Month: July 2016

Martin Wolf: Global elites must heed the warning of populist rage Real income stagnation over a longer period than any since the war is a fundamental political fact

(…) The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery. These experiences have destroyed popular confidence in the competence and probity of business, administrative and political elites. But other shifts have also been adverse. Among these are ageing (particularly important in Italy) and declining shares of wages in national income (particularly important in the US, UK and Netherlands). (…)

First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global co-operation. Global governance, while essential, must be oriented towards doing things countries cannot do for themselves. It must focus on providing the essential global public goods. Today this means climate change is a higher priority than further opening of world trade or capital flows.

Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations.

Third, focus international co-operation where it will help governments achieve significant domestic objectives. Perhaps the most important is taxation. Wealth owners, who depend on the security created by legitimate democracies, should not escape taxation.

Fourth, accelerate economic growth and improve opportunities. Part of the answer is stronger support for aggregate demand, particularly in the eurozone. But it is also essential to promote investment and innovation. It may be impossible to transform economic prospects. But higher minimum wages and generous tax credits for working people are effective tools for raising incomes at the bottom of the distribution.

Fifth, fight the quacks. It is impossible to resist pressure to control flows of un­skilled workers into advanced economies. But this will not transform wages. Equally, protection against imports is costly and will also fail to raise the share of manufacturing in employment significantly. True, that share is far higher in Germany than in the US or UK. But Germany runs a huge trade surplus and has a strong comparative ad­vantage in manufactures. This is not a generalisable state of affairs.

Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. The candidacy of Mr Trump is a result. Those who reject the chauvinist response must come forward with imaginative and ambitious ideas aimed at re-establishing that balance. It is not going to be easy. But failure must not be accepted.Our civilisation itself is at stake. 

David Keohane: War and Peace in our time

Or, the sharing economy, Marx and you, from Macquarie’s equities team (with our emphasis):

Louis-Napoleon Bonaparte had the unique distinction of being the last French emperor and the first democratically elected French president. His sweep to power by a popular vote in 1848 was achieved by relying on what Karl Marx described as ‘lumpenproletariat’ vote. What is ‘lumpenproletariat’? In Marxist theory these are sections of society that slipped below conventional occupations, and hence no longer belong to either proletariat or capital and financial classes. As described in greater detail in the note, according to Marx it includes various groups, ranging from “discharged jailbirds and vagabonds to pickpockets, tricksters, pimps, porters, tinkers….disintegrated mass, thrown hither and thither.’ It was the same group that concurrently fuelled the rise of the powerful ‘anarchist’ movement, dedicated to ‘blowing up the system’, heightening social and geopolitical tensions led mostly by well-to-do and educated elite.

Does this sound familiar? It should, as essentially in modern terminology, Marx was describing disintegration of a traditional order under the pressures of the First and Second Industrial Revolutions; societal dissatisfaction and the rise in income & wealth inequalities, culminating in the ‘gilded age’ of the late 19th century. Given that modern economics is purely a flow science and does not recognize structural shifts or social classes, the term ‘lumpenproletariat’ has fallen into disuse. It is a pity, as we believe it describes much better the dislocating changes occurring in the labour force and its social and political implications, than modern preferred alternatives (‘gig economy’, ‘fissured employment’, ‘angry white men’) and its impact on political process in countries as diverse as the US, UK, France, Austria or Turkey. As electorate shifts either to the right or left, the underlying drivers are identical (structural changes under immense pressures from the Third Industrial revolution and what we describe as declining returns on humans that are permanently altering nature and value of human inputs). We are even acquiring a growing number of our own ‘anarchists’.

In this note, we used BLS stats (US) to estimate the extent to which the structure of the labour force is shifting towards the modern equivalent of ‘lumpenproletariat’ or more contingent and least-paid occupations. Our estimates indicate that its modern equivalent in the US could account for as much as 40%-45% of the labour force; around half of incremental growth and low productivity occupations constitute ~70% of employment.

The same trend is evident in most other developed economies. Indeed these estimates understate the real impact due to lower benefits attached to these occupations; inability to secure jobs in line with qualifications or erosion of job and income stability. Investors might argue that this is just a reflection of an accelerated shift towards services and that new higher value jobs will eventually emerge. We agree but as societies in the 19th century discovered, eventually could be a very long time.

So we’re in another “All of this has happened before and will happen again” post.

