Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The Toronto G-20 leaders’ meeting is being held this weekend (June 26-27, 2010) and one expects it will endorse the position taken at the recent G-20 annual Finance Ministers and Central Bank Governors Meeting in South Korea. The communiqué released from that meeting illustrates how influential the deficit terrorists have become. At the Pittsburgh meeting of the G-20 leaders in September 2009 the communiqué talked about the sufficiency and quality of jobs. Six months later they had abandoned that call and are now preaching higher unemployment and increased poverty via austerity packages imposed on fragile communities. This is in the context of dramatic increases in global poverty rates in 2009 due to income losses associated with entrenched unemployment. Then I note that the recently released 2010 World Wealth Report shows that the world’s rich got richer during the 2009 recession. The only reasonable conclusion is that something is seriously wrong in the world we have constructed.
The G-20 reversal is symptomatic of the direction the public debate is taking in the current period as the Flat Earth Theorists gain traction in the media and the lobbying circles. The sustained campaign against the fiscal support of the ailing world economy is making it harder for governments to do what we elect them to do – use their policy tools to advance public purpose.
The increasing constraints that governments are voluntarily accepting to satisfy the demands of amorphous groups such as the “bond markets” impinge on the democratic rights of every citizen. We expect our governments will act in the best interests of the nation. Sadly they are no longer doing that because they have fallen prey of the deficit terrorists. We introduced a new term for this phenomenon – democratic repression. Please read my blog – Amazing reversals – democratic repression – for more discussion on this reversal of policy position by the G-20.
The poor are getting poorer
The stock take for 2009 is as follows. World production (GDP) contracted by around 2 per cent overall in 2009 as private spending collapsed and government stimulus efforts were of an insufficient magnitude to provide the required spending offset.
The impacts of the recession was not evenly spread across the world. Western Europe saw real output decline by 4.1 per cent while Eastern Europe endured a collapse in real GDP of 3.7 per cent. In the Asia-Pacific countries (apart from Japan) real GDP grew by 4.5 per cent driven largely by the huge fiscal stimulus provided by the Chinese government.
At the same time, in its Global Economic Prospects 2010, the World Bank estimates that the global economic crisis pushed 50 million more people into extreme poverty in 2009 and a further 64 million will be added to this pool by the end of this year.
In this UNICEF paper – Inclusive Crises, Exclusive Recoveries, and Policies to Prevent a Double Whammy for the Poor – Ronald Mendoza argues that:
When it comes to aggregate economic shocks, the poor and the near-poor often face a double whammy. First, they are often among the most adversely affected by the shock, suffering from crisis effects that push them and their children (the next generation) deeper into poverty. Second, the poor and near-poor are also the least equipped to participate in and benefit from the subsequent recovery.
You can read a lay-person summary of the paper also.
While most of the research in this area of enquiry is focused on less developed (developing) nations, the research in advanced countries reveals similar outcomes. The poor are less exposed to crisis in the advanced nations and there are better safety nets.
But a person plunged into long-term unemployment in the US or Australia faces a high chance of becoming poor (relatively in this sense) and losing a significant proportion of the assets they had built up while working (housing etc). Their children also inherit the disadvantage that they grew up with and face major difficulties in later life.
So it is not just a developing country problem – although in the poorer nations the impacts mean death in many cases. In poorer nations, a crisis has devastating impacts. Mendoza notes that “tens of thousands of children in some of the poorest countries in the world could die, paying the ultimate price as a result of this crisis”.
The period of economic recovery is also fraught for the poor. I cover that issue in some detail in this blog – I am in denial – but I know children are dying.
In this context, the ILO recently released a report – Recovery and growth with decent work – published June 18, 2010, which urges the G-20 to place “employment and social protection at the centre of recovery policies”. The ILO note that:
… we must not forget that for many working women and men, and for many enterprises in the real economy, recovery has not yet started … Although job growth has reappeared, global unemployment is still at record levels. This is just the tip of the iceberg of discouraged jobseekers, involuntary temporary and part-time workers, informal employment, pay cuts and benefit reductions. There is still much suffering in many countries. Insecurity and uncertainty abound both for enterprises and for workers.
This is borne out by the persistently high unemployment that will remain for years to come not only impoverishing those directly involved but also setting up the conditions for intergenerational disadvantage as the children who grow up in jobless homes have been shown by the extant research to inherit the disadvantages of their parents. They suffer poor work histories and transit between one poorly paid job after another interspersed with lengthy periods of unemployment.
Arthur Okun coined the term “The Tip of the Iceberg” and I borrowed that for the title of a book I co-authored in 2001. The point is that the costs of recession and the resulting persistent unemployment extend well beyond the loss of jobs. Productivity is lower, participation rates are lower, the quality of work suffers and real wages typically fall.
