Saturday, August 15, 2009

The Waiting Game

The headlines have now largely disappeared, and the financial crisis sits quietly humming away in the background. The sense of collapse, the immediacy of the crisis seems to have dissolved and economics has been returned to the finance pages, for the interest of the economics 'nerds' only. The New York Times headlines with a story about Myanmar, and the Times headlines a story about curbing bonuses in the UK. The obsession with banking bonuses continues, but the state of the British economy barely gets a mention.

It also appears that those that follow the crisis have now settled into two distinct camps. On the one side there are those (like myself) who believe that the government pouring of borrowed money into the economy and printing of ever more money is a catastrophe, and those who believe that the action has 'saved' us from a far worse fate. Some, like Krugman, worry that the spending and printing are insufficient, and advocate more government intervention. How much 'enough' might be is never clear, and the source of the flood of money to be used is not discussed.

Occasionally a story still breaks into the headline news, for example the relentless rise in the numbers of the unemployed. However, most of the important stories fail to gain any traction, such as the ongoing bank failures in the US, or the melt down in commercial property. In the meanwhile organisations like the IMF are predicting economic growth (albeit sluggish) for the coming year. This is the same organisation that has just approved $250 billion in Special Drawing Rights to provide 'liquidity' to the world economy.

It seems that the headline writers believe that we have indeed turned the corner, and that all will eventually end well.

Part of the problem is the ongoing belief that what has taken place is rooted in irresponsible bankers creating dangerous financial instruments. It is the belief that the crisis was simply a matter of poor banking practices, rather than an underlying economic crisis with the financial crisis as a symptom. For those of you who are new to this blog, you may wish to read my article on the underlying causes of the economic crisis here (a link to an article on Huliq). The simple fact is that the world changed in the last ten years, and many 'developed' economies have failed to adapt to a more competitive world. The full entry into the world economy of countries like China and India changed the game, but the rich world is playing according to an out of date rule book.

The problem is that the excess borrowing of recent times simply hid the underlying change in the world economy, and the process of more borrowing by governments seeks to do the same. The borrowing does not alter the competitive position of the developed world (see note 1), but simply hides the lack of ability to compete, and does so at the cost of hobbling the economies in the future. The one thing that needs to be changed, the reform of economies such that they can return to being competitive, is nowhere to be seen in government policy. Instead of government action to make the developed economies leaner, they seek to maintain the fat in the economy.

In my last post I reviewed the fundamentals of the UK economy, and looked for any source of real and sustainable growth in the economy, and found none. There is no productivity miracle taking place, we are still seeing unemployment climbing, and we are still consuming more than we produce. All this is taking place while the economy sinks ever deeper into debt.

The question that is rarely (if ever) asked is this; where is the real and sustainable growth going to come from? Which industry, which sector, is going to return the economies to surplus - such that the money borrowed from overseas might be paid back. For those, like Krugman, who advocate more borrowing and spending, this small detail eludes them. I have yet to see any of the advocates of borrow and spend identify how the economies might return to a current account surplus, an absolute necessity if an economy is to repay overseas borrowing. Instead, they simply advocate more borrowing, and an ongoing deficit as that borrowing translates into more imports, more interest repayments, and a greater charge on the future output of the economies.

So now we are in the waiting game. There is no prospect of return to surplus, ever more borrowing, ever more printing of money. There is no explanation of how economies such as the UK or US might ever repay the money, no reform, just more spending, more consumed than produced. In the end, only time will tell which side of the argument is right. The argument boils down to this; how long can an economy consume more than it produces?



Note 1: There are, of course, 'developed' countries such as Germany who run current account surpluses and which are still competitive.

28 comments:

  1. Doubling of the World Labour Force: Myth or Reality?

    You argue:

    What we can see from 1997-2007 is an approximate doubling of the labour force, and only a tiny increase in the output of another key component of economic activity.

    In 1990, the world labour force was 2.4 billion. In 2003, it was 2.957 billion (Ghose, Majid and Ernst 2008: 25).

    So the world labour force only increased by 22.93% between 1990 and 2003. It did not double.

    According to the CIA World Factbook, the world labour force in 2007 was 3.131 billion.

    So from 1990 to 2007, the world labour force only increased by 30.13%.

    These figures don't support your argument on Huliq about world labour having doubled from 1997-2007.

    Furthermore, once you recognise that in any one year some percentage of the world labour force is always unemployed, the figures given above are actually misleading.

