Economic outlook
Economics may be bad for your health! - Part 2
Benefits of economic growth
Economic growth has long been the goal of conventional economics and politics. It is both the prize and the credo that governs our daily lives. I am unsure as to whether infinite growth is either achievable, sustainable, or for that matter desirable or beneficial to society as a whole.
The arguments in its favour go something like this:
1. Increased consumption is good for you! Greater consumption equals greater prosperity. The economic assumption is that consumption is related to utility, where utility is a measure of the relative satisfaction from or desirability of the consumption of goods. Put very crudely, greater consumption is a measure of success, wealth and good fortune.
2. Increased earnings means increased taxation that in turn creates better healthcare, education and welfare services (or some cynics might say, more money to spend on wars!).
3. Economic growth creates jobs. Higher employment means less poverty. This is something of a fallacy. In some parts of Europe, including where I live in France, there is something called “structural unemployment” that is brought about by structural changes in the underlying needs of the local economy and the geographical distribution and concentrations of the population. In short, there is a mismatch between people living in a place and the employment opportunities available to them there, that is only capable of remedy over time, usually long periods of time.
That’s the theory, at least!
So what’s the problem?
1. Is infinite economic growth sustainable or desirable?
I read a report last year by an economist who predicted that very soon the world's manufacturing capacity will outstrip its ability of consumption. Simply put that means soon we will be able to make more than we need or can ever hope to use. So what happens then?
If you have a house, two cars and all the other things you need, why would you want to own more houses, or three cars, or even two washing machines? Infinite growth in consumption makes no sense. Does increased ownership lead to greater utility or satisfaction? Of course, it does not and there is a law of diminishing returns when people have more money than things to spend it on. That is to say, the utility of ownership diminishes, and when that happens so does the value of goods, which in turn creates more economic pressures.
For sections of the population who experience dire poverty and unemployment, economic growth may provide a remedy, but the evidence is that high economic growth can cause greater inequality and a real increase in relative poverty (Brookings Institution 2007), since it is the better educated and already wealthy that tend to benefit from economic growth rather than the less well off.
2. Damage to the environment through increased pollution that is a consequence of economic growth is becoming a real problem for the entire world. Of course, a benefit of growth might be the investment in technologies that create less pollution. To-date this appears to have been viewed as a lower priority than the pursuit of wealth for its own sake.
3. Increased inequality gives rise to more crimes and social problems. Between 1960 and 1990 the US crime rate went up by some 300%. While crime rates in the USA may have peaked out now, there is nevertheless a strong correlation between economic growth and increasing crime rates.
4. High economic growth is a slave-driver and has led to longer hours worked with a commensurate increase in personal and social anxiety. An economist might argue that this reflects the fact that people value money more than leisure or quality of life. How would they know when they have no leisure? That takes me to my next point…
5. The American Medical Association maintains that stress is a significant determinant in 80% of all our illnesses (that is not to say it’s the only cause). It could be argued that heart disease, obesity and stress related illnesses are a direct consequence of economic growth.
So what of increased prosperity? What of economic growth?
They have created as many new problems as they have solved.
It may be time to look for a better way.
I do not believe that politics holds all the answers either. Left-wing, right-wing or centrist mass politics have all shown themselves to be deeply flawed.
It is not something that the cult of the presidential individual can possibly apprehend. Barrack Obama or John McCain will make no difference, nor will Gordon Brown or Nicholas Sarkozy. I am unsure as to how well the ideology of nation states will serve the world in the long-term either.
One thing is for sure, if we want a better world, then we will all have to take responsibility for its wellbeing, all of us, without exception. That is the underlying principal of true democracy that we claim to hold so dear. It is not enough, as we have in the past, to argue for political freedom alone; there is social, personal and psychological freedom to consider too.
Economic growth is not the Holy Grail.
So what next?
