Who will ‘burn the house down’?

My friend and co-author Gulzar Natarajan has a lengthy and detailed post on few very important and thoughtful articles and reports that have been doing the rounds in the last week or so. His post is  very comprehensive.

I have the following comments on his blog post. It is a slightly expanded version of the comment I left on his post.

I am pleased to see that you had linked to the perceptive essay by Jonathan Rothwell in NYT on the elite interests that have gamed the system and the rules in their favour. Rothwell may be making one mistake, however.

In his long essay and in his tweets, he is dismissing the role of technology and globalisation in the extremely distorted income distribution. But, they were the pursuits and priorities of elites who gamed the regulations (as per his own analysis) to pursue technological upgradation and globalisation that delivered profits. So, they did contribute to the problem of inequality because they were ‘elite’ projects. Some of the domestic factors he lists could be more important but it would be hard to dismiss technological progress and globalisation as inconsequential for in-country rise in inequality in the developed world. In this regard, the review of the book, ‘Captured Economy’ is worth a read. It is well written.

As we discussed bilaterally, to a degree, the recommendation of the Mckinsey Global Institute (MGI) on more digitisation and more technology to restore the ‘glory’ of U.S. manufacturing (mind you, the ostensible problem they were dealing with was the declining labour share of income) vindicates Rothwell above!

MGI report notes that the labour share of income in the U.S. had dropped from 59.8% in 1970 to 55.6% in 2015 and that manufacturing contributed 68% to this decline. But, the solutions they propose, even if they restore the glory of U.S. manufacturing somewhat, might actually further erode labour income share if machines and robots replace workers while only requiring and paying some highly skilled workers and fewer of them. On paper, that might boost labour share of income but the median worker pay will not have improved. Even now, the decline in the U.S. labour share of income will be far pronounced if financial services workers are excluded.

One does not identify the decline of the manufacturing as a principal contributor to the decline of labour share of income and proceed to give solutions that might worsen the situation further. At the very least, there should be a debate/discussion in the report on the consequences of their proposals for the labour share of income. But, I had not read the full MGI report but only the Executive Summary. May be, the full report has such a discussion. The full report and the Executive Summary can be found here.

Further, although Tony Rothman in ‘Project Syndicate’ focuses more on customer convenience and the ‘ends’ of technological upgrades being lost (motion is not progress) in the welter of mindless ‘improvements’ and ‘enhancements’, that too is part of the problem.

As you conclude, the solution is to ‘burn the house down’ completely. But, that leads us to a cul-de-sac. In the Seventies, the pendulum swung (the house was brought down, as it existed then) due to a combination of factors:

  • Excessive abuse of labour power;
  • Economic misery – stagflation
  • The turning of the intellectual tide in favour of rules over discretion, Disgust with politics as usual (Nixon’s impeachment, Ford’s pardon and Carter’s perceived or real ineffectiveness)
  • Rise of alternative leaders who were not exactly perceived ‘extreme’ like in the case of Donald Trump

May be, I am missing out some.

But, if we try to develop a comparable checklist now, we do have

  • Excessive abuse of the power of capital by capitalists
  • Instead of stagflation, we have extreme inequality
  • There was disgust with politics as usual – it is demonstrated in the multiple political election and referendum results across Europe and the United States

But, what is missing are these two,

– There is intellectual resistance to changing the status quo – many would lose out on their personal perks and influence. Notice how many are writing as boldly as Dani Rodrik is writing. Very few. Those who do are not deemed ‘mainstream’. For example, the monetary policy establishment has managed to brand even the BIS and folks like William White and Claudio Borio, et al, as ‘extreme’ or ‘fringes’.

The ‘99%’ is unable to mobilise and have a sane leadership with clarity of purpose and goals as capitalists on either side of the Atlantic were able to achieve in the Seventies.

Usually, crises help overcome all these drawbacks and throw up policy and personnel (leadership) alternatives. One thought that the 2008 crisis would do that. To a degree, it has. It has cracked open the door. But, the door is still being manned and protected well, despite cracks in the door and in the castle.

Perhaps, it needs another crisis to ‘burn the house down’ as you put it. Or, may be, somewhat less dramatically, as Mark Klieman had written (tweeted by Jonathan Rothwell),

a political strategy capable of mobilizing forces proportionate to the massive task at hand. [Link]

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The travails and the triumph of Blackpool

This morning, as I was waiting for my turn in the Purohits’ house in Singapore to perform the rituals for one’s departed elders on the New Moon day, I caught up with Sarah O’ Connor’s piece in FT on the coastal town of Blackpool in UK Northwest.

