"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 )

Friday, December 30, 2011

On Competitiveness and Salaries - A European Note

Most mainstream economists agree that the deteriorating condition of the Euro is the outcome of the differences between the EU countries . The perception the Union as it was formed actually deepened the structural economic “imbalances” between a thrifty “North ” and a profligate “South," while lacking the correspondent policy tools which counterbalance those deficiencies .

The "imbalances" and the proper short run policy response have generated a heated debate among the political and economic circles in Europe. Needless to say that any outcome from the European deliberations will have an impact not only on the Continent but on the global economy. However, there is almost no doubt that for the medium and longer run , the “South” must restore its “competiveness” in order to avoid a second round of economic imbalances. So “Competiveness” is THE core issue to be resolved.

What is competiveness all about? The idea behind the “competiveness” theorem is that the last decade brought about excessive wage increases in the South which eventually caused the loss of a competitive edge vis a vis the North and the rest of the World. The result was the formation of unsustainable massive deficits , private and public as well. . Therefore , as we are told , THE logical solution is to reduce wages and / or improve productivity to avoid these deficits and financial crisis. Is it's so? Are really wages and salaries the real reason for the crisis?

One way to analyze the issue is to compare identical products and see their costs structure and selling prices : A product is sold for a price and the cost is divided between labor and capital and profits ( 50, 50). If Labor cost increases, lets say to 60 , and you want to maintain the 50 profit, the price must increase to 110 . (In that case the RELATIVE weight of labor also increases).

The same logic applies to the national economy: GDP, the “product” of an economy is roughly split between its "costs" i.e. Labor in the form of wages and Capital in the form of interests, amortization and profits . If the labor share increase, it means that in relative terms the worker take a bigger slice of the economy ( and vice versa) .

The following graph which compares two representative countries ( Spain vs. Germany) i.e. the typical “North” and “South” Economies in terms of salaries and labor share speaks for itself

Based on data extracted on 07 Dec 2011 from OECD. Stat ( Annual Income Share real ULC)

The interpretation of the graph is very simple. Any competitive misalignment between the two countries cannot be attributable ONLY to the Labor costs. I will make use of a simple numerical example to illustrate the point: Suppose that in the 80 a German and a Spanish car car were both sold at 10 k Euros. In such case workers got Ap. 7500 Euros ( “labor share”) of it and Capital got the balance, i.e., 2,500 E . If there was no change in the relative prices, in 2007 workers received only Ap. 6,400 Euros and capital 3,600 . Now, if Spanish cars became more expensive and lost competiveness, lets say 11k, part of the blame for the price increase MUST be attributable to Capital as they got for sure more than 3600 ( in our case 3960 E)

In other words, what the figures tell us is that any competitive loss, if there was any such phenomenon of the Spanish economy was necessarily, among other factors the outcome of higher profit rates. Therefore the burden of any alignment process should be bear ALSO by Capital. The calls to reduce salaries in order to restore competitiveness are economically wrong and morally flawed, as Capital enjoyed a 30 years period of a genuine Bonanza.

This graph also tells us something about the importance of adopting a cross borders perspective. If the European working people adopted a pan European perspective, for example by advocating the increase of labor share in each and every country instead of adopting a sort of national perspective, all the working people, including the Germans ( and the rest of economy as well…) could gain from such common stance. But let´s leave that for another blog ….

Wednesday, December 28, 2011

Worse than the 30, Ms. Lagarde, Worse ! (or “The Crisis” from an Historical Perspective)

A couple of weeks ago we got another public warning about the state of the Global Economy. This time the warning call was launched by a top economic figure,the Managing Director of the IMF ,Ms. Lagarde.

IMF chief warns over 1930s-style threats
The managing director of the International Monetary Fund has warned that the global economy faces the prospect of economic retraction, rising protectionism, isolation and . . . what happened in the 30s (Depression)

http://www.ft.com (By Hugh Carnegy in Paris, George Parker in London and Peter Spiegel in Brussels – December 16th 2011)

Now, is it reasonable to deliver a dramatic warning about our modern economy alluding to events which took place some 80 years ago ? The answer is yes, as long as the events share some common patterns . So, the question is not whether 30 and 2011 are identical (obviously, they are not not) but if they share meaningful similarities.

Most economists would agree that both events share important common patterns : Generally speaking, both crisis were preceded by a period of economic “prosperity” accompanied with an Asset/Debt bubble . Consequently the violent pricking of the bubble turned into a debt crisis ( i.e. Debt suddenly became unpayable) ,which affected aggregate demand and financial stability. The policy response ,in both cases, was a massive support to the financial institutions and injection of "real" demand through expansionary policies (monetary and fiscal as well).

Up to now, I agree with the analysis, though my reading goes a step forward ( to an area that most mainstream economists simply ignore): I claim that the bubble and the following crisis were in both cases the outcome of a distorted income distribution, skewed toward the upper income echelons ( I´ve wrote extensively about it, so whoever is interested in understanding that point is invited to read previous posts).Anyhow, to illustrate my point please look at the below graphs dealing with the US and think for yourself if there is no place for such hypothesis.... . In an Hamletian style we should say “ To Distribute or not to distribute : That is the question...” . Needless to say the solution lies in recognizing that simple message.

