Capitalism has survived the crisis. Indeed so in India, where big financial players reinforced the belief in their own power and the working class suffered the worst consequences. For the lack of basic heath and welfare, India lags behind other developing countries. The need to reconcile economic growth with the need of redistributing social risk made Sunil Khilnani call for the establishment of Indian social democracy.
No particular political party or sector of society seems to offer a viable solution to the distribution problem. The left is "worn out", the corporate sector cannot provide any significant contributions with its charity campaigns and the governmental attempts usually benefit selected groups, which reproduces the colonial pattern of give-outs. As in became clear from a speech of Khilnani on 15th of April in Berlin, the young generation seems self-oriented, aiming at raising their own standard, with little regard for the less-privileged groups of their nation. The simple solution, which needs to be implemented is the guarantee of minimal universal provisions for all Indians. How it will happen and who will bring it forward is though still unclear.
I just want to thank Valichka and Siri for inviting me to contribute and everyone else for their great posts and comments.
One of the bits of news coming out of the USA that has made a big splash here is the Labor Department figure of 10.2% unemployment released at the end of last week.
Double-digit unemployment is a psychological tip off for many Americans that things are really bad. The highest jobless rate in 26 years is tough for Americans not used to the slightly higher numbers associated with the more regulated or socially organized economies. Many economists estimated the natural rate of unemployment here to be around 5% since the mid 1990s, leaving a little over 5% to be cyclically related.
The ‘grim milestone’ as it was termed by the Wall Street Journal may be final wound inflicted by an American recession that has stubbornly refused to wane. Or it could be a sign that the recover is faltering. While numbers from the Bureau of Labor Statistics recently reported 3rd quarter growth at an annualized 3.5%, the pain of unemployment is being felt by over 15.7 million Americans with many more forced to take part-time or otherwise unfavorable unemployment.
Ways Out
The Obama administration whose polls on the economy have been steadily declining over his first year in office said they were considering tax cuts for businesses, and increased infrastructure expenditures and energy efficiency investments.
American Equity markets are in the midst of a strong rally. The Dow Jones Industrial Average has climbed back above 10,000. What is driving this exuberance in equities? What is the market seeing that is leading to this optimism?
Some ideas have been famously borrowed from German. The first is of course “Cash for Clunkers” which is nothing more than a poorly executed Abwrackprämie. I’ve heard a number of other commentators mention the Kurzarbeit system, which prevents people from becoming unemployed for too long and thus loosing skills. Currently 1 out of every 3 unemployed have been so for over 6 months. The highest toll in that column since World War II. Any other great ideas we have from Europe or anywhere else we might make use of?
Other Concerns
While equity markets can be considered a leading economic indicator, which mercifully points up at the moment, the steadily increasing price of gold and related inflationary fears is causing some to worry. What is the cause of this gold rally? As equities climb, its less likely investors are looking for a safe haven and more likely they are hedging against inflation.
Economists have long examined the key macroeconomic trade-off of inflation and or more specifically the output ratio. (Okun’s Law describes this trade off is anyone is trying to dig a little deeper) This would state that with such low GDP growth and high unemployment there should be no cause to fear inflation.
However, a weakening dollar increases the cost of goods abroad. The huge Federal deficit being run, and continued easy monetary policy are causing many to fear a large inflationary bubble in the medium term. (This implies the delicate question of how much stimulus and easy money is enough, which would be a good topic for another post.)
I heard a commentator on the Kudlow Report, a market news/discussion show; mention how slow velocity is- great point a lot of people forget about. If we all remember our macroeconomics courses:
ms + v = p + y
ms – growth rate of the money supply
v -velocity (how fast a unit of money is spent)
p – inflation rate
y- real GDP growth rate
If the velocity of money is slowing down in a recession how does that conflict with the Quantity Theory of Money?
