AMERICAN FUTURE

“Gross inequality is not a new phenomenon, but the fact that this year’s survey respondents selected severe income inequality as the most likely global risk to manifest in the next 10 years suggests that concern about its consequences is growing.”

– World Economic Forum, “Global Risks 2012”

Reporting from the World Economic Forum in Davos, the FT’s Gillian Tett takes note of the unprecedented concern at the conference about growing income inequality. In “Income disparity tops list of concerns,” she says:

That is a striking turnround. Until this year the issue of inequality never appeared on the risk list at all, let alone topped it. In the past, Davos delegates have worried about the risks posed by “asset price collapse”, “oil price shock”, “natural resource shortages” or “banks”. But in Wednesday’s debates it became clear why income disparity now appears on the WEF list of concerns. Apart from the fact inequality has been thrust into the political debate in the US, UK and France, the question of social stability has leapt on to the agenda as a result of the Arab spring. Even before the delegates arrived, a report from the World Economic Forum showed that the risk Davos delegates believe is most likely to cause turmoil this year is “income disparity”.

From the report:

On an unprecedented scale around the world, there is a sense of receding hope for future prospects. Gallup polling data in 2011 reveal that, globally, people perceive their living standards to be falling, and they express diminishing confidence in the ability of their government to reverse this trend. Their discontent is exacerbated by the starkness of income disparities: the poorest half of the global population owns barely 1% of the global wealth, while the world’s top 1% owns close to half of the world’s assets.⁶. Figure 13 provides a global snapshot of inequality, while Figure 14 shows a rise in inequality across many developed economies.

Figure 13

[Note that the United States is second only to Mexico in income inequality among OECD countries]

Figure 14

This is the Session Summary of the debate to which Tett refers:

TIME Davos Debate on Capitalism

Wednesday 25 January

Is 20th-century capitalism failing 21st-century society?

In partnership with the World Economic Forum, Time magazine hosts this debate focusing on the uncertain future of capitalism.

Key Points

• Some critics of capitalism argue that growing income inequality and high unemployment indicate that the capitalist economic system has failed society and needs to be reformed.
• Others argue that income inequality is driven not by corporate power but by factors including technological development and the emergence of a highly interconnected global market.
• To make capitalism fair, focus should be on investing in education and promoting innovation and creativity.
• Young people, especially young entrepreneurs, can drive the transformation of capitalism so that it better serves the needs of society.

Synopsis

The financial and economic crisis that has roiled the world for more than three years unleashed a torrent of criticism against large financial institutions. They are irresponsible risk takers concerned only with maximizing profits, the detractors argued, adding that global banks enjoy unfair advantages because they are too big to fail or let fail. As unemployment, particularly among young people, has risen sharply, the debate over the role of the banks has widened. Growing income inequality in both developed and developing economies has raised questions about the dominance and power of corporations and how well businesses are meeting their social responsibilities.

Is 20th-century capitalism failing 21st-century society? Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC), Brussels; Global Agenda Council on Employment & Social Protection, thinks so. The business community “has lost its moral compass,” she reckoned. “We must redesign the model. We must reset it. Stop the greed. Unless employers and workers sit down with governments, the system will continue to fail.” Companies fight against increasing the minimum wage, even though doing so would only slightly reduce their profits, she asserted.

Other panellists disagreed with Burrow’s view that business lacks morals. “The business community has not lost its moral compass,” asserted David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group, USA. “Capitalism may be the worst economic system except for any of the others.” Businesses do not think about ways to reduce wealth and jobs, he added. To ensure that capitalism is fair, focus on improving laws and regulations, investing in education and promoting innovation and creativity, Rubenstein advised.

Growing income inequality is fuelled not by bad corporate governance but by “far deeper forces”, including the development of technology, the emergence of a global market and the need for innovation, Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, Booth School of Business, University of Chicago, USA, explained. These forces are increasing the demand for skills and pushing pay higher. “These are not going to be affected by corporate governance,” Rajan told participants. “The right debate is about how we get the innovation and creativity we need.”

