Ferraris for all

It is easy to get confused by the publication of two recent books by authors called Robert Frank on the subject of wealth and inequality in America. Robert H Frank, a professor of economics at Cornell in New York state, has written a book called Falling Behind: How Rising Inequality Harms the Middle Class (University of California Press). Robert L Frank, a journalist on the Wall Street Journal, has penned Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich (Crown).

Robert H Frank is a journalistically sharper version of Britain’s Professor Richard Layard. Like Layard he has impressive academic credentials, including having co-written a book with Ben Bernanke, now chairman of America’s Federal Reserve. And like Layard he prefers happiness to economic growth in the developed world - although he was several years ahead of Layard in writing a book on the subject. He is also a far more engaging writer than his dreary British counterpart.

This week Falling Behind was favourably cited by Madeleine Bunting in a comment article in the Guardian. No doubt it will be mentioned many more times in the coming weeks.

Strangely Bunting refers to the other Robert Frank in the same article without mentioning him by name. But an extract of his book on “Richistan” was published in the Sunday Times while it was also reviewed in today’s Financial Times.

Labels: America, book, happiness, inequality

I appeared last night on 18 Doughty Street, an internet television channel, discussing a range of topics related to the recent G8 summit of world leaders. The other panellists on the Claire Fox News programme were Deepak Lal and Stuart Simpson. The programme can be watched by clicking: here.

Labels: development, globalisation, media appearances, television

The Organisation for Economic Cooperation and Development (OECD) is organising a substantial conference in Istanbul this coming week on “measuring and fostering the progress of societies”. It is an important step in a trend to move away from economic indicators such as GDP as measures of progress towards well-being indicators (see, for example, posts of 4 April and 31 May). Among the many subjects being discussed are happiness (Richard Layard will be there), what constitutes progress, biodiversity, climate change, governance and global cities. The conference is being organised in co-operation with the European Commission, the Organisation of the Islamic Conference, the United Nations and the World Bank. It follows on from an earlier conference in Palermo in 2004. A large amount of useful information, including background papers, (PDF) is available at the OECD website.

Labels: cities, economics, happiness, progress

The Independent is scared of economic development.

Yesterday the newspaper ran a classic Malthusian scare story on its front cover about how food prices were rising while supplies were falling. It said one of the main factors behind this trend towards “agflation” (agricultural inflation) is the “growing affluence of millions of people in China and India is creating a surge in demand for food - the rising populations are not content with their parents' diet and demand more meat.” The other factor it identified was the increasing use of agricultural crops as a source for biofuels rather than food.

The Independent did a poor job of putting recent food prices rises into context. Although food prices have risen recently the long-term trend is for them to fall. To be fair the article did conceded that: “Sixty years ago an average British family spent more than one-third of its income on food. Today, that figure has dropped to one-tenth.”

On Friday it ran an article on what it saw as the threat of relatively cheap cars becoming available in India. Apart from congestion the inevitable threat of climate change was raised.

It is a tiny step from expressing such fears about development to outright hostility. If the Independent’s perspective is accepted then it makes sense to try to limit development.

The alternative is to welcome economic development as it brings better lives to literally billions of people. It also brings with it a better chance of tackling such problems as insufficiently high agricultural productivity and climate change. After all, the experience of the two centuries since Malthus shows that his pessimistic outlook grossly underestimates human ingenuity.

Labels: china, climate, consumption, development, environment, food, india

James Heartfield has written a characteristically astute review article on technophilia and technophobia for the latest spiked review of books. Rather than attempt to summarise the whole thing I will point to a few snippets:

* “Post-Fordist Britain makes more cars than ever before, and the weight of car production remains firmly in the developed world.” I have long suspected this was the case but had not tracked down the reference to prove it. Heartfield cites The Shock of the Old by David Edgerton.

* American Cold War intellectuals played a key role in developing technophile. For example, Walt Rostow, the author of The Stages of Economic Growth, reworked Marxist theory to make industry the blind agent of history. This is discussed further in Imaginary Futures by Richard Barbrook.

* The New Left led the attack against the technocratic society. Arguably they were the forerunners of today’s environmentalists and therapy addicts. Key thinkers in this tradition included John Kenneth Galbraith, Herbert Marcuse and Reinhold Niebuhr. Theodor Adorno’s Dialectic of Enlightenment was a widely taught anti-technology manifesto of the time. All this is evidently examined by Barbrook.

