April 2016. GrowthPolicy staff member Marzena Rogalska interviewed Harvard Kennedy School Professor Richard Parker, focusing on three key questions motivating the GrowthPolicy website. Below is an edited version of Professor Parker's comments. Click here for more interviews like this one.
GrowthPolicy: Where do you think the future jobs will be coming from?
Richard Parker: I think there are a couple of places. One is the service sector which is going to continue to grow larger and larger. Manufacturing as a share of the total jobs on the planet we never take on the scale that they occupied in the 19th century. Why? Because manufacturing is now so efficient in terms of productivity that a relatively small number of jobs can meet global manufacturing demand. So why the service sector? Well, broadly, as economies become more sophisticated, each stage of advance produces new opportunities for the provision of services. In fact, services, broadly conceived, are then long term growth prospect for capitalist economies. What kinds of services? Well, there are familiar services workers like staff for hotels around the world; here are so-called symbolic analysts in the service field, lawyers and doctors for example. Services speak to the ways in which an economy, once fundamental material needs are met, seeks to produce employment in fields that are much more related to personal discretionary income expenditures. So we spend much more on entertainment today than we once did, as a percentage of income and in total dollars, we spend more money on vacation, we spend more money on quality of life increasingly. Now this is not to speak of the planet as a whole but to speak of the advanced industrial or post-industrial sector. But it’s also to speak about the ways in which rapidly growing developing economies are going to play catch-up with the developing countries.
GrowthPolicy: My second question is about the financial crisis. We still have the fresh memory of 2008 and 2009. Do you think it will come again? What can we do to prevent it?
Richard Parker: I worry a great deal about the possibility that a financial crisis of the kind we saw in 2008, 2009 will strike again in the not-too-distant future, and in this, I’m not alone. The IMF is worried about this. The eminently conservative scholar is worrying about this. Why should we be worried? The first is that finance now is a global economic project and so the fact that it is relatively concentrated in a small number of countries doesn’t in fact mean that it doesn’t have global reach. Financial crises have enormous impact beyond the borders of the country in which they originate. Today that that global aspect of financial crisis is what we have to pay particular attention to because the damage that those crises can do can be communicated far more quickly than the kinds of crises precipitated by standard good sector crises that we think of when we think of most common kinds of economic recession.
The strategy of the early and mid-20th century faced with an earlier version of these crises, some of which were national – many of which also were international in scope. It was to increase the amount of public sector regulation and oversight and the belief that the private financial sector could not really in truth regulate itself. I think that’s still true.
I think that we’re now in a period where there’s a new set of struggles going on as the confidence of the late 1970s and on that – in effect financial capital could regulate itself has lost supporters. In fact, it seems to be very much on the outs nowadays in terms of thinking about the sector. But what kind of regulation? Well, I think that there are a couple of ingredients to the kinds of regulation that should be sought. One is that there should be strong national regulatory systems and that they should be comprehensive in the sense that there are large sectors of finance that exist in the shadows of finance where the regulators don’t reach.
The hedge fund industry is a good example. Two trillion dollars or more in which there is almost no systemic public sector oversight of the sector. The fact that the regulated sector has been getting smaller as a percentage of the total financial sector is also a reminder of why having comprehensive national regulation is absolutely critical. But I would also say that comprehensive international coordination between national regulators and a set of national – excuse me, a set of international standards that national regulators could aim toward is the next single most important part of this, which is that we need international standards, international enforcement mechanisms and international punishments to try to prevent as much as possible the kinds of internationally-derived crises that we saw in 2008, 2009. That is you can think of them in several different forms. One is that in some cases, the actual variance in rules accompanied by variance in currency values or variance in interest rates makes it very tempting for the financial sector to try to essentially play arbitrage across regulator systems or across currencies or across interest rate differentials. To the greatest extent possible, we need to remove that. The idea that somehow this promotes efficiency was an interesting observation to make in the 1970s when there was very little of this going on and we would just live in a regime of fixed rates structured by Bretton Woods.
But today, given the sheer volume of derivatives that are functioning in the markets related to currency and to interest rates – and I’m talking here of, by some estimates, $600 trillion in outstanding derivatives contracts. When you get to that scale, the idea that in another couple hundred trillion in derivatives contracts has anything to do with promoting marginal efficiency, it’s just not plausible or logical. The efficiency gains come very early on in terms of the ratio of derivatives to underlying products. Then after that, you’re essentially promoting a casino economy or a casino financial structure that by itself absent regulation will almost inevitably end up collapsing with all the attended misery that accompanies financial market transactions.
I think there’s a third set of issues that is about simplification and segregation. What do I mean by that? The old Glass-Steagall system recognized that different kinds of financial institutions needed to specialize in providing certain kinds of financial services and certain kinds of financial products. That’s probably something that we should go back to. It seems to me folly to take financial institutions, particularly those financial institutions that are backed by government guarantees of one kind or another, as to the permanence of its underlying capital value. That is of its depositor’s value and let institutions risk them in what are inherently highly volatile capital markets. Those who want to engage in that sort of thing should be encouraged.
