Recession, Beyond the Economy

Lee Hudson Teslik
Council on Foreign Relations
Tuesday, January 22, 2008 11:22 AM

When Goldman Sachs recently revised its forecast for the U.S. economy, predicting a recession in 2008 (Reuters), the shockwaves weren't confined to boardrooms or even living rooms. The economic ramifications of a recession are much-discussed, myriad, and well-known. Less certain are the geopolitical and geoeconomic effects a U.S. downturn might bring, particularly at a time that finds other powers on the rise, the price of vital commodities spiking, and U.S. prestige in question.

First, a turndown could shake the economic confidence of the United States, which in spite of its challenges remains the fulcrum of the global economy. The most recent World Bank data (PDF) show total U.S. GDP more than triple that of Japan, its nearest rival. Even adjusting for regional disparities in purchasing power, the United States still ranks highest in the world in GDP (PDF). A late-January market panic (WSJ), sparked by fears of a U.S. recession, made abundantly clear how closely global markets watch Wall Street. Yet Newsweek's Fareed Zakaria notes that U.S. economic policy seems overshadowed by insecurity and fear.

A recession could deepen this insecurity, emboldening protectionist and isolationist sentiments simmering in the United States. In a recent podcast, CFR's Amity Shlaes discusses the historical context of trade protectionism, warning that trade policy could get significantly more restrictive than it is now. CFR's Candidate Issue Tracker on trade indicates presidential candidates in both parties hold some protectionist views. Already negotiated trade deals with Colombia and South Korea face grim prospects on Capitol Hill.

Beyond trade, a recession could make struggling U.S. corporations and banks more appetizing takeover targets for global investors, particularly Middle Eastern and East Asian sovereign wealth funds flush with cash. "What if Middle Eastern or East Asian SWFs banded together to oust the CEO of a U.S. corporation?" asks CFR's Sebastian Mallaby in a recent Washington Post column. Mallaby says the controversy stirred in 2005 when the UAE-owned company Dubai Ports World bid for ownership of key U.S. port facilities could be only the tip of the iceberg.

Meanwhile, domestic job losses could supercharge the U.S. immigration debate, where anti-immigration activists already blame illegal migrants for siphoning away jobs. Tighter immigration policy might limit U.S. competitiveness globally, particularly in high-tech sectors. Peter Robertson, the vice chairman of the energy firm Chevron, tells that oil firms already face a dearth of skilled petrochemical engineers.

Recession could also heighten the economic stakes of the Iraq war, limiting policy options for the next U.S. president. A November 2007 congressional report details the impact of rising war costs on the economy. Conversely, a recent report from the British-based International Institute for Strategic Studies predicts an economic downturn could solve the military's recruitment woes.

Globally, economists see a silver lining in the developing world. Emerging markets in East Asia, the Middle East, Latin America, Eastern Europe, and even Africa have seen rapid recent growth (Economist), and analysts hope growing consumption in these regions might offset declines in the United States. Either way, analyst Zakaria and others argue, a downturn need not bring a permanent loss of power for Washington, if policymakers reclaim the "open and expansive" attitude with which they once embraced the world.

Of course, not all recessions are created equal. Goldman doesn't predict a deep recession, but rather a mild turndown, with modest recovery in 2009. Experts elsewhere remain divided on whether the U.S. economy truly will "recess," or simply grow at a slower rate. On January 18, President Bush announced an economic stimulus package aimed at forestalling a downturn. The U.S. Federal Reserve, for its part, announced emergency interest rate cuts of seventy-five basis points on January 22 -- the Fed's largest single rate cut since 1982. Economics wonks will keep a close eye on how markets respond to the move. Forward-looking policy wonks will be doing the same.

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