It is a great article in many respects. Some commentators in FT have identified the reasons. It is honest journalistic work; told with sensitivity and with no ideological baggage – one way or the other. There is no air of superiority; there are no lazy ‘I know it all’ prescriptions. The journalist lets the protagonists speak. It is their voices that come through. Ms. Sarah O’ Connor – take a bow!

Further, as several have written, these are the kinds of stories that keep the faith in FT hanging by a thread. They are the antidotes to having ‘free lunches’ and reading other worthies who forget what they themselves wrote earlier or have become so blatantly one-sided that they should add disclaimers about their ideological leanings and personal prejudices.

At least, the FT Editor cannot claim now not to know what clicks with its readers and what they expect of it.

There are many statements made in the article – either by the journalist or by the people of Blackpool – that are worthy of reflection. They make for ideal seminar topics as some of them are rich and are eternal public policy questions. I capture them below with some comments/thoughts preceding them, with the full realisation that opinions an interpretations of the quotes can and will be different.

This is a wonderful doctoral dissertation topic

Well there’s 5,000 new jobs in London every week, and people seem to find it perfectly easy to move 600 miles from rural Romania to take one of these jobs, so why can’t you move 200 miles from Blackpool?’ — it’s true but it sort of ignores the social context.

This lays out how difficult it is to address root causes and why GPs cannot be held responsible for addressing root causes. But, symptomatic treatment is supposed to help buy time for addressing the root causes.  An analogy is QE and zero or negative interest rates. But, they have become the only treatment and for ever!

 Well, yeah, that’s what medicine does, it treats symptoms. Setting a bone doesn’t get to the root cause of a broken leg — if you wanted to get to the root cause, your job would be to remove the slightly wonky paving stones that drunk people fall over on the way out of pubs on Friday night.” Rajpura argues that the ultimate answer is to tackle the mental health equivalent of the wonky paving stones. He believes that, in places such as Blackpool, we sometimes end up medicating economic and social problems.

This is the holistic understanding that policymakers should have. Indeed, even ordinary citizens should remember. The answer to health issues may lie in non-health aspects and medication may only be a part answer:

 [That’s because] 80 per cent of health is determined outside the health service; it’s things like whether you’ve got a job, whether you’ve got a decent home, whether you’ve got social connections and friends.

This is about synergy, information sharing, shedding egos and breaking down silos and it is about walking around and seeing what is there in one’s environment. Sometimes, answers are right under our noses but we become so engrossed in our own little world that we fail to notice the answers around us. Holistic thinking, approach – all those lessons are implicit in the statement below.

Last but not the least, it is about how various government welfare (or even private) initiatives must work together, learn to appreciate the inter-linkages and co-dependencies between each other.

 Rajpura wants to make all these social groups, charities, health services and council services aware of each other, so that GPs have more options when a patient such as Phillips sits down in their examination room.

WoW! Ronald Reagan and Margaret Thatcher (and even Ayn Rynd?) would feel vindicated. This is one of the many evidence of a non-doctrinaire and non-ideological reporting that Ms. Sarah O’ Connor has done in this piece. There is something to be said for taking charge and not depending on the welfare state to do its work for you. The question is about lending a helping hand without making the beneficiaries getting addicted to it. Addiction to welfare and doles is as harmful (to oneself and to the society and to the nation’s coffers) as addiction to drugs are. At least with the latter, the damage is somewhat confined to fewer set of people. The statement below goes to the heart of the challenge: how to help in need; for how long; how much; when to withdraw and how not to stifle humans’ innate survival and fighting instincts.

In any case, Dean Baker, Larry Summers and Paul Krugman should read this article.

“Places like Blackpool have suffered deep budget cuts since 2010, putting public services under pressure. But, says Tracy Hopkins, chief executive of Blackpool Citizens Advice, “It’s led us to be more creative about the solutions. There’s really positive things that have come out of — dare I say it — austerity.

What a brilliant articulation of a public policy goal?! Perhaps, it should be the only goal? Get out of the way; provide or enable the infrastructure to be provided and provide an insurance role – whether it is health or harvest or price realisation or access to credit – step in and provide insurance, when the so-called market mechanism is indifferent or insensitive or simply cannot provide it.

 The state’s “fundamental purpose” is to provide people with insurance against macroeconomic risks they can’t avoid, she says. “And it hasn’t been working since the early 1980s. 

As is evident from this long post, it is clear that Sarah O’ Connor has achieved the purpose of writing – making readers think or rise to the challenge of thinking! Congratulations and may we read more such stuff from her.

Finally, if we are ready to criticise the newspaper (FT) for all the other stuff it has been peddling for the last several years (including its continued backing for ultra-loose monetary policies that is part of the problems faced by places like Blackpool), we should not hesitate to praise it for publishing pieces like this too.

