Look I am no economist, but this issue is burning in my brain so I want to understand my own thoughts through the ever cathatic act of writing.
The US economy and its younger, smaller and ever so slightly less unbalanced younger brother the UK economy, is a weird mess of an economic imperial centre. Bluntly it produces much less than it consumes. We see this in the levels of consumer debt that make up for a lack of wages, we see this in the level of government debt which makes up for a lack of tax receipts, we see this in the level of financial service sector profits which makes up for a lack of manufacturing. We see this in the size of the service industry itself which poorly substitutes for actual production. Before you right me off as an industrial romantic, compare the trade current account's of Germany/ Japan, industrialised, and developed nations that have strong and robust manufacturing industries, or for that matter my current abode South Korea.
I have been reading my Joe Stiglitz and Robert Reich. I really do not claim to be even an amateur economist but what I see in this global economic system we inhabit is something really bizarre. Basically we have a global ponzi scheme called the Bretton Woods 2. US corporations use the entrenched position of the US dollar, US economic power in the world to outsource almost all productive processes to the 3rd World. All that is productive is done in the 3rd world, what is left is a shadow economy of services which require varying degrees of skill, from high tech design and IT, to selling. The United States is for all intents and purposes living of the legacy of its 1950s boom. It became the centre of world consumption after the war and from this it justified its position as the world's economic hegemon.
As a result we have this truly bizarre position where the United States consumer and government borrow far more than they produce. We have a pyramid of interlocking debt obligations which are unserviable and ultimately inflationary. For instance the US government has a debt of approximately $14 Trillion, the US banking sector has massive debts which are hidden beneath opaque accounting practices and federal guarentees. The US household debt is around the same level as that of the total Federal Government debt ( http://chartingtheeconomy.com/?p=1210). In any other economy this level of debt would result in inflation and probably hyperinflation. Money represents goods and services. If the money supply is much larger than production as a result of debt you should see inflation which lessens the value of money in order to correct for a lack of production.
The UK situation sufficit to say is not much different. When I was a radical anarchist in my teens and my friends, family and my friend's families would lecture me about the incentives, effieneny, and general victory of capitalism as a model for economic, social and political stability and progress. Its seem they were talking out of their hats. The Business community and the mainstream economists been either chronically deluded or willfully deceiving. The finance sector and the services based post-industrial consumption economic model is bluntly merely the short term enrichment of the rich, and the growth of living standards of the middle class through unsustainable debt attached to asset bubbles. House prices fueled increases in consumption not wages. Robert Reich tells us that productivity continued to rise through out this period but there was no increase in wages. There are plenty of economists who saw it, I didn't really understand at the time. At the time I ceathed with snobbish rage at the empty consumption lifestyle. Its complacence, its environmental implications, its emptiness.
Where did it start? Deindustrialisation in the US and UK started in earnest with the New Right and Neo-Liberalism. Services supplanted industry, and especially finance supplanted all other services. The experiment is not over yet, the finance industry lives on under the goodwill of the former imperial glories of the British government and the US treasury. It is the prestige and corner stone status of these two governments and the willing collaboration of other more successful exporters and developing countries that maintain a system which should have long since ended in default, disgrace and mass suffering.
Strangely though, for me I start to see signs of optimism. Maybe we can change. Maybe environmental crisis, new technology and manufacturing will resurrect the Anglo-American economise and drive them in new and more productive directions that will serve the average person.
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I agree with you in that there is much more to the concept of Capitalism than we have been told; America is certainly in a bad place, but I believe very few people actually understand how. We have debt and dollars twisted into so many countless knots that even the brightest minds only have opinions and theories.
When it comes to wages and their lack of increase...quite frankly, much of it probably has to do with the same factors that increased production levels - the way we produced changed. Technology moves the wage gap higher, as more of the drudgery is done by machines, devaluing common labor and placing the emphasis on the high end labor.
As you said, any other country would have fallen into a terrible state with the same levels of debt the US has. Only through the Bretton Woods system are they allowed to shun these rules by changing the rules to suit them.
By all means, the US should have been dealt a serious blow, as critics have been prophesying for years, but it has yet to happen. We always recover and fly closer to the sun with our wax wings.
So everything is turned on its head; but in order to look at the situation clearly, we have to be able to properly quantify it and establish what the rules are, and at this point, I don't think anyone has done that satisfactorily.
Grizzly, who are you?! Haha. Very interesting comment. My grasp of Bretton Woods is quite shallow, although I do think that even knowing the name is an achievement (sadly). Its significance seems to be almost completely missed.
Are you a mama grizzly by any chance? (I am only joking, please don't bit off my arms...).
