So what did the relatively poor do to “keep up with the Joneses” in this world of rising standards?
They did what the poor have always done — got into debt. In an earlier era, they became indebted to the pawnbroker, now they are indebted to banks or credit-card companies and, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt.
Of course, some worried about the collapse of the household savings rate, but few were overly concerned. In one of his last articles, Milton Friedman wrote that savings nowadays took the form of houses.
To me, this view of things explains much better than the orthodox account why, for all the money-pumping by central banks, commercial banks have not started lending again and the economic recovery has petered out. Just as lenders did not force money on the public before the crisis, so now they cannot force heavily indebted households to borrow, or businesses to seek loans to expand production when markets are flat or shrinking.
In short, recovery cannot be left to the Fed, the European Central Bank or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.
If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money on public works and infrastructure projects. This is the only way to get the big economies of the West moving again.
However, beyond this, we cannot carry on with a system that allows so much of the national income and wealth to pile up in so few hands. Concerted redistribution of wealth and income has frequently been essential to the long-term survival of capitalism. We are about to learn that lesson again.
Robert Skidelsky, a member of the British House of Lords, is professor emeritus of political economy at Warwick University.
Copyright: Project Syndicate