A New Capitalistism In America And The World Must Prevail

The government will have to play a central role in restructuring the economy in the future.The financial crisis showed that financial markets are not self-correcting and the role of government is essential. The "Reagan-Thatcher Revolution" denigrated the role of government and the end result was having government play a bigger role than this unregulated prescription.We will now have to reconstruct a society with a better balance between government and the market. Any vision for America going forward must be part of a global vision.The most dramatic problem is global demand and supply.Another problem is global unemployment(240 million) and billions don't have the education to reach their potential as workers and consumers. Global imbalances is another problem that hinders stability. One part of the world is living well beyond its means;the other part produces in excess of its consumption.America has been borrowing from the rest of the world($800 billion in 2006 alone) and this isn't sustainable in the future.Some 40 % of the world's population still lives on $2 a day and there is a massive need for investments to improve their opportunities.

The growing inequality contributes to the problem of lack of global aggregate demand-money is going from those who would spend it to those who have more than they need.The financial crisis has put downward pressure on wages throughout the world that has hindered global consumption. Developing countries have exacerbating the problem by holding on to their reserves to protect themselves from a future fiscal crisis.What is needed,according to Stiglitz(Freefall), is more consumption by the poor,including China,and less by the rich(America)to reduce the scale of global imbalances.

Our country has a manufacturing conundrum due to successes in productivity increases and off shoring to China and elsewhere,reflecting a shift in comparative advantage.This adjusting to this shift will not be easy. It is easier to lose jobs in areas where competitiveness has been lost than to create new jobs in new areas. America has to create high paying jobs by creating competitive high tech industrial and manufacturing sectors using our research from our valuable universities.We should be trying to figure out what our comparative advantages would be in a global economy.Public owned firms can be just as efficient as private ones(South Korea,Taiwan's steel mills).Private firms must have the right incentives for themselves and the general society.The Employment Act of 1946 recognized that maintaining the economy at full employment was a national goal and one for which government had to take responsibility.The government should promote innovation(solar power),provide social protection and insurance and prevent exploitation.New capitalism will require trust between Wall St. and the rest of society unlike deregulation and lack of trust during the Reagan revolution.

More from "Freefall" to come.