Is Modern Capitalism Sustainable?


Is Modern Capitalism Sustainable?

CAMBRIDGE – I am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s  Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving.

Indeed, it is far from clear how far China’s political, economic, and financial structures will continue to transform themselves, and whether China will eventually morph into capitalism’s new exemplar. In any case, China is still encumbered by the usual social, economic, and financial vulnerabilities of a rapidly growing lower-income country.

Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject poverty.  Marxism and heavy-handed socialism have disastrous records by comparison. But, as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger.

First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively. The failure of efforts to conclude a new global climate-change agreement is symptomatic of the paralysis.

Second, along with great wealth, capitalism has produced extraordinary levels of inequality. The growing gap is partly a simple byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs’s success; his contributions are obvious. But this is not always the case: great wealth enables groups and individuals to buy political power and influence, which in turn helps to generate even more wealth. Only a few countries – Sweden, for example – have been able to curtail this vicious circle without causing growth to collapse.

A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, beginning with the difficulty that consumers have in assessing the quality of their treatment.

The problem will only get worse: health-care costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30% of GDP within a few decades. In health care, perhaps more than in any other market, many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care.

It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34% of Americans are obese. Clearly, conventionally measured economic growth – which implies higher consumption – cannot be an end in itself.

Fourth, today’s capitalist systems vastly undervalue the welfare of unborn generations. For most of the era since the Industrial Revolution, this has not mattered, as the continuing boon of technological advance has trumped short-sighted policies. By and large, each generation has found itself significantly better off than the last. But, with the world’s population surging above seven billion, and harbingers of resource constraints becoming ever more apparent, there is no guarantee that this trajectory can be maintained.

Financial crises are of course a fifth problem, perhaps the one that has provoked the most soul-searching of late. In the world of finance, continual technological innovation has not conspicuously reduced risks, and might well have magnified them.

In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low.  Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt.

Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.


This is an interesting piece by Bremmer (Eurasia Group) and Roubini (NYU Stern). They are betting their money on the U.S. What do you think?

NOVEMBER 12, 2011

Whose Economy Has It Worst?

With Europe, China and the U.S. in crisis, the real question is which of them will stumble first


It’s no wonder that global markets are so jittery. The world’s three largest economies can’t continue along their current paths, and everybody knows it. Investors watch nervously for signs that China is headed toward a hard landing, that America will sink back into recession, and that the euro zone will simply implode.

[usecon2]Edel Rodriguez‘In all three cases, kicking the can down the road has staved off disaster so far — but the cans are getting bigger and heavier.’

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier. Which economy will be the first to stumble on its problems?

An improved political picture in Italy together with a new prime minister in Greece, is helping to patch up fragile investor sentiment, but some analyst say it could be short-lived. Stacy Meichtry joins Paul Vigna and Jonathan Shipman on Markets Hub.

In Europe, the tough decisions have been put off because the principal players don’t agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.

Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a “transfer union” from rich to poorer states.

The market continues to pin its hope on massive intervention by the European Central Bank to restore market confidence once the new Greek and Italian governments are in place. But that may be wishful thinking. Simon Nixon joins The Markets Hub.

Yet another European view holds that the austerity plans now envisioned by Germany and the European Central Bank are worse than the disease. The Continent needs growth, not just reform and belt-tightening, they argue, and only a surge of stimulus across the entire euro area can achieve it.

The 17 countries and four European institutions now entangled in the euro zone crisis will continue trying to muddle through, but their dawdling can’t be sustained. Markets are already losing confidence in piecemeal reform. Doubts about Italy, an economy too big to bail, will only add to the volatility.

Europe will be the first to drop out of the game of kick the can: Expect a disorderly debt default in Greece, more trouble for European banks and a sharp recession across the continent.

Associated PressA salesperson talks to a woman visiting a housing fair in Nanjing in eastern China’s Jiangsu province on Oct. 13.

