THE CHALLENGES OF MANAGING OUR POST- CRISIS WORLD / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

The challenges of managing our post-crisis world

By Martin Wolf

Published: December 29 2009 20:12



I have recently been thinking a great deal about my long-dead father. I have been writing a memoir of his life for an exhibition being organised by Vienna’s Exilbibliothek (“Exile Library”) in honour of what would have been his hundredth birthday. But I have also been thinking about him because he would have fully understood what is at stake today.

Born in what was then Austrian Poland on April 23 1910, my father’s life began just after the end of the “noughties” of the 20th century, of which I wrote last week. Moved by his parents to Vienna in 1914, he lived through the first world war, the hyperinflation of the early 1920s and the Great Depression, before leaving for London, just ahead of Hitler’s arrival, in 1937. There he survived internment as an enemy alien and the second world war. Nearly all his relatives, apart from his immediate family, were killed in the Holocaust. The same was true of my mother’s family. While she and her immediate relatives escaped by trawler from the Netherlands in May 1940, her wider family was destroyed.

As a central European intellectual born in 1910 – he was a playwright, journalist, broadcaster, documentary filmmaker and writer of television dramas, in his native language, German – my father lived in historic times. Of the countless lessons I learnt from him, the most important is the most obvious: civilisation is as fragile as glass. Moreover, when chaos comes, the worst of human nature will almost always emerge, as it did, to such cataclysmic effect, in his lifetime.

At an emotional level, these views shaped how I have responded to the financial catastrophe of the past few years. I was convinced that, without the policy responses we saw, the world would have experienced a still greater depression. Policymakers could not stand idly by while such calamities unfolded. We could not, in such times, even take the survival of civilisation itself for granted. Never before had I felt more strongly the force of John Maynard Keynes’s toast “to the economists – who are the trustees, not of civilisation, but of the possibility of civilisation”.

We confront huge challenges at a time of great global transformations. Somehow, we must manage to sustain a dynamic global economy, promote development, deliver environmental sustainability and ensure peaceful and co-operative international relations. This will take sustained statecraft of the highest order. As I argued last week, I believe President Obama at least understands the nature of the challenges. It is not so clear that he, or anyone else, understands how difficult it will be to meet them.

For economists, most of these tasks are far above our “pay grade”. I have little idea whether it will be possible to prevent nuclear weapons from falling into the hands of terrorists or terrorist regimes, or to reach a workable deal on carbon emissions (surely to be based on national taxes remitted to the public, rather than on the complexities of a global “cap and trade” regime). But I am sure we will achieve little enduring if the world economy does not return to health. That is, as Keynes would surely have said, the contribution economists ought to be able to make. What else can they be good for? Yes, I do know the answer!

In an article published in the FT this week, Arvind Subramanian of the Peterson Institute for International Economics, argues that economics has redeemed itself by rescuing the world economy from the crisis. I agree, but only up to a point. Many economists argued that the measures were unnecessary, or even harmful. Moreover, these extraordinary interventions have not returned the patient to health. They have merely prevented him from dying. We now must heal five chronic conditions, instead of survive last year’s brutal heart attack.

First, we have the ongoing force of the balance-sheet recession in the US, UK and a number of other significant high-income countries. It is overwhelmingly likely that the highly indebted parts of the private sectors of these countries will seek to lower their indebtedness and raise savings over an extended period.

Second, we have, quite rightly, substituted public sector borrowing for private sector borrowing, on an unprecedented scale, for peacetime. This can continue for some time, but not forever, as the US and UK come to look like Italy, but without Italy’s healthier private sector finances.

Third, despite modest – and, quite possibly, temporary – reductions, the US, UK, Spain and other erstwhile bubble economies continue to have large structural current account deficits, with substantial offsetting surpluses in China, Germany, Japan, the oil exporters and several other countries. Yet, so long as these external deficits continue, the countries concerned must be running ongoing financial deficits in either the public sector, or the private sector, or both. In other words, the domestic balance-sheet problem is likely to become not better, but worse, without global rebalancing.

Fourth, the surplus countries – China, most openly – show little or no interest in making the needed policy changes. Instead, they continue to argue as if it were possible for the Earth to run a surplus with Mars. Somehow a way must be found – ideally, co-operatively – to wean the surplus countries from their addiction.

Finally, the financial system remains damaged. Not only does it still own vast quantities of the “toxic assets” its “talented” employees created, but the world is not addressing the structural causes of the crisis. In some ways, the oligopolistic banking system that has emerged from the crisis is riskier than the one that went into it.

The underpinnings of our global economy and so of our globalised civilisation remain dangerously fragile. Instead of patting ourselves on the back for a job well done, now that a limited recovery has begun, we need to sustain the effort to return the world economy to vigorous health. That will require much co-operative intellectual and policymaking effort. But, first, we must eschew perilous complacency.

Copyright The Financial Times Limited 2009