Economic Sage Sees Tough Times Ahead

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Nouriel Roubini, the economist who predicted both the collapse of the United States housing market and the latest worldwide recession, suggests the global economy is not just on the verge of a double-dip recession, but a complete restructuring as it deleverages.

“Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery,” he said, citing near-zero interest rates and trillions of dollars in bailouts as examples.”Now, they have run out of rabbits.”

Roubini implies that the “greed is good” mantra that has driven financial markets, deregulation and class warfare the past 20 years is self-defeating in this thought-provoking article for the Project Syndicate entitled “Is Capitalism Doomed?” It suggests that both the savage new American strain of capitalism and the European welfare states are poised for sweeping structural change.

What’s the answer? Well for Roubini it’s the stability that comes from treating workers with dignity, proper government regulation of financial markets, and decent pay. Afterall, unemployed workers don’t consume very much.

marxOne of the most astonishing paragraphs in the story lends credence to the notion that the very fall of Communist Russia may have hastened the demise of capitalism by removing a competing system that inhibited its predatory excesses. In this paragraph, Roubini says revolutionary socialist philosopher Karl Marx may have been right all along about the achilles heel of capitalism – namely the unrestricted greed of the powerful as manifest through worker exploitation.

“Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct,” Roubini said, noting that Marx’s view that socialism would be better has proven wrong. “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.”

That sounds a lot like a shot at the current addiction to short-term profit growth among U.S. executives at publicly traded companies. The practice has undermined the long-term growth prospects of fast-growing companies like Research In Motion and Blockbuster and prevented them from evolving into mature, stable employment centers. It’s also spurred needless layoffs and unsustainable production expectations of the remaining workers.

Roubini predicts that governments saddled with debt will be raising taxes and trying to devalue their own currencies to spur export sales in the coming years. Goods produced for foreign buyers are cheaper overseas after the currency of the manufacturing nation declines – that’s why China has artificially pegged its own currency so low relative to its peers.

The only problem is that everyone can’t pursue the same moves at the same time, or they won’t work. This kind of problem is an inherent weakness of a global economy like ours that exists without global regulation.

“Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time,” he said. “So relying on exchange rates to influence trade balances is a zero-sum game. Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. Others will soon follow…

“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. 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.

“The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

“Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. The alternative is – like in the 1930s – unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.