FT too can and should take a bow! Congratulations.

An unreasonable assumption

In reviewing two important books that are making the case for incorporating moral considerations into economics turning it from ‘dismal science’ into ‘distinguished science’, Ricardo Hausmann writes,

But with a few reasonable assumptions, such as the idea that more is better than less, you can make many predictions about how people will behave.

The more I think about it, the more I feel that it is not a reasonable assumption at all because if, at any given point in time, more is preferred to less (or, what you have – because what you have can always be less than what you imagine you should have), it is both socially, economically and morally hugely problematic because the answer to that desire is unbounded.

Humans and Robots

In southern Denmark, the regional government hired a chief robotics officer, Poul Martin Møller, to help integrate more robots into the public sector, largely as a money-saving measure. He decided that the Danish hospital system, which was under pressure to reduce costs, could benefit from robotic orderlies. There were few medical-oriented robots on the market, though, so Møller and his team took small, mobile robots with movable arms, designed for use in warehouses, and refashioned them, so that they could carry supplies to doctors and nurses. The machines worked well, scuttling through surgery wings and psych wards like helpful crabs, never complaining or taking cigarette breaks. But Møller wasn’t prepared for the reaction of the hospital staff, who recognized their mechanical colleagues as potential replacements, and tried to sabotage them. Fecal matter and urine were left in charging stations. [Link]

It is a fairly long article but worth a read.

What is Ray Dalio saying here?

Average statistics camouflage what is happening in the economy, which could lead to dangerous miscalculations, most importantly by policy makers. For example, looking at average statistics could lead the Federal Reserve to judge the economy for the average man to be healthier than it really is and to misgauge the most important things that are going on with the economy, labor markets, inflation, capital formation, and productivity, rather than if the Fed were to use more granular statistics. That could lead the Fed to run an inappropriate monetary policy. Because the economic, social, and political consequences of an economic downturn would likely be severe, if I were running Fed policy, I would want to take this into consideration and keep an eye on the economy of the bottom 60%. [Link]

It is not clear to me as to what Mr. Ray Dalio is advocating here. Does he want the Federal Reserve not to try to normalise monetary policy. Honestly, they have been doing it so gingerly over the last four years that financial conditions have eased substantially since
they began their ever-so-glacial tightening in 2014.

If he documents the divide between the bottom 60% and the top 40% so eloquently, does he not know that Fed policy has played a big role in creating this chasm?

And

He wants the Federal Reserve not to reverse it because it would ‘hurt’ the bottom 60%!

I am TOTALLY LOST.

Demonetisation update 34: from the annual report of OCL India

India’s installed cement production capacity is 450 million metric tonnes (MMT) – second largest cement producer and consumer in the world. Actual production has grown from around 230 tonnes in 2012 to around 280 MMT in 2016-17. That is 21.7% growth in five years and it is 4% CAGR. In fact, in 2016-17, there was a slight decline from 284 MMT in 2015-16 to 280 MMT.

Given these, numbers – cement and tyre production in 2016-17, one can deduce that there has been a considerable growth slowdown.

City-States over Nation-States?

My friend Ram forwarded me the first of the four-part lecture by Lim Siong Guan for the Institute of Policy Studies – Nathan annual lecture series. The first lecture was titled, ‘Accidental Nation’. It is worth going through. The full lecture is available here. Mr. Lim mentions a paper by Sir John Glubb: ‘Fate of empires and search for survival’. The extracts he cited were interesting. The paper is available here. I am yet to read it. I hope this is the paper he referred to.

My wife found an interesting article in the ‘Comments’ section below the newspaper report that carried his speech highlights. That article suggests that the future belongs to City-States rather than nation-States. I don’t buy that. Not that I have done much research into it. Nor do I claim myself to be an expert in such matters. I am grateful to be educated.

From the article, I learnt about the unclaimed land between Croatia and Serbia and also about Patri Friedman, the grandson of Milton Friedman.

But, I do believe that modern nation-States would last longer than the ancient Roman Empire, perhaps.

Humans need anchor these days. They have come a long way from their nomadic hunter-gatherer days. Back then, there were no identity markers such as religions and groups. Now that we have them, it is difficult to go back to that ultimate ‘libertarian’ world.

Even those who enjoy the freedoms that cities afford but nation-States don’t – the highly educated foot-loose global citizens who feel at home in all global cities rather quickly – would ache for the protection and security that nation-States afford when technology and other threats make their livelihoods and lives that much less secure.

So, it is good to have competition for today’s Nation-States. But, I am not prepared to wager on their demise. Not soon.