Was 2007 a Flexion Point, When Everything Started Going Downhill?

Michael Barone
Posted: Apr 21, 2015 12:01 AM
Was 2007 a Flexion Point, When Everything Started Going Downhill?

I would bet on globalization slowly being in abeyance," tech entrepreneur Peter Thiel said in a video interview with George Mason University economist Tyler Cowen. "I think with the benefit of hindsight, we will realize that 2007 was not just the peak year of the finance boom, but also the peak year of globalization, like maybe 1913."

It's a tantalizing thought, and Thiel is well worth a listen. He is the co-founder of PayPal and the first outside investor in Facebook, selling his initial $500,000 investment eight years later for $1 billion. His record for spotting future trends and flexion points is impressive.

His reference to 1913 was surely meant to be -- and should be -- chilling. That was the last full year before the outbreak of World War I, a conflict in which about 16 million people died. In its wake, Communists took over Russia and Hitler took over Germany. The war made the world safe not for democracy, as Woodrow Wilson had hoped, but for totalitarianism.

Thiel adds that "happily," the decline in globalization "hasn't resulted in a world war, at least not yet." But that's not the only possible damage. The globalization resulting largely from British policies -- free trade, the gold standard -- was not re-established after World War I. Instead, trade protectionism and unstable currencies led to the Great Depression.

World trade fell about 90 percent between 1929-33, as shown in the famous spiral graph in MIT economist Charles P. Kindleberger's classic The World in Depression 1929-1939. The result was not, as current critics of globalization might suggest, good for the workingman. It was economic disaster, political instability and World War II, in which about 60 million people died.

As commemorations of the centenary of World War I last year reminded us, 1914 was a flexion point in history. Is Thiel right in supposing, or fearing, that 2007 was a flexion point too? There are unsettling indications that the answer is yes.

One is that world trade has been declining. As Cowen notes in response to Thiel, and as economists in the World Trade Organization, recently reported, world trade, which increased at two to three times the rate of world gross domestic product in the years before 2007, has slowed since, to about the same rate as or slightly lower than the disappointing growth in world GDP. That's not Kindleberger's spiral graph, but it's not good news either.

International trade makes goods and services cheaper for consumers and creates new markets for producers. In the quarter-century from 1982 to 2007, it has lifted hundreds of millions of people -- especially but not only in China and India -- from deep poverty to middle class comfort or better.

Another negative trend since 2007 is growing violence. In his 2011 book, "The Better Angels of Our Nature," Harvard psychologist Steven Pinker argued persuasively that violence, military and domestic, has declined drastically from earlier peaks. About 4,000 American soldiers died in eight years of war in Iraq. On the first day of the Battle of the Somme in 1916, the British death toll was 19,000. On one day.

Recently, Australia's Institute for Economics and Peace has reported that war deaths and global violence have been rising since 2007, to 163,000 in 2014. That's well below World War levels, but still disturbing.

Political freedom, too, seems to be on the decline, and from about the same flexion point. In its 2015 annual report, Freedom House reports that the number of countries with declines in freedom has exceeded those with improvements in freedom in every year from 2006-14.

And it's well known that economic growth in the years after 2007 has lagged behind pre-2007 levels. Immigration to the United States is sharply down -- there was no net immigration from Mexico in 2007-12 -- and so is internal migration within the country. As in the 1930s, though to a lesser extent, in hard times people tend to hunker down.

If Thiel is right, why was 2007 a flexion point? Bad U.S. policy surely played a major role. A losing strategy in Iraq (reversed by the Bush surge, with gains squandered by the Obama withdrawal) weakened America's reputation for maintaining order in the world. Misguided Clinton and Bush housing policy plus stupid regulation led to the financial crisis.

Let's hope the post-2007 negative trends are temporary and limited. But let's start thinking hard about how to reverse them.