John Rapley, Contributor
The world is awash with cash. Really, rivers of it. In the United States alone, the Federal Reserve Board estimates that because of aggressive cost-cutting and declining real wages, firms have amassed over US$5 trillion, which they have parked in their bank accounts.
That's just the tip of the iceberg. The McKinsey Institute recently completed a study for the Tax Justice Network which estimated that somewhere in the neighbourhood of US$20 trillion to US$30 trillion is stashed in offshore bank accounts. You'd think the world economy would be booming. But it isn't. We're all staving off another recession. For to speak of both rivers and icebergs is not, in fact, to mix metaphors. A major cause of our global stagnation is that the cash is locked up, frozen into immense bank accounts.
Yet, the needs of the global economy are equally immense, and urgent. Unemployment is rising across the Western world. Global poverty remains epic in scale. And the owners of that hoard of cash, the planet's rich and super-rich, are hardly benefiting from hiding it in offshore accounts where they earn less interest than inflation. They'd do as well to bury their wealth in the ground.
So why are they sitting on it? It's a catch-22. Because the Western economy remains in crisis, unemployment is rising. Because unemployment is rising, demand is low. And because demand is low, there is no need to invest to boost production. The result: a worsening economic situation in which everyone, the rich included, feels the need to store cash for the next rainy day. The storm, you see, is far from finished. Like any powerful storm, it is circular and builds upon itself.
Why, then, is demand so low? Well, because the rich are too rich. One of the effects of the wave of globalisation that started in the late 1970s has been to widen the gap between rich and poor across the world. Capital became highly mobile, which made it possible for firms to seek out the cheapest labour, driving down wage costs. In itself, that's not a bad thing. Let's face it, few of us avoid Wal-Mart on principle.
However, in a closed political system, a democratic regime would rectify this situation by putting a basement on wage costs, and taxing some of the extra profits so as to maintain social programmes. But little of this happened. Because while we globalised capital markets, we did not globalise our politics. On the contrary, those who disliked widening income inequality tended too often to retreat into a defensive nationalism, blaming globalisation itself, and not globalisation done badly.
A situation in which demand is low, capital cheap and abundant, and inequality too high calls for a Keynesian solution. It worked after World War II, when Keynesianism put much of the world economy on a generation-long path of growth. So why not get back into the business of borrowing money and reflating the economy?
The problem, which first became apparent when France tried Keynesianism three decades ago, is that globalisation has changed the rules of the game. Keynesian reflation boosts demand, sure. But there's no guarantee it will boost demand for the firms of the reflating country. On the contrary, by redistributing wealth from owners to workers, Keynesianism raises costs. In theory, that's good; in practice, it means consumers can get cheaper goods abroad (did anyone say East Asia?). Government debt rises, taxpayers are left on the hook, and those offshore fund-holders get all the benefit.
In a global age, Keynesianism will itself have to go global. This is actually a big political challenge. Keynesianism became very popular among nationalist intellectuals and politicians, who by instinct prefer to resist rather than embrace globalisation. They still tend to opt for go-it-alone strategies. But while they do it, the aggressive globalisers, like the financial industry, grow ever more powerful.
The world economy would probably do a lot better if a generation of politicians on the Left, for instance, recalled Marx's advice - that revolution would be 'world-historical'. It's funny that the folks who cottoned on to this first were the bankers.
John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to firstname.lastname@example.org and email@example.com.