Fault Lines: How Hidden Fractures Still Threaten The World Economy

by Raghuram G. Rajan

set of fault lines stems from domestic political stresses, especially in the United States. Almost every financial crisis has political roots, which no doubt differ in each case but are political nevertheless, for strong political forces are needed to overcome the checks and balances that most industrial countries have established to contain financial exuberance.

Political fault lines

The top 1 percent of households accounted for only 8.9 percent of income in 1976, but this share grew to 23.5 percent of the total income generated in the United States in 2007.

US income inequality

We have long understood that it is not income that matters but consumption.

From the trough of the recession, the average time taken by the economy to recover to pre-recession output levels was less than two quarters, and the lost jobs were recovered within eight months.

Recovery from crisis

increased.

Rise of the Creative Class

The gap between the growing technological demand for skilled workers and the lagging supply because of deficiencies in the quantity and quality of education is just one, albeit perhaps the most important, reason for growing inequality.

Growing Inequality, Techbology and Education

But Goldin and Katz argue that the pace of technological change and its demand for greater skills has been relatively steady:

Pace of technological change

human capital,

Human Capital

Why Is the United States Falling Behind?

Why is US falling behind in education ?

The problem with using the might of the government is rarely one of intent; rather, it is that the gap between intent and outcome is often large, typically because the organizations and people the government uses to achieve its aims do not share them.

using might of the government

Populism and credit are familiar bedfellows around the world.

Populism and easy credit

For example, sensible governments of developing countries do not have strong laws protecting intellectual-property rights when their industrial sector is starting out: such laws would put an end to the rampant copying from foreigners that is often the basis for initial growth. Instead, they enact property-rights legislation when domestic firms have become strong enough to innovate and demand protection.

Developing economies and IP Rights

erecting barriers to entry, offering tax breaks so that private firms can generate larger profits and use their retained earnings to fund investment, encouraging close ties between banks and favored firms so that the former lend abundantly (and cheaply) to the latter, providing raw materials at a subsidized price, and imposing tariffs so that foreign competition is not a threat.

Early developer Government measures to promote industries

What the loose monetary policy instead triggered was a massive stock market and real estate bubble

Japan blunder