(2014) In “Capital,” French economist Thomas Piketty explores how wealth and the income derived from it magnifies the problems of inequality. Gwen Ifill gets debate on his data and conclusions from Heather Boushey of Washington Center for Equitable Growth and Kevin Hassett of American Enterprise Institute.
The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.
BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.
The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.
But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.1
Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.
The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.
In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.
As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.
If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.
For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.
To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.
According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.
This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including
- technological disruption, a
- record-breaking migration crisis,
- anxiety over globalization,
- political polarization, and
- rising nationalism.
All are symptoms of failed policies that could turn out to be trigger points for a future crisis.
.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.
Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.
If Jeff Bezos walks into a bar, the average wealth of the bar’s patrons suddenly shoots up to several billion dollars — but none of the non-Bezos drinkers have gotten any richer.
.. Since the 1970s, however, the link between overall growth and individual incomes seems to have been broken for many Americans. On one side, wages have stagnated for many; adjusted for inflation, the median male worker earns less now than he did in 1979. On the other side, some have seen their incomes grow much faster than the income of the nation as a whole. Thus C.E.O.s at the largest companies now make 270 times as much as the average worker, up from 27 times as much in 1980.
.. similar disconnect between overall growth and individual experience seems to lie behind the public’s lack of enthusiasm for the current state of the economy and its disdain for the 2017 tax cut. G.D.P. numbers have been good in recent quarters, but much of the growth has gone to soaring corporate profits, while median real wages have gone nowhere
.. But how do facts like these fit into the overall story of economic growth? To answer this question, we need “distributional national accounts” that track how growth is allocated among different segments of the population.
.. Producing such accounts is hard but not impossible. In fact, the economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman have already produced estimated accounts with considerable detail over the past half century. The main message is one of growth going disproportionately to the top and not shared with the bottom half of the population, but there are also some surprises in the other direction. For example, the middle class, while still lagging, has done better than some common measures indicated thanks to fringe benefits.
.. In a reasonable world, then, something like the Schumer-Heinrich bill would become law in the near future. In the real world, of course, the proposal will go nowhere for the time being — because Republicans don’t want anyone to know what distributional national accounts might reveal.
.. By now everyone knows that conservatives routinely yell “socialist!” whenever anyone proposes doing something to help less fortunate members of our society — which is a key reason so many Americans now think favorably of socialism: If guaranteed health care is socialism, bring it on. But the right doesn’t just cry foul at any attempt to limit inequality; it does the same thing whenever anyone tries to talk about economic class, or measure how different classes are faring.
.. My favorite example here is still former senator Rick Santorum, who denounced the term “middle class” as “Marxism talk.” But that was just an especially ludicrous version of a general attempt on the right to suppress talk about and research into where the economy’s money goes. The G.O.P.’s basic position is that what you don’t know can’t hurt it.
And to be fair, progressives like the idea of distributional accounts in part because they believe that more knowledge in this area would help their own cause.
If progressive political parties had pursued a bolder agenda in the face of widening inequality and deepening economic anxiety, perhaps the rise of right-wing, nativist political movements might have been averted. So why didn’t they?
Why were democratic political systems not responsive early enough to the grievances that autocratic populists have successfully exploited – inequality and economic anxiety, decline of perceived social status, the chasm between elites and ordinary citizens? Had political parties, particularly of the center left, pursued a bolder agenda, perhaps the rise of right-wing, nativist political movements might have been averted.
.. Part of the reason for this, at least in the US, is that the Democratic Party’s embrace of identity politics (highlighting inclusiveness along lines of gender, race, and sexual orientation) and other socially liberal causes came at the expense of the bread-and-butter issues of incomes and jobs. As Robert Kuttner writes in a new book, the only thing missing from Hillary Clinton’s platform during the 2016 presidential election was social class.
.. One explanation is that the Democrats (and center-left parties in Western Europe) became too cozy with big finance and large corporations. Kuttner describes how Democratic Party leaders made an explicit decision to reach out to the financial sector following President Ronald Reagan’s electoral victories in the 1980s. Big banks became particularly influential not just through their financial clout, but also through their control of key policymaking positions in Democratic administrations. The economic policies of the 1990s might have taken a different path if Bill Clinton had listened more to his labor secretary, Robert Reich, an academic and progressive policy advocate, and less to his Treasury secretary, Robert Rubin, a former Goldman Sachs executive.
.. Until the late 1960s, the poor generally voted for parties of the left, while the wealthy voted for the right. Since then, left-wing parties have been increasingly captured by the well-educated elite, whom Piketty calls the “Brahmin Left,” to distinguish them from the “Merchant” class whose members still vote for right-wing parties. Piketty argues that this bifurcation of the elite has insulated the political system from redistributive demands.
The Brahmin Left is not friendly to redistribution, because it believes in meritocracy – a world in which effort gets rewarded and low incomes are more likely to be the result of insufficient effort than poor luck.
.. Ideas about how the world works have played a role among the non-elite as well, by dampening the demand for redistribution. Contrary to the implications of the Meltzer-Richard framework, ordinary American voters do not seem to be very interested in raising top marginal tax rates or in greater social transfers.
What explains this apparent paradox is these voters’ very low levels of trust in government’s ability to address inequality. One team of economists has found that respondents “primed” by references to lobbyists or the Wall Street bailout display significantly lower levels of support for anti-poverty policies.
.. Trust in government has generally been declining in the US since the 1960s
.. But a progressive left that is able to stand up to nativist politics will have to deliver a good story, in addition to good policies.