Kenneth Rogoff from Davos: Egypt is making the elites nervous

Kenneth Rogoff, former Economic Counselor and Director of the Research Department at the IMF, is no doubt speaking to and for his fellow travelers at Davos when he writes from this mountain enclave of privilege of the rising danger of inequality.  We can easily identify the target audience from the title – “The Inequality Wildcard”.  It’s not written for the protesters in Cairo or the marginalized anywhere in the world; for them, inequality isn’t a wildcard, it’s a daily grueling reality.  It’s a “wildcard” only for the wealthy in the global game of capitalism – and the players are warned: a queen of spades could be in the deck.  Egypt is making the elites nervous.

(O)bservers should not just be asking how far similar events (to Egypt and Tunisia) will spread across the region; they should be asking themselves what kind of changes might be coming at home in the face of similar, if not quite so extreme, economic pressures.

Within countries, inequality of income, wealth, and opportunity is arguably greater than at any time in the last century. Across Europe, Asia, and the Americas, corporations are bulging with cash as their relentless drive for efficiency continues to yield huge profits. Yet workers’ share of the pie is falling, thanks to high unemployment, shortened working hours, and stagnant wages.

The rich are mostly doing well. Global stock markets are back. Many countries are seeing vigorous growth in prices for housing, commercial real estate, or both. Resurgent prices for commodities are creating huge revenues for owners of mines and oil fields, even as price spikes for basic staples are sparking food riots, if not wholesale revolutions, in the developing world.

He tells us that “(t)he causes of growing inequality within countries are well understood”.

We live in an era in which globalization expands the market for ultra-talented individuals but competes away the income of ordinary employees .  Competition among countries for skilled individuals and profitable industries, in turn, constrains governments’ abilities to maintain high tax rates on the wealthy. Social mobility is further impeded as the rich shower their children with private education and after-school help, while the poorest in many countries cannot afford even to let their children stay in school.

Rogoff doesn’t mention such factors as financial manipulation, oligopolistic control of markets, the power of wealth over politics, the media, economic institutions, and culture, but at least it’s a start.

“The status quo has to be vulnerable”, he warns his fellow game players.

Instability can express itself anywhere. It was just over four decades ago that urban riots and mass demonstrations rocked the developed world, ultimately catalyzing far-reaching social and political reforms. …  Inequality is the big wildcard in the next decade of global growth, and not just in North Africa.

Rogoff’s article is very typical of economic writing these days.  He points to the obvious yet offers no meaningful guidance as to what should be done. That’s because any real solution would require fundamental changes in the very nature of capitalism.  And that’s a place no Davos man can go.  He therefore offers this:

How, exactly, will change unfold, and what form will a new social compact ultimately assume? It is difficult to speculate, though in most countries, the process will be peaceful and democratic.

Pretty lame.  Rogoff’s central point, that the working masses are not doing well by the system and may revolt, can’t help but to remind us of a prominent 19^th century scholar, that being Karl Marx.  But despite the seeming relevance of Marxian thought to this “wildcard”, he summarily dismisses the whole tradition.  Successful economists don’t read Marx.

Karl Marx famously observed inequality trends in his day and concluded that capitalism could not indefinitely sustain itself politically. Eventually, workers would rise up and overthrow the system.

Outside Cuba, North Korea, and a few left-wing universities around the world, no one takes Marx seriously anymore. Contrary to his predictions, capitalism spawned ever-higher standards of living for more than a century, while attempts to implement radically different systems have fallen spectacularly short.

First off, the history of capitalism over the past 100 years isn’t quite as glowing as claimed.  We had two world wars, sparked largely by competition for markets, a decade long depression in the 30’s, a decade long stagnation in the 70’s, and, per his point in the article, rising stagnation and unemployment over the past decades.  That leaves only the 50’s and 60’s to brag about.  And was it capitalism that brought the rising standards that did occur or was it worker protest against capitalism?  And it must be noted that the countries which attempted state controlled economies were extremely poor third world societies having no democratic tradition.  Their failure should not be seen as evidence that only capitalism is viable.

I doubt if Rogoff’s read much Marx, but only ideology can keep one from seeing the tremendous relevance his work has for today.  Here’s Marx in the Communist Manifesto:

(The capitalist) has agglomerated population, centralized means of production, and has concentrated property in a few hands. …. (L)aborers … live only so long as they find work, and who find work only so long as their labor increases capital.  These laborers, who must sell themselves piecemeal, are a commodity, like every other article of commerce, and are consequently exposed to all the vicissitudes of competition, to all the fluctuations of the market.

The lower strata of the middle class… sink gradually into the proletariat, partly because their diminutive capital does not suffice for the scale on which modern industry is carried on, and is swamped in the competition with large capitalists, partly because specialized skill is rendered worthless by new methods of production.

This was written in the 19th century but can there be any more concise and elegant description of the reality of our world today?  To say that Marx is unworthy of being taken seriously can only be seen as a case of severe ideological bias or conformist and lazy thinking.  Neither has a place at an institution such as Harvard where Rogoff is a professor of economics.

The class of wealth, privilege, and power that’s gathered now in Davos has every reason to be concerned but Rogoff shows that, while they’re aware of the threat, they have nothing to offer.