Economic Recession in the Early 21st Century
Overview
The Great Recession
The Great Recession had deep impacts on the United States and the global market. Many of the mortgages that were backed by US banks quickly failed and the selling of these mortgages throughout the US market meant that the effects were global.
Learning Objectives
- Evaluate the origin of the Great Recession.
- Analyze the impact of the Great Recession on the global politics and economics.
Key Terms / Key Concepts
The Great Recession: in 2010 the economic collapse of the United States securities backed industry that quickly spread throughout the global marketplace
The Great Recession
The Great Recession began, as most American economic catastrophes began, with the bursting of a speculative bubble. Throughout the 1990s and into the new millennium, home prices continued to climb, and financial services firms looked to cash in on what seemed to be a safe but lucrative investment. After the dot-com bubble burst, investors searched for a secure investment rooted in clear value, rather than in trendy technological speculation. What could be more secure than real estate? But mortgage companies began writing increasingly risky loans and then bundling them together and selling them over and over again, sometimes so quickly that it became difficult to determine exactly who owned what.
Decades of financial deregulation had rolled back Depression-era restraints and again allowed risky business practices to dominate the world of American finance. It was a bipartisan agenda. In the 1990s, for instance, Bill Clinton signed the Gramm-Leach-Bliley Act, repealing provisions of the 1933 Glass-Steagall Act separating commercial and investment banks, and the Commodity Futures Modernization Act, which exempted credit-default swaps—perhaps the key financial mechanism behind the crash—from regulation.
Mortgages had been so heavily leveraged that when American homeowners began to default on their loans, the whole system collapsed. Major financial services firms such as Bear Stearns and Lehman Brothers disappeared almost overnight. In order to prevent the crisis from spreading, the federal government poured billions of dollars into the industry, propping up hobbled banks. Massive giveaways to bankers created shock waves of resentment throughout the rest of the country. On the right, conservative members of the Tea Party decried the cronyism of an Obama administration filled with former Wall Street executives. The same energies also motivated the Occupy Wall Street movement, as mostly young left-leaning New Yorkers protested an American economy that seemed overwhelmingly tilted toward “the one percent.”
The Great Recession only magnified already rising income and wealth inequalities. According to the chief investment officer at JPMorgan Chase, the largest bank in the United States, “profit margins have reached levels not seen in decades,” and “reductions in wages and benefits explain the majority of the net improvement.” A study from the Congressional Budget Office (CBO) found that since the late 1970s, after-tax benefits of the wealthiest 1 percent grew by over 300 percent. The “average” American’s after-tax benefits had grown 35 percent. Economic trends have disproportionately and objectively benefited the wealthiest Americans. Still, despite political rhetoric, American frustration failed to generate anything like the social unrest of the early twentieth century. A weakened labor movement and a strong conservative bloc continue to stymie serious attempts at reversing or even slowing economic inequalities. Occupy Wall Street managed to generate a fair number of headlines and shift public discussion away from budget cuts and toward inequality, but its membership amounted to only a fraction of the far more influential and money-driven Tea Party. Its presence on the public stage was fleeting.
The Great Recession, however, was not. While American banks quickly recovered and recaptured their steady profits, and the American stock market climbed again to new heights, American workers continued to lag. Job growth was slow and unemployment rates would remain stubbornly high for years. Wages froze, meanwhile, and well-paying full-time jobs that were lost were too often replaced by low-paying, part-time work. A generation of workers coming of age within the crisis, moreover, had been savaged by the economic collapse. Unemployment among young Americans hovered for years at rates nearly double the national average.
Stagnation
In 2012, Barack Obama won a second term by defeating Republican Mitt Romney, the former governor of Massachusetts. However, Obama’s inability to control Congress and the ascendancy of Tea Party Republicans stunted the passage of meaningful legislation. Obama was a lame duck before he ever won reelection, and gridlocked government came to represent an acute sense that much of American life—whether in politics, economics, or race relations—had grown stagnant.
The economy continued its halfhearted recovery from the Great Recession. The Obama administration campaigned on little to specifically address the crisis and, faced with congressional intransigence, accomplished even less. While corporate profits climbed and stock markets soared, wages stagnated and employment sagged for years after the Great Recession. By 2016, the statistically average American worker had not received a raise in almost forty years. The average worker in January 1973 earned $4.03 an hour. Adjusted for inflation, that wage was about two dollars per hour more than the average American earned in 2014. Working Americans were losing ground. Moreover, most income gains in the economy had been largely captured by a small number of wealthy earners. Between 2009 and 2013, 85 percent of all new income in the United States went to the top 1 percent of the population.
But if money no longer flowed to American workers, it saturated American politics. In 2000, George W. Bush raised a record $172 million for his campaign. In 2008, Barack Obama became the first presidential candidate to decline public funds (removing any applicable caps to his total fund-raising) and raised nearly three quarters of a billion dollars for his campaign. The average House seat, meanwhile, cost about $1.6 million, and the average Senate Seat over $10 million. The Supreme Court, meanwhile, removed barriers to outside political spending. In 2002, Senators John McCain and Russ Feingold had crossed party lines to pass the Bipartisan Campaign Reform Act, bolstering campaign finance laws passed in the aftermath of the Watergate scandal in the 1970s. But political organizations—particularly PACs—exploited loopholes to raise large sums of money and, in 2010, the Supreme Court ruled in Citizens United v. FEC that no limits could be placed on political spending by corporations, unions, and nonprofits. Money flowed even deeper into politics.