Sum Up
My diagnosis of the US economy is an optimistic one. We will see further job loss, but job gains lag behind economic recoveries, and we will see that eventually. Illustrated here by the Mikeroeconomics BLog: http://mikeroeconomics.blogspot.com/2009/01/gdp-vs-unemployment-rate.html
Some people inspire with their wisdom, some with their accomplishments and commitment. The Indian environmental and human rights activist Vandana Shiva, who came to Berlin on the 3rd of November 2009, is a woman of erudition and integrity. She presented her new book "Soil not Oil" to the German readership in a confident and persuasive manner.
The book speaks of a triple crisis: one that affects climate, energy and food. She highlights the food crisis as the most dire and urgent problem, since it poses an immediate treat to the survival of the poor. The industrial system based on fossil fuels affects the poor in three ways:
i) they suffer work displacement in consequence of changed food production structures,
ii) they experience disproportionately the consequences of climate change,
iii) they are victims of pseudo-solutions like biofuels, which divert their land and food.
Vandana Shiva uses a simple language that wants to inspire and provoke action. The encounter with her raises two questions of economic concern: the social costs of climate change and the unsustainable industrial food system.
1) Is cost-benefit analysis possible?
Environmental economists are inevitably faced with the familiar cost/benefit and quantity diagram. It determines the efficient quantity of production at the intersection of the marginal social benefit and marginal social cost. The idea is then to implement different measures in order to reach this efficient point (price and quantity tools). All this as if the marginal social costs could be objectively measured. The economists then embark on a cost-benefit analysis that, measuring willingness to pay and willingness to accept (e.g. Perman et. al, 2003) approximating the value of environmental quality. Yet willingness to pay clearly doesn't equal ability to pay and this is how low-income countries are at a disadvantage.
Climate change affects disproportionately poor people. A number of examples from Shiva's book include cyclones in Bangladesh and Burma, unprecedented snowfalls in China, extreme rain and floods in India as well as droughts in many other regions. The people's livelihoods in less-developed countries depend heavily on agriculture and a rapid change in climate conditions leaves them threatened and unprepared for the consequences.
Nordhaus and Stern have been encouraged to express the damage of climate change in terms of percentage loss from GDP. The most dramatic loss predictions are for the countries around the Equator: predominantly low-income countries (Nordhaus, 1999). If the high income countries are not going to suffer as much as poorer countries, then how will they internalize the negative effects on those with lower income?
2) Economies of scale - optimal degree?
Shiva criticizes the "pseudo-solutions" of the Western countries including emission trading and biofuels. She claims that 40% of the climate problem is rooted in the unsustainable way of industrial and factory farming: processing, transport, packaging, food waste. In the globalized food system 1 kilogram of food causes 10 kilograms of CO2 emissions. At the same time the same system of ecological farming that would allow more food production will also allow reductions in CO2 emissions.
Clearly ecological farming contradicts the simple economies of scale idea, which persists that expansion of production has cost advantages. What could be though the aspects that economies of scale ignore? Industrial farming not only leads to lower quality food, but causes carbon emissions the costs of which are not on the industry's balance sheet. Moreover the economies of scale are distribution-blind and those cost advantages and higher profits, as economically efficient as they might be, will never be seen by small scale farmers. No wonder transnational companies got so rich in the last decades.
As confident and wise as Vandana Shiva may be, would her ideas be more than wishful thinking? The change that she stands for requires a global structural change, which would hardly result from less than a massive-scale revolution. Her speech in Berlin could be also seen as "preaching to the converted", since the great majority of listeners belonged to an environmentally conscious social group, which applauded all of her statements with little criticism. The people in the industrialized countries are still too comfortable with their lifestyles to be environmental revolutionaries and the gap in standard of living might be a serious obstacle in people's perception of how urgent action on climate change is.
BTE evolved from a lose group of econ students around the Humboldt-Universität zu Berlin. Besides seeking to combine curriculum with hands-on real world issues, the blog serves as a network for sharing ideas and keeping in touch with each other.
Many economists estimated the natural rate of unemployment here to be around 5% since the mid 1990s, leaving a little over 5% to be cyclically related.
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