Ferraris for all

Who has the Financial Times got blogging on this week’s Millennium Development Goals conference at the United Nations in New York? None other than Bono and his sidekick, Professor Jeffrey Sachs.

Bono describes his week ahead as follows: “A sleepless cocktail of rabble-rousing, meetings with politicians, chief executives, faith leaders and NGOs. People such as Nicolas Sarkozy, President Jakaya Kikwete of Tanzania and Gordon Brown.” It seems that not only does he regard himself as extremely important but senior politicians, businesspeople and religious leaders do too.

A few things to note about this week in relation to the conference:

* The Clinton Global Initiative looks like it will play a prominent role. Clinton - Bill rather than Hillary - will be appearing on the Daily Show on Tuesday to promote the campaign. It is billed as: “the almost first husband talks about the Clinton Global Initiative”.

* According to Bono there will be a “historic and innovative announcement on malaria on Thursday”. I would guess it probably has something to do with anti-malarial bednets.

Labels: America, celebrities, development, economics, health

Real Clear Markets has picked up my Spiked myths article in its “off the street” section today.

Labels: America, economics, finance, media appearances, spiked

Since the troubles on Wall Street at the weekend many key notions have been repeated as the accepted wisdom. However, on closer examination they are both old and inaccurate.

* Myth one: recent developments prove that Wall Street is nothing but a giant casino. This notion was stated explicitly by John McCain, the Republican candidate in the American presidential race, when he argued that the American worker has “been betrayed by a casino on Wall Street”. He was, probably unknowingly, echoing the ideas of Susan Strange, a leftist thinker, who in 1986 had an influential book published entitled Casino Capitalism.

In fact as I argued in my book Cowardly Capitalism (Wiley 2001) the contemporary financial markets are characterised by risk aversion rather than a hunger for big bets. This is much more than saying the markets are simply fearful. Rather I argue that the main reason for existence of financial markets has changed from raising capital to transferring risks. Financial markets used to provide a mechanism for businesses to raise funds or for individuals to obtain funds if they needed them. Today the purpose of many financial instruments is to transfer risk from one party to another.

This “cowardly” nature of the financial markets explains why the financial crisis has spread in the way that it has. Repackaging or “securitising” mortgages initially provided a way for lenders to sell on the risk to other parties such as investment banks. In the short term this had what was seen as the desirable effect of diversifying risk. But the risk was simply transferred rather than disappearing. Once problems emerged it could spread more easily from one institution to another. This explains what is sometimes misleading referred to as a “contagion” effect or virus in the market.

* Myth two: the markets were driven by greed. It would be more accurate to say that the developments are driven by fear rather than greed. However, it is not fear in the sense of a timeless human emotion. Rather it is a general climate of anxiety in contemporary society that affects the financial markets as everyone else.

* Myth three: it is all about confidence. It is true that confidence plays more of a role in the financial markets than in the economy as a whole. But it is a mistake of exaggerate the importance of confidence in the resolution of the crisis. The strength of the underlying real economy is a key factor to consider when trying to determine the likely outcome. The contemporary economy has a weak growth dynamic but it is not facing any fundamental crisis. It is characterised by sluggish growth but there are no signs of collapse.

* Myth four: it all started with irresponsible American subprime mortgage lending. The crisis is routinely blamed on irresponsible lenders and reckless borrowers whose debts have now gone bad. According to this caricature a combination of greedy bankers and “trailer trash” are to blame for the crisis. In reality the American housing bubble was simply a response to the low interest rates maintained by the Federal Reserve earlier this decade. This loose monetary policy was in turn a way of keeping an otherwise sluggish economy going by means of promoting a consumer boom. The fundamental problem was therefore a weak economy rather than subprime borrowers or lenders.

* Myth five: The recent actions of the American authorities, particularly last week’s bail-out of Fannie Mae and Freddie Mac, represent an end to the free market on Wall Street. Several commentators have bemoaned the fact that the American authorities have taken a strongly interventionist stance on dealing with the financial crisis (see recent posts). However, even on Wall Street, despite its reputation as a bastion for free markets, state intervention has long been pervasive. The American authorities intervene in the economy in numerous different ways and tightly regulate the financial markets. Indeed, as argued above, the roots of the current crisis can partly be attributed to the earlier actions of the Fed.

Labels: America, economics, finance

Charles Dumas of Lombard Street Research joins those who bemoan the lack of a free market reaction to Wall Street’s problems. In an article in the Telegraph he argues that: “Free markets have been abandoned in America at the crucial hour by their chief exemplars, the financial masters of the universe.”

Dumas also says that: “It seems that: President Bush and the Republicans are not just well to the left of Grover Norquist. They leave clear blue water on the left of Gordon Brown, much to the envy of Euro-lefties no doubt, who would love to ditch what they call "neo-liberalism", and what we call free markets, as easily as the American right wing.”

In a related argument Dumas also points to the surging level of public sector debt in America as a result of the recent bail-outs. As a proportion of GDP it is now not far behind highly indebted countries such as Italy and Japan.

Labels: America, economics, finance

The following comment by me appeared in this week’s Fund Strategy.

It seems virtually all politicians want to present themselves as enemies of "big oil". It is a pity they have forgotten the huge benefits of fossil fuels.

One of the less noticed passages of Gordon Brown's speech to the Confederation of British Industry in Scotland last week was his desire to "set a new ambition to free Britain from the dictatorship of oil".
Exactly how a physical substance can impose a dictatorship over people he did not explain. Rights are normally curtailed by governments, such as his own, rather than by chemicals. But he is far from alone in his hostility to oil.

