It began in Tunisia and Egypt, then spread throughout the Middle East and North Africa. It spilled into Spain, Greece, and Ireland. It leapfrogged to Wall Street. And this past weekend it erupted in London, Rome, Paris, Tokyo, Taipei, and Sydney. In hundreds of towns and cities around the world the uprising’s refrain is similar: economic misery resulting from fizzling economic growth is leading protesters to question corruption both in governments and in financial institutions, and to demand an end to extreme economic inequality.
As long as economies grew, inequality was tolerable. And if the rabble demanded perks, governments could simply borrow money to fund social programs. Corruption could fester unnoticed. But now the economic tide is no longer lifting all boats. Bursting financial bubbles have led economies to contract. That has in turn led to falling tax revenues, which have made existing government debts in several key countries unrepayable. Therefore government bonds held by banks as assets suddenly have little value. Which causes the economy to teeter further. The system is broken.
The universal solution: austerity—a strategy of cutting government spending, government jobs, and government services to the poor and middle classes. Suddenly social safety nets are being withdrawn, and extreme economic inequality is no longer socially tolerable.
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The only thing that could stop the uprising is a return to growth—which would generate new jobs, higher tax revenues, and solvency in the financial industry. But instead the world economy seems poised on a precipice perhaps more dangerous than the one it faced in 2008. This means the protesters likely aren’t going home anytime soon. For governments, there are only two realistic responses: repression or major reform
Brutal police and military repression of the protests could buy time for politicians, but it would solve nothing. The unrest would go underground and tear at the social fabric, leading eventually to revolution or societal breakdown.
Reform, if it is to make a difference, must be fundamental. It must start by addressing issues of economic inequality, but then must eliminate the massive debt overhang that plagues not just governments but households and the entire financial sector. In essence, policy makers must cobble together a new economic model that meets human needs in the absence of economic growth.
Politicians take note: Forces are being unleashed that cannot be tamed. So far, crisis has been dealt with by a combination of denial and delay. Those tactics no longer work. Extraordinary times call for extraordinary measures.