WSJ: So you painted a bleak picture of sub-par economic growth going forward, with an increased risk of another recession in the near future. That sounds awful. What can government and what can businesses do to get the economy going again or is it just sit and wait and gut it out?
Roubini: "Businesses are not doing anything. They're not actually helping. All this risk made them more nervous. There's a value in waiting. They claim they're doing cutbacks because there's excess capacity and not adding workers because there's not enough final demand, but there's a paradox, a Catch-22. If you're not hiring workers, there's not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we've actually had a worsening because we've had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.
"Karl Marx had it right. At some point, Capitalism can destroy itself. You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That's what has happened. We thought that markets worked. They're not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else's income and consumption. That's why it's a self-destructive process."
Anger at poverty, unemployment and despair is driving popular protest across the industrialized world, he notes, and "even the world's middle classes are feeling the squeeze of falling incomes and opportunities."
Marx, to put it more simply than he ever did, saw capitalism's market logic as producing recurring, ever more dangerous crises, precisely because of its tendency to channel most of the wealth produced in society into the pockets of a wealthy elite -- and seeking to increase profits by cutting costs, i.e. the wage bill -- leaving growing numbers of people no longer able to afford to buy what was being produced, forcing a slowdown and contraction of the economy.
That sounds suspiciously like what we're seeing in the U.S. and other Western economies right now -- an economic crisis rooted in low and diminishing demand, which meant that even once the financial crisis was averted, the economy has remained effectively stagnant, at best, as depressed U.S. demand creates a vicious cycle in which corporations see no point in expanding production (and creating new jobs) if consumers can't afford to buy them, and unemployment and poverty expands, further depressing demand.
The "greed is good" mantra may drive Wall Street, but greed can be bad for the wider capitalist economy. The depressed demand in the U.S. economy, for example, may be a product of decades of growing economic inequality. While real household incomes of working people have remained largely static or fallen since the late 1970s the rich have, to put it mildly, gotten a lot richer -- incomes of the richest 1% has grown by more than 176% over the same period. Today one in four dollars earned in the United States accrues to just one in 100 Americans -- or, by a different measure, half of the income earned in the U.S. want to just one in five Americans.
American society, of course, has never had a moral problem with inequality in principle, and there's a widely-held -- if naive -- assumption that anyone who works hard and shows drive and ingenuity can become rich in the U.S. Perhaps, but for every Horatio Alger story there are tens of thousands born on the wrong side of the tracks who are destined to die on the wrong side of the tracks. But the problem posed by inequality, now, is a structural rather than simply a moral one, because of its impact on depressing demand in the economy.
Housing bubbles and cheap credit may have compensated for many years, with the robust consumer-driven economy essentially based on American households living beyond their means, their government borrowing money from China for them to spend on American brand-name products manufactured by low-wage Chinese workers. But when the sub-prime mortgage bubble ruptured in 2008, it was no longer possible to defer the consequences of a massive long-term redistribution of wealth to the rich.
Capitalist societies, including the U.S., have found, through their political systems, the means to avert collapse and its potentially dangerous political consequences by redistributing some of society's wealth back down to poorer sections of the population, spending money to build infrastructure, provide basic health care and education to a population that would otherwise struggle to afford them, by ensuring that working people earned enough to maintain viable consuming households, by creating a welfare support system that allows people to survive unemployment and continue consuming to provide a domestic market, and so on.
"To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods," writes Roubini. "That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.
Read more: http://globalspin.blogs.time.com/2011/08/16/dr-doom-warns-wall-street-and-washington-heed-karl-marxs-warning/#ixzz1VEO9oUFo>
It seems now the capitalists, including Warren Buffett, are talking about taxing the rich, redistribution and approving Marx. Things must be getting really bad.
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