Economic growth has long been the goal of conventional economics and politics. It is both the prize and the credo that governs our daily lives. I am unsure as to whether infinite growth is either achievable, sustainable, or for that matter desirable or beneficial to society as a whole.
The arguments in its favour go something like this:
1. Increased consumption is good for you! Greater consumption equals greater prosperity. The economic assumption is that consumption is related to utility, where utility is a measure of the relative satisfaction from or desirability of the consumption of goods. Put very crudely, greater consumption is a measure of success, wealth and good fortune.
2. Increased earnings means increased taxation that in turn creates better healthcare, education and welfare services (or some cynics might say, more money to spend on wars!).
3. Economic growth creates jobs. Higher employment means less poverty. This is something of a fallacy. In some parts of Europe, including where I live in France, there is something called “structural unemployment” that is brought about by structural changes in the underlying needs of the local economy and the geographical distribution and concentrations of the population. In short, there is a mismatch between people living in a place and the employment opportunities available to them there, that is only capable of remedy over time, usually long periods of time.
That’s the theory, at least!
So what’s the problem?
1. Is infinite economic growth sustainable or desirable?
I read a report last year by an economist who predicted that very soon the world's manufacturing capacity will outstrip its ability of consumption. Simply put that means soon we will be able to make more than we need or can ever hope to use. So what happens then?
If you have a house, two cars and all the other things you need, why would you want to own more houses, or three cars, or even two washing machines? Infinite growth in consumption makes no sense. Does increased ownership lead to greater utility or satisfaction? Of course, it does not and there is a law of diminishing returns when people have more money than things to spend it on. That is to say, the utility of ownership diminishes, and when that happens so does the value of goods, which in turn creates more economic pressures.
For sections of the population who experience dire poverty and unemployment, economic growth may provide a remedy, but the evidence is that high economic growth can cause greater inequality and a real increase in relative poverty (Brookings Institution 2007), since it is the better educated and already wealthy that tend to benefit from economic growth rather than the less well off.
2. Damage to the environment through increased pollution that is a consequence of economic growth is becoming a real problem for the entire world. Of course, a benefit of growth might be the investment in technologies that create less pollution. To-date this appears to have been viewed as a lower priority than the pursuit of wealth for its own sake.
3. Increased inequality gives rise to more crimes and social problems. Between 1960 and 1990 the US crime rate went up by some 300%. While crime rates in the USA may have peaked out now, there is nevertheless a strong correlation between economic growth and increasing crime rates.
4. High economic growth is a slave-driver and has led to longer hours worked with a commensurate increase in personal and social anxiety. An economist might argue that this reflects the fact that people value money more than leisure or quality of life. How would they know when they have no leisure? That takes me to my next point…
5. The American Medical Association maintains that stress is a significant determinant in 80% of all our illnesses (that is not to say it’s the only cause). It could be argued that heart disease, obesity and stress related illnesses are a direct consequence of economic growth.
So what of increased prosperity? What of economic growth?
They have created as many new problems as they have solved.
It may be time to look for a better way.
I do not believe that politics holds all the answers either. Left-wing, right-wing or centrist mass politics have all shown themselves to be deeply flawed.
It is not something that the cult of the presidential individual can possibly apprehend. Barrack Obama or John McCain will make no difference, nor will Gordon Brown or Nicholas Sarkozy. I am unsure as to how well the ideology of nation states will serve the world in the long-term either.
One thing is for sure, if we want a better world, then we will all have to take responsibility for its wellbeing, all of us, without exception. That is the underlying principal of true democracy that we claim to hold so dear. It is not enough, as we have in the past, to argue for political freedom alone; there is social, personal and psychological freedom to consider too.
Economic growth is not the Holy Grail.
So what next?
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Economics may be bad for your health! - Part 1
Recession! What recession?
So what is this new economic crisis? Are we moving towards the Armageddon of western economics? What does and will recession mean?
Economists define recession as a decline in the production of gross domestic product for six-months based on measures taken in two three month periods.
