What will the world look like when the present emergency has passed? The safest prediction is that the post-crisis financial sector will be downsized and more heavily regulated, nationally and internationally. The financial sector as a whole, which peaked at 40 percent of corporate profits in the United States in 2006, may shrink as much as 50 percent in the aftermath of the emergency.
We can also comfortably wager that government subsidies will rule the day. State capitalism, in one form or another, has always existed in Europe and the industrial nations of East Asia. Now, state capitalism with American characteristics may emerge from the de facto nationalization of the U.S. automobile industry and perhaps other sectors that need to be rescued as the wave of deleveraging works its way through the economy.
A generation hence, global industry is likely to be as heavily subsidized as global agriculture. In the 20th century, the agricultural subsidies of the United States and European Union inspired by memories of the Great Depression produced lakes of milk and mountains of butter. In our day, the industrial subsidies of the industrial great powers of North America, Europe, and Asia inspired by memories of the Great Recession will produce cascades of cars and avalanches of aircraft. The glut of subsidized manufactured goods will grow worse over time, as 21st-century manufacturing, like 20th-century agriculture, becomes ever more productive and capital-intensive.
Next up: the unexpected triumph of the classic modern welfare state. Before last September, it was widely assumed in developed countries that public pensions, universal healthcare, and other forms of social insurance were doomed by their costs in a world of graying populations or by their inefficiency compared with privatized alternatives. What a difference the collapse of the world economy can make. Millions of affluent people who thought of themselves as part of a new "investor class" have lost vast amounts in the stock market. Slowly, they are realizing that they will depend more, not less, on public pensions like Social Security in the United States.
And privatization of public pensions? Forget about it. For a generation or two to come, until the memory of the present emergency fades, nobody who wants to be taken seriously will argue that money should be diverted from public pensions into the stock market. Any new savings systems will be so heavily regulated in the interest of minimizing risk that they will be public in all but name.
Meanwhile, countries that staked too much on export-oriented growth, such as China, now realize that they must balance their economies by increasing consumption and reducing private savings. But their citizens will not spend more freely until well-developed public safety nets that provide healthcare, unemployment insurance, and retirement income make it unnecessary to hoard money. Look for developing countries such as China to expand social insurance programs as they try to shift toward consumption-driven growth. Milton Friedman will be rolling over in his grave.
Before the crash of 2008, it was widely thought that the growing number of middle-class consumers in China, India, and the rest of the developing world would drive up the prices of energy, food, and raw materials. The collapse of global demand has not discredited that prediction; it has only postponed its realization. Whether recovery comes in two years or 10, the global economy will rebound, and demand-driven increases in commodity prices will then return with a vengeance.
Combined with the glut in manufactured goods created by industrial subsidies, this will create a world in which factory products are relatively cheap while food and raw materials are relatively expensive. The beneficiaries are likely to be countries blessed by nature with irreplaceable resources and rich and productive agriculture. The United States falls into both categories.
Even in the unlikely event that greens manage to outlaw nuclear power and coal-powered utilities, the country has substantial amounts of uranium, as well as vast reserves of coal, natural gas, and oil deposits, that high prices would make worth recovering. And U.S. agriculture is not only the most efficient on the planet, but also the best situated. According to scientists, global warming is likely to help rather than hurt rain-fed agriculture in the American breadbasket.
The new future will mark the revenge of the farmers against the city slickers, and not only because of the bonanza that awaits agriculture and extractive industries.
New York, London, and other financial centers were heavily dependent on financial-sector profits. Throw in the technology-driven collapse of the publishing and broadcast industries headquartered in such places, and those cities are likely to suffer devastating blows. Capitals of both politics and commerce, such as Paris and Tokyo, will adjust the best in the new state-capitalist world. Purely commercial centers such as New York and Frankfurt will suffer the most. Without the obscenely rich investment bankers and the legions of well-paid retainers who supported their lifestyles, formerly flourishing parts of these former financial capitals may become as derelict as Detroit or the crumbling industrial towns of northern Britain and Germany's Ruhr region.
Post-bubble, these once great cities will have to raise property taxes while slashing services, driving out wave after wave of productive residents. In desperation, some will specialize, like New Orleans and Las Vegas, in entertainment; the metaphorical casino capitalism of high finance will give way to actual casino capitalism for some struggling cities. The general seediness associated with nightlife-driven economies, together with bankrupt schools, inadequate police protection, and skyrocketing property taxes, will force the upper-middle class to flee the worst-afflicted world cities.
There will be no winners from the prolonged and painful economic emergency. But some countries will lose more than others. The United States is likely to emerge less damaged than most, as unfair as that will seem to a world that blames it for triggering the crisis. For one thing, it is much easier for a chronic trade-deficit country such as the United States to rebuild its battered export sector than it is for export-oriented countries like China and Japan to rebalance their economies toward more consumption and social insurance. For another, the United States, alone among the world's leaders, is potentially an industrial superpower, a commodity superpower, and an energy superpower at the same time.
The United States will also continue to benefit from the inward flow of foreign money, talent, and labor. Others may grumble about the creditworthiness of Uncle Sam in light of emergency-driven deficits, but in the foreseeable future what places will be a safer haven for investments? A fragile and politically unstable China? Japan, with a shaky economy and aging population? A Europe of squabbling nation-states, riven by cleavages between natives and Muslim immigrants? Authoritarian petrostates where assets can be confiscated without warning?
The crisis has reduced the flow of immigrants into the United States along with the demand for their labor, but both should recover, putting the country back on its pre-crisis path of immigration-fed population growth and leading to a population of 400 to 500 million by 2050 and as many as a billion people by 2100. Whether the U.S. economy can grow rapidly enough to maintain a high standard of living for all those people remains to be seen (though prophets of Malthusian gloom about alleged U.S. overpopulation have been refuted many times before). The bottom line is: The populations of Europe, Russia, and Japan are declining, and those of China and India are leveling off. The United States alone among great powers will be increasing its share of world population over time.
Otto von Bismarck observed that God favors fools, drunkards, and the United States of America. The U.S.A. has been a lucky country, and despite its present suffering it is unlikely that America's luck has run out. Relying on the import of money, workers, and brains for more than three centuries, North America has been a Ponzi scheme that works. The present crisis notwithstanding, it still will.