Okay, the writing is a tad old fashioned, but consider the views of John Maynard Keynes, writing during the outset of the 1930s depression:
“It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it, a nemesis on man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.”
It seems there is one massive parallel between the crisis of today, and the 1930s which few seem to have spotted. Ironically, the similarity lies not in foolhardy markets, rather, in the genius of man. The real snag, perhaps is this, the financial markets, governments, the labour market, and above all the tax system, have failed to keep pace with technology.
Consider 1929. Consider the innovations that preceded it. The last decade of the 19th century, and the first three of the 20th, were characterised by extraordinary innovation. Electricity creeping into homes, the motor car, the airplane, the telephone – the list goes on. Perhaps just as significant, was the development of mass production. When Henry Ford said you can have any colour you like as long as it is black, he was in fact summarizing a new spirit. The spirit of what happens when a work force cooperates, and workers specialise. In its own way the move towards mass production was more important than the technological innovations that preceded it.
Yet, the global economy hit economic depression – arguably this led to a world war. Only in the 1950s and 1960s did the technological innovations of half a century earlier translate into real wealth generation.
There are parallels with today. The internet and related technology is heralding a new era of cooperation that is kick starting a new wave of innovation.
Within an economy there is a crucial relationship between demand and potential output. If demand is too great, prices go up, but if demand is too low, the result is unemployment and deflation.
Keynes understood that. He saw the key to getting an economy moving again as lying with tax boosts to the lower paid, as well as government spending.
Today, many money advisors have suggested we need to save the equivalent of three months worth of wages. It is good advice. Save while you can. But, supposing we all did that. Supposing the savings ratio shot up, the result would be less demand in the economy as a whole – job losses would mount.
It is called the paradox of thrift. It might make sense for individuals to save more, but for the economy as a whole this would be a disaster.
Keynes effectively argued that the solution was re-distribution of wealth. The poor have a lower savings ratio, so take from the rich, give to the poor, and spending will rise.
Maybe the same argument applies to today. Maybe the fruits of the modern era of innovation have just not been shared out sufficiently.
In this era of gloabalisation, the market for labour has become highly competitive, keeping a lid on wages. But those at the top, those managing and owning businesses that sell across the globe, have been making more money than ever.
Back at the end of 2006 this column referred to a report showing that corporate profits in the US as proportion of GDP were at their highest levels since 1929. In short, corporate profits were taking up a higher share of the GDP cake, dividend payments were rising, but wages to the work-force were not rising so fast.
This is not just a western problem, it is a global problem.
Now, we are seeing a backlash against excess pay awards. This backlash is everywhere.
The financial crisis of 2008 can be solved through tax cuts. Somehow, we need to allow indebted consumers to re-pay debt without cutting back on their spending. This can be achieved via a combination of tighter credit, removing the temptation to borrow, at a time of lower tax.
The money to fund this may well come from taxes on higher income earners and corporation tax. Not now, profits are falling too fast as it is. For the time being, massive government borrowing is inevitable.
Perhaps a real danger lies not so much in the crisis today, but in the cost of repaying this massive government borrowing that will be required to end the crisis. If the debt is re-paid via higher income tax across the board, the result will be many years of economic difficulty. Maybe the long-term solution to the challenge of today lies in more re-distributive taxation in the future.
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