Archive for the 'Economic' Category
April 27th, 2011 by Justin
The IMF recently made a prediction that the Chinese economy, in total size, will be larger than America’s in a matter of years. In fact, the shift is so close that “According to the IMF forecast… whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.”
Regardless of the specific year, it seems clear to even the casual observer that China will be the largest economy sooner rather than later, given the significant differential between the two countries’ economic growth rates, to say nothing of the ongoing economic slump that continues to hamper American dynamism. Even in normal times, whereas the Chinese economy regularly attains 8 to 10% annual growth rates, America can only muster 3 to 4%. The long-run effect of those extra percentage points, year after year, is dramatically demonstrated in this chart, showing total accumulated growth over time:
Accumulated GDP growth for selected countries in recent decades
While China is in a league of its own, the United States lies more or less in the unremarkable middle of pack.
The great success of China portends a global shift of historical proportions. For decades the established wisdom in much of the world saw democratic capitalism as the only real option for delivering economic prosperity. This was confirmed upon the fall of the fascist states in the 1940s, and then reconfirmed by the implosion of Soviet-led communism in the late 1980s and early 1990s. Now there is a new game in town, often termed “authoritarian capitalism.” Recognizing the failures and unworkability of communism as an economic system, authoritarian capitalism embraces private property, market exchange and profit while nevertheless maintaining faith in the direction, discipline and stability imposed by the state.
For third-world governments, the Chinese model provides a compelling alternative to the often chaotic and unmanageable “freedom squared” approach promoted by the democratic west: freedom in economics, multiplied by freedom in politics. This combination has proven toxic many times across the developing world. It has resulted in meager gains or even shrinkages in prosperity in places where civil society, institutions and the rule of law are not well-established, as they have been in the west for centuries.
For decades third-world nations borrowed ideas from both the democratic capitalist first world and the totalitarian communist second world. With the latter now irrelevant, the emergent Chinese model offers a compelling, workable and relevant alternative for poor societies in need of state-guided economic development.
As China becomes the most important economy, the US and its international brethren must continue to support the expansion of democracy and market capitalism, but it must do so in a reasonable, pragmatic way that accounts for the limitations, shortcomings and economic needs of impoverished societies. Otherwise, true democratic capitalism will have had a very brief time in the sun.
April 19th, 2010 by Justin
It was bound to happen. Goldman Sachs was far too successful and prominent to avoid an investigation by regulators in the aftermath of massive financial crisis. And since nobody considers that the economic system itself might be to blame for the crisis, what better scapegoat is there? Surely, there’s nothing systemically flawed with the economy, and so the only rational explanation is some wrongdoing at the highest echelons of Corporate America, right?
Americans, from the average joe to the political power brokers to the corporate honchos, were and are far too attached to the economic status quo to even entertain the notion that significant reform of the economic and financial system is warranted. In place of a reasonable analysis by an informed understanding of economics, Americans have chosen to find scapegoats everywhere imaginable: irresponsible debtors taking on more loans than they could afford, idealistic politicians pushing home ownership in spite of financial unsoundness, the big banks, financial speculators, Democrats, Republicans, Alan Greenspan, Ben Bernanke, Barney Frank, Tim Geithner, and more. Surely, all of these parties bear a fraction of the blame, some more than others.
But to blame any of these individuals or entities misses the larger issue. Most of these actors were–and, more importantly, still are–in hock to the critically flawed economic regime of neoliberalism/ market fundamentalism/ neo-laissez faire and the simplistic assumptions and models underlying it. This includes countless “leaders” in the government, some of the most important businesspeople and, most importantly, the large majority of Americans. Thankfully, there are some prominent individuals who have chosen to take a second look at the old conventional wisdom, but they are few and far between, and have yet to formulate a new intellectual regime that can replace the existing one, decrepit though the latter may be.
It’s very possible that Goldman did something unethical or illegal. But if the SEC or other regulators think that litigating powerful people and firms will even begin to solve anything important, they’re dreaming. They could cripple every major successful firm in the country, and it still wouldn’t get to the underlying problems. We can’t know whether the investment bank will beat the allegations, but we can be confident that it doesn’t mean much. Whatever anybody’s opinion of Goldman Sachs, the SEC’s time and energy would be put to better use rolling up their sleeves and helping to restructure the economic system.
April 15th, 2010 by Justin
A recent piece on Business Insider displayed a slew of interesting charts detailing different aspects of the rise in inequality in the US in the recent decades. The state of American inequality is either a shocking revelation or a banal cliche, depending on your point of view. All of the stats displayed were interesting, but I want to share three in particular that caught my eye.
