US Healthcare & the Global Economy
Look suffering readers will be pleased to hear that I now putting the finishing touches to the next post in my series on ‘capital’.
But today I want to share just one chart. It’s a chart which I think fundamentally changes how people perceive the Global macro-economy.
(And annoyingly enough – the two lines are mislabeled, reverse them).
The headline figures of US consumption as a share of GDP rising from 60% in the late 1960s to over 70% today are crucial to the ‘global imbalances’ theory. The US consumer has been on a credit fuelled binge – buying SUVs and plasma screen TVs and under saving, whilst Asia has saved too much. The world economy is unbalanced.
But what this chart suggests is that this is not the case. Excessive US consumption is not driven by what we typically think of as consumption – but by rising healthcare costs.
This should be viewed alongside John Ross’s article on China.org:
Equally striking, the level of US investment (14.7 percent of GDP) is scarcely above its calculated rate of capital consumption (12.9 percent of GDP)–which means that, in net terms, the US is scarcely accumulating capital.
Such an extraordinarily low investment rate precludes a rapid rate of recovery from the economic downturn. US economic growth following the recession will therefore be relatively anaemic compared to previous downturns.
Could it be the case that excessive healthcare costs are squeezing out US investment?
Oil
I’m still very busy. But I’m nearing completion of my next piece on capital/banks/interest rates. I bet you’re all thrilled.
In the meantime, this is causing me some concern:
LONDON (Reuters) – The world is closer to a peak in oil supply than International Energy Agency estimates admit, UK newspaper The Guardian reported in its Tuesday edition, citing an unidentified “whistleblower” at the IEA.
The IEA, which advises 28 industrialized countries on energy policy, is scheduled to release its World Energy Outlook on Tuesday. It 2008 Outlook forecasts world oil supply will rise to 106 million barrels per day in 2030.
“Many inside the organization believe that maintaining oil supplies at even 90 million to 95 million barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further,” the Guardian quoted the IEA source as saying.
Fatih Birol, the IEA’s chief economist, could not immediately be reached by Reuters for comment on the Guardian article, which appeared on the newspaper’s front page.
While the Paris-based IEA has repeatedly warned that a lack of investment could lead to a strain on supply, it maintains that there is enough oil in the ground.
Its 2008 World Energy Outlook said global oil output was “not expected to peak before 2030.”
The peak oil theory — that supply has reached or will soon reach a high point and then fall — has long been confined to the fringes of informed opinion within the industry.
We would in effect experience the worst of both deflation and inflation. Falling goods and services prices driving down corporate profits and leading to increasing unemployment but rising fuel and food prices which would hit the poorest the hardest.
US Unemployment & Banks
The US Bank Stress Tests conducted by the Fed back in May:
Unemployment — in their negative scenario, the stress tests assumed a year-round average unemployment rate of 8.9 percent for the 2009 and 10.3 percent for 2010.
US unemployment just hit 10.2%. The highest since 1983. The average for the year so far is 9.1%. If it stays at the current level (and I think it will go higher) the average will be 9.3%.
US under-employment (i.e. counting those working part time who want to work full time) now stands at 17.5%.
In other words things are much worse than the ‘worst case’ Scenario from only six months ago. And yet talk is still of withdrawing support, monetary policy exit strategies and fiscal tightening.
Update & another excellent link
I’m snowed under with my actual day job, but still working on the next posts on interest rates, money and capital. They’ll be up next week. Sorry for the delay!
In the meantime, Tony Dolphin has an excellent economic round up over at Left Foot Forward.
Interest Rates
Last night I started planning the three posts I promised yesterday. I think I may have to scale back my ambitions – but at least I didn’t make a ‘cast-iron guarantee’.
So rather than covering the issues raised in three (what would be very long posts) I shall instead cover them in a few more shorter posts.
What I’m arguing is that Government can control long term (as well as short term) interest rates and that through this they can increase investment levels in the economy. This has the short term economic effect of making the economy more stable, the long term economic effect of higher growth and the ‘political/social’ effects of reducing both inequality and the power of financial capital.