* Heartfield also gives examples of how the victory of technophobia is damaging industrial growth right now.

Labels: book, review, technology

James Surowiecki, a staff writer on the New Yorker, has written an unfairly critical review of Indur Goklany’s The Improving State of the World for Foreign Affairs. Surowiecki concedes that “Goklany's rebuttal to the environmental doomsayers is both welcome and convincing”. But he then goes on to argue that: “Goklany's account leaves out too much that matters and pretends that incredibly complex phenomena can be explained away with a few catch phrases.” Surowiecki then goes on to argue that political struggle and the state have played a greater role in human progress than Goklany suggests. Surowiecki then suggests that economic development is a complex business and future advance is not inevitable.

To me this is a classic case of arguing that an author should have written a different book rather than reviewing the one that he did write. It is true that Goklany can occasionally be cavalier in attributing growth and technological development. But his main point is surely right: there is a strong correlation between an increasingly prosperous economy and improvements in human well-being. Explaining economic development in different countries is an immensely complex task. But that is not what Goklany is trying to do.

Labels: book, development, environment, review

A debate between two leading growth sceptics in New Left Review on how best to tackle climate change. Clive Hamilton, a leading Australian environmentalist, attacks George Monbiot for, among other things, over-emphasising moral exhortation: “At times Monbiot is drawn into the most dangerous trap for environmentalists, the recourse to holier-than-thou moralizing.” Instead Hamilton argues that: “Insisting on a collective response to a collective problem is far more politically practical and environmentally responsible than a politics of guilt.”

Monbiot replies that, if anything, there needs to be moral emphasis on moral exhortation: “Is it true that I over-emphasize people’s failure to do more to reduce their own greenhouse gas emissions? I think, if anything, I understate it.” He goes on to conceded – judiciously covering his own back – that: “We are all stinking hypocrites”.

What this really seems to represent is a debate about the best way to achieve rationing. Hamilton implies the state must play a direct role – presumably this is what he means by “a collective response” – while Monbiot stresses the need for individual moral exhortation. It is a debate about tactics and emphasis rather than principles. Both of them are hinting at what they see as need for drastic cuts in the standard of living of the developed world.

Labels: climate, environment

Globalisation needs better public relations according to the Organisation for Economic Cooperation and Development (OECD). Angel Gurria, the secretary general of the OECD, was quoted as saying “the story could be told better” in the Financial Times (FT). This view was endorsed by a leader in the FT itself.

Gurria’s outburst was prompted by the latest annual Employment Outlook (summary in PDF) from the OECD. It made the familiar point that inequality is rising in the rich nations even though real wages are increasing too (see, for example, 19 June post).

Labels: globalisation, inequality, work

A flurry of new papers on China and India:

A paper by David Dollar, the World Bank country director for China, looks at the combination of rising affluence and increasing inequality in China. He argues that some rise in inequality was inevitable with the introduction of a market-based system in China. However, other factors, such as curbs on rural-urban migration, have probably exacerbated the problem. Dollar argues that the government’s recent attempts to rebalance the economy towards domestic consumption should help reduce these disparities.

Meanwhile, a piece by Sanjay Reddy, an assistant professor of economics at Columbia University, in New Left Review argues that China has performed relatively poorly in raising life expectancy over the past three decades. Unfortunately the whole paper is only available on the internet in exchange for payment.

Finally, a paper on India from the World Bank looks at the unusual combination of rapid economic growth and rising government indebtedness. The authors suggest the main factor in rising debt as a result of a reduction

Labels: Asia, china, development, india, inequality

Worldwrite, an education charity which produces films promoting third world development, has produced its first newsreel. The film is based on a critical discussion of the recent G8 summit of world leaders. I was on the panel along with Philip Cunliffe and Stuart Simpson (see 29 May post). It can currently be viewed from the Worldwrite homepage here.

Labels: Africa, development, film, media appearances, Worldwrite

A New Deal is needed on globalisation according to an essay in the July / August 2007 issue of Foreign Affairs. Kenneth Scheve and Matthew Slaughter concede that globalisation has brought huge benefits. However, they are worried that the income inequality it has brought to American workers could prompt a protectionist backlash. For them the solution is for policymakers to promote redistribution of income through taxation.