In China, the need for economic reform also has become obvious. It has been four years since Premier Wen Jiabao first warned that the country’s economic model is “unstable, unbalanced, uncoordinated and ultimately unsustainable” and three years since the financial crisis made clear that China’s growth remains dangerously dependent on exports to Europe, America and Japan.

To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China’s state-owned companies to Chinese households.

European markets may have calmed down but with the future of the euro still unresolved, interest in the dollar should be on the rise. If not the dollar, then where should the hunt for a safe haven turn to next? Dow Jones’s Alen Mattich discusses.

But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China’s growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.

In an interview with WSJ’s Rebecca Blumenstein, former U.S. Secretary of State Condoleezza Rice says she is very concerned about Europe’s future as it confronts a political crisis that threatens to destroy its unity.

Indeed, a key obstacle to reform is that China remains so heavily invested in its state-managed model of capitalism. Of the 42 Chinese companies listed in the 2010 edition of the Fortune 500, 39 were state-owned enterprises, and three quarters of China’s 100 largest publicly traded companies are government controlled. Party officials with a stake in the success of state-owned enterprises have amassed considerable power within the leadership, and they ferociously resist efforts to transfer away their wealth to private enterprises and ordinary citizens.

China has the cash and foreign reserves to postpone a crisis. But growth is slowing, financial stresses are rising, and there is good reason to fear that China’s days of can-kicking are numbered as well.


Which leaves the U.S. No one can restore confidence in America’s long-term fiscal health without a credible plan to cut spending on entitlements and defense while raising revenues, which are now at a 60-year low as a share of GDP. But don’t expect any immediate solutions from Washington. The campaign season will only exacerbate petty partisanship and political gridlock, which means that the structural problems of the U.S. economy are likely to persist.

But the longer-term future appears much brighter for the U.S. than for either Europe or China. America is still the leader in the kind of cutting-edge technology that expands a nation’s long-term economic potential, from renewable energy and medical devices to nanotechnology and cloud computing. Over time, these advantages will yield more robust economic growth.

The U.S. also has a demographic advantage. In Europe, declining birthrates and rising sentiment against immigration point toward a population that will shrink by as much as 100 million people by 2050. In China, thanks in part to its one-child policy, the working population has already begun to contract. By 2030, nearly 250 million Chinese will have passed the age of 65, and providing them with pensions and health care will be very costly.

Despite debate over illegal immigration, the U.S. population will likely rise from 310 million to about 420 million by midcentury. Between 2000 and 2050, according to Mark Schill of Praxis Strategy Group, the U.S. workforce is expected to grow by 37%. China’s will shrink by 10%. Europe’s will contract by 21%.

Finally, despite the rising exasperation of the American public, the U.S. is significantly more likely than Europe or China to quit kicking the can down the road. Nothing much will change during the election year, but 2013 offers a chance for real fiscal reform.

Next November, Republicans are likely to win both houses of Congress. If a Republican is elected president, the GOP will face enormous public pressure to deliver on its reform promises. Even if President Obama is re-elected, the outlook for a grand bargain is bright. He would be free of the most immediate demands of electoral politics, and like other second-term presidents, he could begin to consider his legacy.

Make no mistake: The challenges that the U.S. faces are formidable, and persistent political gridlock could delay badly needed fiscal and structural reforms. But everything is relative, and the best can to be kicking down the road just now is undoubtedly the one made in America.

—Mr. Bremmer is the president of Eurasia Group and the author of “The End of the Free Market.” Mr. Roubini is the chairman of Roubini Global Economics and a professor at New York University’s Stern School of Business.

Here’s from Joseph Stiglitz, twice Nobel laureate (one in economics) and Columbia University professor, on how fiscal policy is needed:

JOSEPH STIGLITZ: Achieving the impossible

22/09/2011 |

How to escape the debt-unemployment dilemma through fiscal policy

There is much hand-wringing about the impossible situation of the global economy: there is insufficient aggregate demand to sustain growth in Europe and America, and high debt levels seem to rule out fiscal policies.

