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By shifting the distribution of income and wealth in their own favour, the world’s elites have dug their own economic graves, says Aseem Shrivastava. The way out of the present crisis is the old Keynesian one of stimulating demand in the economy. A massive redistribution of income and wealth towards the poor is called for. And only governments can do this
Most economists separate the goal of economic growth from the distribution of benefits that growth will bring. First we must expand the pie, so the wisdom goes. Then one can consider ways of distributing it equitably. It is this idea that justified the “trickle-down” economics of the past several decades. In the short run, we were warned, “efficiency” would come at the cost of equity. This could then be corrected “later on”, through appropriate government policies, once investment by the rich had created the wealth.
Now we can see the serious flaw in such a view. It is precisely the growth of inequalities over the past few decades that is responsible for the mess we are in today. Bad income and wealth distribution ultimately put a stop to economic growth itself.
If one could reduce the staggering complexities of the burgeoning financial and economic crisis to one underlying cause, it is this: by shifting the distribution of income and wealth in their own favour over the past several decades, the world’s elites inadvertently dug their own economic graves. Through financial deregulation, the many tax cuts, investment credits, cheap money, and a whole assembly of similar “incentives” (in the guise of “trickle-down” hopes), not to forget the time-tested means of upward redistribution of income and wealth via inflation (and, in India, such ultimately self-defeating measures as forced land acquisition from poor peasants), they ensured that purchasing power would be increasingly concentrated in fewer and fewer hands.
The rich became super-rich, ostensibly in order to reduce poverty in the world. They consumed a part of their greater wealth. They invested the rest, but most of it inevitably in speculative activities. In the event, a point was reached (when American sub-prime lenders could not pay their mortgages) when the realisation began to dawn on the world’s moneybags that there isn’t nearly as much real wealth around as the money floating around the world’s financial markets seemed to indicate. The wind-down was inevitable after that. Expectations had been defeated by the underlying reality.
What rising inequality does to an economy could have been (and was) foretold long ago. Every economy needs a wide base of demand for consumer goods if it is to grow in a balanced, sustainable manner. But the growth of economies during the past few decades has happened on a very narrow base. The rich have led demand through luxury consumption, even as the poor have been denied necessities, even those to which they had limited access till very recently. The middle classes have indulged in debt-driven consumption, which is now at an end, because it was ultimately fuelled by the “cheap money” policies of the Federal Reserve in the US. Now that era is over.
We are learning that every growth strategy has underlying it an implicit strategy for the distribution of wealth and income. One simply cannot separate issues of growth and distribution, not after the present crisis. We are also learning that growth numbers can be artificially buoyed up in an era of cheap money. But when the limits of the underlying distribution of wealth and income kick in, reality sets in to end the hype about growth.
By doctoring or understating the data, governments and international financial institutions have fooled themselves and the world that the middle class was expanding everywhere. If this were really the case, for instance in the US, the bottom would never have fallen out of the housing market in the first place. There would have been no sub-prime crisis. In India, right now, we would have felt protected from the world’s troubles by relying on the huge home market instead of on exports. The middle class may have grown somewhat in places like China. But its future is quite uncertain, especially given job insecurities.
Every bank, every financial institution, every business enterprise everywhere feels the threat of the “contagion” that is currently overtaking markets around the world. All semblance of economic security is gone. Many believed till recently that the crisis is American in origin and will thus remain confined to its shores. How such illusions could be entertained in a globalised economy is a mystery. Financial markets are so intricately networked across the world, and the lure of quick and high returns so universal, that it came as no surprise when banks cutting across countries in the EU were panicked into seeking (and getting) massive state support. It was as foreseeable that the Japanese, Chinese and other Asian economies, relying largely on export-led growth over the past few decades, will have to take the fall of the Western economies on their chins. Shipping, transport, automobiles, energy, steel, real estate, construction, machinery and all other major sectors of these economies are rapidly winding down.
Where the bottom lies, no one cay say.
There has never been such uncertainty in the world in living memory. Globalisation as we have known it, is fast approaching an end.
Is there a way out?
What should be amply clear to economists and policymakers is that pumping more money into the banking and financial system is not only going to be ineffective, it will actually make the problems ultimately much worse. When the economic outlook is gloomy lenders will simply absorb any cash they get. No one wishes to lend today. Liquidity is at a premium. Also, massively leveraged institutions will use the cash to steady their boats by paying off debts (“de-leverage”) rather than generate more credit and demand in the system. Monetary policy has become impotent to tackle what it itself is largely responsible for.
Moreover, everyone should be clear that the bill for such bailouts of the very institutions responsible for the excesses which have precipitated the crisis will ultimately fall on the public. Once again, resources will be redistributed upwards, compounding the present difficulties.
The clue to the right approach may lie in the primary cause of the crisis as outlined earlier. Massive redistribution needs to be done through a wide range of programmes, by governments around the world, in order to expand the demand base. President-elect Obama speaks of “spreading the wealth” around. It needs to be done fast, and in a number of different ways if the world is ever to see the end of this crisis (which many suspect could last up to a decade!).
It is important to first put out of consideration any taxation of the poor, especially via indirect taxes. In a recession, nothing could be more suicidal.
The super-rich everywhere must be taxed heavily -- if only in their own long-term interest. Unlike what right-wing sceptics may think, this can only have a salutary effect on investment. Leaving surplus funds with the rich will only spur speculative (unproductive) investment, as it did in the past two decades leading to the present crisis. In fact, funds from off-shore banking and other tax havens around the world have to somehow be mobilised to “bail out” governments which alone have the authority and the incentive to carry out the kind of spending programmes that are needed.
The way is the old Keynesian one of stimulating demand in the economy. When expectations are gloomy, businesses and consumers cut back on spending. Governments alone are in a position to do something. Watching the collapse of shipping and other key areas of the economy, Beijing, in a panic, has acted. China Daily reports that the government has announced a major “stimulus package” of “$586 billion over the next two years to finance projects in 10 major sectors, such as low-income housing, rural infrastructure, roads, airports, water, electricity, the environment and technological innovation”. This will have what are called “multiplier effects” on the economy, over time. The creation of jobs through the various projects will stimulate consumer demand and help turn the tide in some years’ time -- hopefully.
An Indian version of such a package (a vastly expanded NREGS, perhaps) needs to be conceived immediately, no matter what happens to the government’s budget in the short term. Restrictions imposed on Indian policies by the IMF and the World Bank (such as the FRBM Act of 2003, which commits the government to a balanced budget) must be set aside in what is fast developing into a global economic emergency.
The primary requirement of such an aggressive fiscal policy is that it redistribute income and wealth towards the poor. So the funding of schemes must be done by reversing some of the tax incentives (such as those on capital gains) given to the rich for investing during the past decade-and-a-half. (Those disincentives can’t possibly harm investment, in a climate in which no one is keen to invest in any case.)
To improve on the Chinese version of the stimulus package, the government needs to implement public spending programmes which focus on environmental regeneration. Challenges abound in this area: watershed management, soil conservation, afforestation, etc.
Such programmes, undertaken speedily and on a war footing, will create jobs, improve the distribution of income and wealth, revive output and growth, and address the serious environmental problems that stare us in the face.
If there was ever a moment in which good ethics and environmental management went hand-in-hand with good economics, this is it.
Time is short. It is do-or-die as far as our policy elites and leaders are concerned.
InfoChange News & Features, November 2008 |