Al Gore, the former American vice-president turned environmental campaigner, told the Democratic National Convention in Denver on August 28 that America needed presidential leadership to solve the climate crisis. He is also supporting a campaign demanding "electricity 100% clean within 10 years" (www.wecansolveit.org). Obviously, the term "clean" is open to interpretation but Gore made no secret of his distaste for "big oil and coal" in his speech.

Nor is criticism of oil interests restricted to those who might vaguely be defined as on the left. On the Republican side the new vice-presidential candidate, Sarah Palin, is portrayed by her opponents as a supporter of big oil. But she presents herself as a populist critic of corporate interests.

Few seem willing to put the case that fossil fuel has brought enormous benefits to humanity and, if allowed, is likely to continue to do so. It is a relatively cheap and highly flexible form of energy. That is why the International Energy Agency estimates it is likely to account for 84% of the overall increase in energy demand from 2005-2030. Without oil the world economy would not have grown nearly as fast over the past century.

Although Brown and others offer alternatives, their claims to be able to replace fossil fuel bear little relationship to reality. Brown supports more investment in renewables and atomic power - which is fine in principle - but on nowhere near the scale needed to meet future energy needs. And, contrary to the common misconception, greater energy efficiency is likely to lead to more energy consumption rather than less.

One-sided attacks on oil do not help promote a considered debate on the future of energy.

Labels: America, climate, development, economics, energy, Fund Strategy

Yesterday’s New York Times included a useful review of the assaults on the notion of GDP. It reminded readers that as long ago as 40 years ago it was attacked by Robert F Kennedy who said it: “measures everything, in short, except that which makes life worthwhile.” The article also welcomed the review of GDP as a measure of well-being in France and suggested it might apply to America too:

“We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being,” said Amartya Sen, a Nobel laureate in economics at Harvard. Professor Sen and Joseph Stiglitz, a Nobel laureate at Columbia, are co-chairmen of a commission recently appointed by Nicolas Sarkozy, the French president, to come up with a better measure for France. While Mr. Sarkozy’s goal is to showcase a ‘quality of life’ at odds with the country’s weak G.D.P., the high-profile effort might yield dividends here as well as abroad.”

Ultimately, as I have previously argued, there is less to these attacks than meets the eye. It would be hard to find someone who argues that GDP is a perfect indicator of well-being. But it does not follow that there is no relationship between rising prosperity and well-being. If there is a problem with GDP in this respect it is that it underestimates the benefits of prosperity to human welfare.

Labels: America, economics, Europe, happiness, progress

It’s always nice to be proved right on something but it doesn’t often happen right on cue. After noting in yesterday’s post that inequality is a big debate in America many competing views have been expressed in relation to the Poverty, Income and Health Insurance report published by the US Census Bureau.

The New York Times ran a leader entitled “Where’s the Prosperity?” arguing that the benefits of wealth need to be widely shared:

“What is clear is that economic growth alone will not cut it for most American families. The benefits must be shared more broadly. This means more progressive taxation, increasing access to affordable health care, investing more in public education. “

Meanwhile, Mark Thoma on the Economists View blog has done a good job of summarising responses to the report including those of Paul Krugman and Brad DeLong.

Labels: America, economics, health, inequality

Chrystia Freeland, the US managing editor of the Financial Times (FT), reviews what she describes as a “fine new book” on “the most important US economic trend, and hence most critical domestic issue - growing income inequality” (FT, 25 August): Claudia Godlin and Larry Katz, The Race Between Education and Technology, Belknap Press.

However, I’m not convinced by her contention that “this trend is hard to discuss in the US”. This blog alone includes numerous references to the debate on rising inequality in America.

Labels: America, book, inequality

Tom Friedman, a foreign affairs columnist for the New York Times, is having a new book published in September called Hot, Flat and Crowded. Evidently he argues that America should pursue environmental goals both as a good in itself and because it can help the nation retain its position of world leadership. It sounds like it puts him firmly in the neo-Malthusian camp (for Friedman's earlier work on this theme see post of 15 April 2007).

Labels: America, book, environment, Malthus

The following comment by me appeared in this week’s Fund Strategy.

Many will no doubt see the latest gloomy data from the eurozone and Japan as confirmation that the world economy is heading for a deep recession. Such a view is based on a superficial reading of global developments.

GDP figures for the second quarter show output falling by 0.2% in the eurozone and 0.6% in Japan. In addition, global fund managers say that the credit crunch is spreading from America to the rest of the world.

It is certainly possible, although not certain, that many developed countries will see a technical recession in the coming year (defined as two consecutive quarters of falling output). However, given the strength and size of the developing economies it is hard to see the whole global economy suffering such a fate. In July the International Monetary Fund forecast that emerging and developing economies would grow by 6.9% this year and 6.7% in 2009.

What looks likely is a protracted period of slow growth in the developed world punctuated by financial volatility. Developing country growth is likely to slow but to remain positive.

It is also important to remember that numbers only tell part of the story. This downturn is different from most previous ones in that it is a consumption-led slowdown. It is centred on problems on the consumption side of the economy and the financial markets rather than the industrial sector. Instead of the violent shake-out that has characterised many previous cycles, a less intensive but more prolonged squeeze looks likely.

