Editor in Chief: Moh. Reza Huwaida Tuesday, October 23rd, 2018

Will the Current Economic System Fall?


Will the Current  Economic System Fall?

Few days ago I wrote two articles, titled will the current economic System Fall, where I detailed about what made many stunningly courageous to talk about the possible collapse of the capitalism. And in both articles, I mentioned two factors that fuelled assumptions around the world of the possible collapse of current worldwide economic system. And I also dealt with the issue that the prevalent assumptions were not the first ones in the history, but there were numbers of high influential people, whose theories and activities brought fundamental changes across the globe.

Yet the capitalism continued working and by the course of history it has undergone under a self-reforming process. Countries with the capitalist economic systems have done far better than the countries that have practiced otherwise.

Meanwhile, I do not claim that this is system completely humanitarian, and it could bridge economic gaps and eliminate poverty from mass population of the world. Instead what I mean is that it has done a lot better in comparison to competing ideologies, theories and practices.

Anyhow, coming back to reasons fuelling assumptions about the failure of economic system, I noted two factors and dealt only with one of them—euro crisis.
The second thing is linked to Occupy Wall Street Movement which has now found remarkable number of supporters around the world.

Definitely, the Wall Street Movement is one of the series of movements around the world against government policies, but certainly the biggest one which is linked to visible economic gap and social disparities among Americans.

Let's deal with the issue deeply.
After emergence of neo-liberalism and restoration of deregulation process in the economic sphere, a concept by the course of time took deep root among political and economic decision makers. They believed on "big"; means that a company, corporation, institution and etc could get big enough in extent hardly possible to collapse. Everybody across the world forgot about the biggest economic recession of 30's. Though there were large number of economic and financial crisis which sent the given country into economic-hell and also affected other countries across the globe, but none were big enough to bring about decision makers to act more cautiously.

During past decades, many highly influential economists pre-the appearance of technical problem in the economic system's engine that the world would not experience a kind of economic disasters once it did in 1930s. Instead what would be there are economic fluctuations that could be fixed with a better engineering. The kind of engineering that ended to life of financial crisis of South America and later Asian ones.

By saying these things, I just want to pass the notion to you that 2008 financial burst-up was like a storm without cloud in the sky. It was sudden and shocked politicians, economists as well as the financial market. Previously, no one has thought of preparation for such a day.

When the recession started, made all nervous and every body started acting furiously. Two measures found supporters as well as oppositions—increasing public expenditure and taking austerity measures.
In start, many countries, perhaps all, accepted the notion of increasing public expenditure, without caring about the budget deficits and ultimate accumulation of sovereign debt in an extent that many encountered a reactionary move of the market. Some faced with the threat of possible default.

In that stage, countries shifted back to another extreme, tightening economic belt and practicing severe austerity measures.
In the first stage, along with helping unemployed people and pouring money into pocket of common people in order to motivate them buy and spend without care in order to bring the economic cycle back on track was bailing out disturbed big financial institutions. Huge amounts paid to big financial institutions to help stand back on their foot. Bailing out was made for two particular reasons, one, to scale down high unemployment rate and second to keep them in the market, because without them nothing would have gone ok.

The first aim of bailout was that these big companies and financial institutions should not worry much about market disturbances and start investment that eventually could lead to higher employment; higher employment would have brought money to hands of people, people could have spend and ultimately a commencement of good booming economic cycle.

But fortunately, the goal was not achieved. A problem occurred. The bailout worked and stopped the possible collapse of many, but could not increase the employment rate. So, when the unemployment rate remained high, still there were few telling that incentives were not big enough to pull the market. But we cannot ignore one thing that there were enough cash on the hand of "Mr. Bigs" but they are not willing to invest.

As a result, unemployment rate remained high and huge number of people lost jobs and became unable to find any job, while millionaires and billionaires kept their money somewhere safe and have not been ready to risk them.

So, as a result, large numbers of Americans remained unemployed. And quiet large number of people have jobs but with lower salary range in comparison to pre-2008 period.
Reports released by different credential agencies clearly highlight the gaps among different social and economic classes. These reports show the richest one percent of Americans hold around 40 percent of total wealth. Based on the same data, the income of top one percent of Americans tripled since 70's. The total income of top 20 percent has increased 81 percent since 70's, while the income increase for the rest 80 percent has remained low.

