Thomas Cooley ADEMU

The concentration of wealth is holding back growth

Professor Thomas Cooley, who is the Advisory Committee Chair for the ADEMU project and also the Paganelli-Bull Professor of Economics at the Stern School of Business, NYU, recently shared his views on how the concentration of wealth is holding back growth. The interview with Prof Cooley was printed in the Spanish newspaper ‘La Vanguardia’:

Age? I am already a demographic minority. Born in Vermont: my school only had one classroom. I was an engineer at IBM, but I was fascinated by Economics: I was Dean of NYU and an advisor at Standard & Poor’s. To create jobs, train your unemployed workers. In the wealthiest countries, education is a life-long endeavor.

The concentration of wealth is holding back growth.

Why is the global economy no longer growing like it used to? 
For starters, it is because in the West we have aged and we save more than we invest.

And we’re in debt.
But there’s plenty of liquidity: Large companies in the US are already paying banks to keep huge amounts of money instead of investing it and creating growth.

In the US you’ve already achieved minimum unemployment.
Yes, but wages in the US are still too low, and so is the rate of consumption, which is why the economy is not creating wealth at full capacity.

Liquidity isn’t the problem in Spain, either…
Throughout the world, there is more money than ideas.

…But the money continues to fall into fewer hands.
This rampant inequality is another cause of stagnation that we suffer from…

The richest 1% already own 48.2% of global wealth, according to Credit Suisse….
Because this trend towards concentration of wealth has distorted the normal functioning of the economy and slows growth.

The more money you have, the fewer incentives you have to invest and the more incentives you have to avoid risking a loss.

The rich are more concerned about not losing than they are with winning. Multi-millionaires tend to be less motivated to continue growing small businesses and today can afford to be sitting on mountains of cash.

What is the recipe for growth, then?
If these are the reasons that prevent us from growing as we could, the prescription is very different than if this were a mere cyclical crisis in which we inject liquidity and invest in infrastructure, among other Keynesian stimuli.

In Spain we built the best infrastructures, but look at our unemployment rate.
That’s because the investments that can’t lose are the ones we make in human infrastructure: in well-focused training. Each dollar that is invested to educate a child is multiplied when that child starts to work and starts paying income taxes.

Heckman won the Nobel for showing this: every dollar in education becomes 300.
The same goes for professional training, each dollar invested in it multiplies much faster, if you know how to focus value creation. That’s what is missing in Spain in order to fight unemployment: give quality education to everyone of all ages in classrooms and companies, and then let that talent flow without restrictions to where it will be best employed.

There are more universities every day.
Not only universities, I’m talking about training, in companies, with a sharp focus on improving productivity. In the most productive countries, like Germany and the Scandinavian countries, every worker is constantly learning.

So it’s not only about investing.
It’s about investing in productive sectors. Construction isn’t one of them and Spain tends to concentrate on that one. There is a lack of training: you only have to check the statistics on the qualifications of your unemployed workers to see that they are not preparing themselves to adapt to demand.

Even China isn’t what it used to be.
China also has a large construction bubble in debt from their municipal governments. That’s slowing them down from double-digit growth to the 6.9% growth they have now.

Global catastrophe or just a bump in the road?
If it’s a bubble, it will burst, but their government still has plenty of room to maneuver. China already represents one fifth of the global economy, so if they catch a cold, we’re all going to start sneezing. Let’s hope that India, which is investing in education, can take China’s place as the world’s economic engine.

How long with the zero interest rates last?
I hope the Federal Reserve will raise them before 2016. They should already be doing it now.

Are we ready for that? 
After seven years of flat rates, changes are scary, but it would be good to raise them a little bit.

What’s going wrong in Europe?
More on Europe. The banking union should accelerate and begin a gradual fiscal integration. If a European bank fails, the response should be rapid and centralized. And everyone should know what that response will be.

And that would cause a decrease in unemployment?
Everything is related: that’s how you generate confidence in EU investors, yes, employment. Look: I’ve been studying this for years. Until 2010, all the countries in the Euro Zone were converging in terms of income. Spain and Italy were getting closer and closer to Germany, Denmark, Austria, Holland…

Until the recession showed us that the European Union wasn’t very unified. 
And since then, the Scandinavian countries and Holland, Germany, Austria…keep improving while the periphery–Portugal, Italy, Spain–gets left behind. It is precisely because of this that investors don’t quite trust the EU.

And that’s how inequality increases between countries.
Which makes markets and the economy in general function badly. The worst part is that this inequality shows up in politics and radicalizes positions…as we’ve already seen happening in Greece. And in Spain? What do you say?

We’ll see what the voters say.
Radical positions accomplish much less for everyone in the long run than gradual reforms. Take a look at the countries that have adopted them after falling into the populism trap: plenty of political fuss and very little prosperity. On the other hand, economies that apply slow and steady reforms, like the Scandinavian countries, Germany, Austria…today, they are the most prosperous and fair.