Labels: America, globalisation, inequality

This week’s Fund Strategy included a comment by me on what recent developments in the bond market say about the world economy.

For the non-mathematically inclined any discussion of bonds is about as
welcome as a zit to a teenager. All the discussion of yields, yield curves
and spreads can be brain-achingly confusing. Equities, in contrast, seem
like simple beasts.

But there is no escaping the discussion of fixed interest at present. Global
bond yields have started to rise after years of trending downwards. The bond
markets have suffered a sharp sell-off.

Unfortunately identifying changes in yields is the easy part. Working out
why the reversal has occurred is tricky. The answer has profound
implications for the outlook for financial markets and the world economy.

One possible explanation is that inflationary expectations are rising. There
are certainly warning signs on both sides of the Atlantic. For example, last
week Mervyn King, the governor of the Bank of England, gave a
well-publicised speech warning of inflationary pressures. Meanwhile, it was
reported that consumer prices in America were rising at their fastest rate
for almost two years.

Rising inflation is general painful for bonds but it would signal a rebound
in the global economy. Inflation hurts bonds as it tends to erode their
capital value. But it can also coincide with resurgent economic growth which
benefits the bulk of society.

Judging by the reaction of the stockmarket it seems that many equity
investors may accept the inflation with growth scenario. Stockmarket
investors did not panic in response to the bond sell-off. Although equity
investors are relatively cautious (see the Merrill Lynch survey story on
p10) they seem generally positive.

However, there are alternative possible explanations for rising bond yields.
Perhaps the most plausible is that Asian and Middle Eastern central banks
are reducing their purchases of US treasuries.

According to this theory the massive purchases of American government bonds
by central bankers has artificially depressed bond yields. In other words,
foreign subsidies for American consumption have manifested themselves in a
distorted bond market.

Now, it is argued, the trend has gone into reverse. Central banks are
finally diversifying their holdings away from American government debt.

The problem is that it is hard to be sure what is really happening. Since
central bankers are notoriously secretive about the assets they buy it is
impossible to be certain what they are holding.

It is possible that they are diversifying into sovereign wealth funds which
are buying assets other than American bonds (see May 28 comment). No one
knows for sure.

Developments in the bond markets should be watched closely in the coming
months as they could help discern the current character of the global
economy.

Labels: economics, finance, Fund Strategy

A paper (PDF) published by the Information Technology & Innovation Forum argues that most Americans have benefited from productivity growth over the past 25 years. Stephen Rose, the paper’s author, concedes that inequality has risen but, through a careful statistical analysis, shows there is still a link between productivity growth and wage growth. Much of the difference between median income growth and productivity growth can be explained by demographic change (for example, falling average household size) and rising benefits.

Much of the research for the paper was originally done for the middle class project at Third Way. Stephen Rose is also writing a book called Number Games on the decline of the middle class and other myths. He has also recently written an interesting article on the income of the average American for the Huffington Post.

Labels: America, growth, inequality

Professor Richard Layard has elaborated on his views on teaching happiness in schools. Writing (PDF) in the summer 2007 edition of CentrePiece, a magazine from the Centre for Economic Performance at the London School of Economics, he argues that schools should place great emphasis on developing good and happy people (see also 9 May 2007 post). The argument is firmly rooted in his book on happiness. His practical conclusions for schools include:

• It should be an explicit aim of every school to teach character and moral education.
• Each secondary school should have specialists in life skills.
• The movement must be grounded in science – specifically positive psychology.
• The curriculum should include managing feelings; loving and serving others; appreciating beauty; love, sex and parenting; work and money; a critical approach to media; political participation and moral philosophy.

The magazine also includes a link to a recent lecture (PDF) that Layard gave on the teaching of values.

Unfortunately the criticism of Layard has been limited. The Financial Times (FT) published a critical leader on 14 June but it did not go far enough. The FT’s reasons for objecting were mainly practical:

“The first problem is that happiness is not a teachable subject. It is famously elusive and may be unattainable. Pursuing it as an aim is difficult since it is more readily gained as a side-product of some other achievement or condition.