Top 10% share in Income US

Total Debt - US

The conclusion is that Ms. Lagarde is quite correct by applying an historical perspective when she delivers her warning. However, as “History does not repeat itself, but it surely rhymes” it would be erroneous to confine our understanding to “Similarities” between “Then” and “Now”; a proper historical narrative should draw our attention to the role of dissimilarities as well.

Coincidence or not, last week turned to be the 20th anniversary of the collapse of the USSR. Are Ms. Lagarde statement and the anniversary related ?

Well, for me the answer is YES. The main difference between 1930 and 2011 is in the political arena: The world of 1930, a minute before the spreading of The Plague (Fascism ,Nazism) was obsessed with the new economic and social alternative model represented by the Soviet Union . Regardless our views on the Soviet Regime during its Stalinist phase, the Soviet model was back in the 30 perceived as a serious alternative (or threat) to the Capitalist order. And here lies THE dissimilarity: Ever since the collapse of the Soviet Union 20 years ago, the dialectic challenge to the dominant regime on a global scale has been absent from the political arena. The result : A new wave of Globalization, an accelerated dismantlement of the Welfare State … and so on.. but this is another story for another post.

And how this difference is related to the economic arena? Lets see how the main mentor of the reform policies in the 30 , Lord Keynes and FDR , regarded their work :

"The broad thrust of his (Keynes) efforts, like that of Roosevelt was conservative, it was to endure that the system would survive"( JK Galbraith)
"The Class war will find me on the side of the educated bourgeoisie" ( JM Kyenes)
“Red Russia holds too much which is detestable" ( JM Keynes)

As can be seen, the whole concept of intervention in the economy, seen by many as a "Socialism" was considered by the its main promoters as than an attempt to save the system of private property (i.e. Capitalism). From whom? The main threat was in the East, the USSR , with its fast industrialization, GDP huge growth , and all of that before the Stalinist crimes became widely known ( BTW, THE problem with the USSR was never the lack of freedom: Just remember how the US supported for decades more than one authoritarian conservative regime around the Globe ….). FDR or Keyens were aware of the challenge imposed on the System and reacted accordingly.

As of our modern times , the Economic system lacks any real drive to reform itself as there is no imminent threat around : No Soviets, no reds.... If so, why to bother to reform? Even Keynes and Roosevelt would agree on that . The results of that tragic myopia can be observed in the half baked reforms “imposed” on the financial system (still (!) able to create exteremely wealthy bankers), .... high unemployment rates with no real policy response ....the endless summits in Europe rushing to decide something before the opening of a new trading session… and above all the return of the Austerity talk with its Deficit Hysteria….( if deficit is the problem , why not to raise taxes ???? ) . As we can see, anything is valid as long as it does maintain the current state of affairs, ironically, the very same system that proved to be fragile and unstable.

The problem is that for the mainstream economists and policy makers there is no myopia, as they are in the game for THAT reason, i.e. to protect the system, not to reform it. However it IS a myopia if we agree that the main problem to be resolved is not “Debt” ( which is by definition, other´s people Asset) but inequality and income distribution . It is a myopia for those who remember the 40 .....

Share of Top out of National Income ( OECD Figures)

My conclusion is that under the current state of affairs, absent political threats or serious social alternative, the Elites will not give up upon the privileges gained along the last 3 decades. Without the drive for reforms , the Political and Economic response will be an anti Keyensian / FDR wave i.e. more Orthodox and austere policies to reduce deicits and public budgets. Even Noble prize winners agree that such policies are a certain recipe for disaster in the midst of deleveraging and weak private demand. ("Keynes Was Right" by P. Krugman)

Such tragic path could lead to a permanent recession mode and a worse economic long run consequences than humanity experienced some 80 years ago. And let us not forget that even the relative mild policies of the 30 were not able to prevent by “new” dawn on September 1st 1939….( WWII)

Saturday, April 16, 2011

On Deficits and Debts

“Public Deficits” and “Debt “ became the new bad guys in the neighbourhood that threat the sacred economic stability. What can be done? Main stream pundits assert that Evil can be defeated only with a painful cut of public expenses ( MORE TAXES??? Thats not even an option….) while disobedience would be severely punished by the judge of last resort, the MARKETS. The result of such approach is that country after country, no matter the colour of its party, is being trapped in the net of Austerity programmes. CUT.. CUT… CUT,..

The above narrative is orchestrated and supported by the vast majority of experts, lobbyists, managers…., academics, bankers ,or generally speaking the financial/economic establishment. How short can memory be??? Let me remind you that practically the financial establishment members owe their career, position, bonuses (and in some cases, freedom… ) to a massive injection of public support that saved the financial system from bankruptcy. If we have deficits today is due to their faults, mistakes and in some cases, corruption.

