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.
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Thursday, March 3, 2011
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….
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….
Wednesday, September 15, 2010
The Economics of the Schnitzel*
Everyone can surely remember from his/her own past those unique moments in which a phrase, sight or a comment turned a complicated set of ideas into a simple, clear, concept (“How I did Not Think About It Before?” moment…). That personal Eureka experience may be the outcome of an individual “masterstroke” but it is more commonplace to find the origin of such experiences in our immediate environment.
I had many Eureka moments in my life, one of them dates to my early days as an Economics student. During a Micro Economics class , Prof. U.R. tried to explain what “Revealed Preference” is all about ( Note : R.P. is a method to analyze the consumers´ wants and needs from her actual behavior). A student suddenly asked the lecturer why to bother with complicated calculations as it is much easier to ask the consumer directly about her preferences. The Prof. replied with a simple example: A smart grandmother ( in my case the typical Jewish Grandmother, guess it is the same in other cultures) will never ask her grandchildren if they like the Schnitzel she bothered to prepare. She would prefer to know the “real” answer by having a look at the empty/not empty plates when the meal is over….. That is the essence of Revealed Preference, the understanding that even with kids actual behavior can be a better signal than words as people are prone to answer according to prior strategies and interests, ( in less polite words, to manipulate) That lesson remained in my head as “The Schnitzel Theory”.
Back to the present, I´ve got the feeling that the actual economic conjecture is a perfect candidate to apply the old “Schnitzel Theory”. Listen to what Governments, Central Bankers, the Media (with rare exceptions) and other interested parts have to say about the economy and you will hear an optimistic and sweet melody. Does the economic real “plate” ( i.e. actual decisions ) fit with these calm messages?
Lets have a look on the following graph (Evolution of Interest Rates and Inflation in US)
Source : Treasury Yields in Perspective Doug Short August 16, 2010
What does the graph tell us? First of all the official interest rate is being maintained at record low levels (the red line), practically zero. The market rates (Blue Line) which is heavily influenced by the monetary policy and market expectations is also very low. On real terms (the difference between inflation and interest rates) the official short term rate is in negative territory, i.e. Central Banks are running an ultra expansionary policy (app. negative 2-3%). The last time we had a similar experiment, (2001 -2005) the party eventually ended in tears including the prick of a major real estate bubble and a major economic crisis. That is not a secret, even to policy makers.
The most convincing explanation for such unorthodox and risky policy (with possible assets bubbles or inflation) is that reality is still very unpleasant and the economy requires high doses of cheap money in order to maintain asset prices and employment. In other words, the real and concrete policy measures tell us a different story from the official narrative.
To whom should we believe? My answer to that question as an adept of the "Schnitzel Theory" is that we are still far away from a real and sustainable recovery and a lot of problems lie ahead. Policy makers can say whatever they want, but as long as facts tell us a different story I prefer to believe to the later.
In that context I will ask you a favor : Please let me know when the facts fit with words or when you see a clear return to normal macroeconomic policies. That day it will be possible to say that the plate is empty and the time for the sweet dessert arrived… as Granma taught me : Dessert only for those who emptied their plates ... ( Or "The Wall" version : If you don´t eat your meat, you can´t have any pudding ....")
*Schnitzel : Typical Centre European , a thin meat cutlet (usually breaded and fried), Milanesa in Italy
I had many Eureka moments in my life, one of them dates to my early days as an Economics student. During a Micro Economics class , Prof. U.R. tried to explain what “Revealed Preference” is all about ( Note : R.P. is a method to analyze the consumers´ wants and needs from her actual behavior). A student suddenly asked the lecturer why to bother with complicated calculations as it is much easier to ask the consumer directly about her preferences. The Prof. replied with a simple example: A smart grandmother ( in my case the typical Jewish Grandmother, guess it is the same in other cultures) will never ask her grandchildren if they like the Schnitzel she bothered to prepare. She would prefer to know the “real” answer by having a look at the empty/not empty plates when the meal is over….. That is the essence of Revealed Preference, the understanding that even with kids actual behavior can be a better signal than words as people are prone to answer according to prior strategies and interests, ( in less polite words, to manipulate) That lesson remained in my head as “The Schnitzel Theory”.
Back to the present, I´ve got the feeling that the actual economic conjecture is a perfect candidate to apply the old “Schnitzel Theory”. Listen to what Governments, Central Bankers, the Media (with rare exceptions) and other interested parts have to say about the economy and you will hear an optimistic and sweet melody. Does the economic real “plate” ( i.e. actual decisions ) fit with these calm messages?
Lets have a look on the following graph (Evolution of Interest Rates and Inflation in US)
Source : Treasury Yields in Perspective Doug Short August 16, 2010
What does the graph tell us? First of all the official interest rate is being maintained at record low levels (the red line), practically zero. The market rates (Blue Line) which is heavily influenced by the monetary policy and market expectations is also very low. On real terms (the difference between inflation and interest rates) the official short term rate is in negative territory, i.e. Central Banks are running an ultra expansionary policy (app. negative 2-3%). The last time we had a similar experiment, (2001 -2005) the party eventually ended in tears including the prick of a major real estate bubble and a major economic crisis. That is not a secret, even to policy makers.
The most convincing explanation for such unorthodox and risky policy (with possible assets bubbles or inflation) is that reality is still very unpleasant and the economy requires high doses of cheap money in order to maintain asset prices and employment. In other words, the real and concrete policy measures tell us a different story from the official narrative.
To whom should we believe? My answer to that question as an adept of the "Schnitzel Theory" is that we are still far away from a real and sustainable recovery and a lot of problems lie ahead. Policy makers can say whatever they want, but as long as facts tell us a different story I prefer to believe to the later.
In that context I will ask you a favor : Please let me know when the facts fit with words or when you see a clear return to normal macroeconomic policies. That day it will be possible to say that the plate is empty and the time for the sweet dessert arrived… as Granma taught me : Dessert only for those who emptied their plates ... ( Or "The Wall" version : If you don´t eat your meat, you can´t have any pudding ....")
*Schnitzel : Typical Centre European , a thin meat cutlet (usually breaded and fried), Milanesa in Italy
Saturday, September 4, 2010
Free Markets and ( free ) Immigration
The phrase “There is no such thing as a free lunch” ( M.Friedman) is for economists an equivalent to the Law of Gravity. However, the first phase of the current economic crisis with its massive injection of public money seemed to defy Friedman´s rules. Policy makers were seduced by the idea that generous outflows are capable to relieve any social pain and even cure the economic malaises without real pain FOR NO ONE. Unluckily, as the dust sets it becomes clearer that Alchemy is unable to replace good Economics.
The prolongation of the crisis is evident or better put, it´s becoming dear experience for some of us. Let’s analyze some of the last week news : The Financial Times website admitted that “US banking sector picked up pace in the second quarter with lenders’ profits rebounding to pre-crisis levels amid falling loan losses”, whilst on Friday August unemployment figures are close to record levels ( August 2010 Jobs report announcing the loss of 54 k jobs in the US was considered as a “ good news …) . Another title from the FT says : ” Former Chancellor of the Exchequer Alistair Darling said the UK's supertax on bankers bonuses he introduced last year amid outcry over bankers' pay failed to correct the industry ….. Well as far as I know HM government is very efficient when it comes to realize deep cuts in social rights. Perhaps M. Friedman´s phrase should be modified to“ There is such a thing as a free lunch as long as you get someone to pay for it”.
As the failure of the “recovery” measures become evident, the task of maintaining the delicate balance between social pressures while maintaining the existing economic power structure becomes an even harder mission than before. It is becoming evident that someone must pay …..
The question who is going to pay is already generating a few interesting answers : One of them is the call to restore the dominance of market forces in the economy, since the only instrument capable to restore the path of sustainable growth and employment is the market . The free marketers offer a menu that includes for “Entree” delicacies as tax cuts, reduction of public expenses, flexibilization of labor markets, surplus budgets etc. True, there is some debate about the tastiness of such menu, though the question whether, how and who will manage to reach dessert is “blowing in the wind”. In any case, the burden will fall on those who benefited less from the pre crisis prosperity, the lower classes.
The second position to be noticed is the resurrection of xenophobic discourse, not as a marginal topic but as another component of mainstream policies of “respected” institutions . The xenophobia is linked to the economic crisis ( for example “to fight unemployment”) : France has already deported thousands of Romanian Gypsies, Italian authorities established anti immigration policies, Arizona´s immigration laws are still debated, Spain hardened its policy on immigration etc. In that case the bill is served to the foreign workers and immigrants (at first phase.... others will come later)
The irony is that both lines are generally held by the same people. Why irony? Because the two lines contradict each other . In the case of market fundamentalism , the economic models that justify them assume a free and unrestricted flow of ALL production factors (Capital, labor, and raw materials), products and services. If the flow of labor is constrained (as the xenophobes want) , the whole intellectual edifice of free markets becomes irrelevant or becomes not more than another ideological instrument applied in accordance to the particular interests.
A few examples should explain the last point : Under a genuine global free market it would be inconceivable that a Brazilian from Sao Paolo is “allowed” to make use (and pay ) for Telefonica´s privatized services ( held by Spanish Capital ) but not allowed to work freely in Barcelona… or an East European working at car making industry , generating profits for American funds but not allowed to offer his work in the US without a Green Card… or an Israeli government which approves generous grants to major enterprises in the name of the free markets but decides to expel Israeli kids just because they were born to illegal foreigners.
The intellectual coherence demands that whoever support free markets should also favor free and unlimited flow of people as well. If the incoherence is explained by the need to impose certain restrictions on markets ( to preserve social cohesion etc...) , than why only limit immigration? Why not to question privatization? Shouldn´t market forces be restrained when social equity or other common values are under threat ? If the challenge presented in these simple questions is accepted, than market economy will be hopefully expelled from its quasi sainthood status and exposed to social scrutiny as it should have been from the very beginning.
