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Material production bolstering West

2 Apr 2013

This is my Perspective column from this week’s Fund Strategy magazine.

Many experts have long argued that the developed countries, particularly America, are switching towards a “knowledge economy” and away from industrial production. The trouble is, by some measures at least, this trend seems to have at least partially reversed recently.

It is true that since the 1970s the industrial sector has generally declined as a share of both output and employment. That is not to say that America is producing less in absolute terms but services and finance have grown faster so make up a bigger proportion of the whole.

However, Joel Kotkin, a professor of urban development at Chapman University in California, has pointed to a different trend emerging since about 2000 (“The real winners of the global economy: the material boys” Forbes, 6 March 2013). Many of the world’s best performing developed economies in recent years are resource-rich nations such as Australia, Canada and Norway.

Moreover much of the developing world is making a rapid transition from old-style agriculture to industrial production. Even leaving aside China, with its rapid manufacturing-centred growth, Brazil has expanded rapidly on the basis of manufactured and food exports as well as domestic energy production.

This western trend back to material production is mirrored by developments within America. Kotkin points to the rise of four “growth corridors”, all focused on industry, to illustrate his argument (America’s Growth Corridors: the key to national revival, Manhattan Institute, February 2013). Most foreigners will know little of these places (see box). The thriving regions do not include the likes of iconic cities such as Chicago, New York and Los Angeles.

Kotkin gives several reasons for America’s shift to new centres of growth. First, a domestic energy boom, fuelled by shale oil production, has bolstered three out of the four corridors he identifies. Many others too have pointed to the beneficial effects of this development for the American economy. Oxford Economics, an economic consultancy, estimates that GDP would be 2.4% lower if there had been no shale boom since 2008. It also calculates that industrial output would be 1.8% lower and unemployment would be 1.2m higher (US Weekly Economic Briefing, 25 March 2013).

This energy renaissance has in turn bolstered manufacturing and heavy industry within these regions. Aerospace and high tech are growing rapidly too.

Finally, the economic rise of Latin America is also benefitting the four corridors. There are signs of economic links within America moving from north to south rather than east to west.

To appreciate the scale of this move back towards more material production, particularly within America, it is necessary to think back to earlier discussions. Experts have long pointed to America as the prime example of the shift away from industry. They have used many labels to encapsulate this trend: the information society, the knowledge economy, the post-industrial society and many others.

This shift away from material production was also reflected on the corporate level. Many once venerable members of the Dow Jones Industrial Average have suffered troubles or even disappeared completely. These include firms such as Eastman Kodak, which went bankrupt recently, while others such as Chrysler and General Motors, have needed government bailouts to survive.

Meanwhile, IT firms have taken their place. Some, such as Cisco and Intel, are involved in manufacturing. However, others, particularly those listed on Nasdaq, do not produce any tangible goods. These include internet giants such as Facebook and Google.

No doubt the partial swing back towards material production will also brings its corporate winners. Perhaps it will include new companies that do not yet exist or existing ones that are as yet little known. Or maybe the existing oil majors will be the greatest beneficiaries.

Of course assessing how far the move back towards production can go depends partly on working out what is driving it in the first place. No doubt the rise of China as an industrial power is an important factor.

China’s rapid economic growth has made it a voracious consumer of raw materials. I vividly remember looking through my hotel room window in Newcastle, New South Wales, a year ago and watching huge amounts of coal being shipped through the port to China (“Rulers suffer from lack of resources”, Fund Strategy, 19 March 2012).

China’s demand for energy and other types of commodities is vast. It therefore follows that if China’s growth starts to splutter then global demand for such resources could fall sharply.

Although China is by far the biggest consumer of raw materials many other emerging economies are growing rapidly too. For the time being many other countries in Africa, Latin America, the Middle East and developing Asia are also enjoying fast economic growth. As long as this continues – and it is far from guaranteed – many “material boys” are likely to prosper.

None of this is meant to suggest that the western economies are set to return to the patterns of the 1970s. Although there is substantial scope to increase manufacturing output it is unlikely that enormous armies of industrial workers will be employed once more. Industry is far more productive than it used to be back then: the amount produced by each individual worker in a given time has increased substantially.

But the partial shift back towards material production should be welcomed. It has helped cushion the impact of the economic crisis in the West and it also reflects the rising prosperity of the emerging world.