From a moral perspective the term “opportunism” is an understatement for the above sudden change of mind. Moreover, from a more mundane economic standpoint, such measures could be disastrous to the economy as private demand is still weak, the natural outcome of a painful deleveraging process, lower real salaries unemployment and other factors. However, the real interesting issue is the inner contradiction of the argumentation against public debt.

The main argumentation against deficits goes like this: “Balance” between incomes and expenses is a virtue for itself, overspending is unmoral : What is valid for our small family should be valid for the “big” family, the nation. Luckily, we don´t have to wait to a future Kingdom of Heaven for justice: Financial markets take care of the bad guys , punishing any unmoral overspending. End of argument.

But,,, hey ,,, wait a minute : What are financial markets? Even by the most conservative commentators, financial instruments are a tool to transfer resources ( i.e. money) between those who have and those who need ( for investment or spending) . So the very heart of any financial market is the balance between thrift and over spending. In a modern economy there is no way from the simple equivalence that one´s savings is equal to the dissaving (or indebtedness ) of someone else. So there is nothing unmoral in overspending only in not returning the money to the lender.

Therefore, making use of financial markets as a tool to control policies lacks of any serious foundation. You can argue that markets are not willing to lend to governments under given conditions, but the deficit by itself is not the problem as long as you can pay the principal and interest. Thus, the main concern of our dear economic establishment is not the deficit and debt per se but how it will be financed. Since the normal and natural way to finance public expenses ( or repaying debts ) is , by the end of the day by taxes, the real concern is a tax hike that will affect, normally , those who earn more and enjoy the priviliges of the current social and economic system. Since nobody likes to pay, the Debt quasi moral debate, and especially its “solution” are a mere deviation from the important debate about taxes and income distribution.

Wednesday, March 30, 2011

The New Sovereigns

"The only things certain in life are death and taxes" Said Benjamin Franklin some 200 years ago. Surprisingly, Franklin´s “certainties“correspond to the quintessence of sovereignty and statehood: “Death“? Well, there is no sovereignty without the monopoly over violence (including the right to make use of force, inflict pain, retain freedoms, and even kill ).”Taxes” ? Since the State is a monopoly it finances its apparatus by raising taxes. Thus according to that line of reasoning the “State” institution is among the most certain things in life. Or at least should be.

However, Capital Markets have a different opinion about that matter, at least according to the information revealed in the prevailing prices of a rather obscure but common financial obligation, the denominated CDS (Credit Default Swaps) . (For those not familiar with financial markets : CDS is financial arrangement that resembles the mechanism of an insurance policy, though instead of securing a real asset (for example, a car), the CDS covers the risk that a specific financial obligation (Bonds , for example) could become useless in case the organization ( Governments, Corporations ) that emitted the obligation cannot meet its obligations. ).

First of all lets have a look on the prices (Price : Cost of securing an amount of debt for 5 years in percentage points)

Country Price
Spain 226.84
Germany 46.62
France 78.35
Italy 158.51
Greece 988.88
UK 57.64
China 74.39
Brazil 114.10
Russia 128.55
USA 42.04

What sort of information is revealed from the above prices ? That requires a brief explanation: Since these CDs are traded in financial markets, their price reflects the markets´ perception about the odds that a country would default: The higher the risk, the higher the demand and the higher the price the buyers are willing to pay to get the insurance. So we can see , for example, that the market puts a higher price for an insurance policy against a Greek default than to the German.

Now, CDS are traded not only to cover sovereign debts but for corporation and sectors. Let’s have a look on the CDS prices for defaults of some key sectors in Europe.

Automotive 24.83
Industrial 19.19
Consumption 23.73
Energy 24.82
Finance 146.86

If we compare the first Table of sovereign States to different economic sectors, the market is pricing the risk of default of most of the states is higher than private corporations. That is a weird result ! Countries, in theory, can always print money or rise taxes in order to meet their obligations, two advantages if compared to corporation’s risks of their own country. And can we imagine that a country defaults but its business sector keeps ongoing “business as usual”? Have the Markets go mad?

The answer is NO, markets understand that under the prevailing political and social system, States are there to serve the corporations interests, and the preference will always be to protect their interests, even if that requires the State´s default. THESE ARE THE REAL SOVEREIGNS; AND THE "MARKET" IS THE EXPRESSION OF THEIR WILL . Take for example Ireland, a model country for the last 20 years: The financial bubble created by a generous financing from foreign banks became at some moment unsustainable i.e. So when it became clear that private debts cannot be paid (and someone could lose money!! ), the State stepped in and absorbed an incredible amount of debt that will be paid by the Irish citizens (estimated at 36% of the country´s GDP for many years. Another example: Spain is a country with one of the lower public debt among the OECD but sinking under a pile of private debts, well hidden under accounting trickery at the Banks balances. How do the markets evaluate the risk of the banking sector?

