Four equations that need to be changed

Four equations that need to be changed

Hold onto your hats and your wallets. Since the end of the Cold War, the global system has been held together to a large degree by four critical ruling bargains. Today all four are coming unstuck at once and will need to be rebuilt. Whether and how that rebuilding happens—beginning in the US—will determine a lot about what’s in your wallet and whether your hat flies off.

Now let me say that in English: the European Union (EU) is cracking up. The Arab world is cracking up. China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack and needs a total rethink. Recasting any one of these alone would be huge. Doing all four at once—when the world has never been more interconnected— is mind-boggling. We are again “present at the creation"—but of what?

Let’s start with the Middle East, the world’s oil tap. Libyans just joined Tunisians, Egyptians and Yemenis in ousting their dictator, while Syrians and Iranians hope to soon follow suit. In time, virtually every Middle East autocrat will be deposed or forced to share power. The old model was based on kings and military dictators capturing the oil revenue, ensconcing themselves in power and buying off key segments of their populations. That lid has been blown off by an Arab youth bulge that today can see just how everyone else is living and is no longer ready to accept being behind. It will take time for these societies to write their own social contracts for how to live together without an iron fist from above. Hope for the best, prepare for anything.

Farther north, it was a nice idea, this EU and euro zone: Let’s have a monetary union and a common currency, but let everyone run their own fiscal policy, as long as they swear to work and save like Germans. Alas, it was too good to be true. The producer-savers in northern Europe are now drawing up a new deal with the overspenders—PIIGS: Portugal, Italy, Ireland, Greece and Spain. The northern Europeans are trying to force stronger, rule-based discipline on PIIGS. But how much more austerity can these countries absorb? One way or another, the EU is going to get smaller or tighter, but in the process it could go through a chaotic, world-shaking transition not priced into the market, yet.

China has been relying on a model built on a deliberately undervalued currency and export-led growth, with low domestic consumption and high savings. This has allowed the Communist Party to sustain a unique bargain with its people: We give you jobs and rising standards of living, and you give us power. This bargain is now under threat. Persistent unemployment in China’s US and European markets is making Beijing’s model less sustainable for the world. China also has to get rich before it gets old. It has to move from two parents saving for one kid, to one kid paying for the retirement of two parents. To do that, it has to move from an assembly-copying-manufacturing economy to a knowledge-services-innovation economy. This requires more freedom and rule of law, and you can already see mounting demands for it. Something has to give there.

As for America, we’ve thrived in recent decades with a credit-consumption-led economy, whereby we maintained a middle class by using more steroids (easy credit, subprime mortgages and construction work) and less muscle-building (education, skill-building and innovation). It’s put us in a deep hole, and the only way out now is a new, hybrid politics that mixes spending cuts, tax increases, tax reform and investments in infrastructure, education, research and production. But that mix is not the agenda of either party. Either they find a way to collaborate in the centre around this new hybrid politics, or a third party is going to emerge—or we’re stuck and the pain will just get worse.

When the world is experiencing so many wrenching changes at once, the need for America, the most important pillar of all, to be rock solid is greater than ever. If we don’t get our act together— which will require collective action normally reserved for wartime—we are not going to just be prolonging an American crisis, but feeding a global one.

©2011/the new york times

Thomas L Friedman is a columnist for The New York Times

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