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Kapoor: A depression of wages and real demand will lead to a more radical recession

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We’re talking about global finance with Sony Kapoor. Sony is the managing director of Re-Define, Rethinking Development, Finance & Environment, international think tank, and he’s a former member of the Lehman asylum on Wall Street. Thanks for joining us again, Sony.


JAY: In the first couple of segments, we talked of power of the global finance sector; we talked about three very concrete proposals about how to limit that power. I’m going to revisit them again, just ’cause I think everybody should sort of get through their head what might be possible, and that is close down tax havens, increase the tax on unearned income, and levy a tax, international speculative tax, on financial institutions. Right now none of those three is really being talked about with any seriousness. But what we are hearing is the recovery has started, and we see the stock markets way back up, we see bank profits are up, bonuses are way up, and unemployment is way up. So what kind of recovery is it if unemployment is continuing to go up and maybe hit real unemployment levels in the United States of 20 percent? And, of course, in other parts of the world it’s already worse than that.

KAPOOR: Well, I don’t think it’s a real recovery in any possible way. And what we will definitely see is one of two scenarios: either a very long-term, depressed growth, where the debt overhang and the joblessness means that there is no real demand in the economy; or actually another more radical recession and possibly a secondary financial crisis, for example in commercial real estate. I just cannot see how we can avoid one of these two scenarios, especially here in the United States.

JAY: There seems to be—I don’t know if it’s a plan or it’s happening somewhat spontaneously from the system, and those that know how to make money out of these things recognize it, but is it possible to imagine a world in the next ten years or so where finance capital makes most of its profits out of an expanding China and India, and they don’t mind turning the United States into a relatively low-wage economy?

KAPOOR: Well, I don’t know if they can by themselves turn the United States into a low-wage economy, but I would definitely think that the center of gravity has shifted eastward for good. It’s not just for the finance sector, but also beyond that. That is where the savings are. That is where the growth is going to come from. That is where the house prices are going to go up. That is where the stock prices are going to go up, as they already have. What you have is a very strange system. If you go back to the days of Henry Ford, he was a visionary in one sense, at least. What he decided to do was he decided to pay his workers two or three times the market wage rate, and his reasoning was, “If my workers cannot afford to buy my cars, who else will?” And what you have is a financial system and a government system and governments which don’t recognize that basic fact.

JAY: In fact, the new quote-unquote “reforms” in Detroit, with all the public money and, one would have thought, some kind of public interest driving it, is actually creating a situation where most autoworkers are going to make $14 an hour and won’t be able to afford the cars they make.

KAPOOR: What you have is that each company, when they’re making a choice, a decision on either to fire workers or to reduce wages or to keep wages depressed, is making the unsaid assumption that every other company is paying its workers well, ’cause that is the only way within which this makes sense that you’re reducing costs and you’re producing the products. But you need someone to buy your products, and you’re assuming that workers in other places are well paid enough to buy those. So it is an individually rational thing to do if you’re looking at it from pure economic logic, but it’s collectively disastrous. And what we have seen is, across the world, a depression of real wages, and that means that there has been no real demand. And in the United States and the United Kingdom in particular, what you had is demand that has been supported by borrowing; and that borrowing is completely unsustainable, because real wages stagnated or fell, and the only way to keep buying stuff was to borrow money; and money was available, so everybody borrowed, and that led to the financial crisis. What one needs to do is—and this again goes back to our question of governance and good governance and government needing to play an active role in this—is to have a policy which focuses on increasing long-term real demand. One way of tackling that, one way of doing that, is to reduce the increased level of inequality we see. What you have, for example, is, amongst the two kinds of people in society, those who primarily get their money from wages and those who get mostly unearned income on their investments, etc., it’s the poorer sectors of society who will spend 100 percent of their wages, because they need to, or 80 percent of their wages. If you’re Warren Buffett or if you’re Bill Gates, no matter how lavish your lifestyle is, you cannot spend more than 1 or 2 percent of your income.

JAY: It’s quite ironic that some of the right-wing voices we hear that are always for tax cut, tax cuts, the obvious tax cut, if you wanted a quick stimulus, is just for a year or two don’t do any source deduction taxes at all. Let workers not pay taxes for a year or two, which would be an enormous stimulus, ’cause as you say, if you’re at the low end of the income scale, whatever extra money you have you spend immediately.

