Sunday, January 29, 2012

Davos 2012: Another Monumental Failure?

As Davos 2012 wraps up, it is my chance to write a critical comment denouncing the world's top 0.00000000001% for another boring summit where they myopically focused on Europe's debt crisis, warning that the eurozone continues to pose a severe threat to the global economy.

Crackling tension among European leaders in Davos is set to spill over into an equally charged EU summit this week. Soros said it all when he took Germany to task. Even if a Greek debt deal is in the works, unless they come up with a lasting long-term solution, this deal won't mean a thing and eurozone will remain vulnerable to more speculative attacks. There is a reason why Soros is so successful, unlike most of his peers, he gets the bigger picture.

But in my opinion, all this talk about "debt crisis" is completely misplaced. The developed world has an unemployment crisis and a retirement crisis, not a debt crisis, two themes that were largely ignored at this World Economic Forum.

What scares me the most about the state of the global economy? Easy, the youth unemployment disaster:

Davos is used to bluster from political leaders. But when usually quietly spoken company bosses from all corners of the earth warn of "not a crisis, but a disaster," when they call something a "cancer in society," you know we have a problem.

The world, they say, is "sitting on a social and economic time bomb". The world is plagued by youth unemployment.

The numbers are stark: In some countries of the Arab world, up to 90% of 16-24 year olds are unemployed. In the United States the youth unemployment rate is 23%. In Spain nearly 50%. In the UK 22%.

Worldwide, some 200 million people are unemployed. 75 million are between 16 and 24 and every year about 40 million young people are entering the workforce.

'Unemployment sucks'

The business leaders at the World Economic Forum (WEF) know why it matters: Young people who were unemployed for a long time will earn less throughout their whole lives.

They will be less employable. They won't have the skills that business needs. They are more likely to have long-term health problems. And it can cause social unrest.

There's a term for it: Lost generation. Or as one business school professor puts it: "Unemployment sucks. Youth unemployment sucks even more."

"The youth has lost a line of sight to the future."

Unless something is done to tackle youth unemployment, the world's 'debt crisis' will only get worse. You'd think the world's power elite would focus all their energy there. Instead, the discussion centered around Europe's debt crisis, which is exactly what the financial oligarchs want us to focus on.

There are many smart economists who attended Davos who would agree with me on this issue, but it's striking how little press coverage this issue got. Sure, they talked about preventing another lost generation, but little was done to take concrete actions to tackle the unemployment crisis that threatens the global economy and the very foundations of capitalism.

Interestingly, Davos founder Klaus Schwab did focus on jobs and morals:

Capitalism is out of whack, the founder of the World Economic Forum says, welcoming critics' ideas of how to fix it — even those camped out in protest igloos near his invitation-only gathering of global VIPs.

This anti-big money mood is surprising for a man who embraces free markets and whose livelihood consists of bringing world CEOs and political leaders together for brainstorming sessions.

Klaus Schwab is also unusually downbeat, his trademark optimism tempered by global economic turmoil and public unrest ahead of this year's forum, which ends Sunday.

"We have unfinished business, and we have to act fast," he told The Associated Press in an interview ahead of the forum's opening on Wednesday.

"I'm a deep believer in free markets, but free markets have to serve society," he said in Davos, the ski resort tucked away deep in the Swiss Alps. He lamented excesses and "lack of inclusiveness in the capitalist system."

"We have sinned," he said, adding that this year's forum would put particular emphasis on ethics and resetting the moral compass of the world's business and political community.

Schwab said the forum invited members of the Occupy protest movement, camped in igloos in Davos, to a session on the sidelines to talk about reforming capitalism.

Thousands of Swiss soldiers and police shoveled snow to erect a "ring of steel" against any demonstrators who hoped to gatecrash the meeting. Some 3,500 soldiers provided security to the VIPs, who included German Chancellor Angela Merkel, British Prime Minister David Cameron and nearly 40 other world leaders.

President Obama didn't attend, but Treasury chief Timothy Geithner was there, as were some members of Congress.

When half a dozen demonstrators appeared briefly Tuesday outside the security perimeter, daubing the snow with anti-capitalist slogans, police checked their IDs but allowed the protest to go ahead.

"Everybody who could make a constructive proposal is very welcome. We need new ideas," Schwab said.

He did note a general aversion to allowing too much anti-capitalist fervor to reach Davos.

"I also emphasize that Davos is a place for dialogue. . . . The participants are usually reluctant to be confronted with people who are not open to dialogue and just want to serve their own sometimes one-sided interests," he said.

He warned that an "intergenerational conflict" could be looming as governments compromise future spending to pay today's debts.

"People feel it's a difficult time. They are irritated. There is, they feel, a lack of future perspective," he said.