    For example, in 1998, it is estimated that one third of the world’s labour force was unemployed or underemployed. So one third was not even productive labour.

    See Social Security: A New Consensus, International Labour Office, Geneva, 2001. p. 50. The figure can be viewed here:

    http://books.google.co.nz/books?id=pfYz0JSYtoEC&pg=PA50&dq=%22world+labour+force%22+1997&lr=#v=onepage&q=%22world%20labour%20force%22%201997&f=false


    For the figures on the world labour force from 1990 to 2003, see A.K. Ghose, N. Majid, C. Ernst. 2008. The Global Employment Challenge, International Labour Office, Geneva. page 25.
    You can view it on Google books here:

    http://books.google.co.nz/books?id=zrLcdnOrqfgC&pg=RA1-PA25&dq=%22world+labour+force%22+1990#v=onepage&q=%22world%20labour%20force%22%201990&f=false

    ReplyDelete
  2. China’s Labour Force has not doubled from 1995 to 2006

    In 1990, China’s total labour force was 647.49 million.

    In 2003, China’s total labour force was 744.32 million.

    Thus China’s labour force increased by 14.95% from 1990 to 2003.

    In 1995, China’s total labour force was 680.65 million.

    From 1995 to 2003, it increased by 9.35%.

    (All figures from Gregory Veeck et al., 2007. China’s Geography: Globalization and the Dynamics of Political, Economic, and Social change, Rowman & Littlefield Publishers, Plymouth. p. 179.
    This can be viewed here:

    http://books.google.co.nz/books?id=52u3uToS2IQC&pg=PA179&lpg=PA179&dq=china+%22labor+force%22+1990+2000+manufacturing&source=bl&ots=sMdu9HNP8u&sig=HUdy2Jo_-sOmrApiFZEvAn9IJm0&hl=en&ei=Y2qHSuXoHIaqsgP55dDmAg&sa=X&oi=book_result&ct=result&resnum=5#v=onepage&q=china%20%22labor%20force%22%201990%202000%20manufacturing&f=false).

    It is estimated that China’s labour force in 2006 was 798.1 million.

    So from 1995 to 2006, China’s labour force increased by 17.25%.

    Again none of this supports the idea that China’s labour force doubled. In fact, from 1995 until about 2000, manufacturing employment in China actually declined!

    See Judith Banister, “Manufacturing Employment in China,” Monthly Labor Review, July 2005: 11-29.

    See explains:

    Official data from the China National Bureau of Statistics and the Labor Ministry show a steep drop in urban manufacturing employment in China from 1995 to 2001 and in total manufacturing employment from 1995 to 2000, after which the numbers stabilized or began to rise …. After statistical corrections in both urban and TVE data, China was estimated to have approximately 112 million manufacturing employees at yearend 1998. The number declined to about 108 million in 2000–01 and rose slightly to 109 million by yearend 2002. All of these estimates are based on the supposition that there is no overlap between TVE and official urban manufacturing employee figures. This article has demonstrated that manufacturing employment in China increased during the 1980s and early 1990s, peaked in about 1995–96, declined during the late 1990s until 2000–01, and increased again in 2002.

    Judith Banister, “Manufacturing Employment in China,” Monthly Labor Review, July 2005: 11-29.

    Later figures are available in “Manufacturing jobs in China surge beyond 110 million,” Manufacturing & Technology News 15.14 (July 31, 2008): 2.

    Its conclusions are:

    The number of manufacturing jobs in China has been increasing substantially since 2002, according to Judith Banister director of global demographics at The Conference Board. In 2002, manufacturing employment in China dropped to a 14-year low of 101 million jobs. But as former state-owned enterprises continued to be privatized and as foreign investment in new factories increased, manufacturing employment surged. By 2004, China's average manufacturing employment had increased once again to 104.5 million, and by yearend 2005, the total had reached 110.6 million.

    So by 2005, manufacturing employment in China was about 110.6 million, a number which is actually below the 1998 peak of 112 million manufacturing employees.

    So even in Chinese manufacturing the labour force has not doubled, but actually declined overall since 1998.

    Conclusions
    As I showed in the last post, the world labour force did not double even over the past twenty years. Nor did it double over the past ten years.

    So from 1990 to 2007, the world labour force only increased by 30.13% (and this does not take account of yearly unemployed labour).

    In China, from 1990 to 2006, the labour force increased by 23.26%, below the world average.

