Jeff Frieden: I think there are both short term and long term problems. In the short run, there is little doubt that the first and most important task of governments in the United States and everywhere is to try to restore confidence in financial markets, and that, I think, is what governments are attempting to do. That cannot be done by an individual government, right?
So individual governments do need to provide some support to their own financial systems, but this has to be done in a coordinated way. So, the major financial centers of the world, in North America, Western Europe, Japan, are working together to try to provide some support to financial markets, to try to restore confidence in the normal operations in the financial system. So, in the short run, I think that the most immediate task facing the world is a cooperative international effort to try to restore confidence. But I think there are equally important, perhaps even more important longer term considerations at stake. The crisis will have a very negative effect on the standards of living of many people around the world, in the developed world, in the developing world, and it will, in many instances, have a negative effect on the living standards of people who did not benefit from the previous boom. This is unquestionably going to lead to some real political problems, a backlash.
It’s, in some sense, ethically unfair and politically very dangerous to be asking millions, hundreds of millions, billions of people around the world to sacrifice and suffer economically to bail out a few hundred enormous banks and corporations, and that’s, in a sense, what we’re doing. We are asking tax payers, workers, people around the world to undergo a very, very difficult period of sacrifice and austerity in order to make good some of the mistakes that major governments and major financial institutions have made. That is politically difficult, and I think it’s very important for governments to make clear that they understand that they have an obligation not just to help those who made these bad loans, not just to help those at the top of the economic heap who have benefited over the last 10 or 15 years from the financial and economic expansion but also to provide a safety net to keep people on the bottom of the economic pile from falling even further. I think it’s crucially important in a social sense and in a political sense to provide a back stop for people who are the losers and will be the real losers from the current round of economic crises.
And this is a broader issue as well. Globalization, you know, and international economic integration has had some extraordinarily beneficial effects on countries and people all over the world. We can’t imagine the great economic progress that China and India have made, being realized without an integrative world economy. At the same time, the fact that many countries have been extraordinarily well doesn’t mean that everybody in those countries has done well. There have been many losers from globalization, and there has been, in my view, far too little attention paid to compensating and making good the livelihoods of those who have been losing from global economic integration.
I think that’s a crucially important thing, and it’s important not just in a moral sense, it’s important in a political sense as well because if we have a world economy in which only the beneficiaries have influence and only the beneficiaries realize the positive effects of global economic integration. We will inevitably have the kind of backlash that destroyed the international economy in the 1920’s and ‘30s, because people who feel that they’re being left out of the global economy will inevitably enter the political system, enter social activity in ways that try to restore some balance, and that backlash can lead to some very negative effects, both on global economic activity and on politics.
October 14, 2008