Later the ILO Report says:
Many of the policy options facing governments and intergovernmental bodies will revolve around choices made necessary by inherent conflicts between human values and market values and between speculative and productive investments; choices which must respect the dignity of work and the way in which it underpins stable families and cohesive communities. They will also raise the question of equity: which sections of society should bear the brunt of the costs of the crisis, and how can the most vulnerable be better protected and empowered? Working families and small enterprises cannot be the real payers of last resort.
This is a very interesting statement and goes to the nub of the problem our nations and societies are now facing. There is a gross imbalance between “human values” and “market values”. While the neo-liberals continually try to convince us that there is a nexus between the two, the reality is that the pursuit of the latter always undermines the former.
The idea that self-regulating markets deliver some Shangri-La is one of the biggest con jobs to come out of the simplistic economic models that get rammed down students throats in university education. The text book models bear little if any relation to anything that is real.
You might also like to read these blog – What is it really all about? – which documents the way in which our priorities have been perverted by the neo-liberal agenda.
My ideological disposition tells me that the pursuit of human values is the only sustainable way of organising and running a world. The neo-liberal era has severely undermined that pursuit.
And now as we muddle through the worst recession in nearly 80 years the conservatives are once again re-asserting their dominance and the diversity of outcomes is there for all to see.
The recession has impoverished millions of people while the rich have found a way to make themselves even richer. I will come back to that last point later.
Unemployment and poverty as a loss of collective will
In the 1980s, we began to live in economies rather than societies or communities. It was also the period that unemployment persisted at high levels in most OECD countries. The two points are not unrelated. Unemployment arises because there is a lack of collective will. It does not arise because real wages are too high or aggregate demand too low. These are only proximate causes, if causes at all. The lack of collective will has been the principal casualty of the influence of economic rationalism.
Unemployment rates in almost all OECD economies have persisted at higher levels since the first OPEC shocks in the 1970s. The persistently high unemployment has been due to excessively restrictive fiscal and monetary policy stances by OECD governments driven by monetarist ideology. The rapid inflation of the mid-1970s left an indelible impression on policy makers who became captive of the resurgent new-labour economics and its macroeconomic counterpart, monetarism.
The goal of low inflation replaced other policy targets, including low unemployment. This has resulted in GDP growth in OECD countries generally being below that necessary to absorb the growth in the labour force and labour productivity. The battle against unemployment has been largely abandoned in order to keep inflation at low levels.
And now the economic crisis caused unemployment to sky-rocket from an already high base.
The loss of collective will has manifested over the last 35 years (or so) in a number of ways. Restrictive monetary policy pushed real interest rates to high levels for extended periods that resulted in lower than otherwise private capital expenditure.
Further, public capital expenditure cuts exacerbated the situation. As growth declined and unemployment rose, the resulting high cyclical budget deficits led to further cuts in public capital spending being justified by the balanced budget mania that accompanied the rationalist push.
The pursuit of balanced budgets also narrowed the range of policy instruments used. Accordingly, there has been an excessive reliance on monetary (interest rate) policy despite the bluntness of this instrument.
But the underlying cause is that the reemerging free market ideology has convinced us, wrongly, that government involvement in the economy imposes costs on us and we have thus supported governments who have significantly reduced their involvement in economic activity via spending and tax cuts and widespread deregulation and privatisation. The only way we will return to full employment, with everyone sharing in the benefits, is if the public sector increases its role in the economy.
In the The Death of Economics, Paul Ormerod (1994, pp.202-203) argues that the Post-WWII period of strong GDP growth, balance of payments stability, and high investment could have occurred without the low unemployment. He said:
The sole difference would have been that those in employment would have become even better off than they did, at the expense of the unemployed.
The higher tax rates and buoyant government sectors allowed the flux and uncertainty of aggregate demand to be shared. While the bulk of the OECD has abandoned this method of sharing, some economies have maintained high levels of employment into the current period. Ormerod (1994, pp.203) suggests that Japan, Austria, Norway, and Switzerland, among others have (in their own ways):
… exhibited a high degree of shared social values,, of what may be termed social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time … [and most significantly] … the countries which have continued to maintain low unemployment have maintained a sector of the economy which effectively functions as an employer of the last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified.
The rich are getting richer
On Tuesday, the 2010 World Wealth Report was released by Merrill Lynch-Capgemini.
The Wealth Report considers the fortunes of high net worth individuals (HNWIs) who have “investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables” and Ultra-HNWIs who have “investable assets of US$30 million or more, excluding primary residence, collectibles, consumables, and consumer durables”. So not your average person on the street.
In relation to Figure 1 (below), the World Wealth Report says that:
The world’s population of high net worth individuals (HNWIs) grew 17.1% to 10.0 million in 2009, returning to levels last seen in 2007 despite the contraction in world gross domestic product (GDP). Global HNWI wealth similarly recovered, rising 18.9% to US$39.0 trillion, with HNWI wealth in Asia-Pacific and Latin America actually surpassing levels last seen at the end of 2007.
