to Congress to seek authorization for a massive sum of money to purchase mortgage-backed securities. Paulson requested $700 billion for TARP. Paulson’s initial proposal amounted to three pages that provided few details and absolutely no judicial or legislative oversight. The first attempt to pass the bill failed in the House of Representatives. The negative vote took the markets by surprise. The Dow Jones Industrial Average experienced its largest single-day loss in history; the S&P 500 and NASDAQ both lost approximately 9 percent of their value.
A week later, the House passed a revised bill. By that point, however, much of the damage had been done. Washington’s initial inability to act as expected rattled investors.2 The failure of financial markets to rally after the creation of TARP seemed to vindicate its critics. Paulson’s subsequent decision to use TARP to make direct capital injections into big banks, rather than purchase toxic assets as originally announced, generated even more political controversy. When TARP money was used to assist the automobile companies as well, the program became even more unpopular. Although the American people initially favored TARP, this public support soon ebbed.3 The program was quickly framed as a bank bailout, rendering it anathema to the American people and to members of Congress. TARP and a panoply of other emergency Federal Reserve measures to provide liquidity seemed to many little more than budget-busting exercises in crony capitalism.
Yet as time has passed, two facts have become manifestly clear about TARP and the related Federal Reserve programs. First, on policy grounds, these measures were huge successes. The econometric evidence strongly suggests that TARP and the actions taken by the Fed greatly eased the credit crunch faced by banks.4 According to one bipartisan analysis, without TARP and the Fed’s actions, US GDP would have shrunk by an additional $800 billion, unemployment would have been three percentage points higher, and the federal budget deficit would have been even bigger because of reduced tax revenue.5 A strong majority of leading economists agreed that the benefits of the bank bailouts exceeded the costs.6 In the end, TARP was a bargain. Because almost all the bailed-out financial institutions recovered relatively quickly, they were able to pay back the US government ahead of schedule. The final estimates of TARP’s cost range between $21 billion and $47 billion—a small price to pay for saving the US financial system.
Second, TARP has remained political poison. A July 2010 Bloomberg poll revealed that 58 percent of Americans believed, in retrospect, that TARP was an “unneeded bailout.” By October of that year, 46 percent of respondents in a Pew poll said they were less likely to vote for a member of Congress who had voted for TARP.7 Politicians who voted for the bill abstained from speaking publicly in favor of it. As Ben Smith reported in Politico, “[TARP] is widely seen as the tipping point for disgust with elites and insiders of all kinds—though it could also be seen as those insiders’ finest moment, a successful attempt to at least partially fix their own mistakes.”8 Another assessment concluded that TARP was “one of the most hated, misunderstood, and effective policies in modern economic history.”9 John F. Kennedy famously said that in politics, victory has a thousand fathers but defeat is an orphan. TARP highlights a post-2008 political phenomenon: the policy victory that remains a political orphan.
The most salient explanation for TARP’s unpopularity is that it requires counterfactual reasoning to appreciate its success. The argument in favor of TARP and the related Federal Reserve programs is that even though the US economy has struggled since 2008, it could have been far, far worse. This is true of global economic governance as well. There is no denying that, in the wake of the crisis, the global economy shrunk, protectionism rose, cross-border financial flows dried up, and governments squabbled over macroeconomic policies. Nevertheless, the system worked. In the presence of functioning global economic governance, the global economy suffered only a temporary downturn. In its absence, the world would have likely experienced an explosion of trade and investor protectionism, an evaporation of liquidity, and a second Great Depression.
What about the future? It is one thing to say that the system has worked in the first few post-crisis years. It is another thing entirely to assert that current global governance structures will endure. It is worth remembering that genuine efforts were made to provide global public goods in 1929 as well but eventually fizzled out.10 The failure of the major economies to assist the Austrian government after the CreditaAnstalt bank failed in 1931 led to a cascade of bank failures across Europe and the United States. The collapse of the 1933 London conference guaranteed an absence of global policy coordination for the next several years. The start of the Great Depression was bad, but international policy coordination failures made it worse.
Such a scenario could play out again. The system has worked by preventing a major reversal of globalization. There is no denying, however, that the momentum of economic openness has slowed considerably.11This could just be the beginning of the end of the system as we know it. It is not hard to identify fragility and instability in the current world economy. The international system averted a second Great Depression, but can it continue to do so? Can current global economic governance structures help the world economy survive and thrive going forward?
This concluding chapter summarizes the argument made in the previous chapters, reviews the evidence that the system worked, and then considers the significance of these findings for future scholarship. It speculates about why global economic governance might go downhill from here—and, finally, explains why it will not.
