How to avoid the explosion ?
Is it possible to recover from a hangover with a double Scotch? Can we find a way out of the debt crisis by stockpiling further debt? There is widespread concern of public finance running out of control, but we all know that, in the current state of our economies, curbing deficit could lead to an even deeper recession. As Pascal Lamy, chief director of the WTO, recently declared,” a time-bomb is ticking underneath the current recovery, namely soaring public debt” but he still did not advise putting a plug in the deficit. So what are the choices before us? Either fall further into the morass of recession today, or in a few years’ time, run head first into the wall of accumulated debt ?
In fifteen years, public debt in the US has increased by 2000 billion dollars, which represents 14% of GDP. In order to avoid a complete collapse of their economy, in fifteen years, the US has burned up the equivalent of all the reserves China has accumulated over the past twenty years.
As far as China is concerned, the least we can say is that its situation is unstable. As Stephen Stanley, head economist at Morgan Stanley explains, “88% of the growth comes from investment. Such unbalanced growth has never been witnessed in any other country.” To avoid recession, the Chinese government has launched a rescue plan to the tune of 13% of GDP and forced Chinese banks to grant the largest number of loans possible. In one year, they have granted loans to the tune of 30% of GDP. This is completely unheard of,whichever country in the world we are talking about.
On September 10, the Chinese Prime Minister Wen Jiabao stated that “the Chinese recovery is neither stable,solid or balanced.” On the same day, Xu Xionian, professor at the China Europe International Business School, declared that “to quench its thirst, China had drunk poison.”
According to Paul Krugman, Nobel Prize winner for economics, the likelihood of a relapse into recession by the end of 2010 is of the order of 30 to 40%. Simon Johnson, former head economist at MIT, says “we are heading for a catastrophe.” In November, The Société Générale sent its wealthiest clients a report underlining the risk of a “global collapse” of markets. Nicolas Sarkozy is the only person who still dares publicly state that” all the indicators point to the fact that the economy is back on track”.
As Joseph Stiglitz, Nobel Prize winner for economics, wrote in October 2008,” the Paulson plan is like a transfusion for a patient suffering from hemorrhage”. One year on, nothing has changed: we are still transfusing our economies with trillions of dollars without having stopped the internal bleeding. To avoid the explosion, it is a priority to locate this “hemorrhage”, in Joseph Stiglitz ‘ words. Why is it that, in all our countries, our economies are at risk of recession if we stop increasing its debt? Why are our economies so addicted to debt? Can they be weaned off this drug?
To understand the roots of this addiction, we need to examine how public debt in the US has evolved in the past 50 years. Until 1981,the debt/ GDP ratio remained perfectly stable. The economy had no need to resort to debt to grow steadily. Collective regulations ensured a steady rise in salaries and a fair distribution of productivity gains between employees and shareholders. This compromise in the spirit of Henry Ford, has enabled the US to experience thirty years of stability.
When Ronald Reagan took office in 1981, the liberals started lowering taxes on the wealthiest. This decreased tax income and increased public debt. The main reason why public debt increased is that deregulation policies led to a decreasing salary share as part of GDP. From then on, millions of Americans started running into debt to maintain their standard of living.
The US is no exception. In 1982, the salary share of the fifteen wealthiest OECD countries accounted for 67% of GDP. Today, this same share is only 57%.
The salary share as part of GDP may have been a bit too high at the end of the 1970s, but a 10 point fall is massive, and impacts very negatively on household consumption. In July 2003, the Banque Centrale des Banques Centrales- the bank of International Regulations, had already stressed that sluggish consumption increased the risk of global recession.
How can we account for this reduced share? In all our countries, the fear of unemployment has led to a severe imbalance in salary negotiations. “ If you aren’t happy, you go elsewhere.” Even before the outbreak of the subprime crisis, Japan had 32% of job insecurity, and Germany 4 million unemployed and 6 million odd jobs. The US, while officially enjoying full employment, had so many “bad jobs”( 10 to 15 hours a week) that the average working week – excluding the jobless- had actually fallen to 33.7 hours before the outbreak of the crisis(Source: Economic Report of the President 2007).
In this context of unemployment and massive job insecurity, who can ask for a raise? Who can refuse additional work? Who can hand in their resignation, with the hope that before long they will find a new job? We have all experienced the specter of unemployment. For years, the system worked only because a growing debt boosted purchasing power without any change in salaries, but this fool’s paradise has its limits.
“If you’re not happy, you go elsewhere “
The financial crisis is rooted in 30 years of unemployment and job insecurity. It is because of widespread unemployment that the salary share as part of GDP has fallen sharply. It is because of unemployment that our economies need to resort to debt. Not only is unemployment one of the consequences of the crisis, but it is also one of its primary causes. To avoid the explosion, to stop the hemorrhage, we need to tackle unemployment head-on. It is only in giving the maximum number of people a real job and a real capacity to negotiate their salaries that we will find a way out of the current crisis.
Before Bretton-Woods, Philadelphia
In 1944, even before calling the Bretton-Woods summit to rebuild the financial and monetary system, the allies organised the Philadelphia summit which adopted a Charter setting as an absolute priority certain social goals.
Now, at the beginning of 2010, while nervous financial markets confirm that we are not yet out of the crisis but still in the eye of the cyclone, we must without any delay tackle these two main problem areas, namely the definition & implementation of new financial rules and the construction of new social and environmental regulations.