Santander 197.57
BBVA 206.86

Well as you can see, the banks risks are considered as lower than the Spanish state (Note: I am aware that Spanish Banks work abroad, but their lion share of their business is still in Spain). The case of the banks is more severe than other sectors as these institutions by definition owe their very existence to the State thanks to its status as lender of last resort, so a lower risk for the banks is an absurd result. Unless, as you might guess the State is not more than a loyal servant of the Banks, the corporations and their interests… and would be ready to go bust in order to secure others.

Back to Franklin´s quote, is that overwhelming and apparent unconditional State protection of the corporation’s profitability and interest a new “certain thing”? Well, markets (and ironically K. Marx….) agree on that …That the real Sov

Wednesday, March 23, 2011

Profit Margins and Crisis

Figures can be interpreted in many ways. Lets take for example the following grap which depicts the evolution of the margin earning in the US:

That picture is reflected in other parameters, especially the shape of the main stock market indices. So many could argue that the graph reveals that the situation is just fine, we are back in business and the crisis is over. Is it so?

First of all, you can notice that the American business sector enjoyed the same extreme margins just before the last financial bubble exploded into the worst recession in 70 years. So the margins by themselves can be hardly regarded as a signal for “ Business as usual”.

As a matter of fact that profit rates are a genuine alarm before the next round of crisis. Let me explain: Business profits are the mirror picture of purchasing power of the average citizens or in simple words, every cent out of the total sale goes to the profit is taken from salaries. Therefore the graph means that the average citizen , the one that may own some shares or funds and predominantly lives from his salary is in nowadays worst shape than in the midst of the crisis .

But that is not just a question of justice and distribution but a very serious economic issue. If the average worker is poorer, then to whom will the business sell their products? That is exactly the very root of t he economic crisis we are still in , the unbalanced growth and concentration of wealth and profits among too few hands that are not able to consume the excessive production. The credit bubble was just a mean to cover that lack of purchasing power until it could not be sustained. As the crisis developed, the public sector stepped in to cover that lack of demand … ( no more taxes… but a lot of debts ). So the imbalance went from private hands into public hands.

So we are once again experiencing an unbalanced growth, though this time the reaction capacity of the governments will be much more limited. Under these circumstances a more intense crisis is just waiting around the corner or for the most a sluggish economic growth.

Tuesday, March 22, 2011

The Modern Habitat

Watching TV on a rainy weekend afternoon is THE choice when I wish to turn off my mind for a while. However, since the options are rather limited to recycled movies or insignificant sports events I end the zapping round watching in a nature documentary. The last piece I´ve watched described the struggle for survival of a group of lions somewhere in Africa as filmed by a team that followed a herd in their search for food. With such perspective in mind, it is obvious that the film must lead to the typical hunting scenes (zebras in that case): Slow motion shots of feline movement ...the focus on the sharp eyes ... the zebras running away and finally the inevitable feast of flesh and blood with the resulting pile of dry bones Not for weak stomachs.

Notwithstanding that the film describes life of the wild habitat; the “struggle” motif is being frequently imported into the human social fabric by many ideologies. One of the well known translations was performed by the recalled “Social Darwinist”, which developed a whole theoretical edifice about the “survival of the fittest” , a theory that basically implies a binary code: Life is a jungle so the question “To be or not to be” is equivalent to “ Eat or be eaten”. That survival code became the foundations of ultra Capitalist ideologies and, ironically, Fascist streams.

We can argue that the binary scheme cannot be translated “as it is” into the human social much sophisticated social fabric .But even if we accept such direct and simplistic approach, there is still a question to be asked: Assuming that there are only two choices around (Eat or be eaten), the conclusion is that after many rounds,at some point in the future the “fittest” lions should be able to devour all the animals around. And what´s next? Even if the members of the majestic herd start to swallow each other, eventually, the last lion on Earth will perish from hunger (unless it becomes vegetarian ....). Therefore the dichotomised system is deemed to vanish with its fittest member.

Thus, the main underlying and unintended conclusion of the film is a bit different than the social Darwinist interpretation. The fitness to survive (BTW that concept was not developed by Darwin himself) should not be understood as the deepness of your stomach, but as the capacity to adapt to a given system in order to preserve the specie. As the term “system” implies, by definition, interdependence, such perspective means the irrelevance of a dichotomised /binary approach which , as we´ve seen , leads to its own demise.

Moreover, nature shows us the need to maintain a balance and to some degree opens the way for cooperation based on interdependence. True, there always will be some competition for limited resources but it is obvious that the interdependence requires some degree of cooperation. A smart lion would rather negotiate with the zebras instead of just killing them all, thereby guaranteeing a steady flow of food for the long run.

In such systemic approach, the term weak or strong became relative as even the apparently weak members got some power as the system relies also on their wellbeing and wishes, while the “strong guys” can impose their own rules without considering the reactions of the rest of the system. Since human beings are able not only to adapt to nature but modify the survival terms, the strength or weakness depends up to certain point on the power of will and consciousness.