THE ARGUMENT REDUX
In the fall of 2008, the global economy suffered a bigger and deeper shock than it did in the fall of 1929. Despite that shock, the global economy rebounded. Given the depth of the financial damage, and given how the global economy had previously responded to similar shocks, the post-2008 performance was remarkable. Cross-border flows in trade, FDI, and remittances suffered temporary downturns but soon exceeded or approximated pre-crisis averages. Despite the biggest financial crash in seventy years and the ensuing sovereign debt crises in Europe, the global economy demonstrated remarkable resilience.
How did the global economy recover so quickly? Global economic governance did what it had to do. During a systemic crisis, markets need to stay open and liquidity needs to be provided. International institutions, supported by the great powers, ensured that this happened. The data on trade restrictions show that although levels of protectionism did increase after the crisis, those increases were small; the number of restrictions eventually fell to historic lows. The United States, the European Union, and China adhered to their WTO obligations, ensuring that the rest of the world could export to them. Despite a lot of loose talk about currency wars, actual exchange-rate volatility subsided and was never a serious concern for business executives. The world’s major central banks coordinated interest-rate cuts and swap lines to revive the global economy and avert a liquidity crisis. Quantitative easing and other monetary policy actions also helped to avert the worst-case scenario. Between 2008 and 2010, the G20 economies also coordinated expansionary fiscal policies to make up for the shortfall in private-sector activity. These economies also bolstered the ability of the World Bank and the IMF to help the smaller and less-developed economies. Global economic governance structures aided and abetted exactly the policies that Charles Kindleberger would have advocated to
prevent a depression.
The standard narrative about post-2008 international institutions is that though they might functiioned acted during the depths of the crisis, sclerosis soon set in. The evidence suggests otherwise. The IMF orchestrated negotiations between capital importers and exporters over a voluntary regime to govern sovereign wealth fund investments, which successfully defused brewing political firestorms in the developed world. The Basel Committee on Banking Supervision negotiated Basel III in two years—far more rapidly than it negotiated its predecessor. In taking steps to comply with Basel III, the big banks in Europe and the United States have gone far in recapitalizing themselves. Even though the consensus on macroeconomic policy fell apart in the G20, that body still served its purpose as a focal point for great-power negotiations. In response to a spike in piracy on the high seas, a coalition of states quickly adopted a successful antipiracy strategy. The WTO successfully completed a trade facilitation agreement and expanded its geographic scope to include Russia. G20 pressure nudged China to let its currency slowly appreciate after June 2010. All the major multilateral economic institutions—including the WTO, the IMF, and the OECD—stepped up their monitoring activities to notify G20 economies of incipient trends toward economic closure. Furthermore, recognizing shifts in the distribution of power, key global governance structures reformed their operations. The IMF and the World Bank reformed their quota allocations to reflect the growing economic clout of the developing world. The G20 supplanted the G8 as the premier economic forum for the major economies. Other economic clubs, such as the Financial Stability Board and the Basel Committee on Banking Supervision, expanded their memberships to include the developing-country members of the G20. To be sure, there are a lot of areas in which global governance failed to function as hoped. Against the odds, however, the system worked.
This is not, however, the conclusion that one would derive from most assessments of international institutions after 2008. Why are perceptions about global economic governance so at variance with reality? To be fair, there are examples that made it seem that the system was broken. Despite the longest trade negotiations in history, the Doha Round of trade talks remains unfinished at best and deadlocked at worst. Despite overwhelming scientific evidence that climate change represents a global threat, progress toward meaningful global action on this issue has been feeble. Despite the existence of the strongest, most robust supranational institutions in history, the European Union let difficulties in Greece—a place less populous than Cuba—metastasize into the greatest economic threat to the continent in seventy years.
These problems hint at one major source of misperception—a nostalgia for a mythical Golden Age of global economic governance when everything worked properly. As demonstrated in chapter 3, this yearning is misplaced. Even in the best of times, the proper expectation for international institutions is that they will be “good enough.” There is also a mismatch between the center of gravity for global economic growth and the center of gravity for studying the global political economy. The latter is located in the advanced industrialized economies—precisely the regions that have taken the longest to recover from the Great Recession. It is not surprising that pessimism about one’s national situation translates into pessimism about the global economy. This, in turn, leads to another source of misperception—the conflation of national and global governance. National governments are responsible for most of the egregious policy errors that have taken place since 2008. In some instances, these national governments failed to heed the advice of international institutions. In most instances, these policy errors were own-goals unrelated to events at the global level.