Tags: America, china, economics, Fund Strategy

Leeds inequality debate on 22 May

30 Mar 2013

I will be participating in a debate on “the problems with inequality” on 22 May at the Leeds Salon. Danny Dorling, who I recently debated in Manchester, will also be on the panel with another speaker to be confirmed.

Tags: inequality, speeches

Eurocrats created Cyprus disaster

27 Mar 2013

The real culprits in the Cyprus crisis have got away with it. Blame should be pinned on the technocrats who run the eurozone and the politicians who back them.

All the talk of lazy Greeks, Russian oligarchs and a nascent German “Fourth Reich” are misplaced. Let’s start by taking some of the alleged culprits in turn.

The eurozone’s leaders knew that Cyprus was an offshore financial centre when the island joined the currency union in 2008. They cannot claim to have discovered it recently. The first international banking unit in Cyprus was licensed as far back as 1982. Cyprus also had to accept harsh austerity in the years leading up to joining the eurozone as a condition of membership.

It is also disingenuous to suggest offshore finance is somehow improper. Such activity is not illegal. If it were then Dublin, Guernsey, Jersey and Luxembourg, among others, would presumably all be in trouble with the authorities.

As for the Russian depositors the act of depositing money in Cypriot accounts is not illegal either. Yet eurozone leaders have smeared then as money launderers without providing any evidence of wrongdoing let alone a trial.

Perhaps there is a little more credence to the charges against Germany because it played a central role in the bailout negotiations. But the comparisons between contemporary Germany and the Third Reich are absurd. Not only have Cypriot demonstrators shown Angela Merkel, the chancellor, with a Hitler moustache but publications in other parts of Europe have made similar comparisons including Britain’s New Statesman.

However, it should not take much time to dismiss such allegations as absurd. Germany is not pursuing a conscious plan to dominate Europe let alone wage a military invasion of any of other states or commit genocide. Such comparisons only serve to trivialise the true horror of the Nazi regime.

To understand the real cause of the crisis it is necessary to trace it back in steps to its source.

Cyprus’s troubles can themselves be seen as spillovers from the turmoil in the Greek banking system. Two of the islands largest banks, Bank of Cyprus and Laiki (also known as Cyprus Popular Bank), had large holdings of Greek bonds. They also had substantial branch networks and subsidiaries in Greece.

The Greek crisis forced the two banks to writedown their bonds. A liquidity squeeze also hit the banks and the real economy. The Cyprus crisis emerged as a result of financial contagion from Greece.

But this simply begs the question of why Greece got into trouble in the first place. As I have argued previously in Fund Strategy it is wrong to blame the Greek crisis on the people living beyond their means or on “klepto-socialism”.

The problem is rooted in the structure of the eurozone itself. Combining countries with great variations in productivity levels into a currency union was bound to cause problems including the creation of financial bubbles. As I argued in last year’s cover story:

“For Greece the advent of the eurozone meant that it could obtain credit more cheaply than if it had retained its own currency. Until the emergence of this crisis in 2009 the yield on Greek bonds was little different from German Bunds. In effect Germany was helping to underwrite Greek credit.”

When the Greek bubble burst the country’s inhabitants were the first victims. Recent events have shown Cyprus as suffering its indirect effects.

The eurozone’s technocratic leaders are all too keen to lecture Cyprus about its responsibility for the crisis. Yet it is those same hectoring technocrats who are truly responsible for the disaster.

This blog post first appeared today on Fundweb.

Lessons of the Cyprus bailout

25 Mar 2013

This week’s Perspective column looks at the Cyprus deal. Although the article was submitted last Monday, with a lot happening in the interim, in some respects (such as the principle of taxing bank depositors) things have moved full circle since then. Depositors with less than €100,000 in savings will no longer be subject to the levy but the whole Cypriot economy is likely to suffer as a result of the deal.

It is not hard to see why the €10 billion (£8.5 billion) bailout of the small island of Cyprus has become almost the ultimate middle class nightmare. The spectre of the authorities in effect taking money away from small savers has shaken relatively affluent individuals across Europe.

It is not quite as shocking as secret police arresting innocent people in dawn raids. But it is a reminder that governments can wield enormous power even against individuals who are not accused of any wrongdoing.

It also happened somewhere most British people see as benign. For many Cyprus represents sunny beaches as well as clubbing in Ayia Napa. The island also includes the British military bases of Akotiri and Dhekelia, a legacy of colonial rule, but the last armed conflict was back in 1974 when Turkey invaded. Although the island is still divided between the Greek Republic of Cyprus in the south and a Turkish enclave in the north the border is peaceful.

