Income divide causes fiscal crises in Europe, US
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People's Daily Online, October 9, 2011
Huang Shudong wrote in his new book named “China, You Ought to Be Alert”, which is published by the China Renmin University Press that the current global geopolitics is changing rapidly and China is facing significant historic opportunities.
As long as China successfully solves its domestic problems, China might prevail in future economic competition. Of China's domestic issues, the most important one is the income distribution disparity. Huang believes that if China could solve this issue successfully, China will maintain a rapid economic growth rate for a long period to come.
Huang believes that the long-term structural problem of the Western developed economies are leading the West to a crisis of lasting economic contraction.
For instance, the United States is facing three big difficulties currently. The first one is the high unemployment rate. At present, the unemployment rate of the Untied States runs high at nearly 10 percent. The second one is the high federal debt. The governmental debt keeps inflating, the debt ceiling keeps popping up and rising, and the debt expansion is unsustainable. The third one is the depressed real estate market. While the housing price was slowly rising, the medium and low strata families have kept cashing in to back up their expenses. But now, the real estate market is depressed and wealth of the medium and low strata has shrunken, and therefore the domestic consumption of the United States is trivialized and the economic growth is negatively impacted. Huang said that the problems faced by the United States are also faced by Europe. It is reported that in Spain, up to 40 percent of university graduates cannot find a job.
Huang believes that unfair distribution of income is a main reason for the weak U.S. economic recovery and the deepening European debt crisis. Western governments have been cutting taxes for the rich over the past few decades, which led to massive drops in their tax revenues. Sometimes, the rich even pay less in taxes than the middle and working classes.
Furthermore, Western countries have to keep borrowing from abroad in order to maintain their expensive social welfare programs. Neither temporary monetary stimulus nor foreign assistance can solve this structural problem. Social welfare cuts may cause a series of social problems, but if Western countries decide to maintain expensive welfare systems and refuse to increase taxes on the rich, they will sink deeper and deeper into the mire of debt crisis. Famous American investor Warren Buffett and 16 French billionaires have all been aware of the issue, so that they have written letters to their respective governments asserting that the tax rates for the rich are too low, and must be raised.
Huang stressed that the primary competition among the governments in the world lies in which countries can secure relatively fair distribution of income, address the issue of unequal distribution of income in a rapid and resolute manner, generate enough domestic demand and handle overproduction so as to achieve sustainable economic growth.
This post was first published on Guangming Daily and edited and translated by People's Daily Online.
