As the financial crisis of 2008-2009 slowly passes into history, the first round of autopsies is beginning, with congressional committees looking for culprits, and everyone from business leaders to economists to the proverbial man on the street grappling with answers as to what precisely caused the meltdown. It is now almost cliché to speak of how the so-called “Great Recession” nearly brought down the global financial system—how it was the worst crisis since the Great Depression and how the world has changed dramatically as a result. Clichés can be compact truisms, but in this case, what’s most striking about the world isn’t how much things have changed as a result of the crisis but how little.
First of all, it’s a stretch to rank the recent meltdown in the top five worst downturns in American history. During the Great Depression, unemployment in the United States was 25%, and that was a low-ball estimate at best. Equity markets lost more than 80% of their value, and thousands of banks collapsed. When you lost your home in the 1930s, you likely became homeless, hence the sight of “Hoovervilles,” those tent cities that popped up in New York and throughout the country. Or take the 1973-1974 downturn, which was followed by years of double-digit inflation, the near bankruptcy of New York City, and a sharp rise in crime and urban decay. The economic crises of the 19th century were worse: the Panic of 1873 led to years when as much as half the American labor force lost their jobs.
Outside the United States, the Great Recession wasn’t nearly as great. Unlike prior economic crises, when governments fell and mobs assaulted the centers of power, there has been little political upheaval and almost no violence. In fact, large swaths of the world – China most notably, but followed closely by Brazil and India – emerged with their relative position enhanced as a result of the crisis. China has $2.4 trillion in reserves and a larger share of world trade than before the crisis, and India—by virtue of having an insulated and partly closed financial system – suffered far less and has emerged much stronger. In fact, what is termed the worst crisis since the Great Depression in the United States and Europe is actually the greatest boon since decolonization for much of the rest of the world.
In that respect, the world has changed. The locus of financial and economic activity has moved away from the United States and become dispersed throughout the world. No one center has replaced the United States, and indeed, the U.S. remains pivotal, large and absolutely central to the economic vitality of the globe. But the crisis did put an exclamation point on what had been happening in the decade before, namely the emergence of multiple regions as viable and vital economic powerhouses, especially Shanghai, Beijing and Hong Kong but also Mumbai, Abu Dhabi and Dubai (even a hobbled Dubai), Rio and Sao Paulo, and even Toronto.
The globalization of capital is a dramatic evolution in the economic system but not what most have in mind when they speak about the effects of the not-so-Great Recession. The human costs in Europe and the United States in the form of home foreclosures, double-digit unemployment and restricted access to credit are real, and for the United States at least, may last far longer than in the past. But the structural shifts in the U.S. economy weren’t caused by the crisis; they were obscured by the housing and credit bubble. The housing mania and its attendant boost to domestic manufacturing and construction briefly created an illusion in the United States that the structural changes of the 1990s would have only an upside, namely that the globalization of labor and the efficiencies in manufacturing wouldn’t lead to far less employment. The fact is that 13 million manufacturing jobs in America today produce more goods than 50 or 60 million did half a century ago, just as less than 3 million farmers today produce more food by far than 100 million did at the turn of the 20th century. Technology and globalized supply-chains have wreaked havoc on the domestic labor model in the U.S. and allowed capital to thrive while labor struggles. But that was true in 2007, and in 2000. It just took the crisis of last year to expose that reality.
Finally, as the growing populist anger at banks and Wall Street bonuses makes clear, the economic shifts of the past decade or more have allowed businesses and capital to detach from any one nation or state. That leaves governments and workers at a severe disadvantage, and far from changing that, the financial crisis only aggravated it. If anything, rather than clipping the wings of business and finance, the crisis may have liberated them further. Populism today is not likely to solve that problem, unless it becomes populism on a international scale, and with the emerging world growing wealthier, that is unlikely to happen.
The crisis did, admittedly, raise the specter of a freeze of the global financial system. With technology linking and enabling capital flows, and doing so largely in a way that’s indifferent to national borders, there is the possibility of a meltdown happening too quickly to staunch. The world may be a more stable place in general, but the potential of financial Armageddon is there. The crisis was a reminder of the downside of an interconnected global system, and the fear that engendered explains some of the hyperbolic rhetoric. But there is a deeper fear, and a legitimate one, harbored by many of those who will gather in Davos this week: the American century has come to an end, and with it a particular global order. For some, that is alarming; but for others, and they are far more numerous, it is a new dawn.