Yet despite the shock the tax on depositors has engendered is not the most significant aspect of recent developments in Cyprus. More important is the implication that the eurozone crisis is still far from over. To understand why this is the case it is necessary to look more closely at recent developments.

Cyprus mainly got into difficulties as a result of a knock-on effect of its close ties to the troubled Greek economy. Although Greece is relatively small its economy is still more than 10 times the size of Cyprus. Two of the largest Cypriot banks are among the largest holders of Greek bonds and have an extensive presence in the mainland.

As a financial centre the island is also vulnerable to falling liquidity. Its economy is largely based on tourism, financial services and real estate. It has little of an industrial base.

Back in July the government requested a bailout from the “Troika” – the European Commission, European Central Bank and International Monetary Fund – although it took many months to negotiate. Evidently the tax on depositors was imposed externally although the decision to include small savers in the squeeze was made by the Cypriot government.

Suppliers of funding for the bailout, including Germany, were keen that a large part of the island’s funding needs were covered domestically. As a result external bondholders could be exampled from having to take a haircut.

However, it was the Cypriot government that decided to tax small savers as part of the deal. Evidently it did so to limit the impact on larger depositors. To achieve this goal it had to find legal loopholes to ensure that deposit insurance was not triggered for those with small savings. Savers will be recompensed with shares in their depositor banks but these are of dubious value.

Several features of bailout package are already noteworthy from this sketch. First, it is clear that the northern European states have decided to squeeze troubled countries particularly hard in exchange for bailout money.

The tax on small depositors broke an unwritten rule that they should be exempted from the impact of financial crisis. Since the Great Depression of the 1930s it has become widely accepted that savers should be protected from such trouble. Indeed back in 2008, at the start of the global financial crisis, the leaders of both Germany’s main political parties emphasised that the deposits of their own small savers were secure.

Deposit insurance was not made for altruistic reasons. The idea is to protect banks from dangerous runs when savers lose confidence in the institutions in which they deposit their money.

This brings us to a second implication of the deal. Despite attempts by the authorities to downplay it the Cyprus is likely to increase the risk of bank runs elsewhere in Europe. Savers will be more prone to withdraw their money in panic if they think it is threatened.

No doubt all that talk of Russian “money laundering” through depositing savings in Cyprus was designed to discredit any objections to the deal. There was no action against specific Russians accused of any illegal activity. Instead it appeared more like a cynical ploy to imply that many of the deposits that were taxed were in some way linked to the Russian mafia.

However, the main lesson from Cyprus fall-out is that the eurozone crisis is far from over. It is true that the eurozone’s leaders have shown a remarkable determination to keep the organisation’s institutions intact but that is not the same as resolving its underlying problems.

The fact that events in the island nation with only 0.2% of the region’s output can spark such panic across Europe is itself remarkable. Incorporating such desperate measures as bypassing deposit insurance is a sign of weakness rather than strength.

Among the many other problems facing the eurozone are the unresolved government negotiations in Italy. Clearly the technocratic solutions favoured by the previous government proved deeply unpopular even though no real alternative is being offered.

At it most fundamental the huge gaps in productivity levels between different eurozone member nations remains a source of instability. Cyprus is unlikely to be the last episode of this ongoing crisis.

Tags: economics, Europe, finance, Fund Strategy

The “crude Keynesian” debate

18 Mar 2013

This is my Perspective column from this week’s Fund Strategy magazine.

Readers of this column may wonder why I often use Paul Krugman as a foil for my arguments. The reason is straightforward. His views are a lucid and high profile expression of the economic mainstream.

In that sense quoting the New York Times columnist, Nobel laureate and Princeton professor should be seen as a compliment. I choose to critique his arguments precisely because they are a sophisticated exposition of the dominant view.

If he has a personal failing it is intolerance. He too often assumes that anyone who strays far from his own views must either by stupid or malevolent.

None of this is meant to suggest that Krugman agrees entirely with, say, the Obama administration. On the contrary, he has criticised it for not going far enough in promoting fiscal stimulus. But Krugman’s views can be seen as broadly akin to what Obama would do if he did not feel obliged to make messy political compromises.

There are also other high profile economists who share similar views including Bradford DeLong of the University of California, Berkeley, Larry Summers of Harvard and Martin Wolf of the Financial Times. But none quite have Krugman’s public presence.