Its strange I really cannot help but agree with the far right myth of America as being like the Roman empire on the eve of collapse. From the use of mercenaries for fighting wars (read: Black Water), to the chronic indebtedness. The difference is that the Barbarians as yet do not have the luxury of feeling able to pull the plug. (The Barbarians being all non-American holders of US treasury bonds). And the mercenaries are not at home but far enough away to not be killing the Capital Citizens...
Also I just discovered a rather apt metaphor in this: http://www.econlib.org/library/Columns/y2009/Hummeltbills.html
The collapse could be very sudden like the collapse of Soviet Union. What a stark example. Hubris of the pyrrhic victory of the Cold War didn't immediately lead to a spending binge by the federal government (that followed) but boy oh boy...
I thought US came off bretton woods in like 1971?
If you're interested in an economists point of view.
The shift towards financial services is far far more prominent in the UK than the US. I don't think economists would take fault with the decline of the manufacturing sector in the UK. the decline arises from the liberalization of trade barriers, so we are bound to see such specialisation into different sectors like the Richardian Model Predicts. It is actually more efficient for countries to specialize, especially compoaratively small countries.
Economists would also agree that government debt is not good, with a large caveat. It depends if that debt was used to fund capital investment And it depends if that debt is serviceable by growth.
If the debt is spent on capital investment it almost doesn't matter how large it is, as long as investors are confident that it will be paid back by returns on that investment.
Secondly, It can be shown that it is more efficient for governments to run a small deficit on current spending, if that deficit can be plugged by next year's growth.
perhaps decline of manufacturing and running massive debt is not morally correct, but they are economically justifiable.
right, so it seems to me that in order to analyze this properly, you need to draw a distinction between a economic growth and welfare improvement, because in some cases they can go in separate ways.
forgive me if im not too pessimistic about the former in the USA and the UK, while the latter is obviously the cause of worry on the streets.
firstly, the service sector, while it doesnt provide anything tangible, is still in demand, and insofar as markets are concerned, its here to stay.
Now this is important because the USA/UK service sector is really good at what it does. along with a number of high-end technological products and education services, luxury/electronic consumer goods and autos, this is what the new atlantic economy is really good at doing.
The key here that the rest of the world wants these things, what they do NOT want is overpriced (in relative terms at least) labour, which is what the USA/UK have, in terms of world demand, it simply isnt efficient to relocated mass manufacturing back to the USA because the labour is too damn expensive, which means that the price of manufactured goods will skyrocket, stifling developing economies.
so its all rainbows and unicorns on the international trade scene, the WTO is doing really well in removing tariffs behind the scenes, which basic economic theories predict will eventually bring about the equalization of ALL factor prices. (dont wait on this one, though)
Lets go back to the disgruntled average american/brit, of course they arent happy, world demand simply doesnt think their uncapitlized raw labour is worth anything at its current going rate (hence why you need a degree to work, because it adds human capital to your labour)
now you might say that labour is relatively scarce in the USA/UK, surely that means its valuable?
not so. basic models like the H.O. model predict that the result of free trade is that the owners of the abundant factors of production will benefit from free trade, whilst others will not.
stemming from this, a person called rogowski drew very interesting conclusions http://www.indiana.edu/~gradipe/docs/rogowski.pdf (this is the same link i posted on your wall peter, i take it you didnt read it)
What this basically says is that you can predict political conflicts within one country based on the relative abundance of factors of production.
lets take the USA as an example, its a country abundant in service-labour, capital, and to an extent, resources. in fact the USA is so abundant in these that even 300m or so citizens arent enough to make it relatively labour abundant.
it follows then, that the group of people who benefit from free trade (which is our operating condition here) are service, capital and resource owners, while labour loose out. the two camps are said to be in political conflict.
so how do we change this? two ways: either shut down free trade, thereby increasing the value of now-scarce labour or alternatively allow the free inflow of migrants into the USA, which will increase labour abundance and revert the economy back towards a high relative ration of labour.
a third way would be to remove restrictions on minimum wages, but this has the added obstacle of willingness to work on such low wages.
all these solutions are politically unviable. so a reasonably good strategy if you are in the USA/UK is simply to move out, or capitalize your labour and join the sea of service workers...
ps on the note of the bretton woods and the USA, one of econ profs once remarked that all the USA did was to effectively replace gold with the dollar, which put it in the historically, economically and chemically unique position of creating gold out of nothing.
that is one of reasons that ben bernanke knows that engaging in quantitative easing (read: printing money) isnt that dangerous except from a political perspective, because up to a certain point, the cost of an increase of dollar supply is diffused between all free trading countries of the world.
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While the world may have come off the Bretton Woods system long ago, the world economy has continued to act as though that system was still in place.
