The World Needs Shock Therapy

(Bloomberg Opinion) -- While any global meeting that involves Donald Trump has the capacity to surprise, one thing is virtually certain about this weekend’s G-20 summit in Osaka, Japan: The gathered leaders will issue a pious call to work together to shore up growth, trade and the global financial system. The challenge they face is much bigger than that, however. And good intentions aren’t going to solve it.

The central question is how to restore reasonable levels of growth within resource and environmental constraints. Advanced economies are trapped in what John Maynard Keynes in 1931 called a “semi-slump” -- a torpor marked by low inflation, modest and inconsistent growth, and unstable financial markets sustained by endless monetary easing. Investors seem strangely content with this situation. Indeed, bad economic news is now taken as good news, since it presages more central bank easing.

This is unsustainable. The boost provided by each injection of monetary stimulus is decreasing, even as the U.S. Federal Reserve and its developed-world peers are reaching the limits of their ability to act. Wealth gains are ephemeral and contingent on central bank support never being withdrawn. Sooner or later, the divergence between the real economy and artificially inflated asset prices will have to be reconciled.

For years, policymakers have hoped that time and traditional measures would restore normal growth and inflation. But repeating measures deployed over more than a decade isn’t suddenly going to result in a different outcome.

Reviving growth will require a far more radical restructuring process. It will have to be transparent, globally coordinated and designed for the long-term. Members of society must share the burden equitably if it’s to be politically sustainable and not damage social cohesion. It must recognize environmental risks as we have no planet other than this one, no matter what space-loving technophiles believe.  

The effort will need to proceed along three tracks. First, the high debt levels that are retarding growth need to be brought down. In the U.S. and other Western countries, some debt, which cannot ever be repaid, will have to be written off. The idea of forgiving student-loan debt, for instance, is worth considering seriously. Other borrowings will have to be restructured in terms of maturity and rates to become viable.

This will inevitably entail a large transfer of wealth from savers. An essential feature of Japan’s experience has been the country’s use of its large domestic savings pool to manage two decades of stagnation. Japanese savers have proved willing to impoverish themselves for the common good.

Longer-term measures to restrain future excessive growth of debt must be part of the package. Reviewing the deductibility of interest expense, which skews equity-debt choices, is one option.

Second, structural reforms will have to be implemented. The specifics will vary from country to country. Infrastructure must be upgraded -- not just roads and ports, but education, healthcare and telecommunications. Given that consumption remains around 60% to 70% of advanced economies, labor market reforms -- living wages, greater job security, skills retraining to help workers leave sunset industries -- are essential. These measures will assist employment, productivity and incomes.

Changes to the tax system are central to addressing inequality. Some members of the 1% now openly promote the idea of a reasonable wealth tax. Fair taxation of capital gains and carried interests should be discussed.

Finally, the social safety net will require change to ensure it is tenable. Unsustainable pension and healthcare arrangements are already being reduced by bankruptcy or negotiation. Expectations about when workers can retire and what welfare arrangements they’ll receive when they do will need to be adjusted in line with what is societally affordable.

The obstacles to all this are formidable and obvious. Savers and investors are unlikely to voluntarily accept reductions in wealth. Ideologues aren’t going to like intervention in free markets. Politicians are unlikely to embrace policies which promise only pain, sweat and tears.

At the same time, history suggests that the required measures are possible. Both in the 1930s and again in 2008, faced with collapse, nations were able to institute dramatic new policies. Internationally, the reconstruction of Europe after World War II, the Plaza Accord, which was detrimental to Japan and Germany, and the unified G-20 actions after 2008 suggest that international cooperation can be effective.

Such radical steps may be the only chance to save capitalism and democracy. As a character in Giuseppe Tomasi di Lampedusa’s “The Leopard,” a novel about adaptation, argues: "If we want things to stay as they are, things will have to change."

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Satyajit Das is a former banker and the author, most recently, of "A Banquet of Consequences."

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