    All of this shows that the thesis that world labour doubled from 1997-2007 is simply not correct.

    What has happened is that manufacturing output in China and East Asia increased, but I will save this for another post.

    ReplyDelete
  3. Lord Keynes:

    You seem to have missed the following critical point from my article on Huliq:

    "It might be argued that the labour force has always been there, such that the doubling I propose is an exaggeration. However, in this context I have a very specific meaning for labour. I am referring to labour which is combined with technology, capital, and access to the world market. When seen this way, the increase in the labour supply represents an astounding increase in one of the key inputs into all economic activity."

    I think this covers all of your points.

    ReplyDelete
  4. Reply on World Labour Supply 1

    You say:

    It might be argued that the labour force has always been there, such that the doubling I propose is an exaggeration. However, in this context I have a very specific meaning for labour. I am referring to labour which is combined with technology, capital, and access to the world market.

    Then how actually is this "labour which is combined with technology, capital, and access to the world market" defined? Who are these people? In what sectors do they work?

    What international agency or economic institution measures such jobs?

    How can they not be a subset of the total world labour force?

    Where’s the empirical evidence that jobs of this type of labour have doubled?

    In the absence of hard empirical evidence, this is just a claim that cannot be substantiated.

    It is obvious that manufacturing labour in the export-led growth economies of East Asia must be a large component of this world "labour which is combined with technology, capital, and access to the world market" that you talk about.

    Yet, as I have shown above, in China the manufacturing labour force actually declined in the 1997 to 2006 period.

    And, above all, manufacturing employment in the West and Japan has also fallen sharply since 1990. For instance, the US manufacturing sector lost three million jobs between 1998 and 2003. Yet these are precisely the people who would also count as “labour which is combined with technology, capital, and access to the world market”

    Have you factored the loss of this labour into your analysis?

    As you can see in this graph, manufacturing output in China as a share of global manufacturing output has surged despite the fact that manufacturing employment in China has declined:

    http://myinsight.globalinsight.com/imgs/content/d709ac55-8f4b-4141-afb4-319f9dc9137a.jpg

    The Chinese manufacturing workers (whose numbers declined overall) benefited from Western capital and technology and then export-led growth and moved into industries exporting for world markets, just as manufacturing employment collapsed in the Western countries and Japan.

    In the absence of hard empirical evidence of a doubling of “labour which is combined with technology, capital, and access to the world market”, it is obvious that what is happening is the outsourcing of jobs from Western countries, not a doubling of such labour.

    ReplyDelete
  5. Hi Mark. I find it interesting that you ask

    The question that is rarely (if ever) asked is this; where is the real and sustainable growth going to come from? Which industry, which sector, is going to return the economies to surplus - such that the money borrowed from overseas might be paid back.

    Isn't the whole point of free market capitalism that you don't have to ask that question; it just happens. It can't be predicted; the next growth industry may not have even been invented yet. People's self-interest will cause them to innovate new ways around difficulties concerning debt re-payment or high energy prices. The borrowing and printing of money merely sows the seeds of this growth. Growth has always happened in the past, and it will again.

    What's wrong with this argument? Isn't it what people such as Gordon Brown and Lord Mandelson believe?

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  6. A question regarding borrowing: when we borrow, say, 20% of our (obviously over-inflated) GDP, is it true to say that, effectively, someone else is providing surplus manpower equivalent to 20% of our economy? i.e. borrowed 'money' is turned into real goods and services when spent, which must be provided by someone's real effort.

    Given that our - and the US's - economy is much bigger than it used to be (60 quarters of continuous growth! - remember that one?), and considering the high proportion of our income that is now borrowed, plus the falls in prices of all kinds of manufactured goods, I have no trouble believing that the world's economically-effective workforce has doubled over the last few years.

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  7. The_Rational_MartianAugust 16, 2009 at 2:59 AM

    Lord Keynes, you wrote: "...it is obvious that what is happening is the outsourcing of jobs from Western countries, not a doubling of such labour."

    I think both the above statement and what CE says about the doubling of labor supply (although some numbers are warranted when using quantitative descriptions such as "doubled") amount to the same thing.

    While the size of the labor force in India and China is broadly unchanged, their exposure to the global economy has shot upwards (on account of "outsourcing"). While these workers were still part of the labor force before emerging on the global scene, they were primarily engaged in domestic industry. But starting from the early 80s in China and the 90s in India, they've become much more globally prominent.