Half of America has 0.5% of the stocks and bonds:
Anyone who pays attention to right-of-center thinking knows that one of the biggest economic myths, particularly in the investor community of economic conservatives, is that “everyone is in the stock market.” And since everyone is in the markets (through their pension funds and other retirement funds or investments), policies that help the stock market grow, help large corporations be more profitable, and make financial investing easier and more lucrative do not benefit the rich at the expense of everyone else. Since everyone benefits when the markets and corporate America benefit, such policies are beneficial to a large segment of the society. Well, there goes that idea. Clearly such policies will disproportionately benefit one tiny segment of society over and above the rest.
Poor Americans have a SLIM CHANCE of rising to the upper middle class:
This chart puts in stark visual form the evolution of inter-class mobility in the US in the second half of the 20th century and beyond. The dramatic nature of the change is indeed striking. The US certainly was a very different kind of country in the aftermath of World War II than it is today, judging by the enormous differential between the probability of moving up, and of moving down at that earlier time. The much greater chance of moving in either direction–up or down–in the 1940s and 1950s is also fascinating. It indicates that the US was a much more fluid and dynamic society a half-century ago. Today, by contrast, whatever your lot in life, chances are that you’ll be there for a while. And this is precisely the stuff of which social cleavages and class warfare is made. A permanent elite and a permanent underclass are typically seen as the domain of third world countries.
America spreads the wealth FAR LESS than other developed countries
The interesting part of this graph is the significant difference between inequality reduction through taxes and inequality reduction through transfers. Taxes in America reduce inequality about as much as they do in other countries, but the transfers accomplish much less. I see two major conclusions to draw from this: (1) the US government spends a lot of money on things other than transfers, the biggest of which is defense spending, on which the other countries spend almost nothing in comparison, and (2) the money that is spent on transfers–and there is a lot of it, to be sure–does not accomplish very much, or nearly as much as it could.
The latter point is why many like myself believe that one of the keys to reducing inequality in the US is not necessarily more money, as liberals tend to believe, but simply better managing the money that is already being spent, as well as improving the incentives involved. Also, higher taxes in and of themselves are not needed, as the chart indicates. Better to rework the tax system by, for example, shifting the total burden away from the lower and middle classes, and toward the mega-rich. This can be helped by closing loopholes and exemptions that are disproportionately exploited by the rich, and which result in a largely regressive tax structure. Some more interesting thoughts on how American inequality compares with developing countries can be found on the Map Scroll blog. (Hint: it’s not good for the US.)
February 26th, 2010 by Justin
Close, but not quite...
One of the most brilliant characterizations I have yet heard of the American economic system was given by Stephen Bannon (director of the recent documentary “Generation Zero”), on Sean Hannity’s show: “we have socialism for the very poor, and we have socialism for the wealthy; we have capitalism for the middle class.” It is brilliant because it is succinct, straightforward and spot on. (I nevertheless find the general thrust of that documentary ridiculous, but I will address that in another post.)
The unsustainable nature of the economic system, even accounting for the sorry and incomplete state of the socialist programs for the lower class, is clear. And it is becoming clearer every day, as banks continue to lavish bonuses on their star performers even as they suckle the public teat, while through corruption, waste or fraud, many able-bodied, self-sufficient individuals take advantage of public monies intended for those truly in need.
So what has caused this state of affairs? In short, liberal success combined with conservative success. In many general respects, the socioeconomic story of the US over the last 30 or 40 years has been one of the ascendance of right wing, laissez-faire policy regimes. However, at a less general level conservatives, beginning with and including Reagan, have consistently failed to significantly roll back key socialist-inspired programs like medicare or social security. In addition, important parts of the state interventionist welfare regime have remained solidly in place, enjoying broad support, to say nothing of such thorns in the libertarian side as the Department of Education. Left-wing success.
Nonetheless, with the aforementioned rightist ascendance, public handouts aren’t just for liberals anymore. One of the main ideas independents like myself believe is that both parties favor wasteful big spending, just on different things. Sure enough, Republicans and conservatives have spent liberally (pun intended) on Big Business, the rich and foreign entanglements during their time in power.
And so we have socialism for the rich and the poor, and capitalism for the middle class. That is, while the rich have enjoyed a free lunch at the public trough, and the poor have gotten by with ill-managed, but still significant, programs of their own, the middle class has been stuck with the bill on both sides. In a normal universe, progressive taxation-and-redistribution systems would mean, by definition, that it is mostly the rich that pay for the benefits of the less well-off. But with the oligarchic character of so much of American politics (on both the Democratic (think Wall Street) and the Republican sides), we have a system in which the most productive component of society—and, many argue, the most important component of a democracy—is also the least represented when it comes to policy. And as political wisdom will tell us, if you’re not at the table, you’re on the menu.
