By PINCHAS LANDAU
Last week's column kicked off a review of the outgoing year - which began with the global financial system seizing up, and is closing with global markets in the grips of a renewed bout of speculative frenzy - by recalling that the financial system was itself the main source of the trouble. The sheer size of the financial sector within the American economy (and those of other developed countries) represented a severe imbalance and hence a major problem - arguably, THE problem - from which all the others developed.
But the rapid reversion to form of the financial sector over the last half-year highlights another aspect of the crisis. The cheerleading over the economic recovery, which is being orchestrated and scripted by economists and analysts employed by large financial institutions, and/or by the government ministries and agencies that saved (and, in some cases, actually own) these institutions, ignores how bad things still are for many people - people for whom the "recovery" is at best a faint echo and, at worst, a bad joke.
Even during the long years of "boom" and "growth" there was a widening gulf between the capital market, in which people and institutions lend, borrow, broker and otherwise move money around, and the labor market, where people offer their abilities and skills for pay. The relevant data showed, consistently and depressingly, that real income levels for lower- and middle-income employees were hardly rising, if at all. Yet the higher up the organizational ladder you went, the better off people were. Managers, and more so senior managers, and most of all the CEOs and a few other top-level executives, received steadily higher average salaries, and much, much larger "total remuneration packages," which included hefty bonuses, as well as parcels of shares or options. Not only did the absolute level of managerial remuneration soar, but the relative differences between the lowest and the average wage levels within large organizations on the one hand, and that of the most senior levels on the other, reverted to medieval levels (think of barons and peasants).
The theory on which all this was based was that the senior managers were "adding value" to their companies - and that they were taking significant risks, because failure would result in their dismissal. In practice, however, there was absolutely no positive relationship between company performance and executive pay, even in the good years (a fact amply documented in numerous studies over the last 20 years). Furthermore, the risk being borne by the senior people was illusory, since their dismissal was accompanied by additional large payments ("golden parachutes"). In fact, unlike the medieval social contract, in which the peasants bore the risk of bad harvests but, by only paying a fixed percentage to the baron, also "got the upside" in the good years, in the post-industrial world, the "peasants" are the ones who bear the very real risk of getting fired, but get little or none of the upside in a bumper year.
Furthermore, when things went wrong big time, as they did beginning in 2007, the fat cats have not been saddled with the bills for the damage their greed and irresponsibility caused. Suggestions that the phony profits they made off with (pun intended) be 'clawed back' have been dismissed and even efforts to reform the system pro-actively are being fiercely opposed.
It is an open question whether the micro-economic imbalances within countries and societies are more severe and more destabilizing than the macro-economic imbalances between countries and regions across the world (think not just America-China, but also Germany-Spain or Holland-Ireland). What is certain is that neither of these mega-issues has been seriously addressed in the year since Lehman Brothers collapsed, or in the half-year since the markets reversed course and started rising again.
But averting Armageddon, whilst a major achievement in its own right, is only a necessary condition to putting the world back into working order. It is in no way sufficient. Using the tools needed for preventing disaster to perpetuate, or reconstruct, the old system that fell apart in 2007-2008 is totally counter-productive. It is now abundantly clear that many households and firms in the developed world are making a massive effort to move away from the borrow-and-spend culture that gave rise to the crisis. They are using the government subsidies and handouts offered them, like the "cash for clunkers" programs around the world, but only when and how it suits them.
In a word, they are fearful and defensive - especially if they are older and have jobs. But youth unemployment is double or triple national averages and those youngsters are angry and aggressive. If their needs are not addressed, urgently, they will make themselves heard and felt this coming year.
landaup@netvision.net.il
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