    I think this explains why the West lost so many manufacturing jobs without an apprent increase in Asian manufacturing jobs; the Asian workers became much more productive and outward looking.

    I presume you'll say that Western workers have been short-changed by global corporations who
    cynically exploited cheaper labor; I contend that this a natural order of things.

    ReplyDelete
  8. It never ceases to amaze me that totally rational people can look at the facts and ignore the conclusions those facts imply. And that if enough people do so, economic laws of gravity can be defied for quite some time.

    I am no economic expert, but even I could see the DotCom bubble would burst, and also the housing market. The housing market from 2002-2007 particularly defied all rationality.

    We (and the USA) are doing the same with our borrowing right now. Because there are people prepared to lend us the money, we are doing so, as the alternative is unpalatable. That would entail honest assessments of the earning and taxation capacity of the UK, and tailoring our spending to that, rather than the level we think we deserve.

    So like Wile E Coyote, we run off the cliff, and as yet haven't fallen, because no one (other than a few internet types) dares to look down. Eventually events will show us that we are no longer supported, and the inevitable will occur. It is merely a question of when, not if.

    ReplyDelete
  9. I posted on this in general terms on Friday 14th as "The Great Question etc" and in essence aligned with your own thinking. It is not only where is the real growth coming from, it is how can it be sustained. We have tried to run an economy on the basis of debt related to inflating property prices, in the hope that the finance sector will lay off the implications in foreign dealings. It was bound to crash, and throwing money at it will simply generate another crash. How many realise how finely balanced things are?

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  10. Yes, we seem to have reached some sort of staging post. Another bank going under doesn't make any news. A decrease in the rate of unemployment is mentioned as a green shoot. Cranking up the level of QE is, well, it was done, nothing happened, so a little bit more is hardly newsworthy. The headline shocks of banks going under, or massive bonuses or politicians expenses; we have read it all. Not new news anymore, just the old news.
    I really thought that by now there would be unrest, uprisings, a country defaulting on its debts. But no, it's a case of "carry on day by day and don't think too much about it all".

    Maybe there simply won't be anything calamitous? Just a slow decay in the well being of the masses.

    "oh, I have to work until I'm 70 - uh? ok"

    "oh, I am in negative equity - uh? ok"

    As long as the TV functions and the supermarket has the basic affordable essentials, then maybe the great era of apathy is arriving?

    "we owe a great debt to China - uh? so what?"

    "they won't buy our debt anymore - uh? so what?"

    "The TV is on and I can afford the fish 'n chips, so pass us a beer from the fridge and clear off"

    ReplyDelete
  11. None of it matters does it? We're consuming wealth, (food, energy, commodities) like there's no tomorrow, and nobody is caring about money, you just print it by the shed load.

    Only when the wealth runs out will TSHTF, then it's goodnight Vienna.

    Importing millions of people is a good way of boosting our economy - Oops! they've already tried that, it's what got us into this mess in the first place.

    Ah well, back to the drawing board.

    ReplyDelete
  12. Reply to the Rational_Martian

    You say:

    I think this explains why the West lost so many manufacturing jobs without an apprent increase in Asian manufacturing jobs; the Asian workers became much more productive and outward looking.

    Then you concede that it is not the doubling of "labour combined with technology, capital, and access to the world market" that has happened, because the rise in such labour in Asia is accompanied by the collapse of such labour in the West and Japan?

    You can't have it both ways. As I argued above, for a doubling to happen, manufacturing jobs in the West would also have risen or at least remained stable.

    They haven't.

    I presume you'll say that Western workers have been short-changed by global corporations who cynically exploited cheaper labor; I contend that this a natural order of things.

    No, we've been short-changed by governments infected with idiotic neoliberal ideology, which allowed the corporations to do whatever they want.
    Governments should have adopted aggressive industrial, R&D and trade policies to keep the manufacturing jobs here. You might want to read Cynicus' earlier posts on how China subsidizes the shift in mnaufacturing (e.g., through the undervalued RMB): the process has little to do with free markets.

    ReplyDelete
  13. World Labour and Output of Commodities

    I also notice you argue that

    I have already identified that the world labour force has roughly doubled in the last ten years. At the same time, there has not been the doubling of the other inputs into the world economy. In crude terms, what this means is that the amount of inputs available to each worker to undertake economic activity has been reduced per capita. If we take the example of oil, in 1997 output was around 75 million bpd, and output had only climbed to about 85 million bpd in 2007 (a chart here shows the output - not a good source but the chart is usefully clear and conforms to charts from better sources). What we can see from 1997-2007 is an approximate doubling of the labour force, and only a tiny increase in the output of another key component of economic activity.