The outlook is far from rosy, but it is not comparable to recessions such as that of the mid-1970s or early 1980s, let alone the Great Depression of the 1930s. Although the contraction will not be as great, it is likely that the recovery will be muted. Previous shake-outs often played the role of restructuring the economy with a new round of expansion after the weakest firms and sectors were shaken out - what one economist famously called "creative destruction". This time around, no such recovery is likely as no fundamental restructuring has occurred.

The other big difference is the relative importance of the developing world. In relation to the global economy, the past provides little guide to the present or the future.

Labels: America, Asia, economics, Europe, Fund Strategy

John Engler, the president of America’s National Association of Manufacturers (NAM), has written a piece in the Financial Times disputing the newspaper's article last week arguing China is about to come the world’s largest manufacturing power (see 12 August post):

“China has a long way to go to catch up with the US. The NAM’s analysis shows that in terms of real manufacturing value-added (price-adjusted, to reflect the quantity of output) the US remains by far the world’s largest manufacturer, producing nearly one-fourth of the world’s industrial output. Based on the highly respected World Bank database, our analysis also shows that we will produce twice as much this year as the fourth placed economy, China (the European Union and Japan are in second and third position, respectively). Even in current measures of manufacturing denominated in dollars (which inflate China’s position because of the rising yuan and other factors), China will produce only about 60 per cent as much as the US in 2008.”

Labels: America, china, economics

Miller-McCune magazine, a publication from the Miller-McCune Center for Research, Media and Public Policy in California, has a useful review essay by David Villano on the “more-is-less” thesis. In other words it examines (sympathetically) the argument that it is possible to be more prosperous while consuming less.

Many of the points it makes are familiar – Americans consume far more per head than most of the rest of the world, the threat of climate change is imminent, the need to change lifestyles etc – but it includes many useful references. Among them are Confronting Consumption, (MIT Press) a 2002 book on America’s consumer society co-edited by Michael Maniates. Others include the California-based Global Footprint Network, the Voluntary Simplicity Movement, Redefining Progress and Mean Genes, a book on how our desire to consume is embedded in our DNA.

Labels: affluenza, America, book, climate, consumption, environment, footprint, inequality, progress, review, sustainability

Dick Meyer, a veteran American journalist, has written an interesting-sounding book on self-loathing in America with the brilliant title of Why We Hate Us (Crown 2008). To quote the blurb from his publisher:

“Meyer argues—with biting wit and observations that make you want to shout, “Yes! I hate that too!”—that when the social, spiritual, and political turmoil that followed the sixties collided with the technological and media revolution at the turn of the century, something inside us hit overload. American culture no longer reflects our own values. As a result, we are now morally and existentially tired, disoriented, anchorless, and defensive. We hate us and we wonder why.”

No doubt there is much that is wrong with Meyer’s analysis but he raises some important questions. There certainly is a strong element of self-loathing in America and Western culture more generally. This is apparent in many areas including environmentalism, identity politics and the hostility towards Chinese economic development. It is a topic that is worth examining in more detail.

An extract from the book and interview with the author are available here.

Labels: America, book, china, consumption, happiness

To many it will probably come as a surprise that China is not already the “workshop of the world”. But according to a piece in yesterday’s Financial Times (FT) it is likely that China will take over from America as the world’s largest manufacturer sometime next year. China will account for about 17% of manufacturing output value added ($6.1 trillion) compared with 16% for America. This will end over a 100 years of American dominance. The exact figure is not quoted in the report but India is expected to remain way behind in this respect, despite often being mentioned in the same breath as China.

Today’s FT included a follow-up comment which argued the main challenge from China’s rise is likely to be environmental.

Labels: America, china, economics, india

The Wall Street Journal poses an important question in a column on energy published in America yesterday and today in Europe:

“Al Gore said the other day that ‘the future of human civilization’ depends on giving up fossil fuels within a decade -- and was acclaimed as a prophet by the political class. Obviously boring reality doesn't count for much these days. Even so, when Barack Obama wheels out an energy agenda nearly as grandiose as Mr. Gore's, shouldn't it receive at least some media scrutiny?” (original emphasis).

It also comes to a sensible conclusion:

“Consumption isn't rising because of wastefulness. The U.S. produces more than twice as much GDP today per unit of energy as it did in the 1950s, yet energy use has risen threefold. That's because energy use is tethered to growth, and the economy continues to innovate and expand. Mr. Obama seems to have other ideas.”

Despite a common misconception it is not true that energy efficiency means less energy use. On the contrary, it means even more energy can be used.

Labels: America, economics, energy, environment

A recent study by Betsey Stevenson and Justin Wolfers suggest that the happiness gap between some sections of the American population (black-white, male-female) seems to have narrowed. This is despite a widening of income inequality. A summary of the paper is below:

“Surveys that have attempted to measure the level of happiness in US citizens by means of a subjective response have unveiled decreases in happiness inequality. These findings come in spite of the long-term trend of increasing income inequality.

“The authors of CEPR DP6929 have used these responses to analyse the level and dispersion of happiness within and between demographic groups over the period of 1972-2006. In particular, they look at changes in the racial, gender and education gaps.

“Whilst they find that overall levels of happiness have remained relatively stable with a slight, but statistically significant decline, the distribution of happiness between and within demographic groups has changed significantly. The black-white gap was found to have narrowed substantially and the gender gap to have almost disappeared. In addition, the education gap was found to have widened.