The influence of money in politics only heightened partisan gridlock, further blocking bipartisan progress on particular political issues. Climate change, for instance, has failed to transcend partisan barriers. In the 1970s and 1980s, experts substantiated the theory of anthropogenic (human-caused) global warming. Eventually, the most influential of these panels, the UN’s Intergovernmental Panel on Climate Change (IPCC) concluded in 1995 that there was a “discernible human influence on global climate.This conclusion, though stated conservatively, was by that point essentially a scientific consensus. By 2007, the IPCC considered the evidence “unequivocal” and warned that “unmitigated climate change would, in the long term, be likely to exceed the capacity of natural, managed and human systems to adapt.
Climate change became a permanent and major topic of public discussion and policy in the twenty-first century. Fueled by popular coverage, most notably, perhaps, the documentary An Inconvenient Truth, based on Al Gore’s book and presentations of the same name, addressing climate change became a plank of the American left and a point of denial for the American right. American public opinion and political action still lagged far behind the scientific consensus on the dangers of global warming. Conservative politicians, conservative think tanks, and energy companies waged war to sow questions in the minds of Americans, who remain divided on the question, and so many others.
Much of the resistance to addressing climate change is economic. As Americans looked over their shoulder at China, many refused to sacrifice immediate economic growth for long-term environmental security. Twenty-first-century relations with China remained characterized by contradictions and interdependence. After the collapse of the Soviet Union, China reinvigorated its efforts to modernize its country. By liberating and subsidizing much of its economy and drawing enormous foreign investments, China has posted massive growth rates during the last several decades. Enormous cities rise by the day. In 2000, China had a GDP around an eighth the size of U.S. GDP. Based on growth rates and trends, analysts suggest that China’s economy will bypass that of the United States soon. American concerns about China’s political system have persisted, but money sometimes matters more to Americans. China has become one of the country’s leading trade partners. Cultural exchange has increased, and more and more Americans visit China each year, with many settling down to work and study.
Global Impact of the Great Recession
While it is true that free trade encourages globalization among countries, some countries try to protect their domestic suppliers. The main export of poorer countries is usually agricultural productions. Larger countries often subsidize their farmers (e.g., the EU's Common Agricultural Policy), which lowers the market price for foreign crops. Thus, globalization can be described as an uneven process due to the global integration of some groups alongside the marginalization or exclusion of others.
Many economists discuss that any time the United States has an economic problem, that it creates a much bigger problem for Europe and the rest of the world. The Great Recession of 2008-2012 had an incredibly large process and problem for Europe and the world economics. The impact of the Great Recession in Europe was significant. Many of the great economic powers of Europe, such as France and Germany were directly impacted. This created a significant drop in both of these countries GDP and caused an immediate recession in Europe. England also was significantly impacted economically during this period. While larger countries were able to weather the storm, smaller economies were not as strong.
A group of European countries known as PIIGS (Portugal, Italy, Ireland, Greece, and Spain) had significant problems during this period. There are many different reasons why each of these economies struggled. For example, Greece in the pervious period had large public debts from social safety nets that meant that Greece was virtually bankrupted by the recession. These debts were a problem because each of these European states were members of the European Union, and there was consideration that each of these countries would leave the organization. The fears of member states leaving meant that England, France, and Germany all came together in 2010 to address this issue. There was many fears about how if Greece failed, what would that mean for other European states. In the end, Germany and France agreed to provide economic aid to Greece for stabilization. The end result was that Greece would remain a member of the European Union, but would have to have significant restructuring of their government. One of the conditions of the deal was that Greece would have to elect new leaders to positions of power. Many Greeks resented this, and throughout the majority of 2010-2011, there were several different elections in Greece for new leadership. This resulted in turnover of governments very quickly. As a result, there was a significant problem that emerged: the rise of neo-Nazi parties in political power.
Since the end of World War II, fascism as a political ideology that had power was removed. The end of the Nazi party meant that many fascist states in the world were gone. Yet, because of the Great Recession there were individuals who felt that their voices were not heard and antagonism towards the government. The feeling of the middle being lost and fears of deeper recession and loss of independence meant that many rejected these austerity measures. Those that were radical that had been in the shadows of the political discussion began to have a much bigger appeal due to the economic consequences of the recession. In Greece, the first election of a pro-Nazi politician emerged in 2010. This would give way to the rise of many leaders around the world that would espouse these same ideas throughout the 2010s in states such as Turkey, Brazil, and the Philippines. Very similar to the Great Depression, when the middle class felt that they lost, people began looking to radical and more radical politicians and ideas for answers.
Attributions
Attributions
Images courtesy of Wikimedia Commons: Wallstreet bets https://econafterhoursssc.wordpress.com/2018/09/23/a-beginners-guide-to-the-2008-financial-crisis/
Boundless World History https://www.coursehero.com/study-guides/boundless-worldhistory/the-americas-in-the-21st-century/