Neither the USA nor the UK are experiencing what is described as “negative growth” currently, although there is a widely held belief that we may be heading towards recession.
A lot of factors are being cited as the cause of our current economic difficulties, among which are:
1. The crash in the housing market.
The boom in the housing market was an absurd phenomenon.
House prices in the UK were rising at rates of more than six times the rate of inflation in some years.
Suddenly the world was awash with property millionaires. Someone who had bought a London house for £72,000 ($144,000) in 1983 and stayed put, woke up to find their property is worth £1.6 million in 2007! ($3.2 million). A new two bedroom apartment on the outskirts of Oxford, close to a railway line came onto the market last year at around £500,000 ($1 million). Think about it, one million dollars for a small apartment in a small city outside London!
The average age of a first time house buyer is currently somewhere in the mid-thirties age range. So where do the rest live? How do teachers, nurses, doctors, police and essential service staff ever afford these prices? The answer is they don’t.
It had to stop, and stop it did. House prices are going down in the UK. Economic reports from the USA say that house prices there are over-valued by at least 40%, although by UK standards house prices in the USA look dirt-cheap! Prices have fallen by up to 25% in the past year in (some parts of) the USA.
House price equity in an overblown, pumped-up market is fool’s gold. It is wealth created by a market without any corresponding new value. It has provided a mirage of prosperity by fuelling consumer spending and debt.
To put all this in perspective, the average house price in the UK (across all regions) is about £220k ($440k), the average salary is somewhere in the region of £22k - £26k ($44k - $52$k).
So people have taken risks with borrowing, sometimes taking out loans of between 8 and 10 times their annual salaries in order to own a home. It should come as no surprise therefore that the housing market is in deep trouble.
2. So-called high-risk lending, the “sub-prime” market is collapsing. Sub-prime lending involves lending money for greater returns to poorer people who would not otherwise be able to afford conventional home loans. It’s an economic contradiction that sustains poverty. If one is poor access to money comes at a higher price than if one is rich.
Falling house prices in the USA and to some extent, the UK, means a risk of negative home equity at a very high price. Home repossessions are increasing fast. There is an increasing rate of defaults that means that banks lose money and so do the mortgage companies.
3. So we have:
• Shortage of mortgage funding and banks teetering on the edge of solvency
• Decline in market confidence that affects all sectors of the economy
• Property prices that became vastly overvalued
• Increase in supply accompanying falling demand, with housing costs still running at levels in the UK that are inaccessible to average wage earners, young people and essential service providers
4. Next! There’s the ever-increasing oil price pushing up costs. There is the rising cost of food too that is not necessarily all tied to the cost of oil.
5. One more…the booming house price mirage fuelled consumer borrowing. A falling house market and lowered confidence in the rest of the economy means that people are taking on less debt and looking to save. This in turn means lower consumer spending. Lower consumer spending means lower production that increases the chance of a recession. It is interesting to me that that financial prudence, as I might see it, and a move away from consumption for consumption’s sake has an adverse economic consequence. I’ll come back to that in part 2.
Summary
There are a number of factors involved in our current economic difficulties, but the two main issues as I see them are the decline of an over-heated housing market and a decrease in consumer spending.
Part 2 will be about whether economic growth is beneficial to us all. My feelings are that it is not such a good thing after all. We may need to change the way we view our economic lives.
So what is this new economic crisis? Are we moving towards the Armageddon of western economics? What does and will recession mean?
Economists define recession as a decline in the production of gross domestic product for six-months based on measures taken in two three month periods.
Neither the USA nor the UK are experiencing what is described as “negative growth” currently, although there is a widely held belief that we may be heading towards recession.
A lot of factors are being cited as the cause of our current economic difficulties, among which are:
1. The crash in the housing market.
The boom in the housing market was an absurd phenomenon.