    As I have shown above, the world labour force has not doubled. In 1995, the world labour force was about 2.5 billion. In 2007, it was 3.131 billion. Thus it increased by 25.24%.

    This is an increase of about 600 million. Yet not all of these people are “labour combined with technology, capital, and access to the world market”.

    Even if you accept that “labour combined with technology, capital, and access to the world market” has doubled, it must be a number lower than 600 million.

    How can you calculate the number? Is it 200 million? 100 million? 40 million? 10 million?

    Moreover, without some solid figures, the claim that there was an approximate doubling of the labour force, and only a tiny increase in the output of [oil] doesn’t necessarily mean that output of oil had to double.

    An increase of 10 million workers using more energy would not require a doubling of energy inputs.

    And, as I have argued above, the loss of manufacturing jobs in the West would work against your argument, since the West has fewer workers competing for resources.

    If, say, 6 million workers appeared in China “with access to technology, capital, and the world market” over the 1997-2007 period, this was offset by the loss of 3 million jobs in America!

    This would not produce the “hyper-competition” effect you postulate.

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  14. Lord Keynes:

    After yet another comment, I thought I had better reply. I am not sure that you have grasped what competition actually is. If one person is going for a job, and two people are going for a job, in the latter case, the competition has increased. It is not actual employment but available labour that determines competition. Twice the labour available, no commensurate increase in (for example) oil, and someone is going to lose.

    With twice as much labour competing for the use of the same commodities, you have hyper-competition. I would say I hope that this settles the point, but no doubt you will continue with the point....

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  15. More on the Decline in Manufacturing Employment in the West

    This site has excellent graphs on the decline of manufacturing jobs in Western countries:

    http://economistsview.typepad.com/economistsview/2005/10/the_decline_in_.html

    From 1996 to 2004, manufacturing jobs have fallen by 20% in the US, the UK, and Japan.

    That is many millions of jobs losses that must be subtracted from the total number of new labour "combined with technology, capital, and access to the world market" appearing in China.

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  16. Lord Keynes:

    re: your last comment, this is exactly the point I am making. It is exactly the hyper-competition that is driving this......

    ReplyDelete
  17. re: your last comment, this is exactly the point I am making. It is exactly the hyper-competition that is driving this......

    But then you are conceding that the many millions of jobs losses in the West must be subtracted from the total number of new labour "combined with technology, capital, and access to the world market" appearing in China.

    The hyper-competition effect would be diminishing as jobs in the West disappeared and the US and UK economies moved to being dominated by service sectors.

    That is, the same high energy inputs required for manufacturing in the West just aren't required any more as manufacturing falls.

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  18. The_Rational_MartianAugust 16, 2009 at 11:14 PM

    Lord Keynes, you said "...Then you concede that it is not the doubling of "labour combined with technology, capital, and access to the world market" that has happened, because the rise in such labour in Asia is accompanied by the collapse of such labour in the West and Japan?

    You can't have it both ways..."

    I don't see how there is a contradiction between these two statements. It is not the number of manufacturing jobs which have doubled, it is the amount of labor available to do those jobs, while the demand has not increased by the same amount.

    Prior to economic liberalization, both India and China were socialist/communist economies which emphasized "self-reliance" and were cut off from the rest of the global economy. The workers in India and China were not in direct competition with Western workers. Now they are, and they demand much lower renumeration than Western workers doing the same job. The consequences should not surprise anyone.

    Even with very perceptive and far-sighted governments, the result would probably not have been very different, especially for blue collar workers in the West. Why pay someone 40000$ annually if someone agrees to do the same job for 4000$? Would you pay a plumber 1000$ to do a job that another guy agreed to do for 100$?

    The problem is analogous to that faced by custom automobile makers upon the advent of the model T. The only options, as I see it, is to take the pain and retrain the redundant workers, or to retreat behind high tariff walls. I'd vote for the former.

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  19. Even with very perceptive and far-sighted governments, the result would probably not have been very different, especially for blue collar workers in the West.

    Wrong, the Germans have maintained an export and manufacturing giant of an economy and reasonably high wages. It's a total myth that they don't use state industrial policy to maintain their industry.

