Crises have long tails, and this one will be no exception, regardless of assurances that the worst is over. Just as the Watergate crisis altered the perception and practice of politics in the U.S. and elsewhere for more than a generation, the current crisis will profoundly affect the image and influence of business in coming decades.
Trust in business, and more important, in the values advanced by business, is the first casualty. The claim that business exists to create wealth has been gravely weakened. In this crisis, businesses destroyed wealth - the wealth of investors, but also of millions of others who find themselves jobless through no fault of their own. Likewise, the claim that in business, personal reward is proportional to the personal risk assumed appears particularly suspect these days. Cumulatively massive payouts have been taken by people who outsourced their risks to taxpayers.
Meanwhile, a global generation of middle-class families who bet their retirement savings on the markets are staring into a dreadful future, while a fair number of the people who ruined them remain rich. Not incidentally, the French general strike of 1995, in which a big piece of the population took to the streets to successfully fight transferral of public retirement funds into stocks, looks very wise in retrospect.
The memory of the middle classes will be refreshed every time they pay taxes. Unless something changes, the rich will continue to avoid taxes. The poor have no money for the taxman. That leaves the middle classes, who have already sacrificed their retirements (and in millions of cases, lost their homes). Soon they will also be forced to sacrifice a growing piece of their current income to pay off bailout bills. When inflation kicks in - unless a miracle occurs - even the better-off among them will be desperate.
There are implications for business recovery in this glaring fiscal quandary. Middle classes trapped between taxes and inflation, living in the fear of unemployment, can't and won't buy what they merely want (as anyone who watches eBay auctions or the retail sector can deduce from falling prices and unsold goods). Even before the crisis, they were paying for a growing share of what were formerly public services, from privatised superhighways to health care, out of their pockets. Those pockets are growing shallower.
Business leaders who believe that public pressure to help meet this challenge will soon abate are as naïve as those who believed that housing prices could never go down. Time is not on the side of the business sector, for at least one very good reason.
We are about to see the reversal of a massive diversion of talent from politics into business that took place over the past few decades. Part of this flow was certainly due to the monetary rewards of a successful business career, but that was only one part. Another, and very likely larger part, was visible to anyone who teaches in a business school: There remained deep distaste for politics in the wake of Watergate and the "clean hands" scandals in Italy, France and elsewhere, and there was a subsequent perception of youth that they could accomplish more for themselves, their loved ones and their societies in the private sector.
That perception has been battered, and simultaneously, governments and parties are seeking new competencies to help manage their new economic roles. The result will be a migration of many of the best young people away from the private sector. The human capital of business will decline relative to government, at the precise moment when government claims renewed powers over business. Among the next generation of political leaders, many will look at business with the hard eyes of those who saw their parents ruined.
Can middle class anger be avoided? It's already there. The anger is presently aimed at the wealthy, the government and immigrants, not necessarily in that order. It is rising as people who had jobs lose them, and as their social status declines (and with it their security in both financial and physical terms). I cannot count how many I have heard ask why they are not getting the same assistance that the very rich and the poor and immigrants get (or seem to get).
There is already increased scapegoating of the rich from the Left, and increased scapegoating of immigrants by the Right. It is going to get worse, because policy makers have virtually no choice at present but to keep cutting middle class benefits and raising their taxes. Unfortunately, economic growth is predicated on the creation and expansion of the same middle classes who are now being cut back, by business retraction on the one hand and growing taxation on the other.
Politicians are already speaking to middle class rage. To take a prominent example, Nicolas Sarkozy insisted at election time that the French had to "work more to earn more". But can they? Even before the crisis, it was getting harder and harder in France to attain a comfortable life through work. In this crisis the French are realising that it is nearly impossible, and the rage that is expressed in nearly every conversation is stupefying.
Can we avoid the consequences of that rage? Yes. But we will have to tax wealth to a greater extent than we do now. And we must target those taxes at the increasingly small percentage of the population that controls an increasingly large share of the wealth. Making the very rich a bit less rich is a far better alternative, even for the rich, than making the middle class poor, or making it impossible for them to profit from their work.
Democracy was never primarily about making a few people very rich; feudalism sufficed for that. Democracy was (and hopefully still is) about enabling the poor and their children to live better lives. Jefferson understood that perfectly well when he observed that democracy depends on a broad middle class. The Europeans understood that when they took steps, following the Second World War, to ensure through social programs that the bottom would never again fall out of their societies. A "recovery" that sends a big piece of the middle classes to the bottom is a time bomb that democracy can't afford. It is also a disaster that business interests cannot afford, because it will destroy the markets on which their future depends.