On reflection I intend to proceed as follows (probably with the odd post on other issues to break the tedium for those not at all interested): starting to today with a couple of definitional issues on interest rate policy, I will then discuss Keynes’ liquidity preference theory, the mechanics of how interest rates can be controlled, the history of monetary reform and finally some policy implications for now.
What I’m advocating is a secular cheap money policy – i.e. not just using low rates to combat depression but having them as a permanent part of our economy.
The first thing we must do is distinguish between ‘easy money’ and ‘cheap money’.
One objection that I expect to be raised to my proposal is that we already have a ‘cheap money’ policy – that interest rates have been held too low for too long causing asset price bubbles, global imbalances and excessive consumer debt . This is incorrect – a misunderstanding driven by economists’ (in many cases) poor knowledge of economic history.
In the past year much of the West has had a cheaper money policy (ultra-low rates at the short term and QE on longer term rates) but the real yield (adjusted for CPI inflation) on UK ten year bonds is still 2.6%. That sounds low. But from 1870 until 1913 it averaged 2.4% and in the 1930s 2.7% (not much higher).
Greenspan spoke of the ‘conundrum’ of low long term real rates earlier in this decade. In reality the period of the 1980s until last year was the real conundrum. As an IMF paper of 2006 noted:
We show that current levels of real interest rates on long-term bonds in advanced economies are not low by historical standards and that it is the real long bond rates of the early 1980s through much of the 1990s that look anomalous.
…
In short, current levels of long-term real interest rates of around 2 percent among advanced countries appear low from the vantage point of the 1980s and 1990s, but not so low when compared with earlier epochs. In addition, periods when long-term real interest rates are below the economy’s growth rate—as they have been recently in some advanced economies (notably the United States)—are not exceptional. This was clearly the case in the last two decades of the classical gold standard, the interwar period as a whole, and the early postwar period through the 1960s.
I define ‘cheap money’ as a policy of low real long-term rates. By this definition the period from the mid 1970s until very recently can be considered a period of ‘dear money’. And policymakers globally are already discussing a return to this policy.
It is noticeable that long term periods of cheap money are associated with long term booms.
If ‘dear’/’cheap’ money can be defined by price (the rate) then ‘easy’/’tight’ money can be defined by availability & supply. Since financial liberalisation in the 1970s – money has certainly been ‘easy’. Credit availability increased and personal borrowing in particular soared.
The period from the mid 1970s until very recently then represents a time of ‘dear’ but ‘easy’ money. We are currently (with the policy response of low rates and QE but a broken banking system) in a period of ‘cheap’ but ‘tight’ money. The long term aim of policymakers appears to be a return to ‘dear’ but ‘easy’ money. This is misguided.
A workplan and an excellent link
Yesterday’s post seems to have got a fair bit of interest and attracted some interesting comments. Jolly good.
Lots of questions to answer – and it’ll take more than the comments box to satisfy them.
So the plan is three more posts on this subject this week – starting tomorrow.
I’ll briefly cover Dalton’s ‘Cheaper Money’ policy of 1945-47: the aims, what worked and what went wrong.
On Thursday I’ll answer Luis (and Giles) more theoretical points. And on Friday I’ll try and update the Keynesian debt and interest rate management policies of the 1940s to modern financial markets.
It’s going to be a busy week…
In the meantime Giles has produced an excellent spreadsheet that lets you play with GDP assumptions: have a try. The link is at the bottom of the page – and whilst you’re there have a read of Giles’ ‘Slash and Grow’ report on Osborne’s plans.
What kind of Capitalism do we want? : An answer for Open Left
This week Demo’s Open Left project is asking 5 big questions and posting up responses by some big thinkers. Graeme Cook gives some more details over at LabourList. One question in particular caught my attention:
Should the Left seek to shape a fundamentally different model of capitalism in the aftermath of the banking crisis and subsequent recession?
Open Left will be publishing papers from Andrew Gamble & Maurice Glasman.
My own thoughts, briefly put, are as follows:
What kind of Capitalism do we want?
In his speech to conference this year Gordon Brown said:
Finance must be the servant of people and industry and not their master.
