On the verge of another world economic crisis

For the better part of the last three years, I have been arguing that the world is on the verge of another economic crisis, not unlike the one we witnessed in 2007.
Food line at Yonge Street Mission in Toronto during the Great Depression. (Photo author unknown)

For the better part of the last three years, I have been arguing that the world is on the verge of another economic crisis, not unlike the one we witnessed in 2007. 

My reasons have to do with what I have called the crisis in demand: weak demand is pushing economies back into potential crisis territory.

In the last week, two important reports came very close to saying the same thing.

On Monday, the Centre for International Governance Innovation (CIGI), based in Waterloo, Ontario, released an annual report, The 2014 Survey of Progress in International Economic Governance, in which the authors, Barry Carin, David Kemothorne and Domenico Lonbardi, describe a world dangerously struggling to recover from the worst economic crisis since the Great Depression. 

The authors suggest there is "cause for concern" about the state of the world economy and that there is a general sense that things are getting worse, not better.

Alarm bells sounding

A week ago, The Jerome Levy Forecasting Center, an influential business consultancy group, sounded the alarm bells about another worldwide recession. 

In fact, they claim there is a 65 per cent probability of a worldwide recession sometime in 2015, dragging down with it the U.S. economy by year's end. 

There is no doubt the Canadian economy will be dragged down along with it.

What makes the Levy report particularly worrisome is that it saw the 2007 crisis coming (but of course no one listened), and its founder (Jerome Levy) had a feeling of something big hitting in 1929. 

So its track record is spot on.

There is no doubt the current slow recovery in Canada and the US poses a number of problems. The longer the recovery, the higher the probability of falling back into recession. 

We are now officially four years after the end of the Great Recession of 2007, and we are simply not in buoyant territory. 

While jobless numbers seem to be improving, labour participation is still low, indicating labour markets are not improving as well as we think. 

We are simply bopping along with no clear indication that we are moving invariably toward economic prosperity.

Recovery far off

In fact, the prevailing economic conditions around the world are actually looking worse and this is what the Levy report is all about. 

We are not moving out of the woods, but may be on our way back in. 

Everywhere we look, we have a serious potential for crisis. 

Nowhere is this more evident than in Europe where the eurozone is heading towards deflation, from which it will probably take another decade at least to recover. 

And now, France is going the way of Greece, Italy, Portugal and Spain. And the once-mighty Germany is flirting with another recession. 

The 2007 recession was very deep and the fiscal stimulus undertaken in 2008 and 2009 succeeded in stopping the downward spiral toward depression, but was not enough to push the economy unto the path of prosperity. 

And since then, governments have adopted austerity measures, especially in Europe, with deep cuts in government programs and expenditures. It was too much too soon. 

The economies were too fragile and the result is that we are sinking back into another possible crisis. 
Whatever good the stimulus had, austerity has dismantled.

Harper's policies not up to challenge

Closer to home, we may not feel it here yet. Indeed, things seem to be improving, but they are improving too slowly. 

And if the world takes a turn for the worse, it will surely drag us back down with it. 

If we are on the cusp of another crisis, the current economic policies of the Harper government are grossly inadequate to deal with what's ahead. 

Simply dishing out tax credits to the rich and select families aimed at shoring up political support won't do to counter the onslaught of what lies ahead. 

The economic impact of such credits is weak compared to the impact large fiscal injections can have. 

So, we need more; a lot more. We need large public infrastructure investments and a policy of full employment.

Otherwise, fasten your seatbelts, it'll be a bumpy ride.

Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.


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