That lesson is more acute in modern times. Why is it? We live in a society that managed to create a lot of wealth and well being through the division of labour and specialization. People nowadays can hardly handle elemental tasks in their daily life without some sort of specialist, let alone tasks that require long periods of training and study, while most of us are experts in our very little niche. That social economic edifice human beings totally dependent on the system in ways someone could not imagine a few decades ago. If Robinson Crusoe is an impossible fantasy ( or nightmare) for our civilization, thus the wellbeing of all the society rests on each one of the members.

So the modern hungry lion can get its loot by force only if other members are not conscious of their own strengths or just do not care. However, but it can work only on a short run, as the long run imbalance can be disastrous for the whole system.

As a final note, it seems that I should look for another distraction during the rainy afternoons , since even in front of lions and zebras the mind keeps on wandering .....

Saturday, March 12, 2011

The Sea of Schnorr

“All the rivers flow into the sea, Yet the sea is not full. To the place where the rivers flow, There they flow again” Ecclesiastes 1:7

A recent article published at the WSJ website includes an interview with E. Barak, Israel Minister of Defense.

WSJ, March 8th 2011

“Israel will need to boost military spending and may seek an additional $20 billion in U.S. security assistance to help it manage potential threats stemming from popular upheavals in the Arab world, Defense Minister Ehud Barak said Monday……
….."It's a historic earthquake...a movement in the right direction, quite inspired," Mr. Barak said in an interview with The Wall Street Journal, surveying the youthful revolts in Egypt, Tunisia, Libya and the Gulf. "It's a movement of the Arab societies toward modernity."….

The issue of qualitative military aid for Israel becomes more essential for us, and I believe also more essential for you," said Mr. Barak, a former prime minister. "It might be wise to invest another $20 billion to upgrade the security of Israel for the next generation or so....A strong, responsible Israel can become a stabilizer in such a turbulent region."

Mr. Barak is famous for his analytical skills; some even consider him a genius. Since I am an average man , I will not question the Aid itself but the argumentation exposed in the interview.

If we apply a rigorous and critical analysis to the argumentation presented for case, the whole debate becomes a complete waste of time. How it comes? The test for such assertion is by asking a simple question: What was Mr. Barak ( and the security establishment he represents) opinion in different circumstances, for example a movement of the Arab society against modernity (instead of “toward”)?? Does he change his mind when circumstances change? Or did the Schnorr become a mantra?

The answer to the test requires just a short glance on recent history: Even when the Middle East was apparently stable, as it was along the last 30 years, the flow of military aid from Washington to Israel was vigorous. The argument in those days was in the line of “under the apparent stability there is some amount of instability ( otherwise, there was no need for dicatorships ) which could, in a more distance future, turn into real threats “. As you can see, the argument was different, but the conclusion is always the same: Schnorr….Even the "Peace" argument i.e. Israel needs the aid to feel secure in order to deal with the inherent risks in any future deal with the Arabs does not hold water. The aid was there but the deal is still far away.
Or let’s take another example: What would be the argument if Arabs gets poorer? I guess that it would something like “Well, Israel is in the midst of a area with social conflicts that may end in military conflicts” Conclusion: Schnorr… . And what if the Arabs get richer (Petro Dollars, for example) ? “Well, Israel needs additional resources to maintain its military edge against powerful and rich potential enemies (Conclusion??)

So, if under any circumstance the conclusion is identical, any argumentation is needless, and as said previously, the interview becomes a waste of time. Therefore if “all the rivers (of reasoning) flow to the sea (of Schnorr)”, the examination should go one step deeper in order to understand the special status of the Schnorr as THE conclusion.

The Schnorr reflect is a logical outcome stemming from Mr. Barak vision of Israel as the “Villa in the Jungle” i.e. the impossibility of a genuine reconciliation between Israel and the Arab world which implies that the future of Israel depends SOLELY on its military might. A Modern Sparta, under constant and eternal threat with no in house Helots must have a sponsor.

Therefore the issue is not the aid itself (an important detail for anyone concerned about the security of Israel) but its wider context. Moreover, the Schnorr game, always disguised under heavy layers of hypocrisy is part of the political game in America and around the Globe. The main issue at stake is the philosophy behind the extended arm begging for foreign money, the message which takes for granted the eternity of war between Israel and its neigbours.

Actually, Mr. Barak can avoid the automatic responses and answer a few simple questions: Didn´t the Schnorr philosophy already fall into the illogical loop of a self fulfilling prophecy maintained by vested interest? A vicious circle of arm race? Now, If the need for aid is genuine, could Mr. Barak detail the set of achievable preconditions for a possible and future “No, Thanks” moment for any military aid?? And what can be done to get a bit closer to that moment? The first questions are informative, contemplative. The last is more of a reminder that history is in constant change, thus there are no eternal slogans valid for all cases. “No man ever steps in the same river twice, for it's not the same river and he's not the same man” ( Heraclit). The river of history have changed in the Middle East , so the sea of Schnorr idelogiy should change as well.

