Big questions Michael Elliott, center, editor of TIME International, chairs our panel of economists
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From the audience, a venture capitalist wondered if a skills mismatch might be part of what's holding back job growth in the U.S., a country in which a full 17% of workers are either unemployed or underemployed. "In the 40-some years I've been in Silicon Valley, I've never seen more core innovation," he said. "But we don't have the talent we need in the U.S. — programmers, chip designers, the people who can make these things work." Rajan thought the uptick in innovation and the recent economic malaise were possibly related: "If you look back on history, you see crises tend to be around times of big technological change." But whether or not the U.S. is in a position to take advantage of that change — to produce the workers able to exploit new technologies — is a question without a clear answer. Through a combination of individual initiative, market forces and best-in-the-world higher education, the U.S. has traditionally proven flexible in reallocating its human capital to more productive sectors. But flexible doesn't necessarily mean fast. Even if the shift to a new breed of jobs does come, it's not coming immediately.
That reality — of tens of millions of jobless Americans and Europeans — is shaping up to be a game changer. Ordinary, hardworking Joes (and Josefs) watched as one company after another, this industry and that, got bailed out by governments without getting much, if any, help with their own economic struggles. "I've had lots of conversations with very, very senior bankers in the last couple of years who said, 'Look, we didn't suffer enough pain — we did wrong but we didn't get punished,'" said Arif Naqvi, CEO of the investment firm Abraaj Capital, based in the United Arab Emirates.
That's a sentiment large sectors of the developed world understand very well, which is one reason why politicians across the rich world are finding an appeal in populism, and why bankers need to understand where it comes from. Those in the banking community who opposed the proposed reforms of the Obama Administration, mega-investor George Soros told a lunch later that day, were "tone deaf."
Anger and resentment, however, are rarely a sensible driver of policy — especially in an area as complex as financial market reform and regulation. Taking back fat-cat banker bonuses plays well on the farm, but it's not a particularly meaningful structural change if what you're going for is preventing the next near collapse of the financial system. Bringing transparency to the shadow banking system is more difficult to wedge into a sound bite — Heizo Takenaka of Keio University in Japan said the need to regulate the shadow banking system was one of the key lessons of his time as a policymaker — but would be a wiser goal.
Or consider the movement now afoot, thanks to the so-called Volcker rule, to impose size limits on banks as well as to prohibit deposit-taking banks from trading on their own account. At first blush, that seems like a simple and sensible policy solution, said Rajan. The problem: a quick look at history shows that the sheer size of banks isn't necessarily the culprit. In the 1930s, at a time when thousands of small, localized banks were failing across the U.S., the problem was not Too Big to Fail but Too Many to Fail. The right policy solution almost certainly exists deep in the weeds. Yet the more policy is driven by politicians trying to appeal to the (rightfully) outraged crowd, the less room there's likely to be for nuance. "In the democratic process, the support of the general public is very much needed," said Takenaka. "The education of the general public is indispensable."
One reason for that is because when it comes to the global economy, there is a need for a coordinated, international response to the desire for regulatory change. "In the long run," said Soros, "you can't have global markets without global regulation." But international cooperation can easily fall foul of national politicians anxious to preserve, or at least appear to preserve, sovereignty. And, as we have been reminded in the wake of crisis, institutions like the G-20 find it difficult to make even the simplest proposals stick. "At the World Economic Forum," said Rubenstein, "you should always say, yes, multilateralism is possible and we should come together. But getting national solutions is difficult enough."
Those difficulties suffused the mood in Davos. It's a certain type of person who comes to this spectacular valley — surrounded by steep mountains, bitterly cold at night. And even those hardy souls, this year, kept a lucky rabbit's foot in their pocket. "I think most people that find their way to Davos are just naturally optimistic," said Naqvi. "But we've been through such a massive shock in the global system that we can't expect to recover from it overnight."