Why did the system work? The answer provided here is analytically eclectic. There is no doubt that globalization transformed an array of sectoral interests to favor sustained economic openness. The development of the global supply chain enlarged the number of factors and actors that would lobby for an open global economy even during hard times. That said, an interest-based answer is insufficient to explain what happened after 2008. There are too many examples of powerful actors making concessions that hurt concentrated interests for this logic to be completely persuasive. The history of the Basel III negotiations shows that even the systemically important financial institutions—presumably the most powerful interest group in the world—failed to get their way. Indeed, it is in the financial realm—where sectoral interests have been at their most concentrated—that the greatest limits have been placed on pre-2008 openness. The absence of concentrated interest-group opposition was a permissive condition for the system working—but an open economy politics story cannot explain much more than that.
A closer look at the post-2008 distribution of power and ideas reveals a more surprising two-part explanation for why the system worked. First, the United States was still able to exercise effective leadership. Contrary to public perceptions, the United States remained the most powerful actor in the world. On a host of issues, such as antipiracy and financial regulation, the United States continued to wield the preponderance of power. In other issue areas, the United States was still first among equals, and therefore able to signal its preference that the status quo be preserved.
While the global financial crisis did not fundamentally alter the power of the United States, it did fundamentally weaken its traditional supporters in Europe and Japan. The European Union was still powerful enough to act as a significant supporter, but Japan fell from the first tier of great powers. Furthermore, the crisis enabled China to ascend to that top tier. This leads to the second, even more surprising, part of the explanation. Despite concerns that it would be a revisionist actor as it acquired more power, China largely supported the rules of global economic governance that had enabled the country to rise so quickly. China contributed to global antipiracy operations. China complied with its WTO obligations—indeed, its track record was superior to that of any other advanced industrialized country on that front. Beginning in 2010, China allowed its currency to appreciate slowly against the dollar and its major trading partners, permitting macroeconomic imbalances to subside. China contributed significant resources to bolster the IMF’s reserves.
Perhaps the most important thing is what China did not do. In the wake of the Great Recession, there was a clamoring for new ways of thinking about the global economy. With the Washington Consensus seemingly discredited, a number of elites looked to the People’s Republic of China as the only country that could point another way forward. Western commentators proclaimed the rise of a Beijing Consensus, and Chinese commentators talked about the existence of a China model that might supplant the preexisting ordering principles. In the end, however, Chinese authorities opted not to follow that path—in no small part because there was no consensus about the precise content of the China model. Without a clear set of ordering principles, authorities in Beijing refrained from proselytizing their development path to others. Chinese authorities were keenly aware of the flaws in their development model. Indeed, if anything, by 2013 China was taking concrete steps toward, not away from, the Washington Consensus. To be sure, some elements of neoliberalism, such as unfettered capital mobility, are no longer accepted as gospel. On the whole, however, neoliberalism remains the privileged set of economic ideas in the global political economy. By maintaining an open global economy, these ideas likely helped to prevent another Great Depression. When they privileged fiscal and monetary conservatism, they likely caused more harm than help.
Charles Kindleberger noted that the problem of the Great Depression was that Great Britain was willing but unable and the United States was able but unwilling to provide global public goods. There wasn’t a second Great Depression in 2008 because the United States and China were both able and willing to help—and because they agreed far more than they disagreed about how to make the system work.
The Implications for Theory
As the initial stages of the financial crisis were unfolding, Robert Keohane challenged global political econom
y scholars to “spend more of their time pondering the big questions about change.” He noted the rise of BRIC economies—China in particular—and the increased volatility of global markets. He also acknowledged, “We have taken for granted certain power structures that are in fact changeable.”12 Keohane’s provocative challenge was one of the inspirations for this book. It seems appropriate at this point to consider what my tentative answers mean for the future study of international political economy.
Perhaps the most surprising conclusion to draw is that none of Keohane’s “big changes” dramatically affected post-2008 global economic governance. As discussed in chapter 5, China’s rise is undeniable. That said, the other BRIC economies—India, Russia, and Brazil—have not seen their relative power increase at all since Lehman Brothers collapsed. Any decent assessment of economic power reveals that the other BRIC actors are not in the same league as the United States, the European Union, or China. The 2008 crisis likely accelerated the shift from a world in which there were two great powers to one in which there are three, but the “hegemonic coalition” is unlikely to increase more than that anytime soon. This is particularly true given the demographic, economic, and political constraints that will hamper many of the advanced developing countries over the next few decades.13 Despite the best efforts to turn a Goldman Sachs marketing term into an actual multilateral grouping, Ruchir Sharma is likely correct when he concludes that “no idea has done more to muddle thinking about the global economy than that of the BRICs.”14 Indeed, even Goldman Sachs officials now lament their overhyping of the phenomenon.15
The System Worked_How the World Stopped Another Great Depression Page 21