“In light of increasing income inequality, the authors suggest that these findings may reveal a possible decrease in inequality in the non-pecuniary domain. In particular they highlight changes in the US legal and institutional framework that occurred during the observed time period that may help to explain the changes.”

For a reference to an earlier work by the same authors debunking the “paradox of prosperity” see my post of 16 April 2008.

Labels: America, happiness, inequality

Barbara Ehrenreich, a prominent American activist and writer, has added her voice to the debate about inequality in America. This Land is Their Land (Metropolitan Books), her book on American extremes, seems to be receiving a lot of publicity. This includes an appearance on Comedy Central’s The Colbert Report.

Labels: America, book, inequality, television

There follows a news story by me from today’s Fund Strategy looking at the recent debate on rising oil prices. Three key reports on the subject have been published this month alone.

A key American government report has concluded that fundamental factors rather than speculation have driven up oil prices.* A task force from the Commodity Futures Trading Commission (CFTC) has reached the preliminary conclusion that: "Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors".

Over that period, it notes, the world economy grew at its fastest pace for two decades while oil supply growth failed to keep up. Global oil consumption grew by 3.9 percent from 2004 to 2007, driven largely by rising demand from emerging markets. Over the same period production growth from outside the Organization of the Petroleum Exporting Countries (Opec) countries was well below its historical average. Indeed, output from America, Mexico and the North Sea fell over the period. This imbalance between supply and demand is enough to explain the price surge.

Geopolitical unrest in countries with large oil reserves exacerbated the supply shortage still further. These included disruptions in such countries as Nigeria and Iraq and the threat of disruption in Iran and Venezuela. The task force also concluded that futures trading has not pushed up prices. If anything, speculators would have benefited more from price decreases than increases in recent months.

The CFTC's conclusions are broadly in line with those of the International Energy Agency in its recent Medium-Term Oil Market Report (see Fund Strategy, July 7). In contrast, Opec in its World Oil Outlook 2008 argued, as have many prominent American politicians, that speculation is a key factor in pushing up prices (see Fund Strategy, July 14).

* Interim Report on Crude Oil. Available at www.cftc.gov

Labels: America, economics, energy, Fund Strategy

The cover story of the July-August issue of Harvard Magazine is a piece by Elizabeth Gudrais on American inequality. Compare it to last Friday’s post.

Labels: America, health, inequality

Studies of inequality typically overstate the widening of inequality in America according to a study cited in the Economist. The magazine’s Economics Focus column refers to work which argues that the inflation rate for the poor has generally proved higher than for the rich:

“A challenge to the conventional wisdom is set out in a recent research paper by Christian Broda and John Romalis, both of the University of Chicago’s business school. They argue that standard measures of inequality do not reflect differences in the way that the rich and poor spend their money. A person’s demand for a particular good or service does not rise in exact proportion to his income. As he grows richer, the pattern of his spending changes, as well as the amount. In particular, high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries.

“For most of the past three decades, the price of non-durable goods has been falling relative to the price of the services—investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.”

The article acknowledges that the recent rise in food and commodity prices may have reversed part of this trend.

Labels: America, economics, inequality

Evidently Fareed Zakaria, one of America’s most influential commentators on international relations, expresses concern about the impact of China’s economic growth on the global environment in his new book. Although he welcomes poverty reduction in China he is concerned that rapid growth will lead to such problems as climate change and water shortages. According to Sean Collins writing in the latest spiked review of books:

“In viewing growth as problematic and potentially destructive, Zakaria raises a common theme of our time. Rather than celebrate the benefits of growth, such as a reduction in poverty, Zakaria and others emphasise the downsides that accompany development. This gloomy outlook reveals more about the commentator than the reality on the ground. Zakaria refers to the predicted increase in the number of cars in China from 26million to 120million in 2020 as an environmental problem rather than a cause of celebration, as the Chinese people gain greater freedom of movement. In doing so, Zakaria joins in with today’s growing China-bashing chorus.”

Labels: America, climate, environment, review, spiked

The following comment by me appeared in yesterday’s issue Fund Strategy.


Only a few years ago the emerging markets were considered suitable only for the young and adventurous. The average investor would have at most a few per cent of emerging market stocks in his portfolio.

Times are changing fast. In recent months Fund Strategy has examined the rise of new funds specialising in such areas as Africa, India and the Middle East. Such fund launches reflect a fundamental change in the global economy. Although the developed economies are growing, the developing ones are typically growing much faster.

As a result, a growing proportion of the world economy consists of developing countries. Back in 2000 the advanced economies accounted for about two-thirds of global output on a purchasing power parity basis, according to the International Monetary Fund. By 2013 the advanced economies are projected to account for only about half of the global economy. The advanced economies remain far richer than the developing ones but, on this measure at least, the gap is narrowing.

This trend is to be wholly welcomed. In the past, the benefits of development - including a modern infrastructure and access to consumer goods - were confined to a largely white elite. Now they are becoming more evenly spread.

One of the most potent symbols of this change is the advent of the Tata Nano. The £1,000 people's car is designed to bring motoring to India's masses. Given that the Ford Model T, which made motoring a popular reality in America, was launched a century ago, the development is long overdue. Even in as poor a country as India, with 80% of the population living on less than $2 a day, cars should become more widely available as long as growth continues.

Of course, it may be that one of Tata's rivals ultimately builds a more successful car. However, the key point is not about an individual model of car but the fact that Indians can now realistically aspire to such things. India will also need to sustain a massive roadbuilding programme to ensure that its citizens can enjoy the full benefits of mobility.

