The New Inequality

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From thestart, policy responses to the 2008 financial crisis were colored by memoriesand interpretations of the Great Depression. The conventional wisdom now holdsthat the world avoided a repeat of the interwar catastrophe, largely becausepolicymakers made better decisions this time around. But, while there is plentyof room for self-congratulation, two features of the post-crisis recovery casta shadow over the celebrations.

First, despite unprecedented monetary expansionand massive fiscal stimulus, recovery has been strikingly weak and fragile. Inthe eurozone, the debt crisis triggered a sharp turn to fiscal contraction –and, with it, a return to recession. But, even in the United States, wherethere was plenty of initial stimulus, the long-term growth rate seems likely toremain well below pre-crisis levels for the foreseeable future.

The faltering upswing recalls the 1930’s, when many prominenteconomists, including John Maynard Keynes and his leading American exponent,Alvin Hansen, decided that the world was entering a phase of secularstagnation. In their view, the Industrial Revolution’s vigor and dynamism hadbeen exhausted, with nothing to replace it to sustain economic growth.

The second caveat about the post-crisis world iseven more alarming. Many countries responded to the Great Depression byadopting policies aimed at reducing disparities in wealth and income. As aresult, by the middle of the twentieth century, the extreme social and economicinequality that had characterized industrialized countries seemed to bedisappearing.

But, since 2008, measured inequality, which wasrising even before the financial crisis, has surged, owing largely to the verymeasures that are so often lauded for preventing another Great Depression.Non-conventional monetary policies fueled an asset boom, with share pricessoaring and property prices in economic hubs like New York, London, Paris, Riode Janeiro, and Shanghai shuttingout domestic purchasers.

As the rich became richer, the middle classeswere squeezed by near-zero nominal interest rates, which, in real terms, wereactually negative. Meanwhile, working-class incomes were hit by risingcompetition for jobs from countries with lower labor costs.

Some central bankers like to recall WinstonChurchill’s paean to the heroism of those who fought the decisive Battle ofBritain: “Never in the field of human conflict was so much owed by so many toso few.” But, applied to the modern economy, such praise is awkward at best,because it is literally true: the financial system was stabilized by pilinghuge volumes of debt into a few central banks.

It is not just monetary policy that is having apolarizing impact. Europeans who are considering Keynesian policies are facedwith the costly legacy of past public-investment projects. For example, the2004 Olympic Games in Athens were supposed to turn Greece into a glittering anddynamic modern economy. But, while the games yielded an underground metrosystem for the city and a reasonably modern airport, they also produced theabandoned Hellinikon Olympic complex and a mountain of debt.

Moreover, critics rightly point to favoritismand other forms of corruption in awarding contracts for such projects. This isas much the case in developed countries like Greece and Spain as it is indeveloping and emerging economies.

The seamy side of China’s post-crisis stimuluspackage was ventilated in the trial of Liu Zhijun, who oversaw the developmentof China’s showcase high-speed rail network – a position that garnered him 374properties, 16 cars, and 18 mistresses. When his death sentence appeared likelyto be commuted to a prison term, China erupted with protests.

Such outrage over corruption is mirrored in thepopular unrest sweeping across other large and apparently successfulemerging-market economies. Until last summer, Turkish Prime Minister RecepTayyip Erdoğanappeared to be the genius behind an unprecedented economic miracle. Then heannounced a plan to replace the tree-lined Gezi Park in Istanbul’s TaksimSquare with a replicaof an Ottoman-era army barracksthat would house a shopping mall, sparking massive popular protests.

Major sporting events have been met withparticularly powerful backlashes.Poland was wrackedby scandal after the foreign firms that won contracts for the 2012 UEFAEuropean soccer championship took the government’s money but did not pay thePolish builders to whom they sub-contracted the work. In Brazil, protestsagainst the upcoming FIFA World Cup continue, while Russia’s lavish Winter OlympicGames in Sochi risk becoming a public-relations catastrophe.

In short, the political economy of Keynesianstimulus projects can be highly problematic, because ordinary citizens oftenhave no access to their benefits. To a world that is still reeling from theaftermath of the 2008 crisis, with its lurid revelations of malfeasance in the financial and real-estateindustries, such high-profile projects look like another fix designed to rewarda corrupt elite.

But there is a crucial distinction: what isfueling inequality now is not unfettered capitalism, but problematic public-policy efforts tostabilize economies in the wake of the financial crisis. Capitalist competitionerodes monopoly profits, whereas public policy risks creating entrenchedprivilege. Today, with both expansionary monetary policy and increased statespending prompting a powerful backlash from the excluded and theunder-privileged, steps taken in the name of avoiding another Great Depressionmay end up exacerbating social polarization.

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关键词：Inequality equality quality equal ALI features recovery avoided around better

since 2008,measured inequality, which was rising even before the financial crisis, hassurged, owing largely to the very measures that are so often lauded forpreventing another Great Depression. Non-conventional monetary policies fueledan asset boom, with share prices soaring and property prices in economic hubslike New York, London, Paris, Rio de Janeiro, and Shanghai shutting out domesticpurchasers.

As the rich became richer, the middle classes were squeezed by near-zeronominal interest rates, which, in real terms, were actually negative.Meanwhile, working-class incomes were hit by rising competition for jobs fromcountries with lower labor costs.In short, the political economy of Keynesian stimulus projects can behighly problematic, because ordinary citizens often have no access to theirbenefits.
But there is a crucial distinction: what is fueling inequality now isnot unfetteredcapitalism, but problematic public-policy efforts to stabilize economies in thewake of the financial crisis. Capitalist competition erodesmonopoly profits, whereas public policy risks creating entrenched privilege.Today, with both expansionary monetary policy and increased state spendingprompting a powerful backlash from the excluded and the under-privileged, stepstaken in the name of avoiding another Great Depression may end up exacerbatingsocial polarization.