Galbraith warns on pay inequality

INCOME INEQUALITY is at risk of widening because governments across the world are trying to recreate the boom-to-bust patterns of economic activity that led to the current crisis, according to a leading US economist.

James Galbraith, who was speaking at the annual lecture for the economic think tank TASC in Dublin last night, said a lack of institutional reform meant attempts by governments to fix the financial system were likely to produce “speculative activity, corruption and fraud”.

A professor of economics at the University of Texas in Austin, Mr Galbraith is the son of the influential economist John Kenneth Galbraith and the author of several books, most recently The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.

Mr Galbraith, who favours orderly wind-downs of zombie banks, said the larger US banks should not be at the negotiating table when it came to the issue of their future or the calculation of their losses under stress tests.

“They should be told what the recognisable losses actually are. It’s a question whether the government is taking instructions from a bank that is in some ways more powerful than the government itself. That’s the problem with the banking plan,” he said.

Governments are being seduced by “crude misconceptions” of the function of banks, including the “misleading metaphor that lending is a flow that comes down from the banks to the population”, Mr Galbraith added.

“It leaves an industry that is fundamentally in need of reform, unreformed. It’s a plan that reflects the undiminished political power of the largest banks in the US and that gets in the way of clear thinking and effective action that would be required to get the economy restored. Because the interests of the larger banks and the interests of the economy are not the same.”

The wide campaign funds contribution base secured by President Obama on his way to the White House gives him the mandate to pursue policies that do not kowtow to the larger banks, he believes.

However, Mr Galbraith added that the scale of the fiscal deficit in the US is now much larger “than even the most optimistic Keynesian economist expected that the system would be able to deliver” and was already producing rapid change among US households.

“People have money to spend and people have money to save and that will provide a substantial force for the stabilisation of production. The problem is the unemployment rate will stay very high, because firms will be very reluctant to take people back. They will try to squeeze extra productivity out of the ones that they have first.”

Mr Galbraith described himself as being “pessimistic” about Europe and said it was more likely to be the car and electronic goods manufacturers in Asia that would primarily benefit from any recovery in the US.

The economies, such as Ireland, that had enjoyed the biggest credit booms and inflows of private capital are now suffering the largest contractions, he noted.

“The inference I would draw from that is that the forces that gave us these periods of prosperity cannot be recreated anytime soon and indeed even if they could be it wouldn’t be a good idea to attempt to do so.”

Meanwhile, a fresh commodities spike could pose significant dangers to Europeans, as it would push up prices without creating employment.