The prolongation of the crisis is evident or better put, it´s becoming dear experience for some of us. Let’s analyze some of the last week news : The Financial Times website admitted that “US banking sector picked up pace in the second quarter with lenders’ profits rebounding to pre-crisis levels amid falling loan losses”, whilst on Friday August unemployment figures are close to record levels ( August 2010 Jobs report announcing the loss of 54 k jobs in the US was considered as a “ good news …) . Another title from the FT says : ” Former Chancellor of the Exchequer Alistair Darling said the UK's supertax on bankers bonuses he introduced last year amid outcry over bankers' pay failed to correct the industry ….. Well as far as I know HM government is very efficient when it comes to realize deep cuts in social rights. Perhaps M. Friedman´s phrase should be modified to“ There is such a thing as a free lunch as long as you get someone to pay for it”.
As the failure of the “recovery” measures become evident, the task of maintaining the delicate balance between social pressures while maintaining the existing economic power structure becomes an even harder mission than before. It is becoming evident that someone must pay …..
The question who is going to pay is already generating a few interesting answers : One of them is the call to restore the dominance of market forces in the economy, since the only instrument capable to restore the path of sustainable growth and employment is the market . The free marketers offer a menu that includes for “Entree” delicacies as tax cuts, reduction of public expenses, flexibilization of labor markets, surplus budgets etc. True, there is some debate about the tastiness of such menu, though the question whether, how and who will manage to reach dessert is “blowing in the wind”. In any case, the burden will fall on those who benefited less from the pre crisis prosperity, the lower classes.
The second position to be noticed is the resurrection of xenophobic discourse, not as a marginal topic but as another component of mainstream policies of “respected” institutions . The xenophobia is linked to the economic crisis ( for example “to fight unemployment”) : France has already deported thousands of Romanian Gypsies, Italian authorities established anti immigration policies, Arizona´s immigration laws are still debated, Spain hardened its policy on immigration etc. In that case the bill is served to the foreign workers and immigrants (at first phase.... others will come later)
The irony is that both lines are generally held by the same people. Why irony? Because the two lines contradict each other . In the case of market fundamentalism , the economic models that justify them assume a free and unrestricted flow of ALL production factors (Capital, labor, and raw materials), products and services. If the flow of labor is constrained (as the xenophobes want) , the whole intellectual edifice of free markets becomes irrelevant or becomes not more than another ideological instrument applied in accordance to the particular interests.
A few examples should explain the last point : Under a genuine global free market it would be inconceivable that a Brazilian from Sao Paolo is “allowed” to make use (and pay ) for Telefonica´s privatized services ( held by Spanish Capital ) but not allowed to work freely in Barcelona… or an East European working at car making industry , generating profits for American funds but not allowed to offer his work in the US without a Green Card… or an Israeli government which approves generous grants to major enterprises in the name of the free markets but decides to expel Israeli kids just because they were born to illegal foreigners.
The intellectual coherence demands that whoever support free markets should also favor free and unlimited flow of people as well. If the incoherence is explained by the need to impose certain restrictions on markets ( to preserve social cohesion etc...) , than why only limit immigration? Why not to question privatization? Shouldn´t market forces be restrained when social equity or other common values are under threat ? If the challenge presented in these simple questions is accepted, than market economy will be hopefully expelled from its quasi sainthood status and exposed to social scrutiny as it should have been from the very beginning.
Monday, June 28, 2010
Panem Et Circenses XXI Century
I read the news today “ G20 nations commit to halving budget deficits by 2013” , an headline that resumes the main agreement reached at the last weekend G20 summit. Any observer understands that under the “deficit reduction”
codename lies a whole structure of more budget cuts, less social rights and toughest auterity plans.
Coincidence or not, these days the world seems to be more busy with the World Cup in South Africa . Did anybody in the South hear the above headlines “Austerity for all”???. The level of salaries and bonuses paid and or promised to the national teams and managers indicates that the distance between "Austerity " Canada (G20 meeting) and South Africa is larger than ever. The following table details the annual salary of 32 national team managers that are disputing the World Cup (the data was gathered by the Argentine newspaper OLE) (in USD)
It should be noted that these figures are outflows from public institutions and they do not include the millions of USD destined as salaries and bonuses for the players. It is evident that these salaries are much higher than the average level in their respective countries, in many cases even above the salary of the Head of the State. If you go through the list, you will find that the countries which spend millions on salaries for a few suffer from a complete spectrum of social malaises : Countries with scandalous levels of HIV, other with huge absolute poverty levels, countries that poured billions into a bankrupted finance system, countries with huge unemployment rates and some on the brink of bankruptcy.
And yes, I am aware of the "theory" that the extravagant salaries are not financed from public coffin (i.e. there is no real loss for the country ) but paid indirectly by “sponsors” ,bonuses from FIFA or whatever obscure source ( as Spanish Secretary of Sports claimed). Sorry, but that´s a poor argument: Any NATIONAL football team is a public asset and players, coaches and any professional involved are mere representatives of a nation and as such should be paid a fair salary( let alone the enormous personal publicity they gain for free during such events). And if they refuse to reprsesnt the country, it´s OK , there will always be candidates willing to play football for a decent salary. From that perspective , any extraordinary income belongs to the owner of the asset, the public, and the decision how to make use of these funds is a matter of public choice.
However, the lack of an explicit debate on the issue doesn’t mean that the salaries´ level is not another implicit de facto political decision that sets social priorities in favor of the Football Circus. A reminder from history : During the heydays of Rome, the populace enjoyed the “Bread and Circus” free Combo, a tool used by the governing Elite as a mean to appease social tensions and gain poltical power. From that perspective we are in a worst situation than the average Roman : We are not only asked to pay to enjoy the “national” spectacle (through publicity, PPV …etc) but the modern equivalent of bread (i.e. social rights) is being scarified in the name of a selective austerity. “The Times, they are a changin´”?? Not so sure.
codename lies a whole structure of more budget cuts, less social rights and toughest auterity plans.
Coincidence or not, these days the world seems to be more busy with the World Cup in South Africa . Did anybody in the South hear the above headlines “Austerity for all”???. The level of salaries and bonuses paid and or promised to the national teams and managers indicates that the distance between "Austerity " Canada (G20 meeting) and South Africa is larger than ever. The following table details the annual salary of 32 national team managers that are disputing the World Cup (the data was gathered by the Argentine newspaper OLE) (in USD)
It should be noted that these figures are outflows from public institutions and they do not include the millions of USD destined as salaries and bonuses for the players. It is evident that these salaries are much higher than the average level in their respective countries, in many cases even above the salary of the Head of the State. If you go through the list, you will find that the countries which spend millions on salaries for a few suffer from a complete spectrum of social malaises : Countries with scandalous levels of HIV, other with huge absolute poverty levels, countries that poured billions into a bankrupted finance system, countries with huge unemployment rates and some on the brink of bankruptcy.
And yes, I am aware of the "theory" that the extravagant salaries are not financed from public coffin (i.e. there is no real loss for the country ) but paid indirectly by “sponsors” ,bonuses from FIFA or whatever obscure source ( as Spanish Secretary of Sports claimed). Sorry, but that´s a poor argument: Any NATIONAL football team is a public asset and players, coaches and any professional involved are mere representatives of a nation and as such should be paid a fair salary( let alone the enormous personal publicity they gain for free during such events). And if they refuse to reprsesnt the country, it´s OK , there will always be candidates willing to play football for a decent salary. From that perspective , any extraordinary income belongs to the owner of the asset, the public, and the decision how to make use of these funds is a matter of public choice.
However, the lack of an explicit debate on the issue doesn’t mean that the salaries´ level is not another implicit de facto political decision that sets social priorities in favor of the Football Circus. A reminder from history : During the heydays of Rome, the populace enjoyed the “Bread and Circus” free Combo, a tool used by the governing Elite as a mean to appease social tensions and gain poltical power. From that perspective we are in a worst situation than the average Roman : We are not only asked to pay to enjoy the “national” spectacle (through publicity, PPV …etc) but the modern equivalent of bread (i.e. social rights) is being scarified in the name of a selective austerity. “The Times, they are a changin´”?? Not so sure.
Wednesday, June 23, 2010
Beggar Thy Neighbor OUT, Beggar Thy Roommate IN
“Beggar thy Neighbor” is a term used to describe policy measures aimed to boost the economy of a country at others countries expense . That policy is supposed to improve the competiveness of country through different means , just to mention a few : The formation of economic barriers for foreign competitors, a forced devaluation the currency and so on.
True, such “Win-Loose” strategy can generate some limited economic impact. However, history tells us that things can turn into a ugly story: "A form of this policy, notably the tariff barrier, was attempted at the beginning of the Great Depression with almost no success. A beggar-thy-neighbor policy in the United States caused other countries to follow suit, resulting in a massive decrease in international trade. This made the Depression worse.” Financial Dictionary). Retaliation became the key word in that context.
Was the lesson learnt? Up to a certain point. The calls for protectionist measures heard lately were not ( still) able to bring about a policy change and governments declare their commitment to open trade . But that´s not the whole story: Fearing from the neighbors’ response, countries turned to beggar their own poorer roommates. After all someone should pay for the party ....
The Spanish case will illustrate the last point. Spain is suffering from a combination of deep recession, current account deficit, soaring public deficit and huge unemployment rate (app.20%). Before becoming a full EU member , Spain used to overcome similar episodes by literally beggaring its trade partners, especially devaluating its currency, the Peseta ( and other policy tools as well). It had some limited impact when combined with other policy tools.
Spain membership in the EU brought about the loss of independence of its economic policy. Thus ,as many “experts” claim, the only way open to the country is an “internal devaluation”, or in a less PC parlour , lower salaries. The logic goes like that: Spain should gain competitiveness so the prices of Spanish prices must be lowered. Since such arbitrary reduction cannot be forced, (and companies might ,G-D forbid, lose money), the burden should fall on the regular cannon fodder, the wage earner ( lower salaries = lower cost = lower prices ). Moreover, that theory holds a moral argument : Spanish wages have risen “too much” in the last years, and THAT distortion explains the uncompetitive position of the economy. This position (held by the Nobel Laureate P. Krugman), could sound reasonable…. as long as you don´t analyze the data.
