Economic Crisis and Class Warfare

While there is now talk about currency wars between countries, there is now also talk of class warfare in the developed nations of the West, especially amongst left-leaning publications and websites. The proclamation of the death of Marxist ideas appears to have been somewhat premature.

Such talk arises because of the perceived injustice of asking citizens to endure austerity and reductions in social spending while their governments bail out banks and their shareholders with taxes paid for by the same citizens. As noted by the International Labour Organisation, worldwide employment is unlikely to recover until 2015, and this reduction in economic prospects for working citizens understandably causes anger about the moral hazards of bailing out people who have made poor investment decisions.

We can easily sympathise with the sentiments of the Irish taxpayers when we are confronted with an example like Russian billionaire Roman Abromavich, (owner of Chelsea Football Club) threatening to sue the Irish government when the latter spoke of exploring the option of defaulting on the subordinated debt of the Irish National Building Society. Why should innocent Irish taxpayers bail out bondholders, most of whom are supposed to be sophisticated investors? We can easily imagine the indignation of American taxpayers when Berkshire Hathaway vice-chairman Charles Munger said ‘Thank God’ for bank bailouts (Berkshire owns are large chunk of Wells Fargo Bank) and told them to ‘suck it in and cope’. Something is terribly wrong when the poor subsidises the rich.

On the other hand, people who advocate class warfare are not without fault either. While bailing out the rich is not fair, thinking that governments can ‘stick it to the rich’ with higher taxes so as to continue present levels of welfare and social spending is equally unrealistic. Raising taxes on the rich will only promote capital flight out of those jurisdictions that try such measures, as amply shown by history. Workers in the developed nations, especially those in the EU, need to wake up to the reality that their countries are broke, and that even if their government taxed 100% of everyone’s income, the outstanding sovereign debts cannot be repaid. They also need to understand that in the age of globalisation, it is not realistic to want to sustain First World living standards when their productivity can’t even match those of the emerging economies in Asia.

Unfortunately, I doubt that the parties involved in this economic conflict will be able to resolve things amicably. From a generational cycles perspective, the Western nations are due for some unsettling times as each side struggle to protect ‘their fair share’ of the economic pie. One likely outcome of this struggle will be an increased level of protectionism, as countries seek to protect their own citizens from global competition.

From a Singaporean perspective, all these things may well mean lower economic growth in the next few years as we move into a more turbulent global environment. We should be prepared for tougher times ahead, and position ourselves to better ride the next wave up when it comes after the storm.