Today, Lawrence Summers, the controversial former president of Harvard University, and former Secretary of the Trasury for Clinton in the late 90s, has an interesting Op-Ed in the Financial Times (Europe's main English-language business paper) about the obvious lack of fairness of our current economic policies. I'll quote a few extracts below, but I'd like to highlight one sentence which could be a good hook against our politicians bent on "reform":
Yet it would not be a sufficient response for business or government simply to explain why populist policies would be counterproductive and to suggest – to borrow a term from a different debate – a "stay the course" strategy, perhaps with increased attention to the displaced. If the anxious middle’s concerns about fairness are this serious when the unemployment rate is 4.4 per cent, they will be far greater whenever the economy next turns down.
What a great description of the economic policies of the right.
Summers's point is that of the smart capitalist: the system is currently broken, and needs to be seriously adjusted before the middle classes enter into open revolt and push for what he sees as highly noxious policies (protectionism and the like). One may disagree with him whether what he proposes would be enough (his suggestions focus, essentially, on increasing taxes on the rich and the corporations), and whether it is even possible, but at least he acknowledges the problem and is willing to do something about it.
Only fairness will assuage the anxious middle
In the past, real wages and corporate profitability have moved together – increasing during economic expansions and when the US became more competitive, declining in recessions and when it encountered significant competitive threats. The unique feature of the current expansion is the divergence between the fortunes of capital and the fortunes of labour. While workers normally receive about three-quarters of corporate income, with the remainder going to profits and interest, the Economic Policy Institute has calculated that, since 2001, labour has received only about one-quarter of the increase in corporate income, as real wages have failed to keep pace with productivity growth.
That's a huge imbalance, and it's been the fundamental marker of this economic decade: violent profit growth (bringing profits, as Summers points out elsewhere in his article, to their highest level in two generations) accompanied by (and created by, the unsaid link) stagnant wages.
Indeed, for most groups of workers, wages have not kept pace with inflation over the past several years. College graduates have been particularly hard hit, with their wages struggling to keep pace with inflation over the past five years. At the same time, profits per share for companies in the Standard & Poor’s 500 index have increased at an annual rate of more than 10 per cent, even after taking into account inflation over the past four years.
The Financial Times has a special report on the German economy today, where they state that it is doing great, with exports and company profits going way up, but tucked in there they notice that consumption is stagnant, and even deeper in the report they note that real wages are lower in 2005 than they were in 1991. The story is even worse in the US, with a lot more inequality as the rich captured an ever growing share of the pie.
Today, an increasing fraction of Americans see corporate leaders as part of Davos’s team rather than America’s.
These economic and political trends are and should be of great concern to the business community as well as to policymakers. They have led to populist policy proposals that cut against the grain of the market system by, for example, limiting free trade agreements, restricting outsourcing or limiting the ability of successful companies to expand.
The track record of such populist proposals is dismal. They rarely achieve their objectives and come with huge collateral costs.
Like Dean Baker notes, Larry Summers is basically trying to salvage the Washington Consensus (the creation of which he played a big part in, in his various jobs at the World Bank and then at the US Treasury), by claiming that inequality has only been a problem in the last 5 years, when it has been the trend for the past 25 years - since Reagan and Thatcher came to power, to put it simply, and it has a lot more to do with the general ideological background (whereby government action of any kind, even as a regulator and creator and enforcer of rules, is EVIL, and the taxes to pay for these roles are EVEN MORE EVIL) we've been living in.
And in fact, the track record of populism, in places that have been subjected to the harshest version of the Washington Consensus; like, say, Argentina, or even Chile, is a whole lot better than that of the Washington Consensus periods...
Source (via talos over in the European Tribune thread on Pinochet)
Contrary to ideological expectations about free markets and robust growth, average GDP growth in the period 1974-89--the radical Jacobin phase of the Friedman-Pinochet revolution--was only 2.6 per cent, compared to over 4 per cent a year in the period 1951-71, when there was a much greater role of the state in the economy.
By the end of the radical free-market period, both poverty and inequality had increased significantly. The proportion of families living below the "line of destitution" had risen from 12 to 15 per cent between 1980 and 1990, and the percentage living below the poverty line, but above the line of destitution, had increased from 24 to 26 per cent. This meant that at the end of the Pinochet regime, some 40 per cent of Chile's population, or 5.2 million of a population of 13 million, were poor.
(...)
The radical Friedman-Pinochet phase of the Chilean economic counterrevolution came to an end in the early 1990's, after the Concertacion came to power. In violation of classic Friedmanism, this center-left coalition increased social spending to improve Chile's income distribution, bringing down the proportion of people living in poverty from 40 per cent to 20 per cent of the population. This modification, which increased internal purchasing power, contributed to the post-Pinochet average yearly growth rate of six per cent a year.
But back to Summers:
This puts a premium on finding measures that go with the grain of the market system while also responding to concerns about fairness. The place to start is by restoring the progressivity of the tax system – an area where much can be accomplished before considering changes to the rate structure.
(...)
John Kennedy famously challenged Americans: "Ask not what your country can do for you. Ask what you can do for your country." In the years ahead, this question will be put with increasing force to US corporations. A great deal depends on the vigour with which it is answered.
At least, while his stated objective is to salvage globalisation and free trade, he at least acknowledges that the benefits of such globalisation must be shared around (something which the current "reformers" always fail to mention and, quite the opposite, vigorously contest as being anti-competitive), and he states quite explicitly that this must be done via tougher taxation on the rich and the corporations.
Whether this can be done in a ideological environment where government is bad by definition and taxes are evil remains to be seen, but it's at least a step forward that such ideas are thought and printed in a quite visible place.
In the meantime, I would suggest to spread the meme of the *"stay the course" economics* of the Republicans, whole only goal is corporate welfare, and whose consequences are increased inequality and lower standards of living for all but a tiny minority.