Lets see the data. The following graph shows the relative weight of the salaries in the Spanish economy, in other words how much of what the country goes to the pockets of the wage earners. (until 2009 real 2010 onward Forecast)
Source : Eurostat Data Compensation of Employees percentage of GDP
What is the meaning of the descending line? It means that for each Euro produced by the economy (similar to the price of a product in a private company),the workers received a smaller slice than what they used to receive a few years ago. Even if we accept the “loss of competitiveness” thesis, it is hard to see how it is related to the “growth” of salaries. If Spain suffered from a higher inflation rate than its trade partners, it was probably related to the rising prices and profits of the companies and less to the salaries . Although other European workers suffered from the same problem, in comparison to the European wage earner, the Spanish worker has suffered more .
But governments are not confused by facts. The “Socialist” Government already embraced the narrative that reduced social rights and lower salaries is the key for Spain´s recovery. Under the blessing ( or pressure) of the IMF, EU, Obama…etc…. the Government already marked the path by a 5% cut of wages in the public sector. The next step was the adoption of a set of decrees which overturn essential social rights (some of them dated from the Franco era!) including a dismissal "easy track" and a planned assault on the system of collective negotiation and pensions.
Spain is just a model though the narrative is being noticed in other countries. So from now on say "Beggar your neighbor OUT, your worker IN...." . That is the newspeak we´ll hear from now on from policy makers and the financial media. I humbly dare to foresee that the "beggar" policy is deemed to fail as it failed 70 years ago: it will pres each and every country to a lower salaries policy which will eventually depress consumption and economic activity.
I wish policy makers understand, before it gets really too late, that "beggar" cannot replace genuine and progressive economic policy. Moreover, it is more than the beggary policy is the path toward higher levels of despair and anger.
True, such “Win-Loose” strategy can generate some limited economic impact. However, history tells us that things can turn into a ugly story: "A form of this policy, notably the tariff barrier, was attempted at the beginning of the Great Depression with almost no success. A beggar-thy-neighbor policy in the United States caused other countries to follow suit, resulting in a massive decrease in international trade. This made the Depression worse.” Financial Dictionary). Retaliation became the key word in that context.
Was the lesson learnt? Up to a certain point. The calls for protectionist measures heard lately were not ( still) able to bring about a policy change and governments declare their commitment to open trade . But that´s not the whole story: Fearing from the neighbors’ response, countries turned to beggar their own poorer roommates. After all someone should pay for the party ....
The Spanish case will illustrate the last point. Spain is suffering from a combination of deep recession, current account deficit, soaring public deficit and huge unemployment rate (app.20%). Before becoming a full EU member , Spain used to overcome similar episodes by literally beggaring its trade partners, especially devaluating its currency, the Peseta ( and other policy tools as well). It had some limited impact when combined with other policy tools.
Spain membership in the EU brought about the loss of independence of its economic policy. Thus ,as many “experts” claim, the only way open to the country is an “internal devaluation”, or in a less PC parlour , lower salaries. The logic goes like that: Spain should gain competitiveness so the prices of Spanish prices must be lowered. Since such arbitrary reduction cannot be forced, (and companies might ,G-D forbid, lose money), the burden should fall on the regular cannon fodder, the wage earner ( lower salaries = lower cost = lower prices ). Moreover, that theory holds a moral argument : Spanish wages have risen “too much” in the last years, and THAT distortion explains the uncompetitive position of the economy. This position (held by the Nobel Laureate P. Krugman), could sound reasonable…. as long as you don´t analyze the data.
Lets see the data. The following graph shows the relative weight of the salaries in the Spanish economy, in other words how much of what the country goes to the pockets of the wage earners. (until 2009 real 2010 onward Forecast)
Source : Eurostat Data Compensation of Employees percentage of GDP
What is the meaning of the descending line? It means that for each Euro produced by the economy (similar to the price of a product in a private company),the workers received a smaller slice than what they used to receive a few years ago. Even if we accept the “loss of competitiveness” thesis, it is hard to see how it is related to the “growth” of salaries. If Spain suffered from a higher inflation rate than its trade partners, it was probably related to the rising prices and profits of the companies and less to the salaries . Although other European workers suffered from the same problem, in comparison to the European wage earner, the Spanish worker has suffered more .
But governments are not confused by facts. The “Socialist” Government already embraced the narrative that reduced social rights and lower salaries is the key for Spain´s recovery. Under the blessing ( or pressure) of the IMF, EU, Obama…etc…. the Government already marked the path by a 5% cut of wages in the public sector. The next step was the adoption of a set of decrees which overturn essential social rights (some of them dated from the Franco era!) including a dismissal "easy track" and a planned assault on the system of collective negotiation and pensions.
Spain is just a model though the narrative is being noticed in other countries. So from now on say "Beggar your neighbor OUT, your worker IN...." . That is the newspeak we´ll hear from now on from policy makers and the financial media. I humbly dare to foresee that the "beggar" policy is deemed to fail as it failed 70 years ago: it will pres each and every country to a lower salaries policy which will eventually depress consumption and economic activity.
I wish policy makers understand, before it gets really too late, that "beggar" cannot replace genuine and progressive economic policy. Moreover, it is more than the beggary policy is the path toward higher levels of despair and anger.
Sunday, June 13, 2010
Green Shots , At Last
The influential “Financial Times” published a week ago an article titled “Time to Plan for a Post Keynesian era“ by the famous Economist Jeffrey Sachs. So what?
Let me skip a large and obscure introduction and go directly to one of the punch lines in that article:
“.....Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year...... …...Here are some suggested guidelines.....
….Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit…....
Just in case you are not familiar with the Sachs let me quote Wikipedia “.....One of the youngest economics professors in the history of Harvard University, Sachs became renowned for implementing economic shock therapy throughout the developing world and in Eastern Europe …...” So here we´ve got a mainstream, not only an Harvard Proffessor, but a “shock therapist “ in favour of “more income taxes” ? THAT is a real Green Shot!!
I do not know whether Sach is alone in his approach and what is exactly his diagnosis but Sach´s message is encouraging . I hope more economists would start to adopt a more critic perspective toward the ruling dogmas in order to provide enduring solutions.
A personal note : This blog has been asserting along the whole crisis for the last two years that the crisis should be analyzed from a distribution persepctive : In other words “bailouts” , “quantitative or “qualitative” easing are not more than a curtain of smoke that will eventually proved to be useless.
This blog still thinks that the current economic crisis is the result of a a the skewed income and wealth distribution int he world ( you are invitd to read previous posts ) . Thus the only human and reasonable solution for the crisis is the construction of mechanism to redistribute income and wealth. Any alternative should be banned from the outset , not only on moral and social grounds, but rejected from a “pure” economic perspective. Sach´s article could be atoner sign that this persepective is being taken seriously .
For those with a bit of patience between the football games I attached the article .... .
Time to plan for post-Keynesian era
By Jeffrey Sachs
Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22
Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.
Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that “shovel-ready projects” could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases. In fact, the ubiquitous references last year to the Great Depression were glib; the policymakers had panicked. Adroit central banking could and would prevent depression.
The hastily assembled stimulus packages were a throwback to naive Keynesianism. The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.
Certain counter-cyclical spending is vital on social grounds. But stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money. They reflected a hope that a temporary fiscal bridge would carry us back to consumption and housing-led growth – a dubious proposition since the old “normal” had been financially unsustainable.
The talk of a green recovery, in which the fall in consumer spending would be offset by investments in sustainable energy, made sense and still does. Yet it was quickly undermined by the politicians’ insistence on “shovel-ready” Projects. The shift to sustainable energy systems is a vital but long-term task. It could never be a short-term jobs
programme. Maybe in China there are shovel-ready projects of sufficient scale, but not in. the US.
Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future. The US was not in a credible position to raise an already enormous deficit “temporarily” because the prospect for future deficit cutting was and remains extremely clouded.
America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits. Now we face a world economy with weak aggregate demand in the US and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year.
Here are some suggested guidelines.
First, governments should work within a medium-term budget framework of five years and within a
decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.
Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.
Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education
Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.
Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.
We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.
The writer is director of The Earth Institute at Columbia University
Let me skip a large and obscure introduction and go directly to one of the punch lines in that article:
“.....Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year...... …...Here are some suggested guidelines.....
….Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit…....
Just in case you are not familiar with the Sachs let me quote Wikipedia “.....One of the youngest economics professors in the history of Harvard University, Sachs became renowned for implementing economic shock therapy throughout the developing world and in Eastern Europe …...” So here we´ve got a mainstream, not only an Harvard Proffessor, but a “shock therapist “ in favour of “more income taxes” ? THAT is a real Green Shot!!
I do not know whether Sach is alone in his approach and what is exactly his diagnosis but Sach´s message is encouraging . I hope more economists would start to adopt a more critic perspective toward the ruling dogmas in order to provide enduring solutions.
A personal note : This blog has been asserting along the whole crisis for the last two years that the crisis should be analyzed from a distribution persepctive : In other words “bailouts” , “quantitative or “qualitative” easing are not more than a curtain of smoke that will eventually proved to be useless.
This blog still thinks that the current economic crisis is the result of a a the skewed income and wealth distribution int he world ( you are invitd to read previous posts ) . Thus the only human and reasonable solution for the crisis is the construction of mechanism to redistribute income and wealth. Any alternative should be banned from the outset , not only on moral and social grounds, but rejected from a “pure” economic perspective. Sach´s article could be atoner sign that this persepective is being taken seriously .
For those with a bit of patience between the football games I attached the article .... .
Time to plan for post-Keynesian era
By Jeffrey Sachs
Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22
Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.
Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that “shovel-ready projects” could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases. In fact, the ubiquitous references last year to the Great Depression were glib; the policymakers had panicked. Adroit central banking could and would prevent depression.
The hastily assembled stimulus packages were a throwback to naive Keynesianism. The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.
Certain counter-cyclical spending is vital on social grounds. But stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money. They reflected a hope that a temporary fiscal bridge would carry us back to consumption and housing-led growth – a dubious proposition since the old “normal” had been financially unsustainable.
The talk of a green recovery, in which the fall in consumer spending would be offset by investments in sustainable energy, made sense and still does. Yet it was quickly undermined by the politicians’ insistence on “shovel-ready” Projects. The shift to sustainable energy systems is a vital but long-term task. It could never be a short-term jobs
programme. Maybe in China there are shovel-ready projects of sufficient scale, but not in. the US.
Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future. The US was not in a credible position to raise an already enormous deficit “temporarily” because the prospect for future deficit cutting was and remains extremely clouded.
America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits. Now we face a world economy with weak aggregate demand in the US and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year.
Here are some suggested guidelines.
First, governments should work within a medium-term budget framework of five years and within a
decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.
Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.
Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education
Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.
Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.
We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.
The writer is director of The Earth Institute at Columbia University
Wednesday, May 26, 2010
Will 2011 turn into 1938?
" History Does Not Repeat Itself, But. It Sure Does Rhyme"(Mark Twain)
This is not an exercise in mathematics, it´s about Economics and History. Western governments have lately adopted serious measures aimed to reduce the growing deficit of their public accounts. The list is impressing: The governments of Greece, UK, Spain Italy, Portugal Germany and other countries decided to reduce costs and impose austerity measures expected to inflict a serious ( and additional ) economic stress on their ( more modest ) citizens. Just for the record, alternative or complementary measures as increasing the tax burden (which affects the more affluent classes) or improving the tax collection system are inexistent or of secondary nature.
Such measures can be justified only if that their expected benefits exceed the negative impacts of such measures on the economy. Put it in other words the hidden assumption is that economy is already on “the right track” so the demand of public sector is less crucial than before. However, the propagandist effort pointing on the imminent “recovery” (Green Shots, “We saved the world “ and so on) relies upon a not very solid ground : GDP growth figures are still fragile, interest rates extremely low and unemployment rates high. My claim is that such policies the wrong cure for the wrong disease and they could easily exacerbate the economic recession we are still suffering.
That debate resembles the situation along the mid 30 when the Great Depression was still around but growing pressures for “balanced budget” forced the US administration to cut expenses. True, history does not repeat itself, but it definitively “rhymes”, so the lesson in that case could be interesting.
From the Wikipedia
A few Graphs for illustration
2011 = 1938¿
As can be noticed, the 1937 brilliant cut ( it was a cut, not an increase of taxes) wiped out 2 years of unemployment reduction bringing back the figure to the 20% area. The figures beyond 1939 are irrelevant as the mobilization following the outbreak of WWII changed the rules of the game.
The risks of repeating 1937 1938 experiences are high which means social, economic and political devastating consequences. If history can teach us something, how can we explain the risk approach of policy makers? Given the timing and the nature of these measures, I cannot escape the thought that political decision makers are disproportionally prone to respond to any short term oscillations of financial markets. Personal interest? Class interest? Lack of intellectual skills? Opportunism? Just name it. An honest leadership with a longer run and civic perspective, and even with some “historic” touch would probably adopt a more human and economic measures.
Let us hope that 2011 does not turn into 1938, as the real risk is that 2012 would turn into1939.
This is not an exercise in mathematics, it´s about Economics and History. Western governments have lately adopted serious measures aimed to reduce the growing deficit of their public accounts. The list is impressing: The governments of Greece, UK, Spain Italy, Portugal Germany and other countries decided to reduce costs and impose austerity measures expected to inflict a serious ( and additional ) economic stress on their ( more modest ) citizens. Just for the record, alternative or complementary measures as increasing the tax burden (which affects the more affluent classes) or improving the tax collection system are inexistent or of secondary nature.
Such measures can be justified only if that their expected benefits exceed the negative impacts of such measures on the economy. Put it in other words the hidden assumption is that economy is already on “the right track” so the demand of public sector is less crucial than before. However, the propagandist effort pointing on the imminent “recovery” (Green Shots, “We saved the world “ and so on) relies upon a not very solid ground : GDP growth figures are still fragile, interest rates extremely low and unemployment rates high. My claim is that such policies the wrong cure for the wrong disease and they could easily exacerbate the economic recession we are still suffering.
That debate resembles the situation along the mid 30 when the Great Depression was still around but growing pressures for “balanced budget” forced the US administration to cut expenses. True, history does not repeat itself, but it definitively “rhymes”, so the lesson in that case could be interesting.
From the Wikipedia
General
"The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve's tightening of the money supply in 1936 and 1937".
Background….
“…….. In June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill.
The Results ….
"...The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 per cent and production of durable goods fell even faster”. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938.Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors, hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production".
A few Graphs for illustration
2011 = 1938¿
As can be noticed, the 1937 brilliant cut ( it was a cut, not an increase of taxes) wiped out 2 years of unemployment reduction bringing back the figure to the 20% area. The figures beyond 1939 are irrelevant as the mobilization following the outbreak of WWII changed the rules of the game.
The risks of repeating 1937 1938 experiences are high which means social, economic and political devastating consequences. If history can teach us something, how can we explain the risk approach of policy makers? Given the timing and the nature of these measures, I cannot escape the thought that political decision makers are disproportionally prone to respond to any short term oscillations of financial markets. Personal interest? Class interest? Lack of intellectual skills? Opportunism? Just name it. An honest leadership with a longer run and civic perspective, and even with some “historic” touch would probably adopt a more human and economic measures.
Let us hope that 2011 does not turn into 1938, as the real risk is that 2012 would turn into1939.
Saturday, April 10, 2010
The New Capitalism
These days financial European headlines are greener than ever : Capital Markets, the ultimate measure of all are once again traded in a relative high, following several weeks of rising prices.
The headlines of the last rally are accompanied with news concerning the lamentable situation of Greek finance, including the downgrade of its national debt to the worst investment category ( From bbb + to bbb - … something like that ) . Naturally a bad new which should remind us the gravity of the situation, so how it comes that a bad new brings the markets to new highs ? Have the markets gone crazy?
The explanation for the apparent inconsistency is our ( still ) deep public pockets as the Greek new “junk” status practically oblige the European Union and other international entities to “rescue” that country. The word rescue is somewhat misleading as we are not talking about an humanitarian cause but the handling of money so Greece can pay its obligations to foreign investors. Therefore the rise of financial markets is a confirmation for the new injection of fresh public money into the financial arena. Politicians are applauded by markets ….
Still, the celebration can be interpreted from a different perspective .Since the result of the rescue would be that the owners of the Greek debt ( which probably made a lot of money from these obligations) are not really punished for their errors , this sort of rescues undermine the foundations of the market economy ( Economists call it “Moral Hazard”) . This is the essence of what I call the New Capitalism , an economic system in which the detachment between risk and reward is bridged with public money. That system involves the allocation of wealth and welfare from the average citizen to the average investor ( and banker) , generally not the same average person. Anyhow it should be noted that Europe is not unique in the application of that distorted system. The inconsistency of those actions is even deeper if we consider that the New Capitalism is applied in a very selective way : The average citizen runs his life according to the the laws of the “Good and Old “ Capitalism of free markets and competition .The identification of the rescue of financial markets , (better put the holders of certain financial obligations) with “saving the economy” is pure demagogy .
The problematic rescue obliged politicians and markets to go through a preliminary “tough” game but by the end of the day the unconditional support or financial markets is clear and beyond any real question. Thus more rescues and public interventions are just a matter of time. Maybe the imminent rescue is a good news for the very short term, but from a wider perspective it allows to preserve the actual and distorted financial and economic practices that are the real cause behind the economic crisis. In a more financial jargon, the political establishment bought time with public funds until the next default/crisis, but the problems of the New Capitalism cannot be ignored forever.
The headlines of the last rally are accompanied with news concerning the lamentable situation of Greek finance, including the downgrade of its national debt to the worst investment category ( From bbb + to bbb - … something like that ) . Naturally a bad new which should remind us the gravity of the situation, so how it comes that a bad new brings the markets to new highs ? Have the markets gone crazy?
The explanation for the apparent inconsistency is our ( still ) deep public pockets as the Greek new “junk” status practically oblige the European Union and other international entities to “rescue” that country. The word rescue is somewhat misleading as we are not talking about an humanitarian cause but the handling of money so Greece can pay its obligations to foreign investors. Therefore the rise of financial markets is a confirmation for the new injection of fresh public money into the financial arena. Politicians are applauded by markets ….
Still, the celebration can be interpreted from a different perspective .Since the result of the rescue would be that the owners of the Greek debt ( which probably made a lot of money from these obligations) are not really punished for their errors , this sort of rescues undermine the foundations of the market economy ( Economists call it “Moral Hazard”) . This is the essence of what I call the New Capitalism , an economic system in which the detachment between risk and reward is bridged with public money. That system involves the allocation of wealth and welfare from the average citizen to the average investor ( and banker) , generally not the same average person. Anyhow it should be noted that Europe is not unique in the application of that distorted system. The inconsistency of those actions is even deeper if we consider that the New Capitalism is applied in a very selective way : The average citizen runs his life according to the the laws of the “Good and Old “ Capitalism of free markets and competition .The identification of the rescue of financial markets , (better put the holders of certain financial obligations) with “saving the economy” is pure demagogy .
The problematic rescue obliged politicians and markets to go through a preliminary “tough” game but by the end of the day the unconditional support or financial markets is clear and beyond any real question. Thus more rescues and public interventions are just a matter of time. Maybe the imminent rescue is a good news for the very short term, but from a wider perspective it allows to preserve the actual and distorted financial and economic practices that are the real cause behind the economic crisis. In a more financial jargon, the political establishment bought time with public funds until the next default/crisis, but the problems of the New Capitalism cannot be ignored forever.
Saturday, January 30, 2010
Right Answer for the Wrong Question
Whoever wishes to understand modern politics or economics must stay tuned to America. Despite the fashionable talk about its imminent decline, America is still the most powerful nation on Earth which its influence goes far beyond “hard” power. Visible trends and even underground streams developing in America are the marking paths to be followed by the rest of the world, whether as a vulgar imitation or as a reference point. It´s just impossible to ignore America
Accordingly I think that the annual State of the Nation speech is an event worthwhile to follow. This week ( January 2010) President Obama launched his annual message with some intersting ideas . First of all , the President made the economic worsening situation of millions of citizens the first priority of his administration, in his own words :
“.....But the devastation remains. One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life has become that much harder...”.