If there is a problem, it is that developing economies still have a long way to go to catch up with the West. Sub-Saharan Africa and South Asia in particular remain desperately poor.

The sooner developing economies can be considered mainstream rather than exotic the better.

Labels: America, Asia, Fund Strategy, india, inequality

The current discussion of the Tata Nano, India’s “people’s car”, reminds me of the brilliant “sculptor” advert by Peugeot a few years ago for its 206. Whoever made the commercial, with a catchy backing track by Bhangra Knights, caught the popular aspiration for a better life in a clever and witty way. Only as an advert it was geared towards selling a particular product rather than making a more general point.

I was also struck to read recently that first production model of the Ford Model T, the car that popularised motoring in America, was assembled in October 1908. In other words India is about a century behind America in that respect. Henry Ford had many faults but he fulfilled his promise to “build a motor car for the multitude”.

Labels: America, consumption, development, india, progress

Yesterday’s New York Times has an opinion piece by W Michael Cox and Richard Alm, two officials from the Federal Reserve Bank of Dallas, pointing out that consumption inequality in America is far less than income inequality:

“if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

“Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

“To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.”

However, Paul Krugman, writing in his blog, is sceptical: “there’s no question that consumption inequality at a point in time is less than income inequality. But the CEX study on which they rely is widely believed to be seriously flawed, especially for tracking recent trends. For whatever reason, the survey seems to be missing a lot of consumption growth among the affluent.”

He also points to a useful academic paper (PDF) by Robert Gordon of Northwestern and Ian Dew-Becker of Harvard on “Unresolved issues in the rise of American inequality”.

Labels: America, economics, inequality

The latest Fund Strategy has a comment by me on the debate about productivity trends in America.

It seems a world away but the late 1990s discussion of the "new economy" is worth revisiting in the light of recent data. Looking at trends in productivity growth helps discern the direction in which the American economy, and possibly the markets, are likely to be heading.

Back in the second half of the 1990s there was an obsession with rising productivity growth. The argument was that the diffusion of new technology, such as the personal computer and the world wide web, was making the American economy more dynamic. The rise of numerous dotcom companies seemed to confirm this trend.

In a self-serving way many financial institutions promoted the idea of the "new stockmarket" to complement that of the new economy. Many fund managers endorsed the argument that rising productivity growth meant market valuations could be revised permanently upwards. The theory seemed to explain the stockmarket surge of the late 1990s.

Then reality intervened with decisive brutality. In early 2000 equities started to fall and a three-year bear market followed. It seemed that the golden new era, with ever rising markets, was a mirage after all.

Given the attention paid to the productivity figures a few years ago, it is perhaps surprising that they are hardly discussed today. Maybe it is too painful a memory. But the latest statistics are revealing.

Superficially, the figures appear reasonable. According to America's Bureau of Labor Statistics, productivity grew at an annual rate of 1.8% in the fourth quarter of 2007. But Professor Robert Gordon of Chicago's Northwestern university, a renowned expert on productivity, has calculated that the long-term trend rate for productivity growth has fallen back to 1995 levels. It appears that if there was a spurt in productivity growth, it was relatively short-lived.

Several lessons can be learnt from this. First, it is a mistake to draw sweeping conclusions from short-term trends. A few years of above-trend productivity growth do not make a new economy.

Second, the American economy is not as dynamic as many have claimed in recent years. Productivity growth is an important indicator of underlying economic strength.

Finally, beware of theories that link apparently positive economic developments to the stockmarket. Self-serving ideas normally come unstuck sooner or later.

Labels: America, economics, Fund Strategy

The New York Times has a useful topics page on the debate on income inequality in America. It includes links to the newspaper’s key articles on the subject.

Labels: America, inequality

Paul Krugman has written a dispatch on his blog counter-attacking the criticisms against him in the Economist (see 21 December post). His main points:

“Inequality denial generally involves four dodges — all four of which are present in this article.

“First is a narrow technical issue — the misuse of the Consumer Expenditure Survey, which is used to claim that there hasn’t been much rise in spending inequality. First of all, that’s not true even if you believe the survey; plus, there’s good reason to believe that the Survey has been systematically underreporting the growth in higher-income-group consumption. See CBPP on all this.

“Second is the use of very long-run comparisons — what I think of as the “but even Louis the XIV didn’t have electricity!” defense. Yes, over the centuries economic progress has reduced some gross disparities — modern Americans are relatively unlikely to simply starve to death (though it can happen), so in that sense the gap between rich and poor has narrowed. But the question isn’t whether society is, in some sense, more equal than it was in 1900. It’s whether it is radically more unequal than it was in 1970. And of course it is.

“Third is the downplaying of poverty. Seventy percent of the poor have cars! They must be doing fine! Except that they often can’t afford medical care, sometimes can’t afford enough food, and usually can’t find a way to get their children a decent education.

“Finally, there’s the failure to appreciate just how rich today’s rich are. They’re not people who drive cars just like the rest of us, only fancier.”

Elsewhere on his blog Krugman includes an audio link to a speech he gave on The Conscience of Liberal at the Commonwealth Club of San Francisco.