Wikepdia : Schnorrer (; also spelled shnorrer) is a Yiddish term meaning "beggar" or "sponger". The word Schnorrer also occurs in German to describe a person, who frequently asks for little things like cigarettes or little sums of money, without offering a return, and has thus come to mean “freeloader”. The English usage of the word denotes a sly chiseller who will get money out of another any way he can, often through an air of entitlement. A schnorrer is distinguished from an ordinary beggar by dint of his boundless chutzpah. The term does not apply to begging or being homeless, but rather a habit of getting things (food, tools) rather than money by politely wanting

Sunday, March 6, 2011

Garbage Out , Please

"Garbage In, Garbage Out" (GIGO) is a phrase from the field of computer science commonly used to describe failures in human decision making due to faulty, incomplete, or imprecise data. (Wikipedia). However, the application of GIGO to human behaviour overlooks the fact that for humans the “GI” part depends not only on “real” data but (mainly) on how reality is perceived. Moreover, we are able to adopt “GO” attitudes even it is evident that the hard data support a different conclusion.

Lets take for example the attitude toward a main social issue as “Income Distribution”: The following graph reveals one of the result of a survey about the attitude toward inequality in US. America is just a mirror, an example for other countries.

Source (http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph) from “Building a Better America – One Wealth Quintile at a Time by Michael I. Norton Dan Ariely Harvard Business School Duke University)

The results are very interesting: First, Americans perceive that social inequalities in their country are less acute than really are that “…..First, respondents dramatically underestimated the current level of wealth inequality” . I would say that “underestimated” is an underestimation.

First of all, wealth is regarded as the Direct command over money, but does not include indirect command. For example, under the modern shareholder structure , whoever holds just of a small portion out of the shares of a company is practically the one who holds the command over the overall company´s assets, much above his "real" holdings. That mechanism is denominated as the “OPM” (“Others People Money”) principle. And since Capital accumulation is not just a matter of bank account but of command, for practical matters the pecuniary figure becomes an underestimation of the real power behind Wealth.

In addition , the “Wealth” definition is somewhat misleading. According to the article “Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person's net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.”

The problem with the above "Wealth" definition is that it includes personal house, which is not a typical “asset” but a sort of consumption item which is financed over a long period and does involve a command over future income streams ( as a typical financial asset should). Thus if we exclude housing from “Wealth”, we get an even worst picture of inequality as the lion share of the lower classes wealth is mainly their personal home.

The second conlusion “Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution…”

In clear contrast to the image of an ultra individualistic society: Most American citizens favour a more equal social model than they perceive, evidently much more equal than it really is. They favor a Swedish model society!

So if so many people favour a much more equal social model, how it comes that the actual state of affairs is so different to their ideal? Well, the article does not give a comprehensive answer to that question but on my opinion it´s about perception and its relation to what I call the “tolerance zone” . People generally tend to be pragmatic and would a reality that differs from their ideal as long as it falls within the boundaries of their "tolerance zone". For example we might not like exploitation but we can live with it until certain point.

Therefore perception is a fundamental piece in the social structure of inequality.If people REALLY understood that they live in a much more polarized society, some of them would not be ready to accept it ( i.e. it´s out their tolerance zone) and favour changes in the social structure.

Moreover, Democracy relies on free and accurate information that influence our decisions: if we manipulate data, freedom of decision becomes a fiction. So whatever our political view about inequality is, any genuine Democrat should support a free and accurate flow of information or in other words that there is as less as possible Garbage in the INPUT DATA , so whatever GO we get , we can at least be sure that it was not the outcome of a GI but from an internal BUG in the system.

Thursday, March 3, 2011

Wisconsin, Ohio : Isn´t the Right "Right" ??

The seizure of a Parliament by street protesters seems to be a terrific news item, but for some strange reason the events taking place in the heart of America do not get the appropiate mediatic attention they should (at least here abroad) . So as a courtesy I will begin the blog with a short introduction.

The story goes like that : Wisconsin Governor S. Walker has put forward a plan to end collective bargaining for most state workers. That has transformed Wisconsin into an ideological battleground between trade union activists and small-government conservatives. The State Capitol in Madison has become the focus for daily mass protests. And if this was not sufficient, today ( March 3rd 2011) Ohio's Senate voted to prohibit public employees from striking and to restrict certain collective bargaining rights, including negotiations on pensions and health care.

The fight in Wisconsin is being labeled by many commenters as THE major social battlefield; some even define it as a “Class War”. It that context it was interesting to read some comments which regard the Governor´s proposals not only as a serious step to fight the huge State´s deficit (under US Laws any State is obliged to operate under a balanced budget), BUT an opportunity to cut public employees´ “privileges” such as collective bargaining, health benefits or job security. Other see the opportunity to introduce “private sector” norms into the public sector and turning it more competitive ( to what exactly?) . Sounds as a war indeed….