Perhaps unconsciously, he was echoing a Labour Party paper written in 1944.
Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries…
Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master.
It is strange to think that words written sixty five years ago could have hold resonance today. Strange, and if one is honest, a little disappointing. Financial reform was an agenda pushed by the Atlee Government – most noticeably the nationalising of the Bank of England, the 1945-1947 ‘cheap money’ policy and attempted reforms of the investment market. Despite this the trend of the last six decades has been for finance to become ever more powerful and, if anything, even more unstable.
Before asking the question ‘what type of capitalism do we want?’ we need to ask the more pressing ‘what type of capitalism do we have?’
The answer is ‘finance capitalism’, a state of affairs whereby the economic interests of finance hold sway over not only the workers but also industry. The Labour Party statements of both 1944 and now 2009 seem to acknowledge this and to concede that it is a problem. The Party is in good company, as Keynes wrote in the General Theory:
Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.
The power of finance capital relies on the notion that capital is scare – because of this it can charge a rate of interest. More importantly it can choose where to allocate this capital dependent not on the needs of the wider economy but on the likely return. It is often said that Britain has a ‘comparative advantage’ in terms of financial services. It is less often noted that this implies a ‘comparative disadvantage’ in other sectors. In the new post-credit crunch world any re-balancing of the economy will require large scale investment in other sectors. It is fully possible that finance capital will resist this.
Talk of ‘taking on finance capital’ sounds radical, extreme even – the demented babblings of a ‘hard left’. One can turn again to Keynes, the very embodiment of inter-war Liberalism:
I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. …
Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.
A policy of undermining the scarcity of capital through low interest rates whilst harnessing the power of finance to ‘the service of the community’ would herald the shift from ‘finance capitalism’ to the next stage of development. In many ways it represents the unfinished legacy of the Attlee Government.
House Prices
Rob Williams has an excellent article on the Compass website today:
The great property bubble has been, and continues to be, a disaster. Wealth hasn’t been created, it’s simply been redistributed, and to those who are already well off. It’s siphoned away money that could have been invested in more productive parts of the economy.
For short term electoral reasons, the government would like house prices to rise. For the sakes of the millions priced out of a decent home and for the sake of a balanced economy based on sustainable investment, we must hope they don’t.
Thatcher revolutionised the housing market through the ‘right to buy scheme’. Britain is now close to being the ‘property owning democracy’ of which she spoke. Given that 70% of voters are now owner occupiers it is no surprise that governments, of all colours, will aim to give these people what they want. But this is not what centre-left politics should be about. We need to create a new housing market, where prices rise in line with earnings, where people think of their home as a place to live not a source of cash and where tenants (whether private, social or council) are not seen as lesser beings than owners. This will mean building a lot more homes, replenishing the social and council stock and probably being more prescriptive with banks as regards their lending policies. It is hard for any government to say to 70% of its electors, we don’t want the value of your assets to rise so quickly, but, for a centre-left government, it is necessary.
Jenkins & the wrong kind of stimulus
Vino notes Simon Jenkins article in yesterday’s Guardian.
Jenkins is full of praise for ‘cash-for-clunkers’ style packages to support car sales in Germany and the US and criticises the Government’s smaller scale actions here. He calls for the programme to be extended to other goods.
However as Vino notes:
Furthermore, I think British manufacturing no longer products many of the household goods we buy. They are made in China and elsewhere. We would need to boost our manufacturing capacity before we could meet our domestic demand for consumer goods. Otherwise, the demand for more consumer products would lead to increasing imports.
He’s quite correct.
In 2006 Germany produced 5.4mn cars and the US 4.4mn. The UK only produced 1.4mn.
The pattern is similar with other consumer oriented goods. The UK’s comparative strengths (services, pharmaceuticals, advanced manufacturing, creative industries, etc) are not that easy to stimulate through consumer spending.
Any stimulus of the type Jenkins advocates would increae consumption but also increase imports (which subtract from GDP). The net impact would probably be a marhinally higher GDP but much higher government debt.
Focusing on consumption ignores the crucial point – investment. Increasing investment not only raises GDP in the short run, it helps long run growth and helps rebalance the economy.
