The last golden age lasted from the 1950s until the early 1970s. I call it Deployment, because technology is finally deployed to its full benefit, with profits from customers, not speculation, providing the bulk of new investment capital. A wave of regulation comes in that addresses the excesses of Installation and frenzy. Giant companies and governments redesign themselves, and the new sectors (in our case, the information technology industries) serve as engines of growth for the entire economy. It is like going from turbulent adolescence to young and strong adulthood. There are new institutions in place — some public and some private — and space for them to act in new ways. It is the Victorian boom, the Belle Époque, post-WWII America — the golden age.... But we’re not there yet.
S+B: Our current model could be thought of, then, as akin to 1946.
Perez: Not yet. Still more like the late 1930s, although the real pain is not so visible to people who are well off. We must remember that this current surge is global. In fact, that is why China and India have been able to serve as a “miracle cure” to avoid recession. They have opened vast horizons of investment and rapidly growing markets, while much of their surplus comes back to support U.S. investment and consumption. Such a huge lifesaver is quite unprecedented. But no one can be sure of its sustainability. The bursting of housing bubbles or of hedge fund mountains in America or a collapse in China could bring the whole world economy down.
Riding the Global Wave
S+B: What indicators would tell you that the Deployment period is near?
Perez: People would stop thinking that the Dow Jones is the barometer of the economy and would pay more attention to growth, employment, productivity, improving income distribution and increasing well-being. When you read accounts of these Deployment phases, it’s like reading about a big feast where everyone gets to participate. Six million people came in 1851 to the Great Exhibition at the Crystal Palace in London. In the 19 acres covered by that amazing glass structure, there were more than 13,000 exhibits, among which were the latest industrial products from machine tools, steam engines, looms, and reapers, to the new styles of household items such as china, cutlery, toilets, and cookers. Queen Victoria and her husband, Prince Albert, were the heads of the aristocracy, but they were the conveners of a celebration of industrialization, which the aristocrats had resisted in the past. There was this feeling of construction, of general growth, well-being. The same was true of the 1950s. Most people were happy. They were sure they’d have a place to live, and a job, sure their children would be better off than they were. Instead of the euphoria being limited to the few who invest, there was widespread social euphoria.
S+B: But how does that come about?
Perez: First, finance needs to be adequately regulated. Every time some forward-looking CEO tries to implement a three-year plan, he gets ousted in three quarters. The finance world still expects the easy profits of the bubble, but what is needed now is long-term investment. If capital gains were taxed more stringently when assets were sold before five years, for example, then more investors would “marry” the companies they own and focus on maximizing longer-term returns. Similar measures for all assets would discourage the current massive deviation of investment money toward housing bubbles and derivatives. And, obviously, regulation of global finance must be enforceable at the global level. Quite a tall order!
Second, prices have to come into line. During Installation, there is always strong asset inflation (both in equity and in real estate) while incomes and consumption products do not keep pace. This creates a growing imbalance in which the asset-rich get richer and the asset-poor get poorer. When salaries can buy houses again, we will be closer to the golden age.