Such a description ( which nobody can ignore ) sounds as the preamble for a major economic initiative. Still, the President was much specific when he turned to deal with a much thorny issue , the balance of public accounts :
“[F]amilies across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.)
Beyond the impressive rhetoric, any mainstream observer would notice the apparent incoherence between the two President´s messages : How this administration intends to create jobs while freezing public spending? Is the President adopting the classic laissez faire stance, counting on free market forces to turn around the situation? Is this an admission that the ultra expansionist policy with a record deficit of almost 10% out of US GDP and low interest rates had failed? Hard questions, big dilemmas....
Now, let me make it clear : the above “dilemmas” are typical mainstream questions which are drawn from a wrong analysis. The apparent dilemma between jobs and “fiscal responsibility” is an “issue” for those who consider the crisis as a deviation from a normal path. Under such a pespective , the economic system periodically staggers due to “exogenous shocks” ( such as the predatory habits if Wall Steet ..) and requires a temporal intervention . To put in it in a simple analogy ,the economy system is like an healthy person which suffers from a temporal disease and the job of the Doctor government is to apply the right dose of medicine. The dilemma is between the types of treatments, their intensity and the possible collateral damages.
Those who think that the actual crisis is a natural outcome of our economic system can be divided into two camps : right and left. The “Right” believes that tides are a normal behavior of a market economy and that the system is resilient enough to overcome the crisis. According to that view, public intervention just makes things worse since market is always smarter than bureaucrats. It is like adopting a “natural cure” attitude refusing to visit a doctor because “the body can heal itself”. These guys don´t understand the above “dilemma”. Mainstream observers consider that i the body cannot cure itself, the experiment can bring to a premature death ….what seems to be an interesting view might become a too risky option for the whole society.
The Left doesn´t consider any dilemma situation. view believes that crisis are a normal component of the economic system but not as a temporal “illness” but as a revelation of the inner contradictions and as a signal that things must change. In our case, I believe that the current crisis can accept only a Left interpretation . The crisis caused high unemployment and low capital utilization as a result of deficient demand ( sub consumption) . In simple words, the crisis is not because we, the economy, cannot produce more products but because there is not enough “money” around willing or able to buy what we can produce. How it comes? Doesn´t the market system balance between supply and demand? The economic system tends to concentrate wealth and consumption power too few hands. That creates a situation in which the economy is able to produce vast amounts of products, but since the majority does not have sufficient purchasing power, there is no buyer of these products , unless they are loaded with debt. Since the the only way “not to remain behind” is working harder or amassing debts
This is more or less what happened in the world economy in the last 30 years : a few Gates, Buffets and bankers earned millions and billions that cannot being spent. Their aim is not to spend that money but to accumulate more money ( Buffet is more than 80 years old and still hanging around, looking for new bargains) . The conclusion of such analysis is that only a redistribution of wealth and incomes can generate the demand to turn the wheels of the economy once again. The pathetic attempt to push the economy through bailouts , public spending or reducing interest rates to inflate financial and real assets is just a ideological fixation and will probably bring to a sovereign debt crisis ( the IMF is already warning) . The hole is too deep and the need to finance the public deficit brings back to the arena the cry for “fiscal responsibility”, but the error made by Obama and his Pseudo Keynesian advisors is to try and maintain the health of the public accounts through freezing, while the only available, logical and required step was to increase taxes on those wealthy people. Let us be clear : fiscal responsibility is not a monopoly of conservatives.....
Since US and the global economy are still , unfortunate, far away from such a “radical” idea ( not so radical as it is exactly how the American economy worked for almost 40 years after the Great Depression) , the crisis and its consequences, high unemployment, sluggish growth and poor horizons is what is expected from us , Courtesy from the “Change, Yes We Can “ President .
Accordingly I think that the annual State of the Nation speech is an event worthwhile to follow. This week ( January 2010) President Obama launched his annual message with some intersting ideas . First of all , the President made the economic worsening situation of millions of citizens the first priority of his administration, in his own words :
“.....But the devastation remains. One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life has become that much harder...”.
Such a description ( which nobody can ignore ) sounds as the preamble for a major economic initiative. Still, the President was much specific when he turned to deal with a much thorny issue , the balance of public accounts :
“[F]amilies across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.)
Beyond the impressive rhetoric, any mainstream observer would notice the apparent incoherence between the two President´s messages : How this administration intends to create jobs while freezing public spending? Is the President adopting the classic laissez faire stance, counting on free market forces to turn around the situation? Is this an admission that the ultra expansionist policy with a record deficit of almost 10% out of US GDP and low interest rates had failed? Hard questions, big dilemmas....
Now, let me make it clear : the above “dilemmas” are typical mainstream questions which are drawn from a wrong analysis. The apparent dilemma between jobs and “fiscal responsibility” is an “issue” for those who consider the crisis as a deviation from a normal path. Under such a pespective , the economic system periodically staggers due to “exogenous shocks” ( such as the predatory habits if Wall Steet ..) and requires a temporal intervention . To put in it in a simple analogy ,the economy system is like an healthy person which suffers from a temporal disease and the job of the Doctor government is to apply the right dose of medicine. The dilemma is between the types of treatments, their intensity and the possible collateral damages.
Those who think that the actual crisis is a natural outcome of our economic system can be divided into two camps : right and left. The “Right” believes that tides are a normal behavior of a market economy and that the system is resilient enough to overcome the crisis. According to that view, public intervention just makes things worse since market is always smarter than bureaucrats. It is like adopting a “natural cure” attitude refusing to visit a doctor because “the body can heal itself”. These guys don´t understand the above “dilemma”. Mainstream observers consider that i the body cannot cure itself, the experiment can bring to a premature death ….what seems to be an interesting view might become a too risky option for the whole society.
The Left doesn´t consider any dilemma situation. view believes that crisis are a normal component of the economic system but not as a temporal “illness” but as a revelation of the inner contradictions and as a signal that things must change. In our case, I believe that the current crisis can accept only a Left interpretation . The crisis caused high unemployment and low capital utilization as a result of deficient demand ( sub consumption) . In simple words, the crisis is not because we, the economy, cannot produce more products but because there is not enough “money” around willing or able to buy what we can produce. How it comes? Doesn´t the market system balance between supply and demand? The economic system tends to concentrate wealth and consumption power too few hands. That creates a situation in which the economy is able to produce vast amounts of products, but since the majority does not have sufficient purchasing power, there is no buyer of these products , unless they are loaded with debt. Since the the only way “not to remain behind” is working harder or amassing debts
This is more or less what happened in the world economy in the last 30 years : a few Gates, Buffets and bankers earned millions and billions that cannot being spent. Their aim is not to spend that money but to accumulate more money ( Buffet is more than 80 years old and still hanging around, looking for new bargains) . The conclusion of such analysis is that only a redistribution of wealth and incomes can generate the demand to turn the wheels of the economy once again. The pathetic attempt to push the economy through bailouts , public spending or reducing interest rates to inflate financial and real assets is just a ideological fixation and will probably bring to a sovereign debt crisis ( the IMF is already warning) . The hole is too deep and the need to finance the public deficit brings back to the arena the cry for “fiscal responsibility”, but the error made by Obama and his Pseudo Keynesian advisors is to try and maintain the health of the public accounts through freezing, while the only available, logical and required step was to increase taxes on those wealthy people. Let us be clear : fiscal responsibility is not a monopoly of conservatives.....
Since US and the global economy are still , unfortunate, far away from such a “radical” idea ( not so radical as it is exactly how the American economy worked for almost 40 years after the Great Depression) , the crisis and its consequences, high unemployment, sluggish growth and poor horizons is what is expected from us , Courtesy from the “Change, Yes We Can “ President .
Thursday, December 24, 2009
Income Distribution ,Bubbles and the Finacial Media
An interest comment regarding the link Debt Bubbles -Income Distribution is presented in this post
The text was published last week at the Financial Times (FT) website and it´s not more than an answer from FT Chief economic Commentator (M. Wolf) to a question raised by a reader. I found the text very interesting as it reflects a seemingly stubborn position of avoiding any serious debate on the above link or alternatively the reejction of any alterantive proposal on economic, political, “theoretical” or practical ground. M. Wolf´s text (FT) is followed by my comments to highlight the main issues in the text
FT : “I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent.”
First of all we can notice that the rise in inequality is undeniable but the real denial is the link to bankers´ greed (the preferred scapegoat) rather than referring to a possible systematic flaw. A serious answer should point to the question of WHY the financial sector expanded to a degree it became a danger to the system and what interests that expansion served. Another interesting point is the irrelevant focus on national (“US and UK”) perspective: even FT agrees that the economic system and the crisis are global, so any economic analysis should be done also from a global perspective.
FT : “…But I am not sure about the reverse causal relationship from higher inequality to the bubble. The argument would, I suppose, be that, lacking higher incomes, a large proportion of the population borrowed in order to sustain consumption. This is possible. But I do not know of any convincing arguments for the proposition”.
The FT previous affirmative tone turns to a more skeptic when he refers to “the reverse causal” (from inequality to bubbles) ,Is it because this causation might oblige us to deal with systematic flaws? Anyhow, this causation seems to be treated as some curious and rather exotic perspective “ I suppose… This is possible… “ are expressions of not taking too seriously the argument. The commentator bothers to specify that “there is no convincing argument for the proposition…”, although a coherent exposition should tell the reader if there are also (not convincing) arguments against the proposition: Maybe there are no evidences against the proposition? Anyhow, there is no mention of any real study about the topic, a weird intellectual lacuna for a discipline like economics that investigates extensively almost any human and social phenomena. Very weird indeed.
FT : “…..In any case, whatever the causal relationship, I cannot see how a more equitable distribution of income would now help solve the crisis. I suppose one might argue that it would increase sustainable consumption, though consumption already looks excessive in the US.
Despite the admission of the ignorance about the topic (“whatever…”), there is no doubt about the conclusion, which is declared in an affirmative tone: “An equitable distribution would not help to solve the crisis”….. So we already admitted that we don´t really know (or pretend that we don´t know) ANYTHING about the issue but we DO know that the solution is not that redistribution ? Doesn’t sound very coherent….
