Is there a way to soften the blow of economic downturns?
I am closer today to my 90th birthday than I am to my 80th and I have been thinking back to the many things I have learned throughout my long life. I went to good schools, learned some important lessons in life and even found some self-discipline at university. I often think back to my economics classes at the University of California at Berkeley and how they have kept me attentive to the ups and downs of the economy, particularly in observing how the swings and cycles affect the most vulnerable.
The most consistent cycle in capitalist economies is what we call the business cycle: A period of economic expansion leads to a peak, followed by the obligatory contraction of economic activity and a trough, from where the cycle restarts. While that cycle has been accepted as a necessary feature of capitalist economies, I am increasingly questioning its form, considering the repeated harm it does to some categories, while a select few seem to benefit as much from the bust as they do from the boom.
I wonder whether we are more accepting of these boom-bust cycles because they are nicely defined and every repeating phenomenon carries a neat name: Peak, contraction, trough. It is like naming the flu or meteorological effects that we are somehow less wary of because, with a neat name, they appear less threatening than an unexplained event.
Capitalism has been defined by the business cycle, allowing economists to neatly categorize periods, explaining each of the 12 recessions experienced by the US since the Second World War, for example, with specific causes and patterns. The 2007-09 financial crisis, in particular, has left the impression that the rich suffer little from recessions; their businesses are bailed out or declared bankrupt with no consequence to their own wealth and fat-cat investors win big from betting on the downturn of the economic cycle. The poor, it could be posited, lose comparatively little since they did not have much of anything to begin with. But for the vast amount of people in between there is a stiff price to pay every time a capitalist economy goes into recession.
The rich essentially lose the money of others, as they reinvent themselves after a crash and receive easy bank loans even after bankruptcy. It is the masses of ordinary people who suffer unemployment, who can no longer make ends meet and whose careers and lifetime wealth are permanently stunted. With less government spending, it is mostly sectors like education, health and welfare that suffer the greatest cuts, resulting in generations of people who underperform in educational tests and whose health may also be compromised.
Of course, it is the lower-income tiers that are most affected, as they cannot afford to enroll their children in private schools and, due to welfare cuts, are less able to provide adequate care and attention to their children themselves. The poorest subsist on the drip, drip of charitable organizations, while the rich experience little more than professional reconversions toward new sources of wealth.
It is the masses of ordinary people who suffer unemployment, who can no longer make ends meet and whose careers and lifetime wealth are permanently stunted.
Hassan bin Youssef Yassin
What we learned from the 2007-09 financial crisis is that the bank and big company CEOs and executives who advertised their grandiose expertise convinced people to part with their savings, while themselves claiming tremendous compensation for supposedly high-risk responsibilities they said they were taking on. They were not only completely wrong in their actions and analyses, but they never paid any price for their mistakes, holding onto their millions as small-time investors lost everything. The fact that respected magazine The Economist only a few years ago published an article titled “Economists still lack a proper understanding of business cycles” tells us everything we need to know about economic pontificators.
However resistant we may be to this idea, economists and business experts constantly get things wrong — and not primarily the small things. As a result, we must act accordingly and stop putting economists and executives on pedestals, instead urging humility, precaution and a little less greed and casino mentality all around.
It has been particularly interesting in recent years to see a different kind of capitalist economy, one under firm state direction, outperform Western capitalist economies with its own economic cycles. China’s economy has delivered significant growth and withstood the early stages of the pandemic rather solidly. The West has long underestimated the Chinese model, but it is hard to argue that it has not delivered better for the Chinese people overall than Western capitalism has in recent years.
While these economies are obviously at different stages, China has delivered more steady growth and a less bumpy ride for the Chinese people. Less pronounced boom and bust cycles have served the vast majority of the Chinese people better than what Western societies have had to suffer in recent years. The excesses of the Western system, particularly in the lead-up to the 2007 mortgage crisis, are kept at bay in China through tight state control. Russia’s economy is a different story because it is far smaller and less integrated into the world economy, but China deserves our attention.
These are the reflections of an old man after a lifetime of watching economic cycles and their often-forgotten devastation. I do not purport to be an expert on all of these issues, but I believe the questions certainly deserve to be raised and discussed. An important avenue going forward will be to see how much is lost and forgotten in these boom-and-bust cycles. While Western economies as a whole remain on an upward trend despite these cycles, there is also significant long-term harm done to many categories of citizens. How do we quantify what is lost, both economically and in lost opportunities?
We owe it to ourselves and to others to push this analysis further, exploring ways to protect the losing classes from losing and developing ways to lift people up rather than see them constantly rise and fall.
• Hassan bin Youssef Yassin worked closely with Saudi petroleum ministers Abdullah Tariki and Ahmed Zaki Yamani from 1959 to 1967. He headed the Saudi Information Ofﬁce in Washington from 1972 to 1981 and served with the Arab League observer delegation to the UN from 1981 to 1983.