If the inequality arising out of the unqualified pushing down of costs for capital represents ‘commerce without morality’, the politicians who have enabled a taxation system that facilitates this represent ‘politics without principle’
Globalisation is a grand word that has been used to cover up its true nature, which has always been about reducing costs for companies in the developed markets. To be sure, reducing costs (and/or increasing efficiency) is generally a worthy goal, except when, in planning and practice, it is marred by one of Gandhiji’s seven social sins—commerce without morality.
There is no gainsaying that globalisation has improved the economic lot—often substantially—of millions of people in poorer countries, but it has also led to a stupefying increase in inequality in both developing and developed countries.
And while this may not have really mattered on balance (thus far) in poorer countries because, as they say, a rising tide lifts all boats, it has come back to bite the rich world viciously. For instance, the horrifying increase in inequality in the US has resulted in San Francisco being reduced to a pre-Third World city (worse, in some ways, than the Bombay I grew up in) with human excrement fouling many parts of a city that was for decades touted as one of the loveliest and most liveable cities in the world.
And San Francisco is not alone—Toronto, that used to be a quiet urban backwater a few decades ago, suffers similar street life in certain areas.
Now, being a good Gujarati, Gandhiji understood that commerce is necessary to grease the wheels of economic progress, and, being a far-sighted human, he also understood that the natural instinct of commerce needs to be flavoured with morality to make it truly sustainable.
Also read: Education’s new normal
This flavour can be added in many ways, from Henry Ford ensuring that his workers earned enough to afford his cars to, in a more structural sense, a tax code that is specifically focused on ensuring that inequality does not climb beyond a certain point.
I note that in the 1980s, the capital gains rate in the US was 80%; today it is 15%. One of the sure signs that this has been much too low for too long is the obvious fact that there is too much capital in the world. Asset prices have risen and risen and risen and, finally, inflation has taken off.
Again, till a year or so ago, there was so much capital sloshing around that professional investors were compelled to invest trillions of dollars at negative interest rates. While the Fed has—finally—pushed interest rates higher, real rates (interest rates minus inflation) which affect real people remain negative.
We are in this pickle because the tax code, certainly in the US, is written by politicians who enjoy one more of Gandhiji’s seven sins—politics without principle. The highest bidders—aka the corporate sector, HNIs and their relatives—call the shots, so the tax code is structured to ensure that the rich get richer and the wealthy become super-wealthy.
Also read: What China’s reopening means for India
This galloping inequality needs some kind of circuit-breaker in the tax code (rather like the debt ceiling) to resolve, which, of course, needs a return to some kind of politics with principle.
As a result of all this, we are now in a world where these failures are leading to a huge amount of instability in financial markets, with financial crises occurring more and more frequently. And, here, another one of Gandhiji’s seven sins—knowledge without character—takes centre stage.
Financial regulators, supposedly imbued with the most detailed knowledge of markets, have, certainly since the 1980s, failed to show the backbone they needed.
Starting with Alan Greenspan in 1987, the US monetary authorities made investing a tea party by issuing what became known as the “Greenspan put.”
The Fed told investors (mostly already wealthy people) exactly what it was going to do, sometimes almost to the day—this made investing a near zero-risk game.
A cousin of mine in Switzerland who is in real estate once told me it was like taking candy from a baby—you buy property and, since you know, rates are going down, you finance it very short term and then refinance as rates come down.
Thus, with the Fed, charitably-speaking, asleep at the wheel, inequality continued (and continues) to surge. Equally, investors have forgotten how to price risk, as a result of which financial crises have become ever so much more common—six of the eight financial crises in the last 100 years have happened since 1980.
And so it goes.
The writer is CEO, Mecklai Financial
http://www.mecklai.com