Ben J. Verwaayen, Chief Executive Officer, Alcatel-Lucent, France, and a World Economic Forum Foundation Board Member, concurred: “We need to talk about innovation, real sustainability and reforms – not about corporations and greed. It’s about decision-making. We suffer from nostalgia. We are not going back to the world that we knew. We have to go for transformation. We have to talk about job creation, not job security.”

From the floor, a critic of capitalism called for vision, not nostalgia. Old institutions and ways of thinking have to be disrupted, he said. A Global Shaper from Egypt said that it is important to establish platforms that allow young people to create jobs for themselves so they are not waiting for jobs to be created for them. “We absolutely need young entrepreneurs and they should be supported,” Burrow replied. But she cautioned against dismissing “the old industrial age”. Technology, especially innovations developed by skilled young people, will be needed to improve the way the “old” economy works, she remarked.

These days, many corporations and other organizations including the World Economic Forum are concerned about what young people are thinking and doing, Rubenstein observed. “Corporations recognize that change is coming from young people.” Noted Verwaayen: “You don’t have to wait for permission. Maybe in the past it was asking; today it’s just doing.”

Other Key Takeaways

Responding to the criticism that irresponsible lending contributed to the global financial crisis and that large banks enjoy unfair advantages, Brian T. Moynihan, Chief Executive Officer, Bank of America, USA, said that banks are global and large in size because they reflect the breadth and presence of their customers. “Our power, size and capabilities come from our clients. Our revenue is representative of the economic activity taking place. We are big because our clients are [global] and we support them.”

Contributors

Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC), Brussels; Global Agenda Council on Employment & Social Protection
Brian T. Moynihan, Chief Executive Officer, Bank of America, USA
Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, Booth School of Business, University of Chicago, USA
David M. Rubenstein, Co-Founder and Managing Director, Carlyle Group, USA
Ben J. Verwaayen, Chief Executive Officer, Alcatel-Lucent, France; Foundation Board Member

The former President, who presided over the Roaring Nineties, says that “Charity needs capitalism to solve the world’s problems“:

Charity alone will not solve the world’s problems. Capitalism can help and at the same time put people back to work. There has always been a gap between what the government can provide and what the private sector can produce, a gap charities have long helped to fill. But as our world and economies evolve, we have an opportunity and a responsibility to reconsider how to fill this gap – to rethink the relationship between economic and social challenges, so that benefits and opportunities are available to more people.

First, this rethinking is necessary because people are demanding it. From Zuccotti Park to Tahrir Square, people are standing up and saying that for too many citizens the current systems are not working.

Second, the financial crisis has made plain that the path we were on was unstable and unsustainable. While our global economic system has brought benefits to many, it has also exacerbated inequalities, both within and among countries. Too much inequality not only hurts the poor and stifles the dreams of the middle class, it also hinders productivity and growth.

Finally, our increasing interdependence strengthens the link between our prosperity at home and prosperity abroad. It is hard to sell things people cannot afford to buy. Also, economic privation breeds political resentment with all its costly consequences. We therefore have a vital stake in the fates of others – a stake that extends beyond compassion to political stability and economic security.

How do we change course, to merge social and economic progress? Haiti offers us some lessons. Earlier this month, when I travelled there to mark the second anniversary of its devastating earthquake, I could feel a palpable change in the country. Much of this has to do with the focus and drive of the new government. But a lot of it is also due to the approach of Haiti’s friends and partners – an approach driven more by empowering people and communities than by imposing external solutions. My good friend Denis O’Brien and the Digicel Group not only employs 70,000 Haitians, they also rebuilt the famed 19th-century Iron Market bazaar, one of the capital’s landmarks, to create jobs for others, and give charitably to education to ensure that there will be a better educated, more employable workforce. Another example from Haiti is an innovative fund set up by the Carlos Slim Foundation and Frank Giustra to invest in entrepreneurs – giving them a hand up, not a handout.

