Inside 'Fault Lines'
Title: Fault Lines: How Hidden Fractures Still Threaten the World Economy
Author: Raghuram G. Rajan
Publisher: Princeton University Press, 2010
ISBN-13: 978-0691146836, 272 pages
Review: Fault Lines
By Thomas Bergen, getAbstract
Dismissing the 2008 recession as an inevitable free-market setback might seem simple, but economist Raghuram G. Rajan doesn't take the easy path. He makes a compelling case that the weak links in the global economy remain both visible and fixable. In a provocative analysis unhindered by ideological boundaries, Rajan argues against such government interventions as propping up the U.S. housing market. Yet he urges Americans to create a more generous safety net for unemployed workers facing a "jobless recovery." Rajan's more challenging suggestions, such as rebalancing the international economy or changing global monetary institutions, may not shift policy makers' actions, but he argues persuasively that failing to do so will mean deeper fault lines in the next crisis.
The Cracks Beneath the Global Economy
For all its sophistication and complexity, the world economy is filled with weak spots, or "fault lines," that are invisible in good times but become painfully obvious during a crash, such as the recession of 2007 to 2009. One such fault line is the United State's growing income disparity, as illustrated by top earners' widening share of annual earned income. In 1976, the top 1 percent of households "accounted for only 8.9 percent of income." That soared to "23.5 percent of the total income generated" in the U.S. by 2007. Incomes for median-wage earners, such as factory workers, have stagnated. High wages are not inherently wrong; they're a powerful economic incentive that pushes talented, enterprising people to take on valuable pursuits. Yet income stratification creates the danger that workers will begin to think that luck or connections, not work, lead to success.
Other U.S. fault lines include the weak safety net for the jobless and the government's insistence on propping up the housing market. These fault lines are more visible in a global, interconnected economy, where central bankers' decisions in Washington affect Japanese consumers and London markets, and can make or break African economies. The global economic landscape is marred with fault lines, such as China, Japan and Germany's reliance on exports for growth.
Now, policy makers face the challenge of fixing these fault lines, even if it is politically difficult. The fault lines aren't endemic to a global economy. They result from reversible policy decisions, though changing these rulings won't be easy or popular. For instance, the U.S. Federal Reserve softened the blow of the housing market's collapse based on the rationale that a softer landing would be less painful. But by slowing the pace of the correction, the U.S. is prolonging the recovery and creating inertia among homeowners, lenders and builders. The government also is signaling that profits can stay in private hands, but the public sector will share the losses. This sends a dangerous message that the Fed will ride to the rescue when investors take on too much risk.
America's Gaps in Incomes and Education
The U.S. education system, which leaves many workers unprepared for high-tech jobs, is another fault line. The benefits of a higher education are clear. In 2008, the median wage of a worker with a high-school diploma was $27,963, while a worker with a bachelor's degree made $48,097 and a worker with an advanced professional degree made $87,775. The "college premium" is obvious, yet the U.S. government hasn't responded by making it possible for more people to earn degrees. College graduation rates have stagnated, so the wage growth of the top 10 percent of earners has far outpaced that of the lower 50 percent. The idea that hard work earns rewards is embedded in the American dream, yet many workers are unready to compete in a market that demands fast-changing technological skills...
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