KAPOOR: The best possible way of kickstarting the economy again and keeping it on a long-term-sustainable path is to look at the concept of tax cuts from the bottom up rather than the top down, ’cause every time there’s a tax-cut discussion, mostly brought about by the conservative sectors of society, it’s always thought of as a top-down thing to do. Okay, what is the top level of tax? How do we reduce that? But it should be thought of ideally as a bottom-up way, so who is getting taxed, who is at the margins of society, and to reduce their burden, ’cause every single tax dollar that they don’t have to pay goes straight into consumption, which feeds into demand, which generates an economic stimulus, which is actually what generates economic growth.

JAY: And, of course, the other side of it is the weakness of unionization. And the wage levels of unionized workers is, you know, demonstratably higher than those of unorganized workers. It would be so obvious it would be an actual stimulus if it was easier to get into unions.

KAPOOR: Absolutely. If you woke up, somehow, in a society tomorrow where you had a more unionized workspace, you would get higher welfare, you would get higher wage benefits and a stronger negotiating position. But right now the United States is simply the world’s biggest laggard as far as that is concerned. And what we need to think through is a transition: how best to go from where we are in terms of worker representation, worker rights, and depressed and falling wages to a different landscape. And that transition is a politically tricky one. And that’s what we need to think this through, because I don’t see how we can have this economically sustainable path with increasing levels of inequality, with high levels of unemployment. This is simply not sustainable.

JAY: I have got my own proposal for it, but no one is going to listen to me. I think it would be rather simple. If the federal government and if this administration actually was serious about some of the things they said in the election campaign, oh, you just quickly announce that five years from now the federal government, 50 percent of their procurement will only be unionized companies, they won’t buy from any place that isn’t union, would rather quickly transform the landscape. But we’re not, certainly, hearing anything close to that coming out of this administration.

KAPOOR: It’s an interesting idea. I would need to think about it. I’m not sure I have an opinion on that yet.

JAY: Well, just my idea. So in terms of understanding the crisis, what we need, I think, for people to get is the financial sector, the global finance sector, and the proposals we’ve been talking about limit the power of global finance capital. But in some ways bigger problem or underlying problem one might call the disparity crisis. And if that issue of wages and real demand isn’t dealt with, simply regulating the finance sector isn’t really going to solve it. Am I understanding it correctly?

KAPOOR: You’re absolutely correct. It’s much bigger than this. And I think there is a knee-jerk reaction in some sectors on the left that reaction to crisis is more regulation. I think that’s seriously problematic for two reasons. One is that regulation in the past was often used as a barrier to entry. Just because you have 10,000 pages of regulation means that any new finance actor, any new local community bank, or any entrant who wants to challenge the entrenched players, the big Goldman Sachses of the world, for example, finds a near insurmountable hurdle in terms of the complexity of the regulation. I think we need to simplify things. So the idea is not to regulate more or less but to regulate more smartly and regulate with a view to achieving more a competitive landscape, which is not being discussed.

JAY: Rather than make more money for thousands of lawyers to study and fight out in court for endless years.

KAPOOR: Absolutely.

JAY: Well, you just mentioned the golden word “Goldman”. So in the next segment of our interview, let’s just talk about Goldman Sachs. Please join us for the next segment of the interview with Sony Kapoor.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.

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Sony Kapoor is the Managing Director of Re-Define (Rethinking Development, Finance & Environment), an international Think Tank promoting financial system reform. A prominent expert on international finance and development, he started his career in investment banking and derivative trading. In 2003 he quit to work on reforming the financial system and promoting international development. Kapoor has been a leading advocate for debt cancellation, action against tax havens, and promoting innovative sources of financing. He is a key advisor to several governments, international agencies, political parties, unions, and NGOs on helping shape a more progressive society. Kapoor has worked in a policy advisory and strategy consulting capacity for international organizations such as the World Bank, UN, and UNDP, international NGOs such as Oxfam, and Christian Aid, financial institutions such as the Industrial Credit and Investment Corporation of India, and Lehman Brothers, and governments including that of Norway. He has studied at the prestigious Indian Institute of Technology, University of Delhi and the London School of Economics.