Given his importance it is worth noting when he gets into a huge public spat with another well-known public figure: Jeffrey Sachs of Columbia University in New York. With Sachs, as with Krugman, it is a great understatement to call him an “economist”. He is an important political figure (with a small “p”) who, among many other things, has advised the United Nations on its development goals.

The public bust-up started when Sachs co-wrote a piece for the Washington Post in which he slated Krugman for arguing that fiscal deficits do not matter (“Deficits do matter” Washington Post 7 March 2013). It accused Krugman of holding a “crude interpretation of Keynesian economics” and argued that cutting the deficit should be an immediate priority.

Krugman responded with a post on his New York Times blog which was simply headed “crude” (10 March 2013). The main thrust of his rebuttal was his argument was “pretty sophisticated” and that he only favoured ignoring the deficit in the special conditions of today.

Sachs responded with a full scale riposte in the following day’s Huffington Post (“Professor Krugman and crude Keynesianism”). Sachs alleged that Krugman was wrong in four main areas including his view that the crisis is overwhelmingly cyclical and the focus should be on raising aggregate demand.

At the time of writing Krugman had fired the last salvo (“Dwindling deficit disorder”, New York Times, 11 March 2013). He used it to point out that the deficit is dwindling and saying that “fiscal scaremongering” is a pretext for slashing welfare spending.

No doubt part of the reason for the heat generated in the debate is the clash of giant egos. But, behind some of the technicalities, there are some important issues at stake.

It is not necessary to accept all of Sachs’ points or his agenda, including his support for a green infrastructure, to see a kernel of truth in his criticisms.

First, Krugman and others clearly seem wrong to me in arguing that the current crisis is largely cyclical. For example, the long-term trend in US productivity growth is downwards (see the recent study by the Conference Board, an independent business research organisation: (2013 Productivity Brief – Key Findings 24 January 2013). Despite all the hype about robots and information technology there is relatively little innovation going on in the American economy and indeed elsewhere in the West.

The financial crisis of 2007-08 and the subsequent fall-out can be seen as a symptom of measures taken to postpone tackling this underlying problem. For many years in the run-up to the crisis the authorities kept public spending high and interest rates low as a way of offsetting this underlying weakness. Yet postponing the challenge just made matters worse.

Krugman makes clear that he favours more prevarication or what is sometimes called “kicking the can down the road” (“Kick that can”, New York Times, 8 February 2013). This ignores the reality that the authorities have already prevaricated for many years.

This point relates to Krugman’s second important error. He sees the crisis as existing primarily on the demand side of the economy. The weakness of the productive sphere is played down or ignored.

Krugman acknowledges that he developed his theory of the current crisis through studying Japan’s malaise in the late 1990s. Yet his argument at the time was essentially circular.

He claimed that Japan was suffering from a liquidity trap in which consumers were anxious about spending. They were fearful that if they bought something today it might be cheaper tomorrow.

Although this might describe how consumers perceived the problem it is not an adequate explanation. It failed to explain how Japan got stuck in a rut of low growth in the first place.

The same is true in Krugman’s writing on contemporary America. He is much more comfortable discussing problems related to consumption than in grappling with the economy’s weak underlying dynamic.

Tags: America, economics, Fund Strategy

My latest Guardian comment article

16 Mar 2013

One of the most peculiar but least understood developments of our time is the emergence of billionaires against capitalism. Even some of the greatest beneficiaries of the market system seem deeply disillusioned with it.

Bill Gates provided a striking example this week when he slated the market for distorting important priorities. He reportedly told a Royal Academy of Engineering conference that governments and philanthropic organisations need to counter this flaw. The software billionaire gave the example of the malaria vaccine getting virtually no market funding, whereas male baldness gets ample.

His remark was striking because of Gates’ stature, not because of its content. Socialist critics have argued for over two centuries that the market is poor at meeting human needs. The rich, in contrast, have tended to dismiss such criticisms.

Gates is not alone among billionaires excoriating capitalism. Warren Buffett, one of America’s richest investors, has lambasted the super-rich for failing to pay their fair share of tax. George Soros, another anti-capitalist financier, has long argued that the market system is falling apart.

Of course none of these billionaires, nor the many other wealthy types who hold similar views, are calling for a Bolshevik overthrow of capitalism. Despite disliking important aspects of the market economy, they see little alternative. Recently, many, including Gates and Buffett, have taken to pledging to dedicate most of their wealth to philanthropy, in an apparent form of penance.