FT ” …I think one would have to argue, instead, that greater equality is a good in itself. The big question is how one could achieve it. There are limits, I think, to how much redistribution one can achieve through the redistribution of pre-tax incomes. So the aim should be to alter the distribution of pre-tax incomes themselves. I know of no easy way to do this, certainly not in the short run”
Now we leave the economic arena to the philosophy realm: Even if we agree that a more equitable society is desirable (which is not an economic issue …), the technical obstacle would be a substantial impediment. Were technical considerations relevant when governments rushed to pour trillions of taxpayer money into failing financial institutions creating the worst moral hazard behavior? How it comes that technical aspects become important whenever we deal with distribution policies, even those considered logical ?And if a measure is right for its own merits, should the easiness of its implementation be an obstacle?
As we have seen along that post, the level of the debate got plenty of room for improvement. Anyhow, the evident attempt to avoid a serious debate on that matter is becoming an unsustainable tactic, so I guess the media and the establishment will intensify the arguments against the calls for a more equitable distribution. On my opinion, the income and wealth more equal redistribution is not only justified by moral foundation but is the only way out from the sub consumption crisis we are stuck in.
The text was published last week at the Financial Times (FT) website and it´s not more than an answer from FT Chief economic Commentator (M. Wolf) to a question raised by a reader. I found the text very interesting as it reflects a seemingly stubborn position of avoiding any serious debate on the above link or alternatively the reejction of any alterantive proposal on economic, political, “theoretical” or practical ground. M. Wolf´s text (FT) is followed by my comments to highlight the main issues in the text
FT : “I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent.”
First of all we can notice that the rise in inequality is undeniable but the real denial is the link to bankers´ greed (the preferred scapegoat) rather than referring to a possible systematic flaw. A serious answer should point to the question of WHY the financial sector expanded to a degree it became a danger to the system and what interests that expansion served. Another interesting point is the irrelevant focus on national (“US and UK”) perspective: even FT agrees that the economic system and the crisis are global, so any economic analysis should be done also from a global perspective.
FT : “…But I am not sure about the reverse causal relationship from higher inequality to the bubble. The argument would, I suppose, be that, lacking higher incomes, a large proportion of the population borrowed in order to sustain consumption. This is possible. But I do not know of any convincing arguments for the proposition”.
The FT previous affirmative tone turns to a more skeptic when he refers to “the reverse causal” (from inequality to bubbles) ,Is it because this causation might oblige us to deal with systematic flaws? Anyhow, this causation seems to be treated as some curious and rather exotic perspective “ I suppose… This is possible… “ are expressions of not taking too seriously the argument. The commentator bothers to specify that “there is no convincing argument for the proposition…”, although a coherent exposition should tell the reader if there are also (not convincing) arguments against the proposition: Maybe there are no evidences against the proposition? Anyhow, there is no mention of any real study about the topic, a weird intellectual lacuna for a discipline like economics that investigates extensively almost any human and social phenomena. Very weird indeed.
FT : “…..In any case, whatever the causal relationship, I cannot see how a more equitable distribution of income would now help solve the crisis. I suppose one might argue that it would increase sustainable consumption, though consumption already looks excessive in the US.
Despite the admission of the ignorance about the topic (“whatever…”), there is no doubt about the conclusion, which is declared in an affirmative tone: “An equitable distribution would not help to solve the crisis”….. So we already admitted that we don´t really know (or pretend that we don´t know) ANYTHING about the issue but we DO know that the solution is not that redistribution ? Doesn’t sound very coherent….
FT ” …I think one would have to argue, instead, that greater equality is a good in itself. The big question is how one could achieve it. There are limits, I think, to how much redistribution one can achieve through the redistribution of pre-tax incomes. So the aim should be to alter the distribution of pre-tax incomes themselves. I know of no easy way to do this, certainly not in the short run”
Now we leave the economic arena to the philosophy realm: Even if we agree that a more equitable society is desirable (which is not an economic issue …), the technical obstacle would be a substantial impediment. Were technical considerations relevant when governments rushed to pour trillions of taxpayer money into failing financial institutions creating the worst moral hazard behavior? How it comes that technical aspects become important whenever we deal with distribution policies, even those considered logical ?And if a measure is right for its own merits, should the easiness of its implementation be an obstacle?
As we have seen along that post, the level of the debate got plenty of room for improvement. Anyhow, the evident attempt to avoid a serious debate on that matter is becoming an unsustainable tactic, so I guess the media and the establishment will intensify the arguments against the calls for a more equitable distribution. On my opinion, the income and wealth more equal redistribution is not only justified by moral foundation but is the only way out from the sub consumption crisis we are stuck in.
Tuesday, December 8, 2009
The Economic of Constipation ( or how to deal with Exit Strategies)
The economic recession is not over yet, the recovery is more than questionable, but Financial Markets and Governments are already engaged in a debate regarding the timing and scope of the “Exit Strategy” (echoed by the mainstream press). For those not familiar with the terminology, “Exit” is a codename for the withdraw of the extraordinary Keynesian style measures applied by governments and Central Banks along the last economic crisis ( more spendings, bailouts, deficits, interest rates reduction etc.). Such a “preemptive” attitude looks somewhat weird considering the shortsighted economic policies carried out by the very same people which brought a financial calamity upon us. Is there any difference between then and now that could explain such a shift? Lets analyze the issue.
I will open with a small confession: I might have missed a few Macro Economics classes at the University, but as far as I remember the classic Keynesian model did not include any “Exit Strategy”. Keynes proposals were a sort of “passive activism” policies advocating for public intervention whenever the private sector is not able to maintain growth and full employment. Keynes was not anti markets, he just thought that markets could be too slow to restore economic activity and in the interim the result could be a huge social cost . Anyhow , the model we had in class showed that when the public sector got into the picture boosting demand and economic activity, it was supposed to remain around for a long time. The assumption was that unless someone could show that (the unreliable) private sector could lead the economy once again the govt. must remain in command. In the meantime , no “Exit” and no “Strategy” , just bigger government..... the equivalent to higher taxes (by the end of the day you cannot run deficits for ever). This is more or less the story of the Western economy for 40+ years since the 30.
An this is exactly what financial markets, their cronies in the political arena and cheer leading press are afraid of : They want big governments around only as saviors or liquidity suppliers , forget about taxes or limitations!. Any remote smell of higher taxes change their mind abruptly and this is the real motive for the “Exit strategy” talk, even in the midst of 16% (!) unemployment rates ( U6 in USA) . Their strategic objective is to restore pre crisis lost paradise : 30 years of smaller government, smaller salaries and ….higher profits.
Don´t bother to ask who is going to replace the government demand given the number of constrains and challenges the global economic is facing , just to name a few: Huge piles of private and public debts, record unemployment figures around the globe, international imbalances , global warming, elder population …... : if you insist on raising the question and you get the answer that market forces will solve the problems, than you can be sure that the lessons from the crisis have not been learned yet and the second round is just around the corner.
I will open with a small confession: I might have missed a few Macro Economics classes at the University, but as far as I remember the classic Keynesian model did not include any “Exit Strategy”. Keynes proposals were a sort of “passive activism” policies advocating for public intervention whenever the private sector is not able to maintain growth and full employment. Keynes was not anti markets, he just thought that markets could be too slow to restore economic activity and in the interim the result could be a huge social cost . Anyhow , the model we had in class showed that when the public sector got into the picture boosting demand and economic activity, it was supposed to remain around for a long time. The assumption was that unless someone could show that (the unreliable) private sector could lead the economy once again the govt. must remain in command. In the meantime , no “Exit” and no “Strategy” , just bigger government..... the equivalent to higher taxes (by the end of the day you cannot run deficits for ever). This is more or less the story of the Western economy for 40+ years since the 30.
An this is exactly what financial markets, their cronies in the political arena and cheer leading press are afraid of : They want big governments around only as saviors or liquidity suppliers , forget about taxes or limitations!. Any remote smell of higher taxes change their mind abruptly and this is the real motive for the “Exit strategy” talk, even in the midst of 16% (!) unemployment rates ( U6 in USA) . Their strategic objective is to restore pre crisis lost paradise : 30 years of smaller government, smaller salaries and ….higher profits.
Don´t bother to ask who is going to replace the government demand given the number of constrains and challenges the global economic is facing , just to name a few: Huge piles of private and public debts, record unemployment figures around the globe, international imbalances , global warming, elder population …... : if you insist on raising the question and you get the answer that market forces will solve the problems, than you can be sure that the lessons from the crisis have not been learned yet and the second round is just around the corner.
Wednesday, November 25, 2009
On Rationality and Financial Markets – A note
Whenever I listen to the daily financial news, especially the details about market turnover (millions of shares or USD) I cannot stop wondering: These turnovers are made of millions of transactions, each one of them involving a buyer and a seller that agreed on a price and quantity. The former enters into the deal expecting a positive yield, while the later assumes exactly the opposite. Someone must be wrong, isn´t it? Better said , who is the smart guy and who´s the sucker? The seller or the buyer? From the outset, it is impossible to know, but what it is clear is that someone MUST BE wrong. If is this the case, how can anyone claim that financial markets are rational or “Efficient”??
The Efficient Market Hypothesis (a leading theory behind financial models) tries to explain that apparent incoherence through an interesting mechanism: Individually, the market players can be wrong, but collective wisdom (i.e. “The Market”) is always efficient /correct. The explanation goes like this: Markets are efficient in the sense that prices reflect all the available information in the market, visible and invisible as well .Nothing escapes from the definition for “information”: Raw data, analysis, beliefs, technical analysis, crystal ball , dart throwing monkeys on a WSJ table, etc. As a matter of fact, that definition is a tautology since it is obvious that prices are the ultimate output of all the inputs involved in the process.
The main practical conclusion from EHM is self evident: Since all the info is on the table, there is no one with a real advantage so excessive returns in the long run are due to luck (i.e. the fees you pay to your fund for stock picking or the “analysis” is a waste of money….). From an academic point of view, EHM is the epicenter of passionate debates until these very days. I will not enter into a wonkish zone since my main concern is the broader aspect of the market efficiency postulates.