House prices in the UK were rising at rates of more than six times the rate of inflation in some years.
Suddenly the world was awash with property millionaires. Someone who had bought a London house for £72,000 ($144,000) in 1983 and stayed put, woke up to find their property is worth £1.6 million in 2007! ($3.2 million). A new two bedroom apartment on the outskirts of Oxford, close to a railway line came onto the market last year at around £500,000 ($1 million). Think about it, one million dollars for a small apartment in a small city outside London!
The average age of a first time house buyer is currently somewhere in the mid-thirties age range. So where do the rest live? How do teachers, nurses, doctors, police and essential service staff ever afford these prices? The answer is they don’t.
It had to stop, and stop it did. House prices are going down in the UK. Economic reports from the USA say that house prices there are over-valued by at least 40%, although by UK standards house prices in the USA look dirt-cheap! Prices have fallen by up to 25% in the past year in (some parts of) the USA.
House price equity in an overblown, pumped-up market is fool’s gold. It is wealth created by a market without any corresponding new value. It has provided a mirage of prosperity by fuelling consumer spending and debt.
To put all this in perspective, the average house price in the UK (across all regions) is about £220k ($440k), the average salary is somewhere in the region of £22k - £26k ($44k - $52$k).
So people have taken risks with borrowing, sometimes taking out loans of between 8 and 10 times their annual salaries in order to own a home. It should come as no surprise therefore that the housing market is in deep trouble.
2. So-called high-risk lending, the “sub-prime” market is collapsing. Sub-prime lending involves lending money for greater returns to poorer people who would not otherwise be able to afford conventional home loans. It’s an economic contradiction that sustains poverty. If one is poor access to money comes at a higher price than if one is rich.
Falling house prices in the USA and to some extent, the UK, means a risk of negative home equity at a very high price. Home repossessions are increasing fast. There is an increasing rate of defaults that means that banks lose money and so do the mortgage companies.
3. So we have:
• Shortage of mortgage funding and banks teetering on the edge of solvency
• Decline in market confidence that affects all sectors of the economy
• Property prices that became vastly overvalued
• Increase in supply accompanying falling demand, with housing costs still running at levels in the UK that are inaccessible to average wage earners, young people and essential service providers
4. Next! There’s the ever-increasing oil price pushing up costs. There is the rising cost of food too that is not necessarily all tied to the cost of oil.
5. One more…the booming house price mirage fuelled consumer borrowing. A falling house market and lowered confidence in the rest of the economy means that people are taking on less debt and looking to save. This in turn means lower consumer spending. Lower consumer spending means lower production that increases the chance of a recession. It is interesting to me that that financial prudence, as I might see it, and a move away from consumption for consumption’s sake has an adverse economic consequence. I’ll come back to that in part 2.
Summary
There are a number of factors involved in our current economic difficulties, but the two main issues as I see them are the decline of an over-heated housing market and a decrease in consumer spending.
Part 2 will be about whether economic growth is beneficial to us all. My feelings are that it is not such a good thing after all. We may need to change the way we view our economic lives.
Back to the future, part 3
On reading parts 1 and 2 of this blog, a friend said to me, "Do you think the world can be changed by a minority of conscious people, when so many are content to remain blinkered?"
I'm going to answer this but I will try and do it as factually as I can. This is straight off the top of my head without the aid of textbooks.
Big changes in our world are on their way. You can either believe that or bury your head in the sand, but big changes will happen anyway. There is nothing we as individuals can do to prevent those. Here I'm going to focus on the economic and political outlook. I know a little about economics and I'll just give you the benefit of my limited education.
Let's say it's correct that soon world production capacity outstrips consumer demand. What happens then? That's simple enough to answer: Prices will fall as companies are forced to compete to protect their market share. As prices fall, profits are put under pressure. As profits come under pressure, markets fall. If markets fall long and hard enough, it's called a recession, or a slump or a crash. When that happens, unemployment increases. As unemployment increases, so does social unrest. So that's one hypothesis that may underpin social change.