    Why pay someone 40000$ annually if someone agrees to do the same job for 4000$? Would you pay a plumber 1000$ to do a job that another guy agreed to do for 100$?

    Because if it is applied everywhere it would mean reducing living standards to Third world levels.
    Again, take a look at Germany, which through industrial policy and state funded R&D etc, is still an industrial giant, unlike the US and the UK.

    ReplyDelete
  20. The argument boils down to this; how long can an economy consume more than it produces?

    The answer, of course, is "As long as someone else is prepared to lend (or donate?) to it."

    In the Guardian the other day was an article by Mary Midgeley on the power of fashionable ideas to distort our thinking.

    http://www.guardian.co.uk/commentisfree/belief/2009/aug/15/einstein-darwin-mary-midgley

    "In the 17th century the imagery of clockwork was terribly strong, so when Newton was trying to understand the universe he was seeing it as a clock heading in a single direction. It's not surprising that people were terribly impressed with clockwork because at the time it was magic, a miracle, a mystery. Once you have established a way like that of thinking about how things work, you stick with it, it is gratifying and satisfying – you find you can apply it to lots and lots of things, so you don't feel a need to look for another one...

    By the 19th century, the age of Charles Darwin, the market had already begun to be an image that fascinated people. The way in which Herbert Spencer developed Darwin's ideas to create this terrible idea of "social Darwinism" was an attempt to make a direct equation between the processes of the market and the processes of nature. On the one hand you see the idea of the market deployed to understand nature, illustrating "the survival of the fittest" with reference to the stock exchange; on the other you see the idea flipped so that it can be said: "the stock exchange is actually just a jungle." On both sides of the coin, things are simplified...

    Adam Smith, anyone?

    If everyone in the world believes in the same faulty model of the economy then it seems to me that lenders and borrowers will continue on the same path until the economy literally grinds to a halt.

    Adam Smith's idea is that people don't need to know how the economy actually 'works', but will respond to simple signals from which the economy will self-organise. A prerequisite of this may be that people must not have any idea of how the economy works, nor to try and second guess what is going on.

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  21. Lemming:

    Interesting comment. Yes, this is the problem of using metaphor to understand the world. It changes the way that we think of the world. In one theory of metaphor, we create a 'blended space', and this is the merging of ideas, in which we think of one thing in terms of another. My favourite example is cognitive psychology, where the brain is discussed as if it were a computer, when it is clearly not a computer.

    The use of metaphor in science has positive and negative arguments, with the positive being the aid to creative thinking, and the negative being that the way that metaphor represents the world is not how the world is.

    Agreed, as long as enough people share the same model, it is difficult to see at what point the system will break, but it will break in the end. Note, even the idea of the economy as a system is application of a metaphor!

    My idea for monetary reform is based upon a worry that the economists who 'control' the economy do not control the economy, and do not understand what they see.

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  22. Another interesting article and comments.

    I personally think we're in for a *very long* waiting game as carefully managed downward adjustments are made by the Western powers to the standards of living of the West. Nothing dramatic to upset the masses; but small gradual deteriorations (working until 70; no final salary pensions, tax rises etc). They'll be the odd jolt, sure, to speed things along a bit.

    Counting on a sea of indifference and apathy from (generally) subserviant and pliant populations, decades down the line, with the inevitable major world issues looming (environmental and the rest) we'll look back and think - hell, to think we thought we needed all those things.

    Minimalism will be de rigour as we find bigger fish to fry in a crowded, stressed world.

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  23. The_Rational_MartianAugust 17, 2009 at 8:02 AM

    Lord Keynes, you said: "...Wrong, the Germans have maintained an export and manufacturing giant of an economy and reasonably high wages.."

    That's an interesting point. What are the factors, in your opinion, which have helped retain German competitiveness? I do remember that many German workers had to promise to wage freezes and longer hours to keep their jobs in Germany though.

    "...Because if it is applied everywhere it would mean reducing living standards to Third world levels. "

    Third world living standards are improving rapidly, and I believe that in some time living standards there will rise sufficently that the wage gradient will cease to matter. Of course, the affected workers in the West will not be consoled by the prospect of waiting till Third world standards rise enough. Nevertheless, I can't see how some pain can be avoided; the entry of billions of cheap workers into the global marketplace cannot be without consequence. The pain can be ameliorated, but not done away with, IMO.