Financial market “efficiency” corresponds to the (quasi religious) belief that markets are the best mechanism for resource allocation. That questionable theory got several implications beyond the finance arena, well into the social and economic life, and I could mention at least two conclusions from EHM, relevant in a broader context:
First: If financial markets are efficient, external intervention should be minimized, including regulation of governments and public entities.
Second: Since financial markets are supposed to be the best proxy to a pure version of a free market and as such serve as a model. The logic is simple: If financial markets are efficient, then society should apply the magic “free market “formula to other markets as well.
As mentioned above, the first conclusion is questionable as the efficiency of the market is not more than a tautology. On my humble opinion financial markets are the sum of clashing forces (supply vs. demand etc.) which get into terms by the end of the day through the exchange mechanism. The price is the outcome of perceptions, expectations, alternatives; cash constrains, bargaining power and other, so there is nothing really right, wrong per se in the price set. The concern from social point of view which justifies a strict oversight on these markets is possibility for more than probable bad repercussions (externalities) from the market could affect the whole society.
The second conclusion could be interpreted in a different way. If free markets are not more than clashing interests and perceptions, the internal oversight (such, auditory work) is there to deal with these forces that market mechanism alone cannot handle properly (inside information as an example). In that sense, since society is a much bigger fighting arena of clashing interests, it can also define those the areas beyond the arm reach of market mechanism and its clashing forces.
Summarizing: There is nothing really magic in the price mechanism of financial markets, it is just a balance between clashing forces, which requires oversight and vigilance, sometimes even offsetting “efficiency”. The same applies to the economic structure of the society
The Efficient Market Hypothesis (a leading theory behind financial models) tries to explain that apparent incoherence through an interesting mechanism: Individually, the market players can be wrong, but collective wisdom (i.e. “The Market”) is always efficient /correct. The explanation goes like this: Markets are efficient in the sense that prices reflect all the available information in the market, visible and invisible as well .Nothing escapes from the definition for “information”: Raw data, analysis, beliefs, technical analysis, crystal ball , dart throwing monkeys on a WSJ table, etc. As a matter of fact, that definition is a tautology since it is obvious that prices are the ultimate output of all the inputs involved in the process.
The main practical conclusion from EHM is self evident: Since all the info is on the table, there is no one with a real advantage so excessive returns in the long run are due to luck (i.e. the fees you pay to your fund for stock picking or the “analysis” is a waste of money….). From an academic point of view, EHM is the epicenter of passionate debates until these very days. I will not enter into a wonkish zone since my main concern is the broader aspect of the market efficiency postulates.
Financial market “efficiency” corresponds to the (quasi religious) belief that markets are the best mechanism for resource allocation. That questionable theory got several implications beyond the finance arena, well into the social and economic life, and I could mention at least two conclusions from EHM, relevant in a broader context:
First: If financial markets are efficient, external intervention should be minimized, including regulation of governments and public entities.
Second: Since financial markets are supposed to be the best proxy to a pure version of a free market and as such serve as a model. The logic is simple: If financial markets are efficient, then society should apply the magic “free market “formula to other markets as well.
As mentioned above, the first conclusion is questionable as the efficiency of the market is not more than a tautology. On my humble opinion financial markets are the sum of clashing forces (supply vs. demand etc.) which get into terms by the end of the day through the exchange mechanism. The price is the outcome of perceptions, expectations, alternatives; cash constrains, bargaining power and other, so there is nothing really right, wrong per se in the price set. The concern from social point of view which justifies a strict oversight on these markets is possibility for more than probable bad repercussions (externalities) from the market could affect the whole society.
The second conclusion could be interpreted in a different way. If free markets are not more than clashing interests and perceptions, the internal oversight (such, auditory work) is there to deal with these forces that market mechanism alone cannot handle properly (inside information as an example). In that sense, since society is a much bigger fighting arena of clashing interests, it can also define those the areas beyond the arm reach of market mechanism and its clashing forces.
Summarizing: There is nothing really magic in the price mechanism of financial markets, it is just a balance between clashing forces, which requires oversight and vigilance, sometimes even offsetting “efficiency”. The same applies to the economic structure of the society
Tuesday, October 27, 2009
Distribucion de Riqueza y Crisis Economica ( Spanish)
El breve documento es un resumen en un modesto intento de arrojar luz sobre uno de los aspectos relacionados con la actual crisis económica pocas veces tratado: la relación entre la formación y el estallido de la burbuja de crédito y las tendencias en la distribución del ingreso y la riqueza. El espacio limitado de este blog me obliga a tratar el tema de una forma bastante esquemática , cubriendo solo aspectos generales y especialmente los acontecimientos de la última década, centrándome en EE.UU. debido a su posición dominante en la economía global y la disponibilidad de datos.
Se reconoce comúnmente que el detonador de la actual crisis ha sido el colapso de la burbuja crediticia que se ha venido desarrollando en EEUU desde los años 80 del siglo pasado. Durante estos últimos 30 años la relación crédito / PIB aumentó de un nivel estable (hasta el 80) de ap. 100% hasta un nivel de 350% en 2007. Este nivel de endeudamiento no se veía desde el estallido de una crisis financiera del 1929 que llevó a la Gran Depresión de los 30. La parte del león del aumento de la deuda estaba en las instituciones financieras y los hogares. Resumiendo, se trata de un fenómeno casi sin precedentes y la correlación entre las crisis y la formación de la burbuja crediticia y el posterior estallido de las crisis ( Minsky ) es evidente.
Analizando el asunto desde una perspectiva mas teórica: Deuda, por definición es una transferencia temporal de recursos entre prestamistas y prestatarios. Viéndolo de esta manera, podemos analizar el tema desde la burbuja crediticia desde una perspectiva de ambos lados. Desde la perspectiva del endeudado nuestro análisis sostiene que la expansión de la deuda, especialmente del sector de los hogares americanos esta vinculada al deterioro de los ingresos de la mayoría de los ciudadanos Americanos en términos relativos y absolutos. El endeudamiento masivo sirvió para contrarrestar los efectos negativos relacionados con el estancamiento del ingreso medio ( no promedio!!) por hogar que se mantuvo estable en términos nominales desde 1998 sobre el consumo agregado (Ap. 70% del PIB) y el crecimiento constante del PIB ( ap. 3% anual) . La magnitud de la tendencia se refleja en la creciente brecha de la distribución de las rentas desde los años 80: sólo para la ilustración, el ingreso del 1% mas rico en EEUU antes de impuesto sobre la renta total subió del 9% en 1976 hasta 21,8% en 2005 (el máximo anterior en 2008 fue de 23,9%). O sea los mega ricos aumentaron su participación en la riqueza por más del doble mientras que los ingresos del “ Average Joe”.
El punto de vista del prestamista seria el próximo paso: la distribución desigual del ingreso y la riqueza entre los estratos de ingresos más altos (estudios de la Fed muestran una relación de ahorro más elevada entre los quintiles más altos) formaron una enorme masa de riqueza disponible y prácticamente obligaron al sistema financiero a encontrar salidas a esa masa de , canalizadlos a los mercados financieros y el consumo. Algo parecido sucedió en los años 80 cuando el enorme flujo de petrodólares fue canalizado por la banca a América Latina, causando posteriormente varias crisis de deudas.
Viendo el esquema desde punto de vista de las corporaciones, parecía que el círculo estaba cuadrado: El estancamiento de los costes laborales junto con la expansión del consumo impulsado por el endeudamiento se convirtió en la combinación perfecta para mayores ganancias y / o salarios más altos a los altos directivos.
Una fuente adicional de financiación para el consumidor estadounidense fue el sector exterior ( países extranjeros) que debido a su propia falta de demanda efectiva se vieron obligados a mantener a flote la economía de los EE.UU. mediante la compra de las obligaciones publicas y privadas de Estados Unidos y creando un tasa de déficit de mas de 2 Billones de USD al dia!. El caso de China es interesante, ya que la política de desarrollo del país como el taller del mundo se basa en los costos laborales bajos, y las tasas de ahorro elevadas debido a la falta de red de seguridad social produce una débil demanda interna ( siguiendo la tesis "Que algunas personas hacerse ricos primero" de Deng Xiao Ping). La consecuencia de esta política mercantilista es una dependencia brutal en la demanda externa para garantizar una tasa de crecimiento acelerado para absorber la inmigración de población rural , lo que obliga a los Chinos a mantener un tipo de interés fijo con el dólar a pesar de un enorme superávit en cuenta corriente (especialmente desde 2004) y el flujo de capitales. La consecuencia era inevitable la acumulación de reservas ( de casi 2 billones de dólares a partir del 12/2008), aparentemente muy por encima de las necesidades reales de la economía china.
En algún momento el régimen comenzó a ser sostenido por el aumento de los precios inmobiliarios y una política de bajos tipos de interés que “prometia” un aumento eterno del valor de los inmuebles. Además, las expectativas sirvieron como garantía para prestar mas hipotecas sobre el mismo inmuebles. Como es evidente que este sistema no es viable a medio plazo, los bancos prefirieron empaquetar estos prestamos como productos “serios”y fueron vendidos por una comisión, los que les permitió quitar del balance pasivos y poder siguiendo prestando dinero. El crédito de los titulizados creció de 0,5 a 2,5 billones de dólares entre 1996 y 2007 y una fuente de riqueza para el consumidor que se refleja en el amplio uso del plan de financiación a MEW (MEW: Endeudamiento garantizado por el aumento del valor del inmueble) de lo que explica hasta el 3% de crecimiento del PIB desde 2001 (J. Kennedy y A. Greenspan). Dado que el rendimiento económico real de este régimen es bastante bajo (el análisis de la ROE ROA, en contraste de los bancos de inversión, por ejemplo demuestra los pobres rendimientos de las inversiones reales) los bajos intereses y la falta de regulación es esencial para mantener un nivel de rendimientos decente (y bonos de alto para los altos directivos) y para convertir la deuda dudosa en algo mas respetable. El colapso de los valores inmobiliarios marcó el comienzo de la contracción de la deuda (des apalancamiento) que sufrió el generador de consumo y el valor de las garantías.