The assertion “Simple working people are once again being forced to pay the price for an economic crisis caused by others….” it´s triviality. We don´t need Madison or Ohio to know that fact of life. Moreover, I would be surprised if this was not the response of a conservative establishment ( and the anemic US President) to the growing and mounting debts (which serve other interests… but that is for another blog). Therefore I would prefer to focus on other aspect of the events.

My claim is that Conservatives are correct in their observation. For example lets take the Collective Bargaining issue . In the US only app. 11% of the working force is unionized, an astonishing figure if compared even to the same US 30 years ago (20.8% in 1980). In some important corporations unions are banned and whoever tries to get organized can be fired at once. So the Newspeak that regards the right to maintain collective agreements a “privilege” of just a few is correct.

Or the health care “privilege”, which is indeed the correct definition for that basic service in a country where the right to enjoy a health insurance (for commoners) without being tied to a working place or falling into bankruptcy is not less than a “privilege”.

That’s exactly the point: The transformation of basic right into “privileges” reflects the short sight view of the American Unions. In many countries Unions have become the silent partners of the system securing their own “privileges” forgoing solidarity with the weakest. History can tell us that such strategy is dangerous : About 80 years ago German unions and the country as a whole paid a very high price for not paying too much attention to the “Lumpen ploretariat” the abandoned working class that became one or the main support of the Nazis. The similar sectorial approach dominates the American labor landscape where Unions are among the biggest supporters of the Democratic Party. As such they got their share in the actual state of affairs, they are the establishment.

So, if we might prefer to adopt the conservatives’ logic rather than a sectorial demand but with a twist: Want a “competitive” public sector? OK, raise the minimum salary in the private sector! ? Want to get rid of privileges? Guarantee that the right of free association in each and every workplace so it ceases to be a privilege …. And so on and so on. A solidary response is the proper reaction to the conservative avalanche emerging from the heart of America. However, if solidarity remains as a mean to achieve sectarian privileges than the lost battlefield of Wisconsin,, Ohio and others are just around the corner.

Sunday, February 27, 2011

And Stress for All

Public institutions tend to emphasize the importance of financial stability. It is not just a matter of intentions but a regular use of huge public resources to guarantee the stability of the system. And since the “markets” are considered as the main reflection of the true state of financial business, the stabilization of the financial markets became a top priority of policy makers.

A few examples can show the magnitude of that policy: Ultra light interest policy rates, modified accounting rules to prevent a full disclosure of the real situation of the financial system, purchase of financial assets (“QE2”) above their market prices, design and financing of bailout deals etc. etc. We are told that the reason behind such deep intervention is that the financial markets are the blood stream of the economy as the main transfer mechanism of resources between individuals and companies. As such, they need stability in order to permit their normal functioning and to guarantee that investors willingness to take risks.

As a matter of fact, the stability is just anther good deal for the finance markets since in such mechanism they share the risk with the rest of the citizens but enjoying the benefits of profits.Well, if that privilege was conceded to any citizen I wouldn´t comment about it. However, the way the other production factor “labour”, is being treated in a 180 degrees opposed way to the above stability: Stress.. Stress and more Stress. You can hear about it all over the world: In Wisconsin (US) the administration is engaged in cutting social right and benefits, a measure applauded by “pundits” as the first step to install private sector norms in the public service( i.e. less union and less rights). Or the ECB Chairman ( and who handles Billions of Euros per moths to bankrupt banks) declaring that wage increase in Europe would be “madness”… or Spain´s labour reform aimed to reduce social rights,…. Or UK budget cuts and massive layoffs.

With just a few examples we´ve seen that there is a basic dichotomy in the way Capital and Labour are treated by the institutions, although there is no real apparent reason for that different treatment, at least not from Economic theory point of view. Moreover, a different treatment create distortions that tend to reinforce themselves up to a point that they are not sustainable anymore. What is the reason for the different treatment? Since the the basic foundation of any fair social system is equality, that very important question should be rendered to a second place. If the first step toward justice and equality is “Stress for all”… so be it.

Monday, February 21, 2011

How do you say “K.I.S.S.” in Arabic?

A few weeks ago the disclosure of hundred of thousands of Wikileaks files were seen as the herald of a new era in public life: We suddenly became familiar to obscure intrigues, secret deals, embarrassing profiles….etc. etc. The message was that from now on, any politician should be conscious that the expiration date of any “Top Secret” label is closer than ever. “History will judge” became suddenly a rather anachronistic slogan, Present and History became one.

That being said and despite a personal deep respect for freedom of speech and transparency in public life, I got somehow the feeling that Wikileaks became a sort of “Wiki Miss”. The overwhelming quantity of sophisticated information aimed to she light on bad weeds turned to a sort of “the trees that hide the forest” of reality. The on going events in the Middle East were the definitive confirmation for that feeling.

The “wood” as I call it is a synonymous for simple principles and ideas simple and deep at once: For example we all know that Honesty is a virtue, even if we don´t even know exactly why. The same goes with our innate distaste for oppression: The desire for freedom is stronger than any tyranny, brutal force or systematic brainwashing. It can take years, decades, and even centuries but in the end the desire for a better life is stronger than anything else. That simple understanding was the big miss of Wiki Leaks. Or is too trivial that we sometimes forget its validity….