“Happiness is also too varied to teach: a single set of tools will not work for everyone. One pupil may derive great pleasure from being kind to others - another from being the person on the receiving end of that kindness. Where one child may be happily fulfilled taking on a tough challenge, another may find more happiness with a less driven approach.

“There is also the question of finding time. The national curriculum already includes provision for personal, social and health education, up to the age of 16, which takes pupils through issues such as forming relationships, taking part in activities with others and discovering what makes them tick.”

However, this fails to question the desirability of transforming education from imparting knowledge to a therapeutic attempt to manage the emotional life of schoolchildren. It is likely to encourage children to be self-obsessed while lowering educational standards at the same time. Frank Furedi has previously written on this topic for spiked.

Labels: happiness, spiked

An astute article by Jim Butcher, a lecturer at Canterbury Christ Church University, on eco-tourism is available here. He concedes that eco-tourism may help communities to meet basic needs but it also rules out broader development. Butcher also points out that there is no intrinsic virtue in harmony between local communities and local environments.

Labels: development, environment

This week’s Fund Strategy included a world markets review with a comment by me on the 10th anniversary of the Asian financial crisis.

Ten years after the outbreak of the 1997-8 Asian financial crisis it is worth re-examining what happened. Many commentators have forgotten how wrong they were about the event and its implications.

The crisis started in July 1997 with the collapse of the Thai baht. Currencies and stockmarkets tumbled across the region including Hong Kong, Indonesia, Malaysia, the Philippines, South Korea and Taiwan. There were also widespread fears that instability would spread to the global markets. The near collapse of Long-Term Capital Management, a prominent hedge fund, in the summer of 1998 seemed to confirm such fears.

The conclusions drawn from this experience include the need for greater “transparency” and more robust financial systems. Asian countries have accumulated vast foreign exchange reserves to cushion themselves against currency volatility.

But a vast amount of what was commonly argued at the time has been conveniently forgotten. For example, many experts argued that “Asian flu” or “Asian contagion” would damage the developed Western markets and economies. There was also a widespread view that “crony capitalism” had undermined the rapid economic growth of Asia.

It is clear that these arguments were flawed. The Asian markets, still relatively small in global terms, were always unlikely to destabilise the developed markets. The probability of a significant negative impact on the real economies of the developed world was even more remote.

To the extent that there was short-term market volatility in the West it was a result more of panic than contagion. There was an over-reaction to the likelihood of instability spreading to the developed world.

In fact Western risk aversion played an important role in precipitating the crisis. Western capital that had flowed into the region to take advantage of high growth was quickly withdrawn at the first sign of trouble.

The idea of “crony capitalism” was also flawed. Prior to 1997 many commentators had argued that the Asian “developmental state” had played a key role in promoting the region’s rapid development. In 1997-8 the same institutions were often blamed for Asia’s troubles. Any explanation which is used to account for both success and failure should be viewed with scepticism.

In many ways the key lesson to learn from 1997-8 is the continuing economic dynamism of East Asia. It has recovered rapidly from what was seen by many as likely to be a protracted downturn. From this perspective the lesson to draw is a positive one.

Labels: Asia, finance, Fund Strategy

My comment in this week’s Fund Strategy looks at the “growth and responsibility” motto of last week’s G8 summit. It is a classic growth sceptic formulation.

The slogan for last week's G8 summit of world leaders in Germany was "growth and responsibility". The more closely it is examined the stranger it sounds.

Economic growth has benefits that should be obvious. It has allowed humanity to lengthen life expectancy considerably, slash infant mortality, dramatically reduce working hours and correspondingly increase leisure time. It is closely related to improvements in science and technology, which can also enhance our lives. In a world where almost half the population still lives on less than $2 a day the benefits to be gained are massive. Even those in the developed world could benefit from more resources.

The difficult bit is the "responsibility" part. What does it mean? A close examination of the discussion shows that it refers to the acceptance of self-imposed limits on growth. In other words growth might be OK in certain restricted circumstances but it is viewed as essential to accept limits on what can be achieved. The language is truly Orwellian.

The reasons given for the need for limits are typically environmental and social. It is argued that too much growth can damage the environment and that a growth-oriented consumer society makes people miserable. Another contention is that growth leads to inequalities, which themselves cause problems.