Only now, as the IMF slowly loses its grip on foreign economies, is the system fading from peoples mind; a major part of this is the aging of the leadership and the vitriolic emotions foreigners have for the IMF.
While the parallels between the American situation and history is apt and insightful, we must consider some very significant conditions which were not present before - mainly, that these other countries now have an interest in maintaining the United States as the cog in the wheel. Even though the US may lose its ability to control events, it is very convenient to use as leverage for countries to grow. If the US were to fall, it would have significant repercussions worldwide. Until the world has had time to buffer itself from the US, it will continue. But woe unto the US when that day comes. If Asia and Europe can achieve a common goal and develop a strong inter-related economy which slowly pushes the US out of the limelight, the time may come where it is more convenient to slaughter the sacrificial calf.
Of course, there is an argument for debt. Debt itself can have benefits which are as of yet have not been adequately explored. Nevertheless, the benefits of debt can quickly be outweighed by the dangers of such an unbalanced budget. The amount of risk involved, again, rests solely on the markets themselves. Our debt is a giant social construction which will only last as long as it is believed in, and it will only take a short period of non-participation in the American project for the entire system to pull a Hindenburg.
The problem (or should I say the saving grace) is that the American debt mushroom whilst being around 200% of GDP is backed up by the World's Largest economy which still accounts for at least 20% of the World's total Gross Production. So if America were to loose its ability to borrow we would have the mother of all crisises on our hands. In class on Wednesday I said that if America were to suddenly Default as Rand Paul almost seems like he wants to happen, then the consequences would be catastrophic. IE. We would lose Hot Water, Heating, Food and Lighting in Pusan. It would destroy the World's heart, IE. The banking system. It seems this house of cards must continue to run for at least 20 years. After that I hope for your sake that the American economy has started to grow again, is inventing new technologies and has gotten its Tax receipts and obligations in line. (Note the way I phrase that last part. I want there to be some tax rises on those who can afford to pay in order to give life saving surgeries to those who cannot afford them for instance.)
How about we even out the income of America...just equalize it a little more...
Then we can tax everyone more, and we aren't just taxing the top.
Ingenious, no?
Now, what could we call such a system...
Kemelist socialism? I think the rich need to take a hit, they have been on speed for 30+ years so time for some rehab no?
Then we come to a problem.
How do we balance out the extremes of Capitalism without:
A) Betraying the 'Capitalist ideal' and rousing the anger of the zealous masses
B) Dulling the teeth of Capitalism's Cogs, AKA extremely uneven wealth distribution and capital accumulation.
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And how do we convince people that WikiLeaks is a good thing and there is never an excuse for a lack of transparency. If people are hiding things they are NOT doing things in YOUR best interest, they are doing them in THEIR best interest.
Carne Ross, who founded Independent Diplomat, mentioned on the BBC today that 'Governments only engage in diplomacy to increase or maintain their power', and if we look at the latest leak, we see that governments only talk about money, business, or war...nothing about human rights, the environment, or the good of the little guy.
So how are we to go about changing a system which, quite honestly, don't give a damn about changing? When did the 'government' stop being made up of 'little people'? The ones who make the decisions have to remember that they are not gods, but servants.
Now I will be blunt. There is no direct or inverse connection between the rate of income tax and the incentive to invent things; most of the great inventors of history were not entrepeneurs come tech savy whiz kids but the opposite. Look at Bill Gates and Steve Jobs for example. Or most major scientists in history. Slightly higher marginal income tax, inheritance tax, corporation tax and capital gains taxes will not stiffle invention. On the contrary if some of this money goes into R&D, medical infrastructure and education they will do the opposite. America's great inventions were the product of the 1950s-70s when top tax rates often exceeded 60%. Now they are just adding floss to the great inventions in terms of mods and size reduction... don't you think?
Well, I would first argue that Bill Gates and Steve Jobs are THE DEFINITION of 'Tech Savvy Whiz Kid cum Entrepreneur'.
As for your other point, I agree that the arguments about taxes stifling invention is one of the most boneheaded lines possible.
Furthermore, Capitalism discourages many forms of invention by limiting it to only those avenues which have a direct financial gain attached to them.
I suppose Eli Whitney had Venture Capitalists standing by and a patent pending on his Cotton Gin, right? It was his way to get all the girls?
Invention is simply a reaction to a problem. If there is a problem, people will try to solve it. IN FACT, I would argue that the less the financial incentive there is, the more likely people would be to chase their ideas or at least share them with others.
Rather, people look at the market and say, "Ah, well, it'd just get copied in a few weeks" or "I couldn't get funding for it".
No, I agree. Capitalism is a flawed method. It has specific benefits as long as it is properly regulated, but as we can see from the American experiment, if it is left to grow wildly like a damn garden, all you get is weeds rather than flowers.
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