Ruchir Sharma never bats an eyelid before calling a spade by its rightful name. In his new forceful and trenchant, book What Went Wrong With Capitalism, the former emerging markets investor at Morgan Stanley and the current head of head of Rockefeller Capital Management‘s international business, is at his acerbic best. Castigating deficit spending by Governments globally, Sharma, dissects what went wrong with the highly touted notion of capitalism. Cocking a snook at Keynesian ideas gone awry, Sharma writes, “The Keynesian idea, born in the Depression, that governments should run deficits to create jobs in hard times and surpluses in good times, had given way to running deficits…”
As Sharma painstakingly informs his readers, the original Keynesian rationale for government borrowing was to expend monetary resources to combat dwindling demand in an economy plagued by desperate times. However, an important corollary to this philosophy was to tighten the belt and exercise a great degree of fiscal prudence in discretion during good times. However, governments have taken this simple Keynesian notion beyond reasonable limits by liberally and indiscreetly opening the spigot to shore up the economy even during times that are prosperous.
Sharma also bemoans the pernicious features of bailouts, which have transformed into a cultural norm. Following the COVID-19 pandemic, a gargantuan relief package of $2.2 trillion was signed by the US Government in March 2020, which resulted in a ballooning of the Government spending to 45 per cent of the GDP and taking the fiscal deficit to 15 per cent of GDP, stratospheric levels only seen during the heights of World War II. The impact of this humongous bail out was brought out in frighteningly stark detail by Pandemic Oversight, an independent watchdog established by the Congress to track relief spending. As Sharma informs his readers, “. of about $810 billion delivered as cash benefits, more than $110 billion went to recipients making $100,000 to $200,000 a year…. Checks amounting to more than $600 million went to Americans making more than $200,000.”
Behemoth corporations, another category of recipients thriving on undeserving Government largesse, in addition to taking the concept of moral hazard to hitherto experienced levels, are also running amok in terms of running mountains of debt. “The C-suite has expanded to include Chief Officers of everything from Analytics and Digital to Collaboration, Customers, Ethics, Sustainability, Learning, and Happiness. And every chief needs his or her administrative minions.”
Beginning with Alan Greenspan, central bankers in America have also done their bit, and more, in bringing the fiscal deficit to unmanageable proportions. Cutting interest rates to almost zero, and printing money as if there was apocalypse on the horizon, these acolytes or disguised versions of Alan Greenspan ensured that successive governments, irrespective of their party ideologies, continue to borrow to finance deficits on a scale that is unthinkable. Financial regulations and legislations have also become an absolute quagmire, to navigate which there has arisen an army of lawyers. As Sharma frighteningly points out, the Code of Federal Regulations, first updated annually in the early 1960s, now runs to a bewildering 180,000 pages covering 240 volumes. A common man’s nightmare and a lawyer’s absolute paradise!
This sorry state spans both sides of the Atlantic. The European Union is grappling with its own maze of convoluted regulatory regimes which undergo inexplicable iterations at a speed that is absolutely impossible to keep pace with, let alone comply. An obsession with meeting net zero targets further exacerbates an already chaotic situation.
In the last part of his book, Sharma offers some plausible ways out of the quicksand by making references to the experience of three countries, Taiwan, Vietnam, and Switzerland.
What Went Wrong With Capitalism – a clarion call for setting a crumbling house in order before an imminent collapse.