So, what this data shows is remarkable wealth and income disparities among Americans, perhaps among people in the developed countries that run by capitalism and free market economy.

In the previous parts of this article, I noted some economic and social dis parities among Americans and the level of revenues that top 20 percent richest Americans earn in comparison to the rest 80 percent. I said there are reports showing that 1 percent top richest possess around forty percent of total wealth. And their revenues have tripled since 70's, while the revenue as well as wealth of 80 percent of people has not increased more then 15-20 percent during the same period. This is awful.

The process has started from 1970's when economic deregulation started taking root in the country as well as around the world. Economists like Milton Freidman analyzed the big recession of 1930's as result of lack of monetary regulation not that of evils of free market and unbridled capitalism.

So, to reveal this socio-economic gap, there was a need of fuel, which, thanks to 2008 financial crisis, provided for. Disparities would have remained secret if big companies and financial institutions risked and started investing in various spheres, which ultimately led to recruiting of mass unemployed population. But it did not happen.

Though American economy started growing, but unemployment rate remained high, which caused many economists to blame globalization-based system, in which new skills are needed to compete and those who do not have the required skills would remain jobless. Due to that issue, many have branded the current economic problem of US as cash trap. Means there are huge cash on hand but none ready to risk them because there are no good signs of market recovery on the prospective. So what is the choice ahead?

Here is part of the answer. The United States like many other developed countries is wrangling with threatening budget deficits. There is pressure to decrease budget deficits and scale down sovereign debt, which has become more than 14 trillion dollars.

Part of the solution lies on the bed of millionaires and billionaires. The "buffet's Law" is what the administration of President sees as solution to US budget deficits and sovereign debt. Mr. Buffet is a billionaire and once said that he becomes annoyed seeing his secretary paying larger amount for tax in comparison to himself. He agrees with larger tax on richer, the thing which Obama tries to pass through parliament and Senate, where G.O.P has stand hard.

The current tax policy is based on booming years when the state was enjoying surplus revenues. In this system, taxes are cut from richer groups, which many economists believe help the economy boasts. Richs will be motivated to invest, without caring much about income and revenue taxes. They will have more cash and will make large investment. If tax increases on the rich people, the cash on their hand will decline and as result investment would come down.

But President Obama wants to change the model. He wants to go after richer people and ask them to bear part of the economic crisis. It is not just president Obama and US, it is a global norm. But changing tax system is a quite difficult job; however, it has found ground supporters - the Occupy Wall Street Movement.

This movement has its roots in social and economic disparities. And the participants ask for an establishment which distributes wealth in humanitarian way. This movement, which has found supporters around the world particularly in Europe, consists of all oppositions to capitalism and financial systems

. Some say that the current financial system should be removed and others want to replace the entire economic system. Though financial system cannot be changed and time is needed for a humanitarian distribution of wealth, people are out there asking for fundamental changes. Some others go far beyond this, asking for replacement of capitalism and market economy.

But the question is to substitute it with what? Is there any design to replace with market economy and work better than this? The answer is nope.
Whether this economic system is human or inhuman, it is what it is and yet stands steady and there is no other design to threaten its status.

To calm people there are ways within the system that can be tried and proved effective. The financial system during past decades has gone out of control and civil unrest against it can move it back to a more acceptable position. One of the most convenient as well as effective way is making richer people to share larger burden to pull the global economy out of the mess. So, increasing taxes on millionaires and billionaires, on one hand, provide cash at government disposal, on the other hand, decrease ruling economic disparities in terms of wealth as well as revenue.

In other words, with some technical fixation, the economy will start booming once again. But such a technical fixation is need of large efforts not by individual leaders but through combined global efforts. European countries have to fix their houses and do not let marginal euro countries to face default. Because the default of those countries would be consequential for strong euro economies too as they hold large share of sovereign debt.

The second which is general to all countries is to control financial system and change taxation model. And try to bridge social and economic gaps if they really want to stop disastrous fallout of economic recession, which has already dealt terrible blows to people around the world.

Jawad Rahmani is the permanent writer of the Daily Outlook Afghanistan. He can be reached at jawad_rahmani2001@yahoo.com

Go Top