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  24. Reply to The_Rational_Martian Martian 3

    That's an interesting point. What are the factors, in your opinion, which have helped retain German competitiveness.

    Germany has an efficient state-directed industrial policy that is aimed at making it internationally competitive, and has education policies that produce a highly-skilled work force.

    Unlike neoliberal buffoons in governments in the UK and the US, the Germans are smart enough to beat the Chinese at their own game: state-led economic development in industry. In fact, the Germans were doing it as long ago as the 19th century, well before China became an economic power in 1990s.

    For an excellent overview of the history of German industrial policy, see Wilfried Feldenkirchen, “Germany: The Invention of Interventionism,” in J. Foreman-
    Peck and G. Federico (eds), European Industrial Policy (Oxford: Oxford University
    Press, 1999), pp. 98-123.

    You can read it online here:

    http://books.google.co.nz/books?id=2TgUpmIXF3MC&pg=PA98&lpg=PA98&dq=germany+%22industrial+policy%22&source=bl&ots=vNfX8c19yf&sig=UgmGvsrg6nq05Uv4foB9Q3CN_EY&hl=en&ei=j-iJSpmTHoWksgPg-IXODQ&sa=X&oi=book_result&ct=result&resnum=6#v=onepage&q=germany%20%22industrial%20policy%22&f=false


    I do remember that many German workers had to promise to wage freezes and longer hours to keep their jobs in Germany though

    Where is the evidence for this? It hasn’t affected average nominal wages which rose continuously from 1996 onwards to 2005, as you can see here (in the graph lower down the page):

    http://www.imf.org/external/pubs/ft/survey/so/2007/car051e.htm


    Also by 2007, German real wages began to rise again.



    Third world living standards are improving rapidly, and I believe that in some time living standards there will rise sufficently that the wage gradient will cease to matter.

    No, they are not. Outside of East Asia, where governments largely reject neoliberalism, growth has fallen.

    For those countries that followed the rules of neoliberalism – in Africa, the Caribbean, Latin America, and the former Soviet Union – growth rates collapsed to a level lower than the Bretton Woods era, and in some areas poverty rates have got worse.

    ReplyDelete
  25. Why Capital Controls and Financial regulation would have prevented the Crisis

    I have responded to another thesis of Cynicus on the financal crisis here:

    http://socialdemocracy21stcentury.blogspot.com/

    A sample:

    it is simply not true that the flood of money flowing into the West from 2000 to 2006 was unprecedented or novel. There is an obvious historical parallel: the petrodollars that started flooding into London and New York banks in 1973–1974 and 1979 after the “oil shock” price surge. In 1974, the Arab oil-producing countries had a current account surplus of $68 billion US, which they mostly invested in the West (in 2007 inflation-adjusted US dollars that would be the equivalent of $285 billion entering the US economy). In 1975, these countries had a surplus of US $92 billion, an even greater amount.

    And yet the Western financial system was not destroyed by large destructive asset bubbles in these years. Why?

    The reason is that we had effective financial regulation that still existed before the onslaught of deregulation in the 1980s and 1990s.

    ReplyDelete
  26. Cynicus,

    Do you know the Modern Mystic is reading out your blog on YouTube. You are becoming very famous indeed.

    Check out his link!!

    http://www.youtube.com/watch?v=NyQIP5DzjVU

    ReplyDelete
  27. The time for honourable repayment of debt has long since passed. Deficits are now so bloated, particularly in the welfare/warfare states, that currency devaluation is the only feasible option short of repudiation.

    A formal currency devaluation is a remote possibility, if only because no politican desires the reputation as the man to pare a digit or two from everyone's bank balance - although in my case this would be a positive development.

    There's an even more distant possibility, of course, involving massive tax hikes. However, the doubling (and worse) of taxes to pay down debt would cause more problems than it solved and, again, constitute political suicide.

    So, devaluation will likely take the form of monetary inflation; assuming there's some other kind. All this "quantitative easing" to prop up the bankstas is extracted from the value of currency owed to our creditors... Whose patience is not infinite, as I believe CE has remarked.

    Can anyone forsee how high - even hyper - inflation, particularly in America, will play out globally? It's an unpleasant prospect certainly, but then preparation is half the battle.

    ReplyDelete
  28. Mervyn King wanted to buy half of the UK government debt market

    http://blogs.telegraph.co.uk/finance/edmundconway/100000656/mervyn-king-wanted-to-buy-half-of-the-uk-government-debt-market/

    ReplyDelete

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