Schwab also urged that more attention be paid by leaders and governments alike to jobs — saying Davos participants should focus on "talentism" instead of capitalism — and said leaders must work harder to win public trust.

Schwab has watched the world transform in the 41 years that he's nurtured the forum and turned it into one of the world's leading economic gatherings.

While China, Brazil and other developing economies remain robust, the United States and Europe are still struggling with financial issues that erupted in the credit crunch of 2008, including high unemployment. That contributes to a feeling that the world's economic problems are worse than leaders meeting at Davos in previous years had foreseen.

"We were too optimistic (last year)," Schwab acknowledged.

Indeed, the power elite were too optimistic last year and in my opinion, too pessimistic this year. And once again, they failed to address major issues, including the global disconnect, which will only get worse unless we tackle youth unemployment and the looming retirement crisis.

I suggest the power elite take the time to carefully read Michael Hudson's latest comment, Banking Wasn’t Meant to Be Like This. I quote his conclusion:

Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator and extractive way, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs.

Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss.

This wish means that society should lose, and even suffer depression. We are dealing here not only with greed, but with outright antisocial behavior and hostility.

Europe thus has reached a critical point in having to decide whose interest to put first: that of banks, or the “real” economy. History provides a wealth of examples illustrating the dangers of capitulating to bankers, and also for how to restructure banking along more productive lines. The underlying questions are clear enough:

  • Have banks outlived their historical role, or can they be restructured to finance productive capital investment rather than simply inflate asset prices?
  • Would a public option provide less costly and better directed credit?
  • Why not promote economic recovery by writing down debts to reflect the ability to pay, rather than relinquishing more wealth to an increasingly aggressive creditor class?

Solving the Eurozone’s financial problem can be made much easier by the tax reforms that classical economists advocated to complement their financial reforms. To free consumers and employers from taxation, they proposed to levy the burden on the “unearned increment” of land and natural resource rent, monopoly rent and financial privilege. The guiding principle was that property rights in the earth, monopolies and other ownership privileges have no direct cost of production, and hence can be taxed without reducing their supply or raising their price, which is set in the market. Removing the tax deductibility for interest is the other key reform that is needed.

A rent tax holds down housing prices and those of basic infrastructure services, whose untaxed revenue tends to be capitalized into bank loans and paid out in the form of interest charges. Additionally, land and natural resource rents – along with interest – are the easiest to tax, because they are highly visible and their value is easy to assess.

Pressure to narrow existing budget deficits offers a timely opportunity to rationalize the tax systems of Greece and other PIIGS countries in which the wealthy avoid paying their fair share of taxes. The political problem blocking this classical fiscal policy is that it “interferes” with the rent-extracting free lunches that banks seek to lend against. So they act as lobbyists for untaxing real estate and monopolies (and themselves as well). Despite the financial sector’s desire to see governments remain sufficiently solvent to pay bondholders, it has subsidized an enormous public relations apparatus and academic junk economics to oppose the tax policies that can close the fiscal gap in the fairest way.

It is too early to forecast whether banks or governments will emerge victorious from today’s crisis. As economies polarize between debtors and creditors, planning is shifting out of public hands into those of bankers. The easiest way for them to keep this power is to block a true central bank or strong public sector from interfering with their monopoly of credit creation. The counter is for central banks and governments to act as they were intended to, by providing a public option for credit creation.

Michael wrote on Europe but the truth is the world has reached a critical point in having to decide whose interest to put first: that of banks, or the “real” economy.

Jonathan Nitzan, another insightful economist who knows a lot about differential accumulation, doesn't see this as useful dichotomy as he considers the banking and "real" economy as one. But both of them would agree that capitalism is headed down an unpredictable and destabilizing path.

What would I like to see at Davos 2013? I'd like to see Michael Hudson, Jonathan Nitzan and other "radical" economists discuss their views. I'd also like to see some intellectuals like Charles Taylor, Michael Walzer and many others address these global leaders.

Below, Charles Taylor talks at a public debate on the role of religion in the public sphere in Milan on June 8, 2010. Listen carefully to his comments on the basic challenges to solidarity and how we can need to "create mutual respect for different views " to come together and address the challenges that confront our societies.

I also embedded a clip of Michael Walzer discussing free market and morality as well as a BBC piece on positive vs. negative liberty, drawing on the wisdom of the late Isaiah Berlin. Watch all clips below.

Taylor was the greatest genius I ever had the privilege of learning from. Davos desperately needs such great thinkers at their future conferences. Doesn't make for a good interviews on CNBC or Bloomberg but the biggest deficit at Davos is a deeper dialogue on ethics and how we can improve the global economy, making it more inclusive, serving all our citizens, not just the power elite.

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