So many books have been written about the recent financial crisis that it would seem impossible to find one that has anything new to offer. One such is University of Chicago economist Raghuram Rajan’s latest book Fault Lines: How Hidden Fractures Still Threaten the World Economy.
Much of the previous discourse on the subject has pinned the blame for the crisis on bankers, regulators or government. These discussions have rarely, if ever, sought to get to the root cause of why people—particularly politicians— pressed the US Federal Reserve to support a low interest rate regime. Rajan does so by exploring causes other scholars have chosen to ignore, and describes some of these as “fault lines”.
The growth in income inequality in the US over the last 30 years emerges as the most critical of these. Rajan points out how the benefits of growth have accrued exclusively to the top 10% of the population, and how the rest, particularly the politically influential middle class between the 50th and 90th percentile of the population, have seen stagnation in real incomes. He juxtaposes this with the fact that an increased focus on profitability and global competition have meant that there has been a structural shift in unemployment in the US in the last 30 years. Whereas employment after a recession would recover within nine months, the recent recession has not recovered even after almost two years. These relatively anti-middle-class trends have been compounded by a system where social security benefits are small compared with those of other nations.
This portrays a country that grows richer, but where large sections of citizens see the threat of stagnation in quality of life. The political class responds to the resultant angst with an ever increasing access to credit, which allows people to indulge in consumption as a means to offset the income-eroding impact of unemployment. Since a direct transfer of funds would be unacceptable, the unusually loose monetary policy was justified under the pretext of making the American dream of housing more affordable.
Rajan believes that a solution lies in providing better quality of education, which can enable large numbers of Americans to compete for and take on jobs that currently go to other parts of the world. He recognizes the general excellence of the US education system, but believes that not enough has been done to upgrade the skills of people at the lower end of the spectrum.
But this argument leaves some questions unanswered. While it is true that the US education system may not have always served its citizens well, many of the lost jobs were in low-end manufacturing, and would not have required sophisticated skill sets. Why did so many Americans turn their backs on these jobs? Did the jobs that went away pay below a certain threshold of acceptability in the US? After a certain point in economic advancement, do certain types of manufacturing jobs pay so little that people are better off seeking unemployment benefits? Though this is not the central thesis of the book, one cannot ignore the critical importance of retaining manufacturing jobs, since nothing can really replicate those—a message that must not be lost on India.
Perhaps in the last two decades, Americans did not avail of education in certain subjects, particularly engineering or the sciences, in the numbers necessary to avail of all the job opportunities in those sectors. Hence the question, or the fault line, that we need to examine is not the quality of education itself, but rather why it was unattractive for Americans.
That so few have sought to link these social forces with the financial crisis is strange. Is it possible that political correctness among economists and the media’s unwillingness to highlight a view that ran against the grain of capitalism and the American dream were really the ultimate fault lines?
Govind Sankaranarayanan is chief financial officer, Tata Capital Ltd. He writes on issues related to governance.
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