Fairness is needed in both good and bad times Daniel Daianu 26 june, 2012, OECD

1. Fairness is needed in both good and bad times Daniel Daianu 26 june, 2012, OECD

2. 1. The Great Moderation illusions misgivings vis-à-vis GDP are of long vintage illusions created by the “Great Moderation” due to: cheap credit, a temporary wealth effect, cheap imports, unsustainable social expenditure (public debts), large trade imbalances…(the falsehood of the The New Economy)…living on borrowed time and obscuring deepening rifts in society…. a misdiagnosis of the health of economies (one-sided paradigm and policies)

3. 2. Addiction to growth financial markets welcome growth and judgments are made according to this logic…; inequality and unfairness are less considered, although… quality improvements in life/wellbeing are not read by financial markets (some are not captured by statistics too) Governance reform in the EU tries to consider imbalances of different sorts….

4. 3. Finance and resource allocation; impact on wellbeing the financial industry as an inbuilt destabilizer: (Minsky, Lamfalussy, Haldane): systemic risks, less robust economies, more volatility and uncertainty; long term growth… an undue rent extracted by high finance resource misallocation on the rise: a/ an oversized finance; b/ large buffers needed (optimal currency reserves when capital flows are destabilizing), human resources diverted (quants) rescue packages: a sense of frustration in society (socialize losses and keep gains private) + higher public debts eroded competitiveness (manufacturing, human resources in R&D…)

5. 4. Policy capture policy capture takes place in mature economies too “extractive” vs. “inclusive institutions”; high finance captured policy in major western economies (waves of deregulation: 1986, Glass Steagal repeal, Commodity Futures Modernization Act, etc) the role of a simplistic economic philosophy (Adair Turner, the head of FSA…..) the Policy Drift (Lieberman, Foreign Affairs, 2011): policies that neglected social issues and enhanced rising inequality; not only new technologies explain the erosion of middle class weakening of economies (less robust) and of checks and balances (democracy)

6. 5. Social impact erosion of middle class (OECD data): it is a tendency of the last couple of decades exacerbation of tensions (insiders vs. outsiders) growing inequality declining fairness; lack of fairness is more painful and frustrating during times of duress disenfranchised citizens impact on democracy It is happening at a time of an historical change in the global balance of power: the return of Asia…(Paul Samuelson, JEP, zero sum games)

7. 6. What to do? a needed shift of paradigm in public policy: get back to reason taming financial markets and downsizing finance are a must! unbridled globalization is destructive (it can entail a breakdown of markets (the turn of the 20ieth century) fiscal consolidation is a must, but needs a wider timetable and conceptual frame more fair fiscal regimes Competitiveness and education (more emphasis on science and technology) In the eurozone there is need of a fundamental repair of its design: it is now more constraining than the gold standard regime pay attention to vicious circles (debt deflation) and fallacies of composition (when all do the same…) fairness is critical in both good and bad times; ethical values