The past twenty years have seen a transformation of the global economy unlike any ever witnessed. In the time it takes to raise a child and pack her off to college, the world order that existed in the early 1990s has disappeared. Some three billion people who once lived in sleepy or sclerotic statist economies are now part of the global economy. Many compete directly with workers in the United States, Europe, and Japan in a world bound together by lightning- fast communications. Countries that were once poor now find themselves with huge surpluses of wealth. And the rich countries of the world, while still rich, struggle with monumental levels of debt—both private and public—and unsettling questions about whether they can compete globally.
This shift is hardly news. Starting a dozen or so years ago, we began to hear all about globalization and the economic threat that the new, “flat” world poses to developed countries. Yet since 2008, that talk has been overshadowed by the financial crisis and its aftermath— a crisis that eviscerated trillions of dollars in household wealth, created near-record levels of unemployment, and left the United States and Europe in adverse economic straits that persist to the present day (joining Japan, which has been hobbled for two decades). The causes of the crisis, it was said, lay in too much risk taking by the lords of finance, along with too big an appetite for debt among ordinary people. And so for the past five years, we’ve heard less about China and India and more about how to fix the financial systems and economies of the developed countries.
When people think about today’s economic challenges, many of them put the problems facing the United States and Europe in separate baskets: one basket for such thorny issues as how to jump-start growth, reduce unemployment, and control the national debt; and a second basket for how to deal with trade deficits, currency issues, and competitiveness writ large.
My new book, The Age of Oversupply, argues that all these challenges belong in one basket. You can’t understand the housing bubble and the financial crisis without appreciating how the rise of the emerging nations distorted the economies of rich countries. And you can’t chart a course to more growth and stability in the developed world without recognizing that many of these distorting forces are still at work.
It is time to recognize that the central challenge facing the global economy is an oversupply of labor, productive capacity and capital relative to the demand for all three.
Beginning in the late 1990s, a tidal wave of cheap money began flooding the global economy, much of it coming from Asia as China and other countries began to run huge trade surpluses and their burgeoning middle classes and thriving corporations socked away savings. Easy credit set the stage for the real estate bubble and the financial crisis. And cheap money also allowed Americans to sustain a high standard of living with low-cost borrowing and to ignore their declining competitiveness amid a growing surplus of global labor. Of course, the party couldn’t last forever.
Yet five years after the financial crisis, many leaders and commentators in the United States and Europe still don’t get what happened. Nor do they seem to realize that the age of oversupply is here to stay and that oversupply is a central obstacle to restarting growth. Many of the standard tools for fueling growth simply don’t work.
Cheaper credit through monetary easing doesn’t yield much in an era when cheap capital already exists in abundance. And policies that seek to stimulate growth run up against the fact that there is a huge oversupply of global labor and productive capacity. Meanwhile, major risks linger in the banking sectors of the United States and Europe, where reforms have not gone nearly far enough. Today, despite the painful lessons of recent years, the global financial system is anything but stable.
Finally, the United States and Europe face a huge overhang of unresolved private debt, a legacy of the credit bubble—-debt on a scale no nation has ever before confronted. These debts hold back growth, but asset holders—-mostly the banks—-have been loath to write these debts off and take the hit they have to take. Few political leaders are ready to force a painful resolution of these debts. And across both the political and financial worlds, hopes abound that growth will resume, inflating the value of “underwater” assets and devaluing outstanding debt.
That is simply unlikely to happen anytime soon. Economic growth won’t rebound in a sustained way until the developed countries confront deep systemic problems in their own economies and the new and profound distortions in the global economy. Even though three billion people and trillions of dollars in wealth have emerged on the world scene, most policy makers are still stuck in denial about the earth-shattering nature of this shift.
This piece is a modified excerpt from Dan Alpert’s new book, The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy. The book will be released on September 26, from the Penguin Portfolio division of Penguin Random House. Special preview copies will be available on September 24 at The Century Foundation. RSVP today.