Also at present the USA is the dominant political and economic power in the world. It is dominant, not because Americans are nice people or that they make good movies. It is dominant because it is one of the wealthiest nations in the world. It is sheer economic power that underpins the USA's power and influence, nothing else. This may change in the near future.
Despite what some people might say, George Bush is no fool. He has bolstered the American economy by allowing the dollar to devalue against other currencies by approximately 33% over the past five years. What that means effectively is that American goods are a third cheaper than they were five years ago in world markets, if the selling prices have remained the same. There has been some inflation in the USA too but nevertheless, this devaluation is very significant. A country cannot continue to devalue its currency indefinitely. In effect, it's reducing the price of the dollar and ultimately that has the same result as reducing the price of goods.
Let's go another way for a moment. I understand that the price of electrical, leisure and clothing goods have fallen in the UK over the past couple of years. I seem to remember that the price drops have been dramatic, like in double figure percentages. Two factors may be in play here: One is that supply may be outstripping demand in these areas already. The other might be the influence of China and its developing economy with its lower costs coming into play in the new global economy. Certainly we have benefited economically from the exploitation of lower cost labour from countries in Eastern Europe that have recently joined the European Union.
Now let's go to China. China's economy is in a very early stage of capitalist development. Its economic capacity is huge. It's vast and it's many times greater than that of the USA. So what happens if China becomes the new economic super-power of the 21st century? What will happen if China, not the USA, is pulling the strings on the world stage? There's another factor, the costs structures in China are perhaps below 10% of what they are here in the west. What happens to our markets if we reduce the cost of goods by 90%? Could you manage on 10% of your wages? These are rhetorical questions.
We could try and keep the Chinese at bay through tariff barriers and other means of market exclusion, but we left that kind of stuff behind twenty or so years ago. We're living in a global free capitalist economy now. No-one wants to get back high degrees of state regulation again, economically or otherwise. If anything they want the degree of State control reduced still further. That after all is what George Bush is actually doing at present!
There's the other factor too. Our western businesses need access to the Chinese markets to bolster their flagging profits and to realise growth. There is not too much more dramatic economic growth that can be achieved here in the west anymore. We have full supply already.
One last thing: Most of our economic development and most of our technology development in the west over the last sixty years have been caused by wars. It's no wonder that the Germans and the Japanese economies have grown to be so strong. Their countries had the opportunities to rebuild and modernise their economic infrastructures as a result of being completely devastated in the second world war. In the UK, we tried to keep doing the same old thing but then everything changed as international competition in world markets intensified, particularly during the last twenty years of the 20th century.
But think about all that new technology we have now, miniaturised electronics and the like. Most of our brave new world of electronics has been developed as a result of, or at least the pace of its development has been supported by, war. By going out and killing people! There was the cold war too, there were not too many people killed in that one, but it did have that certain feeling that if the cold war had gone hot, then we might reasonably have contemplated the end of the world in a nuclear holocaust.
I'll leave you with that thought again. What happens when and if China displaces the USA as the world's new economic and political superpower? Who becomes the third world then? If you know the answer, then let me know. I'll end with a quote from Napoleon Bonaparte who said, "Let China sleep, for when she awakes the whole world will know."
Well, it's wakey-wakey time in more ways than one!
Footnote: This was written originally in October last year before the collapse of the “sub-prime” mortgage market, the banking crisis – the extent of which is not yet known (and may not be known until after the US presidential elections), and the recent surge in oil prices.
I'm going to answer this but I will try and do it as factually as I can. This is straight off the top of my head without the aid of textbooks.
Big changes in our world are on their way. You can either believe that or bury your head in the sand, but big changes will happen anyway. There is nothing we as individuals can do to prevent those. Here I'm going to focus on the economic and political outlook. I know a little about economics and I'll just give you the benefit of my limited education.