Sorry, but on a long enough timeline they’ll all probably (appropriately) go that way. Which isn’t very comforting considering this particular tale consists of juxtaposing the periods of late 19C high globalisation with what came shortly afterwards…

The world of late 19th and early 20th centuries was therefore in many ways very similar to the global economy and politics in the late 20th and early 21st centuries. By 1913, exports rose to as high as 13% of global GDP (a level not repeated until the late 1960s); it was the world of rapidly changing technologies (from electricity to telegraph and telephone; to indoor plumbing and refrigeration; air conditioning and cars; first flights and rockets; lengthening life span and the first commercial medicines and chemicals), far more advanced than anything experienced in prior periods. It was the world of rapidly developing finance. However, it was also a world of rising income and wealth inequalities; disintegration of traditional occupations and dislocation of hundreds of millions; closure of borders, rising trade barriers to protect local population and citizens; and rising violence related to nascent nationalism (prior to 19th century, in most places there was no such concept as nationality) and anarchism, fuelled by the above described dislocations.

….

As citizens ask for help to reduce uncertainties and protect them from volatilities of financial, technological and real economies, the politicians are likely to respond. The recent rise in populism is not an aberration but a logical outcome. Hence, we expect that over the next five to-ten years, most countries would swing either to the left or to the right and in both cases the role of the government and state is likely to rise. Although over the longer-term the risks are high (as Weimer Republic in 1923 or Japan in 1930s or Britain in 1960s illustrated), we do not currently see an alternative.

The suggestion from Macquarie is that the political response “to widening income/wealth inequality, stagnating incomes and [to bring the lumpenproletariat back into it] increasing ‘liquification of the labour markets’ (where most designations or professions make very little difference or meaning) is to offer protection through tilting foreign trade; limiting immigration and trying to fence off finance industry, whilst maintaining flow of lending to the key segments of the economy.”

(In order to pay for the widening of the state, btw, they are guessing that we’ll see aggressive redistributive polices, increased state borrowing and/ or moves ever closerto helicopter money.)

Their broad narrative is kinda, oddly, and worryingly par for the course as current narratives go, so… we better shut this down before we mention the referendum that was or the convention that is.

But, before we do, it’s worth remembering another bit of headline justifying (alongside the Napoleon ref and general state of the world) Tolstoy too: “We can know only that we know nothing. And that is the highest degree of human wisdom.”

Which is particularly relevant where mapping future change is involved — like the so-called “Next Industrial Revolution” and pessimism about robots replacing humans (rather than augmenting them, to put it equally broadly).

Plenty more — on the historical parallels free trade, movement of people, anarchy, the robotic takeover of labour, and *ahem* investment strategies — in the usual place. 

Philip Stephens: Global disorder: from Donald Trump to the South China Sea 

The belligerence of domestic politics is spilling on to the world stage

Donald Trump is confirmed as the Republican nominee for US president. Recep Tayyip Erdogan, Turkey’s president, tightens the authoritarian screw after a failed military coup. Scores die in another dreadful terrorist attack in France. You could add to this list the blow to western cohesion struck by Britain’s vote to quit the EU and China’s defiance of an international court’s ruling on its territorial claims in the South China Sea. (…)

Take a harder look and some uncomfortable patterns emerge: rising nationalism, identity politics, disdain for institutions and a fracturing of the rules-based international system. Governments have lost control, and citizens faith. The belligerence in domestic politics spills over on to the global stage. This is not quite a Hobbesian world but the direction of travel is evident. (…)

Voters cannot be blamed for their anxieties. Many have legitimate grievances. Liberal capitalism has favoured the wealthy. Average incomes have stagnated. The new titans of global capitalism — Apple, Google, Amazon, Facebook — consider taxation a voluntary impost. Political establishments have become complacent. But the prescriptions of the populists — invariably divisive, pessimistic and inward-looking — are transparently bogus. A Trump presidency would impoverish the US; Brexit will do the same for Britain. (…)

Zero-sum nationalism is not the sole property of western populism. In rejecting the judgment of the arbitration panel on the validity of its maritime claims, officials in Beijing said public opinion would not tolerate any retreat from the claims of sovereignty. Others might take the message that now China is once again a great power it no longer feels bound by international rules written before its rise.

The other day I heard a western diplomat describe China’s defiance as a threat to the postwar order. He had a point. Then I listened in to some of the speeches at Mr Trump’s convention in Ohio. Making America great again does not include respecting international law. The one, of course, does not justify the other. But, together, they warn us where we are heading.

Will (can) Melania copy that?

Michelle Obama in Carpool Karaoke de James Corben.