I think there’s a separate second thing that could be done there to mitigate risk, which is to in American terms force investment banks and similar higher risk takers to function as partnerships rather than as corporations thereby placing a lot of the risk of downside consequences on the partners themselves rather than letting the managers shed those downside risks and place them on shareholders or ultimately on government, the taxpayers. I think there’s a third thing which is about the transparency of products and I think here there has been plenty of exploration of alternatives. One is that as securitization goes forward – and I’m not opposed to securitization on principle but that as securitization goes forward, at each stage of the pass-along from the product origination to securitization, to marketing of securitization, to holding of final securitized product, there should be skin in the game. That is that no whole product should be sold off with the underlying enterprise that generated or transferred that product being released from partial liability. What we find is that the veil of ignorance and the asymmetry of information in too many of these situations lead to a product being offloaded onto unwary customers in a systematic way that is ideal for the seller, because the seller gets to shed all responsibility upon sale for the accuracy of his projections or his characterizations of the product’s intrinsic risk coefficients. As we’ve seen, there’s just too much of an opportunity for sellers in these markets to gain the risk coefficients. So we need to hold those sellers on – liable in part on a semi-permanent basis or a long term basis for the products which they’ve helped originate or which they’re passing through the markets as intermediaries. Are there other things? I think that there’s a fundamental way in which we need to ask ourselves, “In what sense do these financial products promote growth and more important equitable growth around the planet?”
There is every right of regulators and of citizens and the states of citizens to seek to regulate and in some cases limit the formation and the operation of capital markets. We need to understand that while we’re a global economy that is moving very quickly toward a much more extensive service-based economic system worldwide, that to the degree that financial services are left as an unregulated sector within that larger service economy, we essentially have a potential cancer within us at every moment that could quickly and unobserved initially move through the system such that the cure or the treatment for the disease is too late and too little.
GrowthPolicy: And the last question would be about inequality. Is it an in,evitable feature of the 21st century or the curse of the 21st century?
Richard Parker: Several things to say about inequality, which is first of all, there’s no binary between inequality and equality. I’ve never heard anyone suggest that pure equality – that is the absolute division of total income or total product on a per capita basis that makes every citizen or every capital recipient or income recipient equal to every other as a plausible policy goal, let alone a political goal. So the question then becomes, “What levels of inequality are you comfortable with? How do you structure that inequality? Why is that particular level of inequality valuable to the society as a whole?” The idea here is that what you want to do is understand several things. One, does the level of inequality tend to create a widespread sense of fairness in the economy? I start with this kind of vague psychological idea of the felt sense of fairness because I think that economists particularly are prone not to understand that the emotional and moral content of a society’s economics are central to the successful functioning of that economy or at least successful to the successful functioning of a democratic capitalist economy, that tries to avoid outright autocracy and compulsion as a condition for the operation of the economy. So the first is, “Does the level of equality promote a sense of fairness?” The second is, “Does it promote a measurable greater efficiency?” That is, it is not difficult to conceptualize economies in which you would have greater inequality but lower growth as a consequence of the inequality because the concentration of income is so great that the level of consumption is lowered by the concentration of savings that accompany the concentration of income. So you have right from neoclassical model standards a question of whether or not you have tipped over into some world of excess concentration which creates a suboptimal growth rate. That’s something that economists of a liberal or conservative stripe ought to be at least able to recognize conceptually.
In fact we’ve had lots of attempts to recognize this concept by conservative economists such as Arthur Laffer who by focusing on taxation has talked about the ways in which structures and levels of taxation are disincentives to growth or incentives to growth. It’s only one step from the level of taxation to the idea of net income and therefore of net income functionally created both by taxation and also by market level distribution to make this a legitimate and worthwhile concept for investigation.
The third is that we need to talk about ways in which that income is generated and its relationship to the use of the resources of the planet. I think that in the 19th century when the tenets of market theory were inscribed by figures likes Alfred Marshall or the modern capitalist economies got started in Northern Europe before spreading out and now of course spreading across the globe, that the idea of scarcity was the driver of – the theoretical driver or the theoretical best moral justification for such a system. That is the capitalism was abundantly able to create more goods more efficiently than previous forms of economic and social organization. I still think that there’s a strong case to be made for capitalism’s ability to do that, to produce more and address the concept – to address the issue of scarcity than any system that we have. However, there are many types of capitalism and the many types of capitalism recognize that some types of capitalism can be hideously wasteful of other valuable inputs. Those valuable inputs can range from the condition of nature at the end of a production cycle by human beings. That is what damage has been done to nature in order to produce a given set of products, to damage done to the human soul if you will for – to turn to something that economists don’t like to talk about. There are ways that we know from the 19th century that 80-hour weeks, six days a week, imposed on women and children were not characteristics that created a more abundant and fulfilled human population.
The third is to recognize that we are moving across the 21st century in terms of population and in terms of per capita consumption by an ever-growing global population toward a threshold level that very easily could become a tipping point from which there is no return. That is that economics as it was conceived in neoclassical terms has no limit in terms of wants. With no limit in terms of wants and no theoretical conceptual structure to say that the wants now exceed the ability of the earth to supply essential inputs, you have a system that is a train heading for disaster, for a collision that could literally destroy human life on the planet and a good deal of other forms of life as well too. So the idea that economics is a system which is only trying to answer the question, “How much more can we produce more efficiently?” seems now horribly dated in light of the sheer number of human beings that are on the planet and that will be on the planet within the next century and the levels of consumption which they will be accustomed or believe they have rights to by virtue of being citizens of the planet. We need to have a much more candid discussion about that third risk feature of an unlimited inequality, not of growth, not of – one of felt sense of fairness but whether or not we are now banging up against the sheer limits of the planet and its ability to provide us with the raw materials to create human civilization.