"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Sunday, February 22, 2009

Financial Crisis and Wealth Distribution

It is commonly agreed that the detonator of the current crisis was the collapse of the credit bubble which have been developing since the 80. During that period the US Credit/ GDP ratio increased from a stable level up to 350% (a level not seen since the 30). The lion share of the debt increase was at financial institutions and households sectors

By definition debt is a temporal transfer of resources between a lender and a borrower .From the borrower side our approach claims that the debt expansion, especially of the American household sector, served to counterweight the detrimental effects related to the stagnation of the median household incomes on consumption (ap. 70% of GDP). The magnitude of the trend is reflected in the widening gap of income distribution since the 80 : just for the illustration , “Top 1% Pre Tax Income Share” ascended from 9% in 1976 up to 21.8% in 2005 ( the previous peak in 2008 was 23.9%). From the lender side, the vast accumulation of wealth among higher income stratus (Fed surveys show a rather high saving ratios among the higher quintile) was channeled to the financial markets and consumption (Corporations apparently did not need finance due to their positive cash position along the last decade). It seemed that the circle was squared: Stagnating labor cost combined with expanding consumption means higher profits.

An additional source of finance was the foreign sector as a result of their own lack of effective demand which obliged them to keep financing the US economy by purchasing American obligations. The case of China is interesting since the country development policy as the workshop of the world is based upon low labor cost , and high saving ratios which means weak internal demand (“Let some people get rich first“ Deng Xiao Ping ) The consequence was an inevitable accumulation of reserves (almost 2 Trillion USD as of 12/2008) much above the real needs of the economy.

At some point the scheme began to be sustained by increasing real estate prices (and low interest rates). The expectations served to guarantee mew mortgages ( which were packed and sold for a commission) and a source of wealth effect for the costumer reflected in wide use of MEW finance scheme which explains up to 3% of GDP growth since 2001 (J. Kennedy and A. Greenspan). Since the real economic yield of that scheme is rather low (analyzing the ROE in contrast ROA of investment banks for example) the huge leverage and lack of regulation was essential to maintain decent yields (and high bonuses for top managers) and to turn dubious debt into respectable stuff. The collapse of real estate values marked the beginning of the debt contraction (deleveraging) which sustained the consumption generator and the value of collaterals.

Public institutions are nowadays engaged in pouring trillions of public money on bailout plans for financial institutions, various industries, consumers, etc, and public projects to reactivate aggregate demand. Leaving aside the question regarding the effectiveness (and fairness!) of these efforts, the extra expense will be financed somehow and here the distribution specter returns to the debate. If we accept the basic lines of the above analysis, the reactivation of the economy must include a major income and wealth redistribution mechanism on global scale ( income redistribution on national scale is a close relative to protectionism) to ensure a lasting demand generation based upon sound economic principles.

Sunday, February 8, 2009

Lieberman and Israel do not cry anymore

This week Israel will celebrate elections for the Knesset which cording to latest polls seems to remain undecided until the very last minute (and even afterwards if the vote is too fragmented). Though, the most interesting story is the spectacular rise of Lieberman's Right Wing party "Israel our home" to the status of third political power, surpassing the traditional Labour party which led the Zionist movement and Israel for decades.

Lieberman's party main message is “No citizenship without loyalty”," No rights without duties”. From the outset these requirements sound logical: After all, every state confines the right of citizenship according to its dominating values or interests. But Lieberman's message is not destined for aspiring Israelis (an option practically available only to immigrants Jews) but to actual Israeli citizens, a newspeak terminology which leaves many questions unanswered: How can you measure loyalty? Who will decide what loyalty is? In addition , we know from recent history that Afro American were denied for decades to exercise their Civil Rights in USA by requesting arbitrary criterion (such as reading tests, etc.) thereby circumventing formal equality.

I guess that Lieberman will not require hundreds of thousands of Israelis carrying a foreign Passport (Israel permits double nationality) or those living abroad to choose between "Us or Them". I am afraid that he doesn't really mean to verify the Jewish roots or creed among hundred of thousands of Ex USSR immigrants, which their Jewish ness, (according to the Jewish Code "Halacha”) is rather questionable. Its main target is the 20% plus Arab minority, and in that sense, his proposals are racist.

Arab "brotherhood" is rather limited (as have been demonstrated in the last war in Gaza) and the Palestinians are fully aware of it. Thus, what interest has reasonable Israeli Arab to betray his country? What for? Arab Israelis are connected to the Arab world, but they are clever enough to recognize the benefits of belonging to Israel. On my opinion the issue is not the loyalty to the country but an attempt to maintain the minority in its current conditions. It is well known ( and even PM Olmert recently admitted) that Arab Israelis have been suffering for too long from discrimination .Their political demands rights within the political democratic game are the real reason for the Lieberman's loyalty test.

Other claim that Israel should guarantee its identity as a Jewish state and the demand for loyalty comes from this aspect. What is the meaning of a Jewish State and where is the Jewish ness of Israel is reflected is a heavy issue but I will limit myself to mention R. Ovadiah Yosef words , he spiritual leader of oriental Jews , which stressed that voting for Lieberman is like voting for the Satan ! . Anyhow, as long as Israel sees itself as the spearhead of democracy in the Mid East it must comply with basic democratic rules, including basic and equal rights to minorities. Democratic country cannot launch pre-emptive measures against one fifth of its population. `

From a Jewish perspective the loyalty test is rather dangerous beyond its unmoral aspects. Jews were accused along history for "double loyalty", bearing the harshest and tragic consequences for these unfounded accusations. Will someone dare to question the loyalty of top Jewish politicians in the Western countries (US, France just to mention a few)?

Many people will claim that the comparison is inadequate: Jews were never really tied to "enemies" as Arab Israelis are linked to the Arab world. Historically, this argument is flawed: for example, in WWI Jews actually fought in all armies, Allies and Axis as well (the division even went through the Zionist movement .Just for an illustration young Ben Gurion - was enlisted to the British Army and M. Sharet - the future PM - was an officer in the Turkish army).

The most amazing aspect of Lieberman rise is the crippling acceptance of his ideas and the ambiguous response from the main parties, which penlights the long run erosion of basic democratic and human values. Twenty years ago Rabi Kahane and his Kakh movement were banned from participating in the elections for their explicit call for a massive transfer of Arab citizens from Israel.

Israel was proud in the past for its ambiguous attitude toward war “Shooting and crying ".Israel doesn't cry anymore, the country has changed since and not for better.