Let's say it's correct that soon world production capacity outstrips consumer demand. What happens then? That's simple enough to answer: Prices will fall as companies are forced to compete to protect their market share. As prices fall, profits are put under pressure. As profits come under pressure, markets fall. If markets fall long and hard enough, it's called a recession, or a slump or a crash. When that happens, unemployment increases. As unemployment increases, so does social unrest. So that's one hypothesis that may underpin social change.
Also at present the USA is the dominant political and economic power in the world. It is dominant, not because Americans are nice people or that they make good movies. It is dominant because it is one of the wealthiest nations in the world. It is sheer economic power that underpins the USA's power and influence, nothing else. This may change in the near future.
Despite what some people might say, George Bush is no fool. He has bolstered the American economy by allowing the dollar to devalue against other currencies by approximately 33% over the past five years. What that means effectively is that American goods are a third cheaper than they were five years ago in world markets, if the selling prices have remained the same. There has been some inflation in the USA too but nevertheless, this devaluation is very significant. A country cannot continue to devalue its currency indefinitely. In effect, it's reducing the price of the dollar and ultimately that has the same result as reducing the price of goods.
Let's go another way for a moment. I understand that the price of electrical, leisure and clothing goods have fallen in the UK over the past couple of years. I seem to remember that the price drops have been dramatic, like in double figure percentages. Two factors may be in play here: One is that supply may be outstripping demand in these areas already. The other might be the influence of China and its developing economy with its lower costs coming into play in the new global economy. Certainly we have benefited economically from the exploitation of lower cost labour from countries in Eastern Europe that have recently joined the European Union.
Now let's go to China. China's economy is in a very early stage of capitalist development. Its economic capacity is huge. It's vast and it's many times greater than that of the USA. So what happens if China becomes the new economic super-power of the 21st century? What will happen if China, not the USA, is pulling the strings on the world stage? There's another factor, the costs structures in China are perhaps below 10% of what they are here in the west. What happens to our markets if we reduce the cost of goods by 90%? Could you manage on 10% of your wages? These are rhetorical questions.
We could try and keep the Chinese at bay through tariff barriers and other means of market exclusion, but we left that kind of stuff behind twenty or so years ago. We're living in a global free capitalist economy now. No-one wants to get back high degrees of state regulation again, economically or otherwise. If anything they want the degree of State control reduced still further. That after all is what George Bush is actually doing at present!
There's the other factor too. Our western businesses need access to the Chinese markets to bolster their flagging profits and to realise growth. There is not too much more dramatic economic growth that can be achieved here in the west anymore. We have full supply already.
One last thing: Most of our economic development and most of our technology development in the west over the last sixty years have been caused by wars. It's no wonder that the Germans and the Japanese economies have grown to be so strong. Their countries had the opportunities to rebuild and modernise their economic infrastructures as a result of being completely devastated in the second world war. In the UK, we tried to keep doing the same old thing but then everything changed as international competition in world markets intensified, particularly during the last twenty years of the 20th century.
But think about all that new technology we have now, miniaturised electronics and the like. Most of our brave new world of electronics has been developed as a result of, or at least the pace of its development has been supported by, war. By going out and killing people! There was the cold war too, there were not too many people killed in that one, but it did have that certain feeling that if the cold war had gone hot, then we might reasonably have contemplated the end of the world in a nuclear holocaust.
I'll leave you with that thought again. What happens when and if China displaces the USA as the world's new economic and political superpower? Who becomes the third world then? If you know the answer, then let me know. I'll end with a quote from Napoleon Bonaparte who said, "Let China sleep, for when she awakes the whole world will know."
Well, it's wakey-wakey time in more ways than one!
Footnote: This was written originally in October last year before the collapse of the “sub-prime” mortgage market, the banking crisis – the extent of which is not yet known (and may not be known until after the US presidential elections), and the recent surge in oil prices.