None of these arguments is particularly convincing. Typically as the economy becomes more developed the resources become available to improve the environment. For example, a noteworthy news story last week was a report from the Environment Agency that showed toxic pollution in Britain was at its lowest level for a century.

The argument about inequality is similarly misplaced. It may be the case that growth can lead to greater inequality - it often depends how you measure it - but the general trend is for absolute living standards to rise. To the extent there is a problem the solution is to work out how to have even more growth rather than holding back on development.

Perhaps the strangest argument of all is on happiness. It should be clear that there is no necessary link between prosperity and subjective well-being. But the argument for mass affluence is based primarily on its objective benefits rather than the separate question of people's feelings.

The "growth and responsibility" motto should be rejected. Adding caveats to the need for growth is a retrograde step.

Labels: environment, Fund Strategy, growth, happiness, inequality

The theme of today’s New York Times magazine is inequality. It includes a piece on whether labour should be globalised, an article on whether equality can be promoted without killing American prosperity and a piece on Larry Summers’ views on the impact of globalisation on the middle class (on the final point see my post of 2 November 2006).

The books section also contain a review by George F Will of Brink Lindsey’s The Age of Abundance (see 27 May post).

Labels: globalisation, inequality

Last Wednesday (6 June) I want to a Bookshop Barnie featuring Thomas Homer-Dixon, director of the Trudeau Centre for Peace and Conflict Studies at the University of Toronto, on his new book, The Upside of Down. One of his central arguments is that the “growth imperative” is pushing the world towards breakdown. His solution, typically for growth sceptics, is to preach the need for restraint. One of his previous books, The Ingenuity Gap, evidently takes on “ingenuity optimists” such as William Nordhaus and Julian Simon.

Labels: development, growth

I have come across so much on happiness in the last few days that I will have to resort to relaying it in bullet point form:

* Happiness debate in the Financial Times. Martin Wolf, the chief economics commentator of the Financial Times, had a belated review of Richard Layard’s 2005 book on happiness published in Wednesday (“Why progressive taxation is not the route to happiness” 6 June). A particularly interesting point he made was that the attack on happiness can be seen as a challenge to modernity itself. Developments such as improvement in life expectancy, the liberation of women from household drudgery or easier divorce do not increase reported happiness.

Two book hitters in the happiness debate replied to Wolf with letters. Layard says that there are some aspects of modernity that should be ameliorated. He gives levels of trust as an example. Meanwhile, Andrew Oswald, professor of economics at the University of Warwick and well-known happiness advocate, makes the familiar point that reported happiness has not increased over time in the rich countries over the last few decades. He goes on to state: “That graph could usefully be pinned up in every minister’s and president’s office”. Why he thinks it should be such a decisive argument is not clear.

* Debating Andrew Oswald at Debating Matters. Talking of Oswald, I will be debating him at the national final of the Debating Matters competition in London on June 29. We will both be “expert witnesses” debating whether happiness should be a goal of national policy. Later on the same motion will be debated by the high school students who are taking part in the competition. In conjunction with the discussion the Debating Matters team has produced a useful topic guide for the debate. (Last year I debated John Hilary of War on Want on globalisation at the same event).

* Quoted in Financieele Dagblad. Yesterday I was also quoted on the happiness debate in a substantial feature in the leading Dutch financial daily newspaper by Esther van Rijswijk. I am hoping to get it translated.

* Paradox of Prosperity essay republished. My spiked essay on the “paradox of prosperity” is to be republished by the Institute of Chartered Financial Analysts of India. The organisation is publishing a book in its professional reference series which is provisionally entitled: Prosperity Index: Assessing Growth Anew. It is due out in November.

* Happiness expert website. Ruud Veenhoven, one of the world’s leading experts on happiness, has a website: here. Evidently he also argues that a “paradox of prosperity” does not exist.

* Parenting-happiness link. A parenting expert made the point to me yesterday that the debates on happiness and parenting are linked. The likes of Oliver James argue there is a clear link between women not looking after children and the outbreak of “affluenza” in society.

Labels: affluenza, growth, happiness, india, media appearances, modernity, speeches, spiked

This month’s Prospect magazine includes an essay by Paul Collier, director of Centre for the Study of African economies at Oxford university, on why African countries are poor (the first paragraph of the article is available here). He examines several competing explanations including the naturalistic (it’s the environment or geography) and the moralistic (it’s corruption or institutions).