Labels: America, book, economics, inequality

The special double holiday issue of the Economist (22 December) includes a piece on inequality which is essentially a rebuttal to Paul Krugman. In his recent book, The Conscience of a Liberal, the New York Times columnist and Princeton professor emphasises widening income inequalities in America. The Economist concedes they are widening but argues they only tell a small part of the story:

“measures of income inequality are misleading because an individual's income is, at best, a rough proxy for his or her real economic wellbeing. Because we can save, draw down savings, or run up debt, our income may tell us little about how we're faring. Consumption surveys, which track what people actually spend, sketch a more lifelike portrait of the material quality of life. According to one 2006 study, by Dirk Krueger of the University of Pennsylvania and Fabrizio Perri of New York University, consumption inequality has barely budged for several decades, despite a sharp upswing in income inequality.”

However, consumption surveys also have their limits. The Economist argues that broader measures of well-being show that inequality is narrowing in many respects:

“This increasing equality in real consumption mirrors a dramatic narrowing of other inequalities between rich and poor, such as the inequalities in height, life expectancy and leisure. William Robert Fogel, a Nobel prize-winning economic historian, argues that nominal measures of economic well-being often miss such huge changes in the conditions of life. “In every measure that we have bearing on the standard of living...the gains of the lower classes have been far greater than those experienced by the population as a whole,” Mr Fogel observes.” (The Economist reference is to Fogel’s The Escape from Hunger and Premature Death 1700-2100 Cambridge University Press 2004).

Labels: America, book, inequality

Steve Salerno, the author of SHAM: How the Self-Help Movement Made America Helpless (Crown, 2005), has an interesting article on the “happiness myth” in today’s Wall Street Journal. It discusses how the “pursuit of happiness” has become an American obsession. He is not talking about the term in the sense used by America’s Founding Fathers as part of a broader struggle for social progress. Instead it has become an expression of narcissism:

“Certain to end up under the trees of at least some Americans who don't already own it is that unparalleled tribute to wishful thinking, "The Secret," by Rhonda Byrne. The year's blockbuster best-seller-cum-cultural phenomenon sold six million books and DVDs on the strength of the belief that you can imagine your way to total fulfillment.

“Some of the season's hottest inspiration books, though not "how-to" in format, sell a similar message. Notable is Elizabeth Gilbert's "Eat, Pray, Love," the story of one woman's (literal) journey to happiness, in which she decided to forsake the comfort of her known life for regions uncharted. "Eat, Pray, Love" reached the top of the best-seller lists after being blessed by Oprah. Self-help guru Tony Robbins, too, has lately been spamming his online community with holiday offers. Various Robbins products, and even tickets to his entry-level seminars on personal reinvention, will likely end up as stocking-stuffers.

“If the quest for joy doesn't take center stage at Christmas, it will surely pop up the following week. Typically, New Year's resolutions that don't involve weight loss have something to do with embracing change, choosing happiness, following your dreams, etc. We are consumed by the pursuit of happiness.”

Labels: America, book, happiness

An international opinion poll conducted in 20 countries by GfK Research on behalf of the Wall Street Journal Europe shows how gloomy contemporary opinion tends to be. According to the main article in Friday’s (7 December) Weekend Journal Europe:

“the most surprising detail of the survey statistics was the overall negative outlook. "It is striking how negative the attitude is in Europe, but even more so in the U.S.," where 62% said society was getting worse, says Mark Hofmans, a managing director in GfK's Brussels office, who analyzed the survey results…

“The survey didn't point to a single source of dissatisfaction among Europeans but showed a diverse set of worries. Terrorism ranked as the biggest fear for 17% of those surveyed, but issues such as war (15%) and global warming and environmental degradation (14%) were also major concerns.

“By comparison, in the U.S., moral decay was the single-largest worry, cited as the paramount problem by 20% of respondents. In Europe, only 11% of those surveyed said moral decay was their main source of anxiety.

“India, with its booming economy, was the most optimistic country included in the survey, with 51% of respondents saying global society was getting better. By contrast, only 20% of Europeans and 22% of Americans said society is improving. Turkey, where global warming was the single-largest worry for 27% of respondents, was among the most pessimistic countries included in the survey -- only 13% of those polled said global society is getting better, while 72% said it is deteriorating. (The most negative overall was Greece -- devastated by forest fires last summer -- where 74% said life is getting worse.)”

In other words the mood is overwhelmingly downbeat despite the fact that objective trends are generally improving. This is one of the key paradoxes I hope to examine in my forthcoming book.

Labels: America, environment, india, progress

On Thursday I will be debating the virtues of America at a Manifesto Club event timed to coincide with Thanksgiving. My brief is to talk on the importance of mass consumption and production. I have also contributed to a Spiked article on the subject.

Labels: America, consumption, speeches, spiked

It is frustrating that two recent key books in the growth sceptic genre are not yet available in Britain. From what I can gather Paul Krugman’s The Conscience of a Liberal focuses more on politics than economics. Krugman, a New York Times columnist and professor of economics at Princeton, apparently blames fundamentalist Republicanism for widening inequality in American society. It is hard to be sure but I strongly suspect he somehow links inequality to economic growth. I hope to receive the book soon. In the meantime there is a useful review in the New York Sun and a piece in the New York Review of Books.

Robert Reich, a professor of public policy at the University of California at Berkeley and former Clinton labor secretary, is more clearly a growth sceptic. In a Q&A on Supercapitalism, his new book, he argues that contemporary capitalism has a dynamic side but then refers to the familiar growth sceptic litany:

“Inequality hasn’t been this wide in 80 years. Jobs are far less stable, and the median wage is below where it was in 1980, adjusted for inflation. Main Streets are disappearing. And our planet’s environment is endangered.”

