I am at the International Monetary Fund (IMF) – World Bank Annual Spring meetings as a Non-Governmental Civil Society Organization (NG-CSO) participant this week.
These usually eclectic gatherings of development professionals such as myself, subject to disturbance of peace persecutions when in violation of the First Amendment of the United States Constitution since the World Trade Organization (WTO) meetings in Seattle in 1999 where tear gas was used by people with tears in their eyes of passion for development on the inside on those with tears in their eyes of passion on the streets. That social disconnect from the crises of the 1990s has come to bear upon us all now, inside America and outside, maturing the processes of engagement of economic institutions with the peoples of the world.
Joseph Stiglitz was fired from his perch as the Chief Economist of The World Bank for his criticism of trade policies during the 1990s. He was then Nobelled. Stiglitz then wrote a book called Civilization and Discontents and once again criticized the International Monetary Fund (IMF) when Kenneth Rogoff was the Economic Councellor of the IMF. Rogoff, a former Section Chief in the Federal Reserve’s International Finance Division, who later became an academic in 2002, perceived Stigilitz’s Keynesian social justice critique of global trade with utter disregard and defended the IMF from Nobel Laureate “Joe” on the IMF’s public website.
Here we are in 2012. US unemployment is at 8.2 per cent (and broadly at 14.5%), European unemployment would rather not be measured, Indian unemployment is rising and China’s growth is slowing. Income inequity, across the world, including in the United States, is not a pretty sight to behold. Economic recovery after 2007 is in a tantalizing steady-state, money taps wide open around the world with nothing much to show for the paper. The flypaper from the central banks and the finance departments of governments can only be found when subject to investigation.
The people see government as good per se, but corrupt.
A panel on the ethos of inclusion led by economic ethicist and Nobel Laureate Amartya Sen at the United Nations Development Program (UNDP) in Manhattan, New York perceives the people of Europe in crisis and the world as needing good government. Political governance is being seen as held hostage by financial interests.
The governments, however, appear to be seeing, in my view, the popular desire for benevolence in representation as an economic want, but not a need. The crisis, in their minds, is a bad dream of the otherwise prosperous 1990s which went awry after Iraq, only to be waited out.
Both sides have a point, because at issue is not more or less government, but the structure of better government.
Economists have a tendency to stick to supercessions. New models replace old models. The lenses change. The neoclassical progress to truth is not a tapestry of ideas but a straight line. Robert Solow had given the structural break to growth theory. All which had come before him is scientific precedence for the first few pages of advanced text books on economic growth.
Wisdom, however, is hinged on context. The semantics of observation in applied economics enables the choice of models, not the blind use of a particular model akin to a harnessed horse with blinders on unable to see the green fields in peripheral view.
The Harrod–Domar model, developed independently in 1939 and 1946 respectively by Sir Roy F. Harrod and Evsey Domar, used a production function where output was purely a function of capital stock but not labor. It produced knife-edge properties of economic instability.
Robert Solow explained steady state growth better with the now more standard Cobb-Douglas production function which produces constant returns to scale or 1 unit each of labor and capital returns one unit of output. Solow-Swann does not, however, mean that Harrod-Domar is wrong.
High levels of unemployment must be explainable by the distribution of capital stock relative to labor participation in the production of output, under the assumption that financial capital from central banks is transformed into industrial and service (or human) capital leading to economic growth.
At the present time, labor participation in the global economy is low and is trending lower – meaning effective, not average, capital provides a better picture of what is really happening in the labor markets: more capital is being distributed among the few, leading to income inequity in a post-modern version of feudalism.
Harrod-Domar led to Marxism after the Industrial Revolution and may once again lead to Market Authoritarianism after the crisis of 2007.
The matter of ethics of the financial crisis is more or less a straight forward explanation from the text books of microeconomics: moral hazard in monetary policy since 1987 leading to the shift out of the steady state of Solow-Swann’s labor and capital to the knife-edge instability of Harrod-Domar’s capital during the Great Moderation in inflation in the United States.
Advanced economies are increasingly services-oriented. US economy is comprised of slightly more than 50 per cent Service-sector participation, the other two sectors being Agriculture and Industry, domestic US consumption, in particular, relying on foreign production in the Industrial sector.
Corporate debt is written-off by fiscal policies and/or forgiven by monetary policy.
Capital owners are not investing as much in industrial output and their Marginal Propensity to Invest (MPI), an unprecedented concept in economic theory except in these pages, given the money supply by central banks cannot be as influenced by the central banks, at least not yet.
The pricing of services, moreover, from haircuts – both financial and real (as in peoples’ hair) - is a fuzzy science, whether that be at Goldman Sachs (Goldman Sachs, for example, took no haircut or losses on their instruments of financial innovation in the recent housing crisis) or on airplane tarmacs.
Emerging Social Crises Amidst Possibilities Of Great Opportunity
Structural change to sustainability in energy and natural resources is the source of future job growth toward which both governments and people are gravitating. Social divergences are producing undesirable market frictions in the transformation to an outcome which has not materialized yet.
Identity is a dynamic composite rooted more so in individual experience in a more globalizing world, contrary to the analysis George Akerlof’s model of buckets of static attributes which jump from one bucket to another when identities change.
Societies are engaging in ideological identity conflicts over civilization – the Kondratieff sine-wave – to both aspire for and to preserve gains from the Industrial Revolution, hindering investment in global sustainability.
The Coming Global Depression?
Corporate profits are being driven by financial services’ allocation of financial capital between financial instruments, industry and agriculture as a function of relative return among the three sectors.
Financial markets, since the market downturn in October 1987 are increasingly engaging in investing in movements of economic variables, both macroeconomic and microeconomic, for profit-taking, connected to the remaining two sectors only to the extent minimally necessary through financial engineering, under the presumption that financial sector losses will always be held up by the central banks and the other two sectors by fiscal policy, leading to higher debt levels among both consumers and governments. Weaknesses and strengths in economies are not only exploited but created and manipulated for financial gain.
Debt-to-personal income ratios of the majority participants in the labor markets in advanced countries are worse than that of the few owners of industrial and services capital.
The Keynesian Marginal Propensity to Consume (MPC) is higher for all except the holders of capital. Sadly, a majority of consumers cannot continue to consume to hold up the economies because money supply is being routed to recapitalize the illiquid borrowings of capital owners but not of the majority consumers.
The weakest link in national output is not the capital owner but the consumer who constitutes majority of Gross Domestic Product (GDP). Geopolitically, for the financial markets, the other variable is divergences in currency unions such as the Economic and Monetary Union (EMU) of the European political Union (EU).
Without real investment in the United States, EU and any Brazil, Russia, India and China (BRIC) problems benefiting the US analogous to the ’90s to produce a wealth effect can cause stagflation in the United States because of the transmission of asset price inflation to wages and prices among some income categories.
Consumer weakness in homo economicus and social divergences in various degrees everywhere around the world, but most pronounced in Europe – currency union or no currency union - given the continuing monetary moral hazard and the looming threat of rising inflation in this tentative US recovery which could be severely exacerbated by energy shocks to United States and Europe as in the 1970s because of the Iran situation, put together, is the foregone conclusion of a global depression, unavoidable by the monetary (Bernanke) and fiscal largesse (Bush 43 and Obama) since 2007.