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"The paradigm of the 21st century is negative growth in jobs and salaries, and the biggest problem for the West is that its populations are unprepared for this."

 

jon MOYNIHAN, PA executive chairman

The West will not bounce back

Rodrigo Turrer

Época

17 September 2012

 

Jon Moynihan, PA Executive Chairman, has been interviewed in Época, a weekly Brazilian news magazine. 

Asked to outline his views about the economic decline of the West, Jon says: “The paradigm of the 20th century was a sort of social contract between governments and the electorate: a constant and stable annual job growth of 2% regardless of what happens. The promise was: while you have a job, your salary will increase by 3% to 4% per year. This contract satisfied the majority of the population but has now ended and will not come back. The paradigm of the 21st century is negative growth in jobs and salaries, and the biggest problem for the West is that its populations are unprepared for this.”

Responding to the suggestion that a steady increase in wages in the West after World War II created a middle class that was beneficial to the development of its economies, Jon replies: “This was the positive side; without doubt. The negative side was the creation of an enormous disparity between salaries around the world. Over the last decade, 500 million people were earning over US$135 per day in the West. In urban areas of the developing world, there are 1.1 billion people earning US$13 per day. In rural areas there are 1.3 billion people earning up to US$2 per day. This disparity allows developing countries to employ the poorest for lower salaries and thereby drain jobs from the West.”

Discussing governments’ role in the decline of the West, Jon says: “What I am trying to do is look beyond governments’ tactical decisions. All mechanisms tried by governments to restart growth are short-term efforts to stimulate the economy. If we look at the actual causes of the decline, we will see that it is impossible to avoid a drop in salaries and jobs. The decline can be catastrophic, as we are seeing now in Greece, Spain and other countries. There, governments’ decisions have  made the inevitable decline much worse.” 

He continues: “In 1971, Richard Nixon, when discussing the United States’ decision to decouple the dollar from the gold standard, paraphrased the economist Milton Friedman: ‘Well, we are all Keynesians now’. If we are all Keynesians, we are all wrong. In unstable economic conditions, it may be necessary to consider giving the state a more active role in addressing the crisis and turning around market scepticism. But the formula proposed by the Keynesians – increasing taxes so the state can soften the effects of the crisis – just worsens the problem. By doing this, over the last three decades, leaders have been taking society to the abyss, instead of pulling it back from the brink. It is therefore necessary to understand the process and deal with it in a more intelligent way.”

Asked to clarify what this more intelligent way would be, Jon says: “A number of things could, and should, be done. It will take ten years of hard work before the West sees light at the end of the tunnel. This was the time it took Germany to recover economically after its deep reforms of the 1990s. In the private sector, it is necessary to curb banks’ excessive remuneration. This requires reform of the banking system, including close supervision of banks’ liquidity and a guarantee that they are viable institutions. In the public sector, it is necessary to limit excessive spending on pensions and public services that are impossible to maintain, such as universal healthcare. It comes down to pure mathematics: sustainable investment requires available resources to be reoriented from other areas. Governments have withdrawn money from critical investment areas – such as infrastructure, education, and cutting-edge scientific research – to invest in social welfare policies that are nothing more than election strategies to keep the promises of the past.”

To read the article in full in Portuguese, click here.

 


This article is based on a talk given at the LSE by Jon Moynihan. Click here for more information.  

To find out how we can help your organisation respond in multiple ways to the continued challenges you face in the current economy, click here or contact us now.

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