G8 leaders must tackle low wages

Washington's death

At the G20 meeting in London in April, Gordon Brown, the British prime minister, pronounced the 'Washington consensus' dead.

The 'Washington consensus' is shorthand for the free market ideology that pressed for financial sector deregulation, privatisation and trade liberalisation.

It is this 'neoliberalism' that has informed the way business has been done in the world for the last 30 years - whether in the developed or developing world.

So if it is dead, what are the alternatives? What new international system will replace it? What hints and promises have we been given?

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Well, the one thing all countries seem to agree on is banking regulation. Banks have been asked to ensure they have more hard cash in their coffers.

That way, when things come crashing down, it doesn't turn into a tsunami that sweeps us all along with it, as has happened this time around.

However, I think we have become pretty gung-ho when it comes to regulation, without properly studying what really led to the crisis in the first place.

This means, of course, that the new regulations being introduced may not be the most effective or even appropriate.

Moreover, I believe the regulations we have agreed to put in place are not of the kind necessary to really change the modus operandi of Wall Street or the City in London (see previous post: The 'save-us-or-else banks').

The powers that be are not breaking up the banking oligarchs or their networks.

Regulations are politically and conveniently deceptive; they are a great decoy.

Income inequality

This is because they confer on the world leaders and their finance ministers the appearance of doing something, without having to deal with the real issues as to why we got into this mess in the first place - our indebtedness.

Why we borrowed so much from banks has little to do with the failures of financial markets or their regulations per se.

But it has everything to do with income inequality and our low wages.

"Before governments start speaking of exit strategies, can they also please tell us how they will invest in affordable homes, health care and pensions?"

The fact is that wages in the Western world, for the vast majority of us, have been stagnant since the 1990s, with some economists saying wages have been at a standstill since the 1970s.

And no, I am not talking about the salary of bankers here, but those of the majority of the population.

This income stagnation was taking place while our standard of living was going up.

So to make up for our own balance sheet hole, we had to borrow on things such as our homes.

This allowed banks to get up close and personal with us in our lives. Our homes, our education, our health care and our pensions were all linked to a bank or financial intermediary.

Our governments assisted in this, under the economics and politics of 'neoliberalism', they pulled away from the provision of affordable health care, housing, education and pensions.

Moreover, they relied on us spending from our illusory debt-based wealth to support our economies. We, the people, created our own stimulus packages out of debt.

This illusion of success and wealth, got governments off the hook.

They didn't have to come up with any "structural" changes into the economy that would give us a higher real wage - such as investing in newer technologies or green industries - all sectors that could pay higher wages and allow us to afford more things without having to borrow.

New profits

Banks were delighted for this to happen, because we became their new source of profit, as the economist Santos Los Paulos writes:

"First, lending and the selling of financial services to individuals developed as central lines of business for leading banks.

"Credit to individuals reached almost 50 per cent of all balance sheet lending of US commercial banks in 2006.

"Citigroup and Bank of America committed, for example, over three quarters of their loan portfolio to such lending.

"Through such services, financial intermediaries [banks] have tapped directly into the income of wage earners as a source of profit." Gulp!

Root of crisis

And this is the root of the current crisis. Traditionally, a bank's normal role is to lend to industries which in turn invest that money, and by doing so they become more productive, employ more people and make a profit.

So banks are meant to be nurturing and assisting the productive side of our economy.

The buck was not meant to stop with us because we don't make a profit - we earn a salary. We pay interest to the banks out of our earnings. The distinction is huge.

Once banks started seeing us as sources of profit, the trouble started.

And this trouble will return again once the recession starts bottoming out, and banks start lending again.

This is because the power of banks has not been diminished, nor has their size relative to our economies.

In the next G8 communique, I want one world leader to address the issue of how they plan to raise our wages.

And before governments start speaking of exit strategies, can they also please tell us how they will invest in affordable homes, health care and pensions?

If we do not hear answers to such questions, then you and I will know that our leaders have learnt nothing from this crisis.

And we really cannot allow this to happen.

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