El colapso de la demanda efectiva tiene muchas manifestaciones, incluidas las cifras récord de desempleo (casi 10% en EE.UU.), el colapso de la utilización industrial , el estancamiento del crédito, caída de los precios de los inmuebles, entre otros. Hoy en día el consumidor estadounidense está agotado y finalmente consciente de que el el estilo de vida de “0” ahorro garantizado por el aumento eterno delos precios inmobiliarios se ha terminado. Están subiendo las tasas de ahorro para cubrir las deudas del pasado y para recuperar el ahorro necesario para jubilarse. ¿Existen sustitutos para el consumidor estadounidense como motor de la "demanda" mundial (aproximadamente el 16% del PIB mundial)? Descartamos el modelo europeo, especialmente el alemán se basa en la demanda externa, y el Japónes que es más de lo mismo (con una enorme deuda nacional), con el agravante que se trata de economías en envejecimiento. China y otros países en desarrollo (BRIC, por mencionar sólo algunos), aplican modelos de crecimiento basados en salarios bajos y distribución del ingreso enormemente desigual (coeficiente de Ginny en 200 M Brasil se acerca a 60) con una dependencia brutal en la demanda externa. En estas circunstancias, es difícil esperar que las empresas privadas para impulsar la demanda a través de inversiones.
El Salvador se convirtió en el sector público, paradójicamente considerado a lo largo de las décadas de oro del laissez faire como "el problema". Las instituciones públicas son hoy en día participan en una mezcla de políticas keynesianas y monetaristas, vertiendo miles de millones de dinero público en planes de rescate para instituciones financieras, industrias, consumidores, etc, y proyectos públicos para reactivar la demanda agregada.
Dejando de lado la cuestión relativa a la eficacia (y la justicia!) De estos esfuerzos, el gasto adicional será financiado de alguna manera en el futuro por los impuestos, la deuda y / o la monetización. Dado que es difícil ver cómo la economía sin estas herramientas (y, a pesar del efecto multiplicador) se encargará de volver a anteriores agregados normal.
Aquí el espectro de distribución de rendimientos en el debate. Si aceptamos las líneas básicas de este análisis, la reactivación de la economía debe incluir un mecanismo de ingresos importante y redistribución de la riqueza a escala global (la redistribución del ingreso en la escala nacional es un pariente cercano al proteccionismo) para asegurar una generación de demanda duradera basada en el principios económicos sólidos.
Se reconoce comúnmente que el detonador de la actual crisis ha sido el colapso de la burbuja crediticia que se ha venido desarrollando en EEUU desde los años 80 del siglo pasado. Durante estos últimos 30 años la relación crédito / PIB aumentó de un nivel estable (hasta el 80) de ap. 100% hasta un nivel de 350% en 2007. Este nivel de endeudamiento no se veía desde el estallido de una crisis financiera del 1929 que llevó a la Gran Depresión de los 30. La parte del león del aumento de la deuda estaba en las instituciones financieras y los hogares. Resumiendo, se trata de un fenómeno casi sin precedentes y la correlación entre las crisis y la formación de la burbuja crediticia y el posterior estallido de las crisis ( Minsky ) es evidente.
Analizando el asunto desde una perspectiva mas teórica: Deuda, por definición es una transferencia temporal de recursos entre prestamistas y prestatarios. Viéndolo de esta manera, podemos analizar el tema desde la burbuja crediticia desde una perspectiva de ambos lados. Desde la perspectiva del endeudado nuestro análisis sostiene que la expansión de la deuda, especialmente del sector de los hogares americanos esta vinculada al deterioro de los ingresos de la mayoría de los ciudadanos Americanos en términos relativos y absolutos. El endeudamiento masivo sirvió para contrarrestar los efectos negativos relacionados con el estancamiento del ingreso medio ( no promedio!!) por hogar que se mantuvo estable en términos nominales desde 1998 sobre el consumo agregado (Ap. 70% del PIB) y el crecimiento constante del PIB ( ap. 3% anual) . La magnitud de la tendencia se refleja en la creciente brecha de la distribución de las rentas desde los años 80: sólo para la ilustración, el ingreso del 1% mas rico en EEUU antes de impuesto sobre la renta total subió del 9% en 1976 hasta 21,8% en 2005 (el máximo anterior en 2008 fue de 23,9%). O sea los mega ricos aumentaron su participación en la riqueza por más del doble mientras que los ingresos del “ Average Joe”.
El punto de vista del prestamista seria el próximo paso: la distribución desigual del ingreso y la riqueza entre los estratos de ingresos más altos (estudios de la Fed muestran una relación de ahorro más elevada entre los quintiles más altos) formaron una enorme masa de riqueza disponible y prácticamente obligaron al sistema financiero a encontrar salidas a esa masa de , canalizadlos a los mercados financieros y el consumo. Algo parecido sucedió en los años 80 cuando el enorme flujo de petrodólares fue canalizado por la banca a América Latina, causando posteriormente varias crisis de deudas.
Viendo el esquema desde punto de vista de las corporaciones, parecía que el círculo estaba cuadrado: El estancamiento de los costes laborales junto con la expansión del consumo impulsado por el endeudamiento se convirtió en la combinación perfecta para mayores ganancias y / o salarios más altos a los altos directivos.
Una fuente adicional de financiación para el consumidor estadounidense fue el sector exterior ( países extranjeros) que debido a su propia falta de demanda efectiva se vieron obligados a mantener a flote la economía de los EE.UU. mediante la compra de las obligaciones publicas y privadas de Estados Unidos y creando un tasa de déficit de mas de 2 Billones de USD al dia!. El caso de China es interesante, ya que la política de desarrollo del país como el taller del mundo se basa en los costos laborales bajos, y las tasas de ahorro elevadas debido a la falta de red de seguridad social produce una débil demanda interna ( siguiendo la tesis "Que algunas personas hacerse ricos primero" de Deng Xiao Ping). La consecuencia de esta política mercantilista es una dependencia brutal en la demanda externa para garantizar una tasa de crecimiento acelerado para absorber la inmigración de población rural , lo que obliga a los Chinos a mantener un tipo de interés fijo con el dólar a pesar de un enorme superávit en cuenta corriente (especialmente desde 2004) y el flujo de capitales. La consecuencia era inevitable la acumulación de reservas ( de casi 2 billones de dólares a partir del 12/2008), aparentemente muy por encima de las necesidades reales de la economía china.
En algún momento el régimen comenzó a ser sostenido por el aumento de los precios inmobiliarios y una política de bajos tipos de interés que “prometia” un aumento eterno del valor de los inmuebles. Además, las expectativas sirvieron como garantía para prestar mas hipotecas sobre el mismo inmuebles. Como es evidente que este sistema no es viable a medio plazo, los bancos prefirieron empaquetar estos prestamos como productos “serios”y fueron vendidos por una comisión, los que les permitió quitar del balance pasivos y poder siguiendo prestando dinero. El crédito de los titulizados creció de 0,5 a 2,5 billones de dólares entre 1996 y 2007 y una fuente de riqueza para el consumidor que se refleja en el amplio uso del plan de financiación a MEW (MEW: Endeudamiento garantizado por el aumento del valor del inmueble) de lo que explica hasta el 3% de crecimiento del PIB desde 2001 (J. Kennedy y A. Greenspan). Dado que el rendimiento económico real de este régimen es bastante bajo (el análisis de la ROE ROA, en contraste de los bancos de inversión, por ejemplo demuestra los pobres rendimientos de las inversiones reales) los bajos intereses y la falta de regulación es esencial para mantener un nivel de rendimientos decente (y bonos de alto para los altos directivos) y para convertir la deuda dudosa en algo mas respetable. El colapso de los valores inmobiliarios marcó el comienzo de la contracción de la deuda (des apalancamiento) que sufrió el generador de consumo y el valor de las garantías.
El colapso de la demanda efectiva tiene muchas manifestaciones, incluidas las cifras récord de desempleo (casi 10% en EE.UU.), el colapso de la utilización industrial , el estancamiento del crédito, caída de los precios de los inmuebles, entre otros. Hoy en día el consumidor estadounidense está agotado y finalmente consciente de que el el estilo de vida de “0” ahorro garantizado por el aumento eterno delos precios inmobiliarios se ha terminado. Están subiendo las tasas de ahorro para cubrir las deudas del pasado y para recuperar el ahorro necesario para jubilarse. ¿Existen sustitutos para el consumidor estadounidense como motor de la "demanda" mundial (aproximadamente el 16% del PIB mundial)? Descartamos el modelo europeo, especialmente el alemán se basa en la demanda externa, y el Japónes que es más de lo mismo (con una enorme deuda nacional), con el agravante que se trata de economías en envejecimiento. China y otros países en desarrollo (BRIC, por mencionar sólo algunos), aplican modelos de crecimiento basados en salarios bajos y distribución del ingreso enormemente desigual (coeficiente de Ginny en 200 M Brasil se acerca a 60) con una dependencia brutal en la demanda externa. En estas circunstancias, es difícil esperar que las empresas privadas para impulsar la demanda a través de inversiones.
El Salvador se convirtió en el sector público, paradójicamente considerado a lo largo de las décadas de oro del laissez faire como "el problema". Las instituciones públicas son hoy en día participan en una mezcla de políticas keynesianas y monetaristas, vertiendo miles de millones de dinero público en planes de rescate para instituciones financieras, industrias, consumidores, etc, y proyectos públicos para reactivar la demanda agregada.
Dejando de lado la cuestión relativa a la eficacia (y la justicia!) De estos esfuerzos, el gasto adicional será financiado de alguna manera en el futuro por los impuestos, la deuda y / o la monetización. Dado que es difícil ver cómo la economía sin estas herramientas (y, a pesar del efecto multiplicador) se encargará de volver a anteriores agregados normal.
Aquí el espectro de distribución de rendimientos en el debate. Si aceptamos las líneas básicas de este análisis, la reactivación de la economía debe incluir un mecanismo de ingresos importante y redistribución de la riqueza a escala global (la redistribución del ingreso en la escala nacional es un pariente cercano al proteccionismo) para asegurar una generación de demanda duradera basada en el principios económicos sólidos.
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