January 23rd, 2010 by Justin
President Obama recently announced new banking and financial reforms that indicate that while he clearly still doesn’t quite grasp the underlying economic and financial structures that fostered the crisis, he’s getting there. The Economist reports:
Though not a full return to Glass-Steagall, the law that separated commercial banking and investment banking in the wake of the Great Depression (and was repealed in 1999), [the new reform] is at least a return to its “spirit”, as one official put it. Reflecting the possible dent it could put in profitability, bank shares tumbled, pulling stockmarkets down sharply around the world.
Nowadays, if the big bank shares are tumbling, chances are you’re doing something right. That’s because their business models are shot through with flaws, and the kinds of things that benefit them (like unlimited state subsidies) are precisely the kinds of things that are anticompetitive and harmful to a well-functioning economic and financial system. Moving on, the Economist writes:
The first half of the plan concerns restrictions on the scope of activities. Banks that have insured deposits, and thus access to emergency funds from the central bank, would not be allowed to own or invest in private equity or hedge funds. Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.
The second part focuses on size. Banks already face a 10% cap on national market share of deposits. This would be updated to include other liabilities, namely wholesale funding. The aim is to limit concentration, which has increased greatly over the past 20 years, accelerating during the crisis as healthy banks bought sick ones. The four largest banks now hold more than half of the industry’s assets.
The first part has the right spirit—to limit the scope of activities, what a given institution can and cannot do. Here’s the problem: it’s backward-looking, not forward-looking. Note that institutions with insured deposits “would not be allowed to own or invest in private equity or hedge funds.” That seems perfectly reasonable, and it is, except for the inconvenient truth that in 20 years’ time, “hedge funds” may very well be obsolete. Financial and economic innovation ensure that over time, regulations that are tailored too closely to current conditions, current paradigms and current business models are inevitably rendered impotent. Given the relative infrequency of this kind of financial crisis, by the time something comparable is capable of occurring years from now, we can rest assured of two things, (1) that the character of finance, and of banking and investment practices, will have changed significantly, and (2) that the character of regulation will not have changed meaningfully at all.
That’s why a more explicit return to Glass-Steagall or something like it—which would deal with the basic kinds of activities (taking commercial deposits versus playing the stock market, for example), rather than the kinds of firms that do those activities (your local bank versus a Greenwich hedge fund)—would be much more effective and long-lasting. Indeed, Glass-Steagall seems to have been a quite successful piece of legislation, remaining relevant for many decades (from the 1930s until the turn of the century), despite the obvious changes in finance during that time.
In addition, the continued ability for deposit-taking institutions to engage in investment banking (precisely one of the hallmarks of Glass-Steagall was to separate the two) is troubling, because investment banking is not a particularly low-risk activity.
***
Some of the biggest problems with the Obama and Democratic reform plans currently in play have to do with a knee-jerk reaction toward bigger government, new agencies, more regulators and increased power. As Nicole Gelinas of the Manhattan Institute has argued, the best ideas for regulation are often the old ones that have been around for a while, and that simply need to be updated, reinforced or just plain executed for once.
Some of her reasonable suggestions include the following:
… the government must once again insulate the core economic functions of long-term borrowing and lending from potential short-term excesses. The government can do this by requiring financial institutions to hold uniform levels of capital against all of their investments — cushioning them from some losses — so that firms cannot game the system by structuring some securities to avoid robust capital requirements. Government regulators should also require financial firms that depend disproportionately on short-term lenders for their own funding to hold more capital.
Note that this kind of an approach would be ingenious in the sense that it would allow government officials to adjust the percentage level of capital requirements in the same way they adjust tax rates, for example. Depending on new analysis or changing priorities, regulators could quickly, efficiently and straightforwardly alter the capital requirements. Just as tax rates are tied to the amount of income or the type of activity, the capital requirements could be tied to the amount of assets or the type of investment or financing activity, rather than what the firm is called or how its business model or prospectus reads. Remember that we already have a strong precedent for management of capital requirements: the central bank already imposes such rules on commercial banks as a tool of monetary policy.
Consistent with activity-based rules, as opposed to firm-based rules, Gelinas says:
… the government must re-impose clear, well-defined limits on activities such as borrowing for speculation. Financial firms should not be able to make hundreds of billions of dollars in promises with negligible cash down, as the insurance giant American International Group did through unregulated financial instruments called credit-default swaps. Nor should regular Americans be able to purchase homes with zero cash down, leaving them — and their lenders and the economy — unduly vulnerable to declines in the values of those homes.
So it looks like straightforward, common-sensical rules for lenders and borrowers of all sizes and scopes can be found being discussed on both sides of the political divide. One hopes that the powers that be are listening. Otherwise, we can all safely rest assured that a new, equally destructive financial crisis is looming on the historical horizon.