The wood suddenly appeared in the Desert: First they took Tunisia, then they took Cairo, as I am writing these phrases Bahrain is under siege, Lybia is burning …. And who knows who´s next. These events took everyone by surprise: Politicians, Markets models, Dynasties, Swiss Bankers … and even Wikileaks was not able to tell us anything about it. Trees and more trees…. The wood remained obscure.

Who ever adopts the wood vision will not be surprised when millions “suddenly” say “Enough!” and get out to the streets, or even risk their life for something they never knew (most of the population in these countries never knew other regime than tyranny). I would even say that whoever applies that principle will find any “Leak” or confidential information just as a detail, a small tree surrounded by the wood of reality.

That way of thinking is known as the K.I.S.S. principle (Keep It Simple Stupid) . Watch out! That principle is not an encouragement for oversimplification or triviality, it´s just an attempt to but reminder that to too many questions and concerns can be summarized into few and simple principles. Although we are dealing with an English acronym , its seems that it got a good translation to Arabic. Better put , the principle does not need any translation as it is understood by any human being.

Sunday, February 13, 2011

What are they afraid of ?

The refreshing news coming from Cairo are regarded by many Israelis commentators, as a “threat”: How can genuine (self proclaimed?) democrats regard the chance of a free future for more than 80 million people as a “threat”? I will try to ignore “geopolitical” analysis and try to scratch the surface in order to see what is really behind that ( false) sense of threat.

Well, for many the “Threat” is a possible breakdown of the “stability” the region “enjoyed” along the last 30 years. These “stable” years include the events such as the 1982 invasion to Lebanon, many Palestinian uprisings, massive attacks on Gaza, etc. So stability in that case is not a synonymous to “No more bloodshed “ but refers to the relative impunity the Israelis hard line government enjoyed thanks to a loyal Southern ally, Mr. Mubarak and his gang.. It is clear that from now on the disposition and/or capability of any Egyptian ruler to ignore the natural popular resentment following any Israeli military actions should not be taken for granted. Any future adventure will carry other consequences than the prevailing along the previous “golden era”. That is one big “threat”.

Second “Threat”: A more deep concern arising from the Tahrir Square is what I would call “ Back to the Middle East”. Many Israelis consider their country location as a geographical casualty: According to that perspective, the country is an isolated Western democracy surrounded by wild neighbours (like a good Old Western) and as such it is deemed to be under a constant threat ( Mr Barak used the image of a “mansion in a jungle”). The “logical” conclusion is that the country must isolate itself from its violent neighbourhood, physically (walls), culturally, emotionally, militarily…etc.

In other words, the dominant motto is “My heart is in West and I am at the end of the East” ( as a paraphrase to the medieval poem of Spaniard Iehuda Halevi) . That is a key element in the Israeli self-image and identity. Anyhow, why are Cairo events regarded as a “threat”?

The autocratic regimes around Israel are a fundamental piece of that twisted image of Israel , as they reinforce the image of the ever threatened Democracy ( for internal and external use as well). For quite a long time that system worked with impressive success: Although Tel Aviv is less than 100 Km from a bombarded Gaza its habitants feel as if Gaza´s misery is something remote as Bangladesh. However the fall of Cairo walls was well heard in the neighbourhood and it heralds the end of an illusion that the Yarkon is closer to the Thames than to the Nile.

Third “Threat”: The image of the “Arabs” turned around in less than 20 of street protests. A population fighting for its freedom cannot be regarded anymore as a faceless, ignorant and even ridiculed mob (an image that reinforces Israel´s prominent status). Cairo street protesters were revealed as normal (some of them quite brave) human beings that wish freedom, a descent job, a normal future for themselves and their kids, like most of us, the normal guys. So, if in the other side of the fence there are normal people, why to isolate from them? Are they really a threat? That question could become a serious blow to the cult of “Bitahon”, (security in Hebrew) based upon the fears and history, a cult that displaces a lot of social and identity deep questions that can threaten the actual social relations in the country.

However, threats can turn into opportunities: New constrain” to the political equations of violence might bring second thoughts when comes the time to pull the trigger and should, hopefully, pave the way to a genuine reconciliation process. The new image of the Arab world arising from Cairo should convince Israelis and others that in the other side of the wall there are human beings, not blood thirst fanatics.

The end of isolation and the fall of the real and imaginary Ghetto walls can do only good to Israel. After all the idea of really living in the Middle East, the traditional bridge between West and East can turn to be a not too bad idea. Israel society can become a more just and equal society as the military threat ceases to be an excuse to a polarized society.

As a final word, let us not forget: Despite decades of conflict between Israel and Arabs, any single European nation spilled much more Jewish blood than all its Middle East Neighbours taken together. Tahrir Square events are a good opportunity to remind that simple fact.