More than 2,500 alpha men and women from more than 100 countries will descend on the Davos annual meeting this week to spend four days discussing the world’s urgent need to adopt “resilient dynamism.” This, the organizing watchword for this year’s annual gathering of panjandrums at the World Economic Forum, is allegedly the way out of the crisis. It is meaningless.
Who, for example, would support non-resilient stagnation? Western capitalism, and, arguably, global capitalism, has arrived at an apparent dead end. It is in profound trouble. However, if the best answer to austerity and economic malaise is resilient dynamism every delegate should stay at home. As a call to action, you might as well urge everyone to be manly, womanly and decisive. Virtuous states of mind, but hardly blueprints for action.
For most of the business leaders attending Davos, the economic malaise is an abstraction. Profits as a share of GDP in almost all Western countries are at record highs, along with executive pay. Meanwhile, real wages for the majority are stagnating, if not falling, justified by our economic leaders in Davos as the proper if sad consequence of “structural adjustment.”
Goldman Sachs, for example, shamed from deferring its bonus payments into the next financial year so that its staff could enjoy the lower tax rate, has just enjoyed a bumper year. Davos men and women are prospering. No structural adjustment for them.
There will doubtless be the usual appeals for more free trade, more scientific research and more investment in skills as the expensively clad executives move from seminar and sonorous keynote speech to reception and back to the dinner table. However, what there will not be at Davos is a willingness to countenance a sea change in the way capitalism is organized. It can do what it will and that is to continue to confer fortunes on those at the top, with little risk, while directing pain on to others.
The paradox is that the chief reason capitalism is in crisis is that without such challenges it has undermined its own dynamism and capacity for innovation. Instead, it merely offers unjustified self-enrichment for those at the top.
Nor does the malign impact of inequality stop there. I was stunned to read in a recent IMF working paper, with the hardly catchy title Income Inequality and Current Account Imbalances, that the whole — yes, the whole — of the deterioration of the UK’s current account deficit between the early 1970s and 2007 could be explained by the rise in British inequality. It is a similar, if less acute, story across the rest of the industrialized or, rather, deindustrializing West.
What the IMF team shows is that as the share of national income devoted to profits and top pay rises to its current levels, so a noxious economic dynamic is created. By definition, there is less of the pie available to the mass of wage earners, whose real wages become squeezed. To sustain their living standards, they borrow, which has been easier than ever over the past 40 years as banks take advantage of financial deregulation. Overall demand thus carries on growing, but at the price of sucking in imports and ever higher personal debt levels for ordinary wage earners.
Finally, the music stops, as it has now, as both debt and import levels become unsustainable. The state of play in the UK — crazy levels of private sector debt and a record trade deficit — can thus be explained by the rise of inequality. And one of the chief causes of that, the IMF believes, is the decline in trade union bargaining power.