But it would be wrong to dismiss their gripes about the market as hypocrisy or spin. It is hard to see why they would feel under any pressure to adopt such a stance for appearances’ sake. Their immense wealth gives them the luxury of ignoring public opinion if they wish. Nor is anyone threatening to appropriate their riches. The more disconcerting possibility is that they believe their own criticisms. They have lost confidence in the system that has let them become fabulously rich.

The more this possibility is examined, the more it becomes clear this is what is happening: fears about the destructive impact of capitalism trickle down from the wealthy. Take the discussion of the environment. Rich men such as Richard Branson, Ted Turner and indeed Al Gore seem genuinely worried about severe environmental damage and perhaps even the planet’s destruction. Naturally, they see this possibility as an example of market failure, rather than deliberate intention. The conclusion is that capitalism must be constrained, rather than be allowed to operate unfettered.

This can be seen as a form of romantic anti-capitalism rather than anything to do with socialism. It is a conservative reaction against what they see as the destructive side of modernity, popular prosperity and industrial production.

This view inverts the traditional leftwing critique of the market. Capitalism used to be criticised for failing to raise popular living standards sufficiently, and was seen as insufficiently dynamic to meet the needs and expectations of the working class. Romantic anti-capitalism, in contrast, slates capitalism for in effect being too productive. The market is routinely savaged for producing too much “stuff”. High levels of popular consumption are condemned as unsustainable and viewed with dismay, if not disdain.

So what at first appears to be a radical viewpoint, with its stinging rebukes of capitalism, turns out to be essentially conservative. It leads to calls not only to restrain economic growth, but for individuals to curb their material desires.

This green perspective shapes the drive to austerity. It holds that everyone should be prepared to make do with less, for the sake of social cohesion and the environment. Or, in Buffett’s phrase, it emphasises the need for “shared sacrifice”. Barack Obama too has endorsed this view.

Those who oppose austerity should stop fretting about supposedly all-powerful neoliberals who are ideologically committed to a minimal state. To the extent such figures ever had influence, it was back in the 1970s and 1980s.

Paradoxically, the contemporary drive to austerity comes from a peculiar form of anti-capitalism. It permeates down from the wealthy through the political class to the rest of society. Its criticisms of the inefficiency and inequities of capitalism only make it more convincing, and therefore more dangerous.

Tags: consumption, environment, inequality, media appearances

My latest review for the FT

16 Mar 2013

Why Philanthropy Matters, by Zoltan J Acs, Princeton University Press, 2013, RRP£19.95

Why do those Americans who succeed in accumulating vast fortunes often end up giving away so much of their hard-earned money? The question is posed sharply by such initiatives as the Giving Pledge, launched by Warren Buffett and Bill Gates in 2010. Since then more than 100 billionaires, mainly American, have pledged to give away most of their wealth. To sceptics and economists the rich would only divest themselves of so much wealth for reasons of self-interest, such as tax benefits or even the positive emotional pay-off.

But it is hard to believe hard-edged entrepreneurs are all suddenly overwhelmed by pure altruism. The above reasons do not seem sufficient to explain the central role philanthropy has come to play in American life.

Zoltan Acs, an economics professor at George Mason University in the US, sets out to examine this phenomenon. The book’s title is significant. His subject is not so much philanthropy itself but how it fits into the American model of capitalism. This broader perspective makes the book particularly interesting. His argument rests on a vital distinction between charity and philanthropy. For Acs, philanthropy involves a reciprocal relationship between donor and recipients.

For instance, when Leland Stanford donated money to found a university in his dead son’s name he expected future students to expend their time and effort. Both sides in such deals make a form of investment. In that sense, Acs favours much more philanthropy but much less charity given away.

This implicit social contract is, Acs argues, essential to understanding the US model of capitalism. Americans are free to accumulate vast wealth, but it is embedded in American culture that the wealthy should help create opportunities for the next generation.

In that respect philanthropy has played a central role in America’s long-term economic success. The US has generated enormous wealth by giving free rein to the forces of entrepreneurship and “creative destruction”. It has let the market economy rejuvenate itself by shaking out less efficient businesses. But philanthropy has allowed it to eschew a rigid social hierarchy while at the same time creating world-class universities and research institutions.

Unfortunately, this book sometimes reads too much like a paean to American capitalism, rather than a critically detached study. It tends to overestimate the differences between the US and other models of capitalism while underestimating the problems facing America.

Acs describes the US as having a weak state compared with European and southeast Asian capitalism. But once state and local spending are taken into account the share of government activity in gross domestic product is not that different from other countries – the International Monetary Fund estimates total government expenditure in the US accounted for 40.6 per cent of GDP in 2012, against 44.9 per cent for Germany. This is a difference of magnitude but less substantial than Acs suggests.

