Global Financial Crisis
The coronavirus is certainly an unexpected gut punch for the global economy. But it would be a grave mistake to view the problem and the response in isolation. Why you should think of the coronavirus crisis and the global financial crisis as part of the same story?
When the economic damage fully materializes in the months ahead — and make no mistake, it will — the world will be facing its second major global recession within close to a decade. This is unprecedented in modern history. It places an overwhelming burden on younger generations already questioning the framework of the global economy. And the fallout will reveal the deep fractures that have been widening since long before 2009.
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The coronavirus crisis and the global financial crisis
To understand the problem concretely, think of one individual. A 22-year-old engineering major who graduated in May 2008, four months before the collapse of Lehman Brothers. The entire early part of her career was thrown off course. Studies show that students in the U.S. who graduated in 2008 and 2009 on average make one-third less than their peers who graduated both before and after. Economists call this “hysteresis,” or the scarring effect. Most everyone else calls it bad luck.
But at least our graduate was young. She wasn’t close to retirement like her parents, whose 401(k)s and pensions were pummeled. She spent the next decade figuring out a path for herself. Now comes the coronavirus crisis. Our 22-year old is now 34. She just bought a house and has a young child. She’s entering the middle of her career and peak earning years. Once again, she will be out of a job. This time, the stakes are much higher.
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Two big lessons
What are the lessons she has learned about the global economy in the past decade? There are two clear intertwined major fault lines.
First, the system itself can’t be trusted. The new Edelman trust barometer shows that trust in institutions was at an all-time low even before this crisis. What do we think the results will show next year?
The best-case scenario is that our leaders step up and coordinate on a major fiscal stimulus. This would be a replay of the so-called “London 2009 moment,” when the G-20 agreed to jointly pump $5 trillion into the global economy.
But the odds of the sequel happening are 50/50 at best when the G-20 convenes virtually this week. The spirit of multilateralism has been badly frayed over the past few years, and it is an open question of how quickly the patchwork can be repaired. If it can’t, skepticism in institutions will be warranted. If our London moment does arrive, it will only be a temporary fix, one that is unlikely to help restore the trust that has eroded over the years.
Massive debt across the world
Second, our big problems will be left unaddressed. Before this most recent crisis, the global economy was not on solid ground. In advanced economies, aging populations were weighing on social safety nets. Inequality was at or near record highs throughout much of the nations belonging to the Organization for Economic Cooperation and Development. Trade wars were stultifying the growth of global commerce. Climate change was wreaking economic havoc on low-lying and vulnerable countries.
The policy tools to fix these problems were limited. Interest rates throughout the G-7 were at historic lows. Massive debt build-ups across the world since the global financial crisis made governments too hesitant to deploy more fiscal firepower.
Enter the coronavirus. For millions, this is not the first shock, but the second. Younger Americans never had a chance to build a financial foundation, it may be devastating. Think of the global financial crisis and the coronavirus crisis as part of the same story and you’ll see why our response to this moment must be unprecedented.
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Thankfully, we can learn from our history. It’s true, as Mark Twain supposedly said, “History does not repeat itself, but it does often rhyme.” In some ways, as the International Monetary Fund recently noted, the 2020s have an eerie similarity to the 1920s: A time when inequality, protectionism, and isolationism ultimately led to financial disaster and conflict.
The Allies’ post-war economic response is a model for what we need now, but this time on an even broader global scale. We need a sweeping, whole-of-government, private-sector, and international coordinated effort to reshape the contours of the economy. This is not only to fix the immediate challenges — loss of jobs, homes, and savings — but the long-term shared challenges of climate change, extreme poverty, and automation.
Imagine a revitalized World Trade Organization focused on creating new rules of the road for trade in services and e-commerce. Or a shared guide to the gig economy which employs so many young people and will become even more vital in the aftermath of this pandemic.
These are the types of actions that can start to rebuild trust with the world’s youth. This is the spirit we need for the days ahead.
The coronavirus crisis is public health and global economic emergency. The lessons of 2009, and 1929, should be front and center in our minds as we confront them. Stopping the fallout is not enough. We have to use the moment to fully heal the fractures in our global economy.