The Anglo Disease

Kama

Posting partially in response to Belfast - The Collapse of the Middle Class.
I'm writing from Texas, USA, where the middle class is well and truly shrunk, with college grads as WalMart greeters. Stagnating or declining middle-class income and debt-financed consumption are coming home to roost here.


Jerome a Paris wrote 'The Anglo Disease on EuroTrib, largely in response to trashing of the European market-social model (aka 'Eurosclerosis') as opposed to a more Anglo neoliberal regime.

Essentially, its a critique of corporate-financial globalization on the neoliberal model through its effects on national economies; the exceptional returns from the financial industry displaces other productive activity by appropriating disproportionate and inefficient levels of capital, human and investment, similar to the resource curse of the 'Dutch Disease', with consequently increased economic vulnerability in case of a cascade of deleveraging (Vide SubPrime, SIV's, CDO's, etc). Curious what people here think of his argument...

The Anglo Disease - A Summary

Jerome a Paris



The ability of the financial world to generate high returns on capital has fuelled the massive financial boom we've been in for most of our lives and which has so transformed our economic landscape. By demonstrating regular high returns possible, it has generalised the requirement for such returns in all economic activities, and thus the need for constant restructuring of businesses, for cost-cutting, offshoring and, often, for the wholesale dismantlement of whole sectors of activity that could not generate the required profitability.

Sectors like manufacturing have seen their share of economic activity shrink , as many activities were outsourced, offshored or eliminated altogether. The trade balance has gone south, and jobs have disappeared under relentless pressure for higher competitivity.

This might not be so bad if the jobs created in the service sector, and in finance in particular, were as numerous and high paying - and durable as those in the industry. All statistics on median wages suggest that this is not the case: median wages have been stagnant over the past couple of decades, with a stark increase in inequality. Increased wealth (as measured by GDP or average income) has been captured by a small number of people at the top, something strikingly similar to the remuneration structure of big investment banks and the rest of the financial industry.

The inequality might be acceptable if there was a prospect of reversing it as increasing prosperity is created (this is essentially the argument of Martin Wolf and other proponents of globalisation), but is in fact a structural and necessary feature of the system. Globalisation has spawned a whole ideology about efficient allocation of resources, optimisation of investment decisions, and the invisible, but natural, and morally neutral hand that allow markets to reveal the best price at any given moment for any item. It brings along a vicious hate for taxation, and sees government, and its core functions, redistribution and regulation, as something to be avoided and eliminated as much as possible, being fundamentally anti-efficient. It also brings the core idea that only things that have a price have a value, that everything can be measured in dollars, and that what isn't so measured has no worth nor legitimacy. It fosters a culture of individualism ("freedom") and consumerism ("success"). Social policies (which require distribution), common goods (which need to be defined and managed) and non-economic measures of well-being are spurned and actively fought. Growth is paramount[...]

In the 70s, the Economist coined the label "Dutch Disease" to describe the economic travails of the Netherlands as the country's export-oriented industrial sector struggled with the increased exchange rates caused by the rapid growth in gas exports that followed the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.

Today, we can observe a similar phenomenon on a large scale around the financial industry, whose high profitability for many years has also caused weakness for other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I would propose to label this the "Anglo Disease."

While the Dutch managed to avoid the "oil curse" that has struck many oil exporting countries, I will also argue that the Anglo Disease carries its own curse, whose early symptoms are reflected in the current financial crisis.

The dominance of the financial world can be readily seen in the growth of the share of financial firms in total corporate profits (from below 20% in the 70s to above 40% today), in the capture by the richest few - most of them directly working in the financial industry, or benefitting from financial investments - of a large chunk of the net growth in total incomes, and by the concentration of foreign investment in the UK in mono-activity London.
Financiers, with their ability to monetize today future revenue streams, are able to generate instant profits which can be captured by them and, to a lesser extent, their clients and employers. That capacity to create apparent wealth out of thin air cannot be matched by any other sector in the economy, and sucks in talent, resources and money. Meanwhile, the investors that have made those immediate profits possible will want to ensure that the future flows that underpin them do materialise, and will impose their rules and discipline on the underlying economic activity.
Thus the financial world imposes its unrelenting focus on profits and shareholder value on all economic activities; the domination of "return on capital" criteria ensures that many activities outside finance are in decline, as they struggle to reach the required returns on potential investments. Financial analysis sees labor as a cost, reducing profits, and pushes for its reduction, either via outsourcing, offsorisation or wage stagnation. Similarly, government regulations are seen as restrictions on profit to be fought and eliminated, as, naturally, taxes.

To boost domestic demand in the face of flat incomes, debt has been pushed on households as the way to keep on increasing their spending, to the further benefit of the industry that provides the loans. The combination of expansionist monetary policies in the West and mercantilist policies in China has made it possible to find the holy grail of no inflation and rapid asset price increases, thus generating massive (and increasingly less taxed) corporate profits. The reality was, of course, that of huge global imbalances and a massive bubble, but for the longest time it looked like perfect growth, further validating the policies that underpinned it.
The model of financial capitalism is thus all-encompassing, not only grabbing an increasing share of the economic pie, but also dominating all politicial and economic discourse.

The reality, unfortunately, is that a massive inequality, declining or stagnant living standards for the majority, which spend more than they earn, and, as a consequence, a massive bill pushed out into the future. Well, that future is now, and the imbalances will only be unwound if incomes match spending, which can happen via lower spending or via higher incomes.

In the financial capitalism model, incomes are a cost and should not increase; if that logic prevails - if the Anglo Disease is not cured from our body politic - spending will crash and a recession is not only inevitable but likely to be very painful, as the real economy slows down brutally, and the financial bets that ride it suddenly look highly unreasonable, and turn into losses (as is happening already in the subprime sector).

If, to the contrary, policies are focused on propping incomes for the poor and the middle classes rather than profits, on investing in the real economy rather than in monetising its existing activities (for instance via plans to boost energy efficiency in the household sector and renewable energies), on taxing today's wealthy rather than tomorrow's citizens, then there is a chance to limit the crash.


Just like the Dutch disease was caused by a new sector providing temporary windfalls, the Anglo disease was made possible by the combination of technological progress in the financial world, the long bond bull market created by Volcker's successful fight against inflation and the successful promotion of the ideology of greed by the right (with the timely fall of the Berlin Wall providing an additional boost by discrediting the other extreme of the ideological spectrum). The great middle classes created by the keynesian policies of the New Deal have now been exploited for the past 30 years, and they are depleted. The economy will need to find another, more real, way to grow and prosper.

Belfast

interesting article

Frankie Lee

Very good article

Kama

Yeh I'm very interested in this guy, felt a bit messianic and thought I'd try and spread it. Glad someone got value out of it.

Really did make me think of what productive use all those theoretical physicists etc hired out of college might be doing if they *weren't* making models of derivatives, heavy quant trading programs and so forth. The 'Dutch Disease' analogy is an interesting one imo.

Tbh this should be in Economics, but when posted that board was lost somewhere in Biz/Personal/Corporate/Entertainment/SlashFanFic/Shatner, or somewhere

g5fd6ow0hseima

very interesting

Kama

Not on-topic, but Jerome has some typically well-thought pieces on Georgia/Russia etc on his diary here and here.

As an energy investment banker who did his thesis iirc on Russian energy policy, its worth a gander...