Collier puts the blame on crooked and misguided opponents of reform within African governments. His preferred solution is a return to empire (see 14 May 2007 post).

Many of Collier’s recent papers can be downloaded from his university homepage. His book, The Bottom Billion (Oxford University Press), is endorsed by the likes of George Soros, Sir Nicholas Stern and Larry Summers.

Labels: Africa, corruption, development, environment

My comment in this week’s Fund Strategy argues that environmentalist ideas could damage the growth of the rapidly developing economies

It is the same but different. This week's achievement of a record high by America's S&P 500 index was reminiscent of the bubble years that ended in 2000. But important changes have happened since then.

The similarities are easier to spot than the differences. Stockmarkets are at all-time highs after years of growth, the economy is expanding strongly and the investment industry is preoccupied with future themes. There is also one prominent market that is growing particularly fast. Last time around it was the Nasdaq, America's technology-heavy market, this time it is China's domestic stockmarket.

But, although the world is not fundamentally different, it has changed significantly since 2000. The clearest change is the rise of China to play a substantial role in the world.

China's rapid growth spurt dates back to the late 1970s. But it was only earlier this decade, when the world economy was suffering a cyclical downturn, that it reached the stage where it could influence global affairs. Capital flows from China played an important role in subsidising American consumption and maintaining momentum in the world economy.

It is important not to exaggerate China's importance. The Asian demographic giant has only recently overtaken Britain to become the world's fourth largest economy. That means, in terms of income per head, Britain is still about 20 times richer. But China, and to a lesser extent other Asian countries, will continue to grow rapidly.

Another key change is the rise of environmentalism to a state of almost universal acceptance. It is striking that the new Schroder Global Climate Change fund is not being marketed as an ethical fund. Schroders argues, with considerable justification, that the overwhelming importance attached to tackling climate change has become mainstream. Meanwhile, Patrick Collinson reports in his weekly column that Invesco Perpetual's Neil Woodford sees himself as a long-time investor in "green" themes.

What is not widely understood is the pernicious influence of environmentalism. It has become viewed as simply a common sense approach to saving the planet. The desire to question the accuracy or desirability of such a viewpoint has weakened.

Yet the criticisms made of environmentalism a few years ago are even more poignant today. The emphasis on limiting human impact on the planet distorts the economic growth process. Instead of driving to increase human control over the environment the dominant trend today is to support collective restraint.

This is where the two key themes clash. If the developing countries are to achieve the maximum benefit from economic growth they will need to overcome the bane of environmentalism

Labels: development, environment, finance, Fund Strategy

Deutsche Bank has published a substantial report on happiness. Stefan Bergheim, one of the bank’s economists, uses a statistical “cluster analysis” to identify what he says are 10 “indicators for a happy society”:

1)High degree of trust in fellow citizens

2)Low amount of corruption

3)Low unemployment

4)High level of education

5)High income

6)High employment rate of older people

7)Small shadow economy

8)Extensive economic freedom

9)Low employment protection

10)High birth rate

Strangely, America and Britain are classified by Deutsche Bank as happy societies. This is in contrast to much of the internal debate within these countries which sees them as unhappy.

It is also notable that the paper argues that happiness and life satisfaction should be explicit policy objectives. So now we have a bank saying that governments should concern themselves with making us happy – presumably whether we like it or not.

Labels: corruption, Europe, happiness

This week’s Economist (2 June issue) includes a 15-page report on how business is tackling climate change. The main issue’s lead comment piece argues that a pre-condition for effective action is for governments to put a price on carbon emissions. That way, the magazine argues, business investment in clean energy technology is likely to flourish.

What the magazine misses is the importance of challenging the idea of collective restraint. What we need is far more growth and much better technology. That way humanity will be in a better position to tackle any challenges thrown at it.

Labels: climate, economics, environment

I do not share the pro-intervention stance held by Alan Beattie, the world trade editor of the Financial Times, on Africa. However, his deliciously acid remarks in today’s paper are astute:

“Africa needs more than to be 'put on the agenda'. It has been on dozens of agendas down the decades. Nor does it need to be 'put on the map'. For the confused, it's the big wedge-shaped continent south of Europe.”

Labels: Africa, trade