"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, November 7, 2010

Who Cares About Growth???

Sometimes I´ve got the strange feeling that Analysts, Policy Makers or Economists have signed an unconscious agreement: Under any circumstance, no matter what they are asked about the econmy , they alwaya return to THE eternal Mantra “(Economic) Growth isn´t everything, it´s the only thing!”. The repetition has its effects , and Economic growth (the rate of change of the national product -“GDP) is quoted, analyzed and commented endlessly as if the whole world was pending on a rather weird and obscure figure. Since most of the population normally tends to listen to “experts” (especially in the field of economics), the GDP talk became a widely accepted yardstick to measure policies, and most important politicians.

Why Growth is so important? And who benefits from the “Growth” obsession? First, the GDP importance stems from its general nature and apparent neutrality, after all the figure measure the well being of the WHLOLE society. So, if GDP grows by 1%, we are “all”, on average, 1% richer. In that simplistic way it is correct though the problem lies in that the “average” citizen simply does not exists. The 1% is the growth of the overall economy, but it does not imply how the somewhat biggest pie is going to be eaten. Some might even receive less than before , even the overall pie has grown.

I would like to illustrate that point by making use of data from the American Economy. The graph describes the evolution of the GDP growth and the share if the most rich 10% of the population for the last 65 years. (Why America? The data is available and it reflects in general terms the trends in other countries).

As can be seen from the Graph, America´s GDP grew almost every year since WWII (exception in recessions) . However, the way the growing pie was distributed can be divided into two main periods. Along the first 30 years after WWII the relative share of the richest 10% citizens was stable (app.30-35%). Since the mid 70 the top 10% slice grows steadily and dramatically, and nowadays they grab almost 50% of the national income. If you want to see it in another way, 10% of the population received 60 cents of the additional wealth created during those 30 years, while the average citizen in the lower parts (the rest 90%) received 4 cents.... 60 vs. 4!.

So, if politicians and mainstream media are so obsessed with growth it must be because they care a lot about the 60% share, otherwise there is no reason why to focus mainly on that figure. As mentioned above, this is data from the American Economy, but it is possible to track the same trends in many other developed countries. Some would argue that “they deserve it “ i.e. the most top 10% are the guys that work hard, innovate, assume risks .. in effect they are the drivers of growth so they deserve a bigger share , while the bottom 90% should be thankful for getting almost 50% of the additional wealth.

Needless to say that such argument is so poor and based upon debatable hypothesis as what is growth and justice. However that argument can be easily refuted with our simple graph. If the only condition to growth is an ever increasing share for the most talented, can someone explain what happened between 1947 and 1977?? The American economy not only grew vigorously but 30% more than the following 30 whilst the “talented” share remained stable. QED

The way growth and well being is distributed should not be confined to the “moral” arena, far away from the “practical” sphere. Living together in a society implies a general, sometimes , vague, common reception of ethical values , justice and fairness . However, my point goes beyond that : The very fabric of the modern society and economy is based upon sharing the benefits of the economy : The wealth as expressed in financial assets and other depends on the capacity of the mass consumer to generate sales , profits and wealth. A polarized society with an insufficient purchasing power of the average citizen is a weak growth society which tends to rely upon external demand ( the model adopted, for example , by China ) or to engage in an endless speculation orgy of extravagances and that sort of things. In a next blog I will try to link the current trend of income and wealth accumulation and the current economic crisis.

As a finish line, I will just ask you a favor : Next time you hear a debate dealing with growth and GDP, just ask the most natural question , the basic moral imperative of an individualistic and capitalist society : What do I get out of it ??? Although I do not know you personally, I can tell you with 90% probability that you will get almost nothing….

Monday, November 1, 2010

The No Change President

The victory of the Democratic Party in 2008 seemed to be the beginning of a new era for America and the World. Forget the color skin of the President, it was all about the refreshing message of “Hope” and “Change” that inspired so many people to act and dream.

Two years later , Democrats will probably loose (tomorrow) their majority in the House and some seats in the Senate. If this was not enough, recent approval ratings polls tell us that President Obama is not very popular, or better put,less popular than before and other sources point to an emerging and growing tendency among Democrats to look for another candidate for the 2012 Presidential elections. What happened in the interim? Where the winds of Hope and Change have gone?

I am not an expert in American politics, but from the very first days of the actual Administration it became clear (for me) that Obama will probably end as a one term President. The first warning signs were his top nominations, most of them part of the reigning establishment ( and naturally committed to the past he pretended to change) :Secretary of Defense? Bush´s Gates ;Secretary of Treasure? NY Fed President ( and City´s Chairman protegee); Head of Economic Council? A controversial Economy professor with deep ties with the hedge funding industry. Even when he had the chance to change the Fed Chairman, he reappointed Bernanke for a second term . So who was supposed to lead the change? His wife? Experience cannot and should not be an explanation since sometimes experience can be from the bad type...

However, the most important deviation from the “change” was and still is his economic policy. Some commentators (including Nobel Laureates), said from the very beginning that the fiscal stimulus packages were too small and inadequate for the colossal task of reducing unemployment they were designed for. They are all partially... but deeply wrong: it is not the size of the package that matters but the philosophy behind it that deserves the deepest critiqu .

This Blog have been saying for at least two years that the economic crisis is the result of insufficient demand , the natural outcome of three decades of stagnating wages and massive wealth accumulation among too few hands . Both phenomena are two sides of the same coin that depresses consumption and encourages the formation of debt ( for more details, read previous posts). The conclusion of such an analysis is that stimulus is just a tool that should be followed by a massive redistribution of wealth and incomes in order to guarantee sustainable economic growth.

Therefore Obama sinned twice : First, by promoting a small stimulus in the name of bipartisanship and moderation . Second by not adopting a genuine redistributive policy. And if you needed another confirmation for the genuine interests behind the actual policies, just look on SP 500 last quarter earning figures ( banks included ) or the massive masking of banks´ losses to understand who are the main benefactors of the “Change” President. The results are evident: unemployment is still high, foreclosures are increasing and the general mood is that America and the world should be ready for a “New Normal” of low growth, high unemployment and most important, no hope. So, if American citizens feel disappointed and some of them join the “Tea Parties” movement as a way-out for their outrage you should not be surprised.

Some would claim Obama has a progressive agenda and the evidence is the success to pass the historical healthcare law despite a fierce opposition. Well, that is an important though limited achievement, and if placed in a wider perspective it is almost nothing. Just have a look on FDR achievements some 80 years ago, under more difficult circumstances and understand the poor score of Change Obama. After all we are talking about the most powerful man on Earth, so political constraints are just one part of the power equation he must deal with . And he got the tools.

The comparison to FDR is tempting, so let me quote a few phrases from his inauguration speech:

“Practices of the unscrupulous moneychangers stand indicted in the court of public opinion, rejected by the hearts and minds of men.True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The moneychangers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths”.

Obama soft talk ,and more important soft actions ,does not even resemble the moral integrity and firmness of FDR. However, Obama got still time, not too much but still enough to save his legacy and his country. He should open history books and read FDR actions and words, if not as a policy guide but as an inspiring story of boldness and determination. The calculations should be self evident : Since his opponents have no intention to compromise, any moderate policy is useless .In other words, the launching of a bold and decisive progressive agenda is costless from a political perspective . Such a policy might not only give him a second term but an honorable place in the American history, on my opinion the only open alternative to pull out the economy from its dire straits. Reminder , FDR was not elected for one term , but for four.....