For the first time ever, the size of the HNWI population in Asia-Pacific was as large as that of Europe (at 3.0 million). This shift in the rankings occurred because HNWI gains in Europe, while sizeable, were far less than those in Asia-Pacific, where the region’s economies saw continued robust growth in both
economic and market drivers of wealth.
The global HNWI population nevertheless remains highly concentrated. The U.S., Japan and Germany still accounted for 53.5% of the world’s HNWI population at the end of 2009, down only slightly from 54.0% in 2008. Australia became the tenth largest home to HNWIs, after overtaking Brazil, due to a considerable rebound.
After losing 24.0% in 2008, Ultra-HNWIs saw wealth rebound 21.5% in 2009. At the end of 2009, Ultra-HNWIs accounted for 35.5% of global HNWI wealth, up from 34.7%, while representing only 0.9% of the global HNWI population, the same as in 2008.
The following graph is taken from the Wealth Report 2010 (Figure 1).
How did this happen when world poverty and unemployment was going in the opposite direction?
The Report says:
Key drivers of wealth experienced strong gains. Many of the world’s stock markets recovered, and global market capitalization grew to US$47.9 trillion in 2009 from US$32.6 trillion in 2008, up nearly 47%. Commodities prices dropped early in the year, but rebounded sharply to end the year up nearly 19%. Hedge funds were also able to recoup many of their 2008 losses.
So the market values clearly swamped the human values.
Further reading of the Report reveals that the millionaires diversified their investments into “fixed-income investments seeking predictable returns and cash flow” which has presented a challenge to brokers to convince “clients to move off the sidelines and pursue riskier, more fruitful investments”.
So among the “safe” assets they diversified into were government bonds. If at this stage you feel like doing something nasty to your computer screen please resist the temptation.
This reinforces the theme I have been developing recently which demonstrates that the issuance of public debt is a major part of the corporate welfare system provided by the government. I most recently advanced this theme in this blog – Market participants need public debt.
In this light, all the cries that the unnecessary issuance of public debt will impose onerous burdens on the future generations etc are exposed as being ideological claptrap. The reality is that the public bonds provide significant benefits to the richest citizens in the world. They can use the public debt to hedge the insecurity that a major recession brings and actually benefit while the workers are losing their jobs and running down the meagre asset stocks they have managed to accumulate in better times.
I think this juxtaposition is one of the more obscene aspects of the way we organise our economic and financial system.
This polarisation of economic wealth and opportunity will be an enduring legacy of this crisis. The crisis has delivered the neo-liberals with an unprecedented opportunity to ram home their overall agenda which is to transfer as much real income (output) into the hands of the wealthy and to impoverish increasing numbers of workers to keep them docile.
The current policy agenda – austerity – will reinforce that dynamic.
There is very little being done to break the grip that the financial markets have on our economies. Governments are too gutless to stand up to them.
As a weekend reflection, I thought this quote from Paul Ormerod’s The Death of Economics was worth sharing. He is talking about the fabulous salaries earned by the largely unproductive financial markets and says (page 7):
James Tobin, the American Nobel Prize winner in economics, has questioned very seriously whether it makes sense from thepoint of view of American society as a whole to divert so much of its young talent from the top universities into financial markets. This debateis not new. John Maynard Keynes considered the same questionin the 1930s, and expressed the view that on the whole the rewards of those in the financial sector were justified. Many individuals attracted to these markets, Keynes argued, are of a domineering and even psychopathic nature. If their energies could not find an outlet in money making, they might turn instead to careers involving open and wanton cruelty. Far better to have them absorbed on Wall Street or in the City of London than in organised crime.
Admin note: changes to my blog
I am wanting to reclaim some more time (from work) to increase my family activities. I previously introduced the Saturday Quiz and then the Answers and Discussion blogs to minimise the weekend blog impost on my time.
But I now desire to reclaim even more time. So I am going to publish the Saturday Quiz on a Friday and the Answers and Discussion as usual on a Sunday and basically not write a dedicated blog on a Friday. That will give me a clear weekend for my other academic work and my family.
I will only deviate from this plan if something really interesting comes up on Friday that cannot wait until Monday. I cannot see that happening. This change will give me more time to drink cups of tea in cafes and hang out with those dearest to me. It will also give you – my dear readers – more time to read the archives.
This change will start from next week which is a convenient week to do this because I will be away in the US (Boston) all week (leaving Monday) to present a workshop on fiscal sustainability to a group of investment bankers. I will provide more detail about that on Monday. But next Friday I will be winging my way back across the Pacific Ocean to Sydney.
The Saturday Quiz will be back sometime tomorrow – even harder than last week!
That is enough for today!