Purpose – The paper aims to clarify the relationship between the rise of the sovereign debt in the G20 and the relative underpayment of labor versus capital.
Design/methodology/approach – The historic analysis of successes and failures of demand management in the leading market economies. Provide data to support and illustrate the claims made in the paper.
Findings – The argument presented in the paper is that the root cause of the rapidly rising sovereign debt lies in the demand deficiency originating in the cumulative effect of lagging labor compensation relative to productivity gains. Developed market democracies desperately need policies to mend the failing social contract between labor and capital. The real solution of the debt is to address demand deficiency, increase labor participation and wages, or basically, introduce a new social contract between labor and capital.
Research limitations/implications – The detailed analysis of demand management policies would have to be country specific which goes beyond the scope of the paper.
Practical implications – The paper implies that G20 policies go into a wrong direction and increase the risk of chain debt defaults in the leading market economies.
Originality/value – This paper fulfils an identified need to study the root cause of the demand deficiency syndrome and the need to introduce long term policies needed to restore growth in the market economies.
