FYI with no comments, except possibly saying that I agree with Michael
Yates wholeheartedly
Best,
Sabri
Begin forwarded message:
From: "Nouriel Roubini" <[email protected]>
Date: October 24, 2011 9:15:04 PM GMT+03:00
To: [email protected]
Subject: Re: [recovery-human-face] E-Discussion: A Recovery for All?
Reply-To: [email protected]
Dear colleagues,
This year has witnessed a global wave of social and political
turmoil and instability, with masses of people pouring into the real
and virtual streets: the Arab Spring; riots in London; Israel’s midd
le-class protests against high housing prices and an inflationary sq
ueeze on living standards; protesting Chilean students; the destruct
ion in Germany of the expensive cars of “fat cats”; India’s
movement against corruption; mounting unhappiness with corruption an
d inequality in China; and now the “Occupy Wall Street” movement
in New York and across the United States.
While these protests have no unified theme, they express in
different ways the serious concerns of the world’s working and middl
e classes about their prospects in the face of the growing concentra
tion of power among economic, financial, and political elites. The c
auses of their concern are clear enough: high unemployment and under
employment in advanced and emerging economies; inadequate skills and
education for young people and workers to compete in a globalized w
orld; resentment against corruption, including legalized forms like
lobbying; and a sharp rise in income and wealth inequality in advanc
ed and fast-growing emerging-market economies.
Of course, the malaise that so many people feel cannot be reduced to
one factor. For example, the rise in inequality has many causes: the
addition of 2.3 billion Chinese and Indians to the global labor
force, which is reducing the jobs and wages of unskilled blue-collar
and off-shorable white-collar workers in advanced economies; skill-
biased technological change; winner-take-all effects; early
emergence of income and wealth disparities in rapidly growing,
previously low-income economies; and less progressive taxation.
The increase in private- and public-sector leverage and the related
asset and credit bubbles are partly the result of inequality.
Mediocre income growth for everyone but the rich in the last few
decades opened a gap between incomes and spending aspirations. In
Anglo-Saxon countries, the response was to democratize credit – via
financial liberalization – thereby fueling a rise in private debt as
households borrowed to make up the difference. In Europe, the gap w
as filled by public services – free education, health care, etc.
– that were not fully financed by taxes, fueling public deficits and
debt. In both cases, debt levels eventually became unsustainable.
Firms in advanced economies are now cutting jobs, owing to
inadequate final demand, which has led to excess capacity, and to
uncertainty about future demand. But cutting jobs weakens final
demand further, because it reduces labor income and increases
inequality. Because a firm’s labor costs are someone else’s labor
income and demand, what is individually rational for one firm is des
tructive in the aggregate.
The result is that free markets don’t generate enough final demand.
In the US, for example, slashing labor costs has sharply reduced the
share of labor income in GDP. With credit exhausted, the effects on
aggregate demand of decades of redistribution of income and wealth
– from labor to capital, from wages to profits, from poor to rich, a
nd from households to corporate firms – have become severe, owing to
the lower marginal propensity of firms/capital owners/rich househol
ds to spend.
The problem is not new. Karl Marx oversold socialism, but he was
right in claiming that globalization, unfettered financial
capitalism, and redistribution of income and wealth from labor to
capital could lead capitalism to self-destruct. As he argued,
unregulated capitalism can lead to regular bouts of over-capacity,
under-consumption, and the recurrence of destructive financial
crises, fueled by credit bubbles and asset-price booms and busts.
Even before the Great Depression, Europe’s enlightened
“bourgeois” classes recognized that, to avoid revolution,
workers’ rights needed to be protected, wage and labor conditions im
proved, and a welfare state created to redistribute wealth and finan
ce public goods – education, health care, and a social safety net. T
he push towards a modern welfare state accelerated after the Great D
epression, when the state took on the responsibility for macroeconom
ic stabilization – a role that required the maintenance of a large m
iddle class by widening the provision of public goods through progre
ssive taxation of incomes and wealth and fostering economic opportun
ity for all.
Thus, the rise of the social-welfare state was a response (often of
market-oriented liberal democracies) to the threat of popular
revolutions, socialism, and communism as the frequency and severity
of economic and financial crises increased. Three decades of
relative social and economic stability then ensued, from the late
1940’s until the mid-1970’s, a period when inequality fell
sharply and median incomes grew rapidly.
Some of the lessons about the need for prudential regulation of the
financial system were lost in the Reagan-Thatcher era, when the
appetite for massive deregulation was created in part by the flaws
in Europe’s social-welfare model. Those flaws were reflected in yawn
ing fiscal deficits, regulatory overkill, and a lack of economic dyn
amism that led to sclerotic growth then and the eurozone’s sovereign
-debt crisis now.
But the laissez-faire Anglo-Saxon model has also now failed
miserably. To stabilize market-oriented economies requires a return
to the right balance between markets and provision of public goods.
That means moving away from both the Anglo-Saxon model of
unregulated markets and the continental European model of deficit-
driven welfare states. Even an alternative “Asian” growth model
– if there really is one – has not prevented a rise in inequality
in China, India, and elsewhere.
Any economic model that does not properly address inequality will
eventually face a crisis of legitimacy. Unless the relative economic
roles of the market and the state are rebalanced, the protests of
2011 will become more severe, with social and political instability
eventually harming long-term economic growth and welfare.
Nouriel Roubini
Chairman of Roubini Global Economics
Professor of Economics at the Stern School of Business
New York University
Published at: http://www.project-syndicate.org/contributor/1095
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