Debt-unravelling, the Biggest Pain in the World

Southern Methodist University economics professor Ravi Batra says the financial crisis is just one symptom of a long-festering economic disease – a disease caused by neglecting basic economic principles over the past 30 years. The doctor’s medicine includes following policies that close a wage-production gap and going against policies that created it: free trade, regressive taxation, and merger mania.

In an interview with Trouthout, Dr. Batra emphasizes that pursuing economic policies that begin to reverse a decline in the real wages of individual consumers is the only way to heal the limping economy. Changes in the “wage-productivity gap” – or the difference between how much consumers earn and the value of goods and services an economy produces – can explain the current situation and can help guide policy-makers out of it.

The wage-productivity gap is the gap between the real wage and labour productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows, explains Dr. Batra.


Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.

Capitalism seems to love the productivity rise, but if it leads to overproduction, that leads to high unemployment such as we are seeing now. Overproduction is a disaster and it leads to depressions, Dr. Batra maintains.

In the U.S. the wage gap started off with President Ronald Reagan. The wage-productivity gap started to develop in 1981. Reagan’s economic policies increased productivity while restraining wages. One example is “free trade,” which increased productivity but also reduced the real wage in the United States.

Regressive taxation

Reagan raised every tax that burdens the poor, but sharply reduced the income tax; all this caused a fall in consumer demand. Economic growth fell after Reagan’s policies were introduced. Slow economic growth leads to pressure on wages because low growth means low demand for labour relative to labour’s supply, so wages fall.

Merger mania

The third reason the wage-productivity gap grew as a result of Reagan was the “merger mania.” Big firms were permitted to merge with each other. Each time there was a merger, there were lay-offs, which also exerted downward pressure on wages. Mergers also increase productivity, further widening the gap. Reagan’s anti-union policies were also responsible for the falling wages, Dr. Batra says.


The biggest problem is that consumer debt is so high and the public has used up all its collateral. The banks don’t feel confident enough to lend to anybody. The banks have lost so much money that they are feeling gun-shy now.

What we are seeing now is called “debt-unravelling” which is the biggest pain in the world. The potential for this scenario is worse than what happened in the Great Depression. During the Great Depression, consumers did not have that much debt.

The situation could be as bad as the Great Depression because, while banks are protected by the government, the 401ks and other investment plans are not protected. People are losing their savings through the fall in stock prices. The end result is the same: their savings are disappearing – the same thing that happened in the Great Depression.


We should be following policies that close a wage-production gap, but that means you have to go against policies that created it: free trade, regressive taxation, and merger mania. This is not going to be easy and it will require a revolution in thinking. This will entail breaking up companies, raising taxes on the rich and lowering them for the poor. I’m not sure the country is ready for this yet, but it will be once we fall deeper into the abyss, Dr. Batra foresees.

Dr. Ravi Batra’s latest book is The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos (Palgrave Macmillan, 2008)


PROUT Globe 2011

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