For some 30 years after the second world war the global economy grew with only minor interruptions but with creeping inflation. In some countries, the creep tended to accelerate and when the oil shock of 1974/5 worsened the terms of trade inflation exploded in most developed countries. That period was characterised by either a stable share of wages and profits in GDP or, in some countries, a rising wage share. [...]
As a consequence, from the mid-1980s economic power swung decisively from labour to capital. Inflation died in all developed countries and in most the share of profits within GDP began to rise. Cyclically adjusted, the rise was to last for over 30 years. Within the labour market in Western countries jobs at the top of the hierarchy became better paid, those at the bottom worse paid while those in the middle dwindled in relative number. [...]
In a world of deficient demand and shortage of “jobs”, all countries want to run an export surplus. Easy money everywhere eliminates the possibility of competitive devaluation – everyone is trying it so no-one can do it. The country that expands its fiscal deficit quickly ends up with a current account deficit. Calls on surplus countries to take their share of the burden of raising demand fall on deaf ears. Indeed, Germany, for example, is congenitally deaf on this issue. Trade imbalances grow, so does international indebtedness and eventually creditors become alarmed. No one wants to be another Greece so stabilisation via fiscal deficit is unfashionable as long as international co-ordination of fiscal policies is impossible.
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