Misguided monetary policies, combined with inadequate regulation, may have helped get the world into its current mess. But seemingly aggressive monetary policies are incapable of getting us out. Some argue that there is a liquidity trap – so pumping more money into the system, while it may pose a risk of inflation down the line, is not going to get the economy’s engines revving again.

Only part of this is true: the economy is in fact seriously weak, and at most, monetary policy can only do a little. But monetary policy in conjunction with appropriately designed fiscal policy could do a lot more—even within today’s fiscal constraints.

First, a diagnosis: this crisis is more than just a financial sector crisis. The series of bubbles served to paper over the more fundamental weaknesses – structural transformation that is the result of the successes in increasing manufacturing productivity at a pace exceeding demand, so compelling labour to move elsewhere. The financial crisis compounded these existing problems, leaving a legacy of overleveraged households, deeply indebted governments, falling real estate prices, and excess real estate capacity.

Moreover, for most countries, including the US, the weak economy is the most looming problem, not the debt and deficits. Eliminating the deficit will not restore growth, and more than likely would push the US into a serious double dip. Even back-loaded deficit reductions could be problematic: if average citizens are told their taxes are going up next year, it’s likely to dampen spending.

Further, with interest rates at historic lows, standard models would suggest a flood of investment. The lack of one suggests something else is going on: what matters is the availability of credit, and the unprecedented levels of macroeconomic risk.

Monetary policy hasn’t worked, and isn’t likely to, for a couple of simple reasons. It does a far better job of restraining an overheated economy than reigniting a stalled one. With globalization, matters are worse: money goes to where the returns are highest. Right now, that means emerging markets, where money isn’t needed – not the US, where it is.

Traditionally, monetary policy is supposed to affect lending, but lending is still circumscribed, especially to small and medium-sized enterprises. The reason is simple: for all the fanfare of the Troubled Asset Relief Program (TARP) and the bank bailouts, a disproportionate share of the money went to the big banks – which are more focused on making money from speculation, trading, and M&As – than on the smaller regional and community banks, many of which are very weak. If the Obama and Bush Administrations had done more to fix the banks and the real estate market, monetary policy might have been more effective, but, alas, this was not the case.

Fiscal policy can still do the trick: if financial markets weren’t so shortsighted, they would realize that if, say, the US borrows at 3% for a long-lived project yielding 20%, in the medium term the national debt – and even more, the debt/GDP ratio – will be down.

Opponents of this approach argue, for one, that that public investment will crowd out private investment, because interest rates will supposedly rise. But in the current context, with the Fed committed to low interest rates for years, that argument seems absurd. Secondly, they argue that individuals, worried about future tax liabilities, will save more. Evidence for this, especially in the US, is almost nil: the Bush tax cuts, which set the country into its deficit, were followed by a dramatic fall in the savings rate. America’s savings rate has recently gone up not because of a far simpler reason than concern about future tax liabilities: the bottom 80% had been spending 110% of their income, and that was simply not sustainable. They have been forced to live within their means; but they are not saving for their future.

If financial markets demand more immediate gratification, the balanced budget multiplier says that if the government increases taxes and spending by an equal amount, GDP increases. If taxes on upper income Americans are increased by just 1% of GDP, rough calculations suggest that GDP could be increased by as much as 2% to 3%. Using Okun’s law, which relates changes in output and unemployment rates, the unemployment rate could fall by 1 to 3 percentage points. This approach would, in the medium term, markedly decrease the debt and debt/GDP ratio.

The fact is, we can reduce the long-term deficit and stimulate growth, but it won’t happen on its own. It won’t happen if we rely on monetary policy, and it won’t happen if we stick with what is on the table in today’s political discourse.

Joseph Stiglitz is Professor of Economics at Columbia University and a Nobel Laureate