Martin Wolf may not have written that r > g and so has not, as yet, achieved Thomas Piketty's status as alternative economist of the moment, but there is no doubt that his commentary in the FT remains invaluable to those seeking alternative explanation as to why the world is in its current mess. He wrote an article yesterday, about which I did not have time to comment because of other commitments, that was a powerful explanation of much of what is happening, and will happen, in the world's major economies. It is worth getting a free registration on the FT just to read it.
I want to pick out just one theme here. As he said, after explaining the range of policy responses such a s low interest rates and QE that the crisis precipitated:
These unprecedented policies are needed because of the chronic deficiency of global aggregate demand. Before the wave of post-2007 crises hit the world economy, this deficiency was met by unsustainable credit booms in a number of economies. After the crises, it led to large fiscal deficits and a desperate attempt by central banks to stabilise private balance sheets, mend broken credit markets, raise asset prices and ultimately reignite credit growth.
That is an extraordinary paragraph; the sort that takes a few minutes and well over thirty years of experience to write. Think about what is implicit in it.
First, Wolf is saying that the reason for the banking crisis was not loose regulation (although it helped, I do not deny); it was lack of demand, declining real wages, increasing inequality and the inability of markets to function and deliver both growth and reasonable levels of employment on the wages that companies were willing to pay that led to the crisis.
Second, he's saying that the same low level of earnings that leads to inadequate demand for the goods and services that the markets wish to offer also leads to a level of tax revenue too low to pay for the level of public services that the voters of most economies both want, and need.
This is deeply significant. What it means is that spillover effect of the failure of the markets to provide goods and services that the public want is that we apparently cannot, as a consequence, enjoy the benefit of the public services that we need even though the economic resources to provide them clearly exist. There are plenty of people who could, for example, be employed right now by the government to meet the demand for public services but who are unemployed instead because of a refusal to raise the revenue to actively engage them in the economy.
Martin Wolf makes one conclusion as a result of this: he suggests that low interest rates are here to stay for a long time because any increase will only reduce aggregate demand, and so exacerbate the problem, and that will not, as a consequence, happen in his opinion. I tend to agree with him, but I think he misses another point. This is the glaringly obvious one that if the problem needing a solution is how to re-engage those people who are currently unemployed in economic activity so that total aggregate demand, including that for public services, can be met then the only way to do this is to have them supply the services that are in greatest demand but shorter supply, which of those delivered by the government.
There are three ways of funding that route to recovery. The first is to literally print more money: we have clearly got away with it to date and there seems to be no reason why we could not do so again. Second, we could simply run a deficit: there is no shortage of demand for government bonds and in particular those long dated ones which are curiously attractive for this purpose. Thirdly, we could raise tax, by which I mean we could, for example, close the tax gap, increase tax on the wealthy, reduce tax on some forms of consumption, and ensure that some taxes (such as National Insurance) which are currently regressive are transformed into progressive taxes and are also applied to investment income.
Martin Wolf goes nowhere near these solutions, and yet they seem so glaringly obvious. If there is a fundamental problem of engaging people in the market economy because that market economy is either so efficient that it does not need their services, or is so inefficient that it cannot create goods and services that people want to buy ( with both potentially being true in different parts of the economy at the same time) then an entirely different approach to funding public services and to creating the prosperity which underpins our future has to be adopted, and that can only happen by breaking the link between private sector demand and the provision of public services. There is no implicit reason why one is dependent upon the other and it is time that this relationship was rethought.