To him the solution is to put curbs on corporations. For him it appears corporations are the force that gives capitalism both its dynamic and destructive side:

“We have to end the corporate arm’s race. That means strict limits on corporate lobbying, on corporate spending for public relations intended to influence legislation, on legislators and public officials turning to lobbying when they leave office, and on corporate money otherwise flowing in politics.”

In reality the problem is not that capitalism is too dynamic. On the contrary, it is not dynamic enough. Rather than putting curbs on corporations the emphasis should be on promoting even more growth.

The first chapter of Supercapitalism is available on the New York Times website. More information can also be found on Reich’s website.

Labels: America, book, corporations, corruption, inequality

Paul Krugman, a New York Times columnist and professor of economics at Princeton, has launched a blog. It seems the must-have accessory for any self-respecting economist nowadays (see my posts of 24 March and 25 April).

Krugman uses one of his first entires to publicise his new book, The Conscience of a Liberal. He describes it as: “a book about what has happened to the America I grew up in and why, a story that I argue revolves around the politics and economics of inequality.”

Labels: America, book, economics, inequality

The Library of Economics and Liberty has published a podcast by Paul Romer, one of America’s leading experts economists, on economic growth. The webpage from which it can be downloaded includes lots of useful links including a defence of Thomas Malthus.

Romer is the leading advocate of new growth theory - also called endogenous growth theory - which emphasises such factors as technological change and ideas in the growth process. It is a move away from the focus on physical capital which previously dominated economics.

Labels: America, economics, growth, Malthus

Growth sceptics sometimes make the point that life expectancy in America is lower than in many less rich countries. The implication is that countries stop benefiting from greater wealth beyond a certain point. But an article in Real Clear Politics by John Stossel throws a different light on this discussion. He argues that factors such as America’s high murder rate and the high number of car accidents – in other words factors not related to affluence – skew the statistics for American life expectancy.

Stossel’s concern is to defend America’s health care system. But there is a case for looking at the relationship of life expectancy and affluence more generally.

Labels: America, health

The image of the “overworked American” is misleading according to an article in the Boston Globe ( 12 August). It draws on academic work which argues that innovations such as vacuum cleaners and takeout food have yielded enormous time savings over the past 40 years:

“(T)oday, these scholars say, we spend far less time on work than Americans did four decades ago. From 1965 to 2003, according to one study published this month, the average American gained the equivalent of seven weeks of vacation -- in the form of extra leisure time spread throughout the year.

“Much of the time-savings comes from a source few people think about when they whine (or brag) about their workweeks: cleaning and cooking. We do much less of it than we used to, thanks to vacuum cleaners, takeout food, and other innovations. And the time-savings there more than offsets the extra time women now spend in offices, according to the study, which appears in the latest issue of The Quarterly Journal of Economics.”

However, other academics criticise the time diary methodology used in this study.

Labels: America, economics, work

David Brooks, a conservative columnist for the New York Times, had an article on July 24 arguing that the trend towards inequality in America is being exaggerated. Although Brooks has a vested interest in countering the Democrat’s arguments it does not follow that everything he says is wrong. The column is reproduced in full below (see also post of 17 June):

A Reality-Based Economy

If you've paid attention to the presidential campaign, you've heard the neopopulist story line. C.E.O.'s are seeing their incomes skyrocket while the middle class gets squeezed. The tides of globalization work against average Americans while most of the benefits go to the top 1 percent.

This story is not entirely wrong, but it is incredibly simple-minded. To believe it, you have to suppress a whole string of complicating facts. The first complicating fact is that after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years.

The second complicating fact is that according to the Congressional Budget Office, earnings for the poorest fifth of Americans are also on the increase. As Ron Haskins of the Brookings Institution noted recently in The Washington Post, between 1991 and 2005, ''the bottom fifth increased its earnings by 80 percent, compared with around 50 percent for the highest-income group and around 20 percent for each of the other three groups.''

The third complicating fact is that despite years of scare stories, income volatility is probably not trending upward. A study by the C.B.O. has found that incomes are no more unstable now than they were in the 1980s and 1990s.

The fourth complicating fact is that recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work. A few years ago, the rewards for people earning college degrees seemed to flatten out. But more recent data from the Bureau of Labor Statistics suggests that the education premium is again on the rise.

Fifth, companies are getting more efficient at singling out and rewarding productive workers. A study by the economists Thomas Lemieux, Daniel Parent and W. Bentley MacLeod suggests that as much as 24 percent of the increase in male wage inequality is due to performance pay.

Sixth, inequality is also rising in part because people up the income scale work longer hours. In 1965, less educated Americans and more educated Americans worked the same number of hours a week. But today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week.

Seventh, it's not at all clear that the big winners in this economy are self-dealing corporate greedheads who are bilking shareholders. A study by Steven N. Kaplan and Joshua Rauh finds that it's not corporate honchos who are filling up the ranks of the filthy rich. It's hedge fund managers. Or, as Kaplan and Rauh put it, ''the top 25 hedge fund managers combined appear to have earned more than all 500 S.&P. 500 C.E.O.'s combined.'' The hedge fund guys are profiting not because there's been a shift in social norms favoring the megarich. It's just that a few superstars are now handling so much capital.