We are starting to see the success of this new approach in other countries and sectors as well, in the approach of the Bill and Melinda Gates Foundation, in companies such as Walmart, Google and Procter & Gamble that have shifted their corporate culture from promoting social responsibility to increasing shared value.

This is the lesson that we learnt while working to solve the Aids crisis, when the pharmaceutical industry moved from being a low-volume, high-margin business to a low-margin, high-volume one with guaranteed payments. Today, this system is providing millions of people around the world with lifesaving HIV/Aids treatments at much lower costs while also improving the profitability of the companies involved. Similar lessons were learnt from our work with farmers in Africa: by helping them access the fertilisers, seeds and markets they need, we could provide them with a fundamentally more sustainable way to lift their families from poverty than we could ever hope to achieve through traditional charity. The lessons of this work and the benefits of boosting productivity are clear.

The common thread through all this evidence is that private wealth can effectively advance the public good when governments, businesses and non-governmental organisations work together to share expertise and implement lasting solutions. When our bottom line is more about strengthening the future than maintaining the present, and when our financial interests are aligned with our social ones, we will be closer to the kind of world we want all our children to live in.

One of the ways in which I have been trying to support the work of leaders around the world as they rethink our approaches to global problems is via the vigorous discussions and diverse commitments that are generated through our Clinton Global Initiative. To date, members of CGI have made more than 2,100 commitments that have already improved, or are now helping, the lives of nearly 400m people in 180 countries. Many of these commitments reflect the new approach to problem-solving by better aligning the interests and objectives of private corporations, governments and non-governmental organisations. Beyond their specifics, the goal of these projects is to work ourselves out of a job – not to generate perpetual aid dependence.

These efforts benefit both the communities they target and the corporations and philanthropists involved, diversifying their businesses, expanding their markets, training more potential workers and helping to create a culture of prosperity. All this enhances profits, increases economic inclusion and gives more people a stake in a shared future.

Because of these developments, and in spite of current economic conditions, I am hopeful for the future. The problems we face are solvable: we have the means. What we need is innovation, imagination and commitment. The most effective global citizens will be those who succeed in merging their business and philanthropic missions to build a future of shared prosperity and shared responsibility.

Two articles have been added at the bottom of this post.

Notice that the title of this post doesn’t conclude with a question mark. The reason for its absence is that, since early this month, the Financial Times has been running a series of  articles asserting that there is — rather than asking whether there is — a crisis of capitalism. It’s always been evident to me that the philosophical/ideological divide between London’s Financial Times and New York’s Wall Street Journal is greater than the geographical distance between the two financial centers. The WSJ never has and never will claim that anything is wrong with capitalism; instead, it’s government’s growing involvement in the private sector that’s preventing capitalism from functioning properly.

As some of you know, I’m a retired Wall Street analyst. As such, I’m one of capitalism’s beneficiaries. Notwithstanding that fact, I believe that — to use Churchillian words — capitalism is the worst economic system, except for all the others. More to the point, my judgment is that capitalism’s flaws have intensified during the past 30 years. The most important of these flaws is the unrelenting increase in the concentration of income and wealth in the United States. I’m convinced that, if this trend is not reversed, it will eventually undermine the social stability that we all take for granted. As yet, there are no alternatives to capitalism, as there were during capitalism’s last great crisis in the 1930s. It would be both presumptuous and dangerous, however, to conclude that our country will forever be immune to discord resulting from an ever-widening gulf between the few “haves” and the many “have-nots.”

With the posting today of a video interview of two of the paper’s top columnists, this strikes me as the right moment for me to post the articles from the FT’s “Crisis of Capitalism” series. Below the fold are the contributions to this series.

Continue reading ‘The Crisis of Capitalism (UPDATED)’ »