Davos: Two Worlds, Ready or Notby Simon Johnson | January 31st, 2011 | 10:08 am
On the fringes of the World Economic Forum meeting in Davos last week, there was plenty of substantive discussion—including about the dangers posed by our "too big to fail" and/or "too big to save" banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the United States looks so bad.
But in the core keynote events and, more generally, around any kind of CEO-related interaction, such themes completely failed to resonate. There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive—it was hard to detect any note of serious concern.
Many of the people who control the world’s largest corporations are quite comfortable with the status quo post–financial crisis. This makes sense for them—and poses a major problem for the rest of us. The thinking here is fairly obvious. The CEOs who provide the bedrock of financial support for Davos have mostly done well in the past few years. For the nonfinancial sector, there was a major scare in 2008–09; the disruption of credit was a big shock and dire consequences were feared. And for leaders of the financial sector this was more than an awkward moment—they stood accused, including by fellow CEOs at Davos in previous years, of incompetence, greed, and excessively capturing the state.
But all of this, from a CEO perspective, is now behind them. Profits are good—this is the best bounce back on average in the postwar period; given that so many small companies are struggling, it is reasonable to infer that the big companies have done disproportionately well (perhaps because their smaller would-be competitors are still having more trouble accessing credit). Executive compensation at the largest firms will no doubt reflect this in the months and years ahead.
In terms of public policy, the big players in the financial sector have prevailed—no responsible European, for example, can imagine a major bank being allowed to fail (in the sense of defaulting on any debt). And this government support for banks has translated into easier credit conditions for the major global corporations represented at Davos.
The public policy issue of the day, from the point of view of such CEOs, is simple. There needs to be sufficient fiscal austerity to strengthen public balance sheets—so that states can more effectively stand behind their banks in the future, and to keep currencies from moving too much. Leading bankers, in particular, insisted on the paramount importance of providing unlimited government support to their sector during 2008–09; now they insist with equal or greater vigor that support to all other parts of society be curtailed.
This is where cognitive dissonance creeps in. Most CEOs feel that the provision of general public goods is not their responsibility, although they are very happy to help guide (or capture) the provision of public goods specific to their firm.
But it is reckless decisions by some in the financial sector that produced the crisis and recession—this is what accounts for the 40 percent of GDP increase in net government debt held by the private sector in the United States (to be clear: It’s the recession and mostly the consequent loss of tax revenue). And CEOs are happy to lead the charge both against raising taxes and in favor of deficit reduction.
This adds up to public goods being weak and so much under pressure around the world. No one can put significant resources to work helping to bring down unemployment. No one is seriously addressing the loss of skills faced by the long-term unemployed. No one is offering real resources to help improve education for lower-income children or adults who did not finish high school.
Self-anointed "fiscal conservatives" claim the budget issues we face are all about discretionary, nonmilitary spending. This is nonsense. The United States faces an incipient fiscal crisis: (1) in the shorter term, because of what the big banks did and what they are likely to do in the future, and (2) over the next few decades, if we fail to control rising healthcare costs (both in general and as funded by government budgets).
The gap between the CEOs’ world and the real world should be bridged by the official sector. But where are the politicians and government officials who can explain what we need and why? Who can confront the CEOs in the highest profile public forums, and push them on the social responsibility broadly defined?
The biggest disappointment at Davos was not the attitude of the corporate sector; these people are just doing their jobs (as they see it). To the extent the US or eurozone official sector showed up at all, it continued to demonstrate the deepest levels of intellectual capture. The reasoning seems to be: As long as we do what the big banks and big firms want, everything will turn out all right. There was zero high-profile public debate at Davos last week on anything related to this way of seeing the world.
Corporate Davos was borderline exuberant. Even if a deeper crisis looms, does the global business elite really care?
Also posted on Simon Johnson’s blog, Baseline Scenario.