Global Crisis, Recession, and Wages: What Happened and What Now?

When Gordon Brown, the current Prime
Minister of Great Britain, announced that
his government’s response to the financial
crisis was to “recapitalize” British
banks by buying shares in them, while at
the same time extending deposit guarantees,
it amounted to a coup d’etat, or
more precisely, a coup du monde. Britannia literally ruled
the world for a moment—at least the world of finance.
As soon as Brown announced the plan, other governments
in Europe and elsewhere, and most notably here in
the US, all having previously announced very different
plans, fell over one another to announce that they would
do the same as Brown. The reason they did so is they
feared that if they didn’t, customers would take their
deposits out of all other banks and put them in Brown’s
British banks. That’s economics.
The reason they now all say Brown is a very smart person
is they would rather have us believe they were persuaded
than bullied. That’s politics.
The lesson we should draw from this is that we live in
one global financial community. There is no protection in
boundaries nowadays. Anyone watching the movements
on the stock exchanges would come to the same conclusion.
The indices of exchanges in the US, Canada, Mexico,
Brazil, Britain, Germany, Russia, Japan, China, Australia
and elsewhere move up and down with eerie synchronicity.
If they are not in synch, it is probably because they are
closed by the authorities.
The lesson is we need to think in terms of world government.
I’m not saying we should create one: we already
have one, ramshackle and ad hoc as it may be. Government
and business leaders coordinate with each other all
the time, in and outside the framework of global institutions
such as the IMF and the United Nations. There are
tacit understandings as well as frightened phone calls; and
of course there are formal agreements, such as the WTO.
Beyond trade promotion, these contribute to the standardization
of law, accounting and numerous other practices.
Maybe there should be a formally recognized and differently
structured world government; maybe not. That can be
debated another time. But beyond debate already now is that
we need to think in terms of world government as much as
we think in terms of global economy. The reason is that the
consequences of policies spread the world over. The current
financial crisis is global; the recession will be global; and any
policies to deal with financial institutions or the recession will
have to be global too. Gordon Brown just showed us why.
The global problem lurking behind both the financial
crisis and the recession is low wages. Here in the US, wages
stagnated during the past thirty years while output and productivity
grew. But the worst is not here; it is overseas in
China, India and elsewhere, where output grows faster with
production techniques rapidly modernizing, but where
wages are much lower and are growing only slowly. Modern
products efficiently produced using workers making around
$1 per hour: that is a recipe for huge business profits.
Huge profits cause no trouble when productively
invested or pleasurably consumed. However, when recipients
of profits choose to save the money instead, that presents
a challenge to the financial community. Of course the
challenge is welcome; that is how the finance industry
makes a living; it is a challenge nonetheless.
A central promise of capitalist finance is, if you earn your
money, your money will earn for you. So you work, borrow,
cheat, steal, or inherit: and now the financial community
has to take that money and get it to earn returns for you.
Think of brokers, bankers, financiers and all the rest as
matchmakers, trying to bring together your money and a
productive return-yielding project. If they get too much
money, they run out of good matches. But they don’t turn
away business, saying “sorry!” because that is bad for reputation
and earnings. Just like third world matchmakers
make any match for a bride that earns the fee, even to
pimps in far off lands, these financiers take your money to
less reputable ventures. One day it all comes out, that billions
or trillions are lost. And instead of too much investment,
there is suddenly too little, because everyone is
scared, suspecting there is still too much money floating
around for it to be safe.
You can complain about the corruption; it doesn’t help.
The real problem is not the human character; it is too
much money looking for investment opportunities.
Now suppose wages rise all over the world. There would
be more demand for products, so more good investment
opportunities. At the same time, there would be less profit,
so less money looking for investment opportunities. Investment
becomes straightforward, so the bloated finance
industry shrinks to a proper size. Everything will get better,
for quite a while. This would be good global policy.
Of course, with well-organized labor all over the world,
in China, India, Viet Nam, Nigeria, South Africa, Brazil,
Mexico, as well as of course in Europe, Russia, the US and
Japan—all enjoying good wages with benefits and a
healthy sense of entitlement—you can imagine things
eventually going too far: too many investment opportunities
and no profits left to invest. Stagflation and the bad old
70s return. Time to elect a new Reagan. But—Oh dear!—
where is the foreign cheap labor going to come from then?