Eighth, to the extent that C.E.O. pay packets have thickened (and they have), there may be good economic reasons. The bigger a company gets, the more a talented C.E.O. can do to increase earnings. Over the past two and a half decades, the value of top U.S. companies has increased 500 percent, according to Xavier Gabaix and Augustin Landier. The compensation for the C.E.O.'s of those companies has also increased 500 percent.

Ninth, we're in the middle of one of the greatest economic eras ever. Global poverty has declined at astounding rates. Globalization boosts each American household's income by about $10,000 a year. The U.S. economy, despite all the bad-mouthing, is chugging along. Thanks to all the growth, tax revenues are at 18.8 percent of G.D.P., higher than the historical average. The deficit is down to about 1.5 percent of G.D.P., below the historical average.

All of this is not to say everything is hunky-dory. Inequality is obviously increasing. There's evidence that global trade is producing more losers.

Instead, the main point is that the Democratic campaign rhetoric is taking on a life of its own, and drifting further away from reality. Feeding off pessimism about the war and anger at Washington, candidates now compete to tell dark, angry and conspiratorial stories about the economy.

I doubt there's much Republicans can do to salvage their fortunes by 2008. But over the long term a G.O.P. rebound can be built by capturing the Bill Clinton/Democratic Leadership Council ground that the Democrats are now abandoning. Whoever gets globalization right will have a bright future, and in the long run, the facts matter.

Labels: America, inequality

Human beings are worth virtually nothing. That at least is the conclusion of the new “insignificance” tour at the prestigious American Museum of Natural History in New York. The tour is led by Jing Li, a Columbia university student, who is quoted in an article in the New York Sun as saying "The objective for me is to show how insignificant humans are on a planetary, evolutionary, and socio-economic-anthropologic scale". So humans have only lived for a tiny fraction of time in planetary terms, we are not at the top of the food chain and our environment determines who we are.

It is a sad reflection of contemporary society that human achievements are viewed with such disdain.

Labels: America, development, environment, progress

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

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

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

The Christian Science Monitor has a review of Bill McKibben’s Deep Economy (Times Books). McKibben is a prolific writer, climate change campaigner (see 2 April 2007 post), active Methodist and leading growth sceptic.

Judging by the summary of his book it contains little that is new. Environmental limits, happiness and inequality are all there. However, it is likely to be an articulate synthesis:

“McKibben's main thesis: ‘Growth is no longer making most people wealthier, but instead is generating inequality and insecurity.’

“Growth ‘is bumping up against physical limits" [peak oil and global warming] so that continuing to expand the economy may be impossible and possibly even dangerous.’

“Then there's this wild card: ‘New research from many quarters has started to show that even when growth does make us wealthier, the greater wealth no longer makes us happier.’"

The review also puts McKibben in the tradition of other American writers who advocate greater communal living and reducing the human impact on the environment including: Hazel Henderson, Lester Brown, Herman Daly, Wendell Berry, Jonathan Rowe, Sarah van Gelder, Duane Elgin, and Vicki Robin. Arguably Henry David Thoreau and even EF Schumacher (although he was a Briton of German origin) belong there too.

Labels: America, book, growth, happiness, inequality

The Economist’s Lexington column has a useful discussion of The Age of Abundance, a new book by Brink Lindsey of the Cato Institute:

“His argument goes like this. The industrial revolution in America was driven by a bourgeois Protestant ethic that celebrated work and frowned on self-indulgence. Those who invested their pay earned respect as well as compound interest; those who wasted it on whiskey and cards forwent both. But over the years, thrift combined with technology and capitalism produced such vast returns that thrift went out of fashion. The 1960s saw the coming-of-age of the first generation whose members had never known scarcity, and therefore did not fear it. Spurning their parents' self-restraint, the baby-boomers rebelled against every form of authority and sampled every form of fun.

“It was quite a party. Mr Lindsey, a vice-president at the libertarian Cato Institute, makes two observations about it. First, it could not have happened without mass prosperity. The search for alternative lifestyles was driven by college students, whose numbers exploded during the 1960s, and who were the only group with the spare time and cash to attend love-ins, be-ins and yogic retreats. Second, the 1960s spawned the two cultural movements that still dominate American politics. There was the counter-cultural left, whose members were eager to explore new freedoms and who pushed for civil rights, feminism and environmentalism as well as sex, drugs and rock 'n' roll. And partly in reaction to the excesses of the counter-culture, there was a revival of socially conservative Protestantism. As flower children were celebrating the “Summer of Love” in San Francisco, Oral Roberts, a fundamentalist preacher, was founding a university in Oklahoma to fight their dissolute ideas.”

Lindsey’s book is in contrast to Benjamin Barber’s(see 7 May post).

Labels: America, book, consumption

Spiked has published an article by me on the campaign to oust Paul Wolfowitz as president of the World Bank. It argues that it is the poorest people of the world who suffer most as a result of the campaign against corruption.

Labels: Africa, America, corruption, spiked

Two prominent American economists have written a justification for income inequality. Gary Becker, a Nobel laureate, and Kevin Murphy, winner of the John Bates Clark Medal of the American Economic Association, argue that widening inequality can be “beneficial and desirable”. In an article on American.com they point out that in China the rise in income inequality has accompanied a sharp decline in absolute poverty. In America it represents an increasing pay-off for education and other skills. Both African Americans and women have benefited from the latter trend.

The two authors are partly right. It is true that absolute rises in incomes and living standards should be welcomed. However, it would be preferable if those at the bottom of the income distribution gained even more tha