Increase Wages to End the Crisis (Says the IMF!)
Last week I again argued for “re-balanced domestic demand” as a solution to Britain’s economic woes and questioned the Coalition’s emphasis on “export-led growth”. Simply put, policy should aim to increase the share of GDP going to workers by increasing wages.
A policy based on rising wages and employment would allow for sustainable domestic consumption without recourse to consumer borrowing. This would be coupled with policies aimed to unlock the corporate surplus and increase investment (whether though public capital spending or subsidies to private business investment). I consider such a policy to be not only more likely to succeed than a policy of gambling on export recovery but also far more in keeping with Social Democratic aims.
So, I’m pleased to see some new analysis from the IMF (pdf), an institution notoriously staffed entirely by Bolsheviks and widely known for it’s pro-labour sympathies and heterodox solutions. (Or maybe not!)
As a Fistful of Euros reports:
The other was to shift the labour share of income upwards. They found that this achieved a faster, bigger, and more lasting reduction in leverage and a reduced probability of crises. In their own words:
“The main difference to Figure 14 however is observed following period 30, where under a loan restructuring leverage and default probability resume an upward trajectory for several additional decades, while under the bargaining power solution both immediately go onto a declining path. By year 50 leverage is around 20 percentage points lower under the bargaining power solution than under the loan restructuring solution. For long-run sustainability a permanent ﬂow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large….But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.”
They also argue that the inequality-finance-lending transmission mechanism might also explain the global imbalances, with the emergence of a globalised rich elite driving the demand for AAA-rated assets, the growth of the financial sector, and the emergence of persistent large capital account surpluses and trade deficits. (My emphasis).
There we have it, the IMF thinks that policies designed to raise the share of GDP going to wages would produce a “faster, bigger and more lasting reduction in leverage” and reduce the probability of further crises occurring.
This should be Labour’s agenda.
(Hat top for the link to the ever-insightful Luis in the comments).