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Friday, 9 May 2014

The Grand Bargain

The contre Piketty cottage industry continues to delight. A week ago, the FT published an amusing analysis of the nine stages of the Piketty bubble, which put me in mind of the classic K├╝bler-Ross model of grief (OK, I had to look the name up, but I did remember that there were five stages), namely: denial, anger, bargaining, depression, acceptance. I think it's fair to say we are way past denial and anger (everything Piketty says is wrong and he's a Soviet fellow-traveller to boot), so there should be no surprise that more recent critiques have skipped the insults and attempted to justify inequality. We're into the bargaining stage.

Tyler Cowen got the ball rolling by claiming that it spurs creativity and that most wealth is the product of innovation rather than inheritance (the facts suggest otherwise). Now Kenneth Rogoff (of austerity epic-fail fame) and Andrew Lilico are claiming that inequality is the necessary price for aggregate global growth. In other words, it's a quid pro quo. Says Rogoff: "The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor". In its appeal to equality, progress and "the lot of the poor", this is a neoliberal defence that proudly displays its utilitarian roots. Jeremy Bentham and John Stuart Mill would have been proud.

Andrew Lilico takes a more free market perspective, smuggling in nods to Greg Mankiw and Sherwin Rosen: "In our modern globalised economy, the gains from a new idea or skill can now be leveraged over enormously more people. Instead of your new and better mousetrap being sold just to the fair folk of Wolverhampton, the whole world beats a path to your door. In such a world, improved added value creates large inequalities. But that is precisely because the added value of a Windows or Facebook or awesome evening's football skill benefits so enormously many people – even if each only benefits a little compared with the huge aggregate benefits benefits taken by the value-creator". This ignores the monopolistic tendencies of Microsoft and Facebook, not to mention UEFA and FIFA.


The dog that didn't bark in these thumbnail sketches of the awesomeness of free trade is finance. Globalisation has been the workhorse of growth in accumulated capital over the last 30 years, but not just in the obvious sense that the international market has grown in size, thereby amplifying the normal rate of growth in productivity delivered by technological progress. That alone would increase the number of private fortunes, particularly in emerging markets, but it would also distribute profits by producing high yields for savers in both developing and developed economies, despite the tendency of wages in developed economies to stagnate as developing nations caught up.

The liberalisation of capital flows in the 70s and the deregulation of banking in the 80s created a much larger field for investment, and greater scope for financial managers to extract rents. Easy leverage allowed capital to generate returns higher than GDP growth rates. Ultimately, this was funded by diverting a growing share of the yield on savings (mainly bank deposits and pensions) from global savers to privileged borrowers (i.e. high net worth individuals and proprietary trading desks in banks). As median incomes stagnated and household saving rates declined in developed nations, the finance system sought to continue the growth in leverage through derivatives and mortgage-backed securities, which led inexorably to 2008.

The ongoing decline of investment banking is due to the tighter regulation of capital since then. This, together with the increased liquidity of QE, reduces the total demand for capital and dissuades banks from investing scarce resources in high-risk opportunities. The consequence is lower but safer returns for most savers, but also an increasing importance attached by banks to the servicing of wealth, i.e. the surplus capital prepared to countenance more varied risk. As Frances Coppola notes: "There will always be a need for the services that investment banks offer: M&A activity is starting to increase again after being flat for the last few years, and corporate investment is also expected to rise. Wealth and asset management, too, seem set to become increasingly important as the world’s capital glut shows no sign of dissipating and interest rates remain stubbornly low. What does seem to have ended – for the moment – is banks primarily making money by doing leveraged trades with each other. Proprietary trading is dead: customer service is the latest fashion in banking".

In ignoring the way that capital has sucked value out of median-income households, Rogoff and Lilico are justifying inequality as a rent (or tax, if you prefer) on aggregate global growth. The rising tide has lifted some boats, while others remain aground, but a large pump has siphoned off much of the water. In this light, the continuing opposition to a financial transaction tax, let alone the global wealth tax advocated by Piketty, is ironic, but that merely serves to throw a light on the basis of the right's opposition, which is the simple defence of privilege dressed up in the ideological clothes of "freedom" and "opportunity".


I don't expect Rogoff and Lilico's bargaining strategy to work - neither a levelling-up in India nor the just rewards of Mark Zuckerberg will excite most people - so in coming months we can expect to see depression set in on the right as the indefensibility of extreme inequality becomes ever more entrenched in popular opinion. Alternative bargaining strategies will be attempted, of which the guaranteed income may ultimately prove the most fruitful, not least because it potentially allows the rich (via their political representatives) to keep control of the spigot of distribution. Unlike grief in the face of an irreversible event, acceptance in this case will mark not surrender to the inevitable, but a stitch-up: a grand bargain, if you will. Capital will concede the need for partial wealth redistribution to prevent strife as technological change reduces social mobility, but it won't concede control of the means of production, distribution and exchange. The robots will not be part of the commonwealth.
The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.
Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries--but-wrong-about-the-world#yvXQ5boEB5a7wxM2.99
The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.
Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries--but-wrong-about-the-world#yvXQ5boEB5a7wxM2.99
The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.
Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries--but-wrong-about-the-world#yvXQ5boEB5a7wxM2.99

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