Similarly, the US is more hesitant about embracing creative destruction than it was in the past. It has acted to constrain market restructuring, rather than welcoming it. Whether the bailouts of 2008 were wise is arguable, but they certainly represented a limitation on the operation of the free market.

There are also serious studies showing that, by some measures, contemporary America is less mobile than many other developed countries. Such results will always depend on the measures chosen, but American mobility is not as manifestly superior as Acs suggests.

None of this is meant to deny that the US has succeeded in generating enormous wealth, nor to contend that the American model is more or less identical to European capitalism. But it is not necessary to hinge a genuine insight into the nature of American philanthropy – its central role in the ideal of equality of opportunity – on a one-sided account of the US model of capitalism.

One authority quoted by Acs captures elegantly a central paradox of US capitalism: Americans tend to see “economic freedom as an equal chance to become unequal”.

Tags: book, inequality, media appearances, review

Awkward questions for pundits

12 Mar 2013

Let’s take a hypothetical example to illustrate the hopeless character of much financial punditry on recent elections.

A recently formed populist party has done well in the general election in a large European country. It has won a large number of votes although not enough to form a majority government.

A financial expert appears on a broadcast news programme, it could be radio or television, to give his verdict. He could be a fund manager, financial adviser or even a specialist journalist.

It is 9am in Britain although in the country where the election took place it is already 10am. Since the country’s stockmarket opened an hour ago its main equity index has dropped 2%

The presenter reminds his audience about the fall in the index. He then turns to the pundit for a soundbite to divine the meaning of the figures.

“Investors are clearly nervous about how well [insert name of populist party] has done”, says the pundit. “Markets dislike uncertainty”.

This type of exchange is so common that readers will no doubt have heard it many times. Sadly it is rare for even basic questions to be asked about its usefulness:

How much does the pundit know about the particular country concerned? Has he spent much time there or perhaps he speaks the language? In many cases the pundit will have little knowledge of the country but this will not stop him pontificating about it. Even if he does know a lot he may not have had time to check the background to the story.

What else has happened in the hour since the market opened? For instance, it could be that a large local company has announced a profit warning. Or perhaps there is another piece of bad news. It is not possible to know exactly how the market would have done in the absence of the election. However, it is unlikely that the entirely of any index move is a response to the vote.

Is the market swing within the normal range of moment for that particular index? For a volatile market a 2 per cent move may not be exceptional. In that case why read much into it?

Why assume that the level the index happens to be at during the interview is particularly significant? Perhaps it would be more meaningful to look at the index after two hours rather than one, or at the end of market trading for the day, or even when the government is finally formed. In some cases the process of coalition negotiation can take weeks. Just looking at the level of the index when the interview happens to take place is entirely arbitrary.

Why assume that the change in the level of a large company index is more revealing than looking at, say, smaller cap stocks or bond yields? The best-known equity indices are usually the ones highlighted in such reports but there is no reason to privilege their significance. Often they represent large companies with a good proportion of their business overseas.

Why not look instead at how small or medium-sized companies are doing? Alternatively bond markets are often far larger than the corresponding equity markets.

Why assume that asset prices say anything useful at all about economic or political developments? Long-term studies seem to indicate no correlation between economic growth and equity performance. Why assume they say anything useful in the short term either?

If markets do indeed say something useful why repeat the truism that “markets dislike uncertainty”? It may be correct but it is so general that it offers no new insight. It is almost akin to saying “mothers generally love their children”. True but not a great addition to the sum of human knowledge.

It is time that everyone, including financial journalists, pays less attention to short-term movements in equity indices. At best they are a useless indicator of the significance of broader developments and in many cases they are misleading.

Discerning economic and political trends means grappling with the specifics of each particular case. It involves working to develop expertise rather than mouthing banal sound bites.

This blog post first appeared today on Fundweb.

Tags: Europe, finance, Fund Strategy

Italy’s protest election

11 Mar 2013

This is my Perspective column from this week’s Fund Strategy magazine.

Much of the discussion of the results of last month’s Italian general election has had a decidedly elitist tone.

The pedigree of some of the successful candidates made it easy for the critics. The party of Silvio Berlusconi, who could charitably be called a “colourful” figure, came second and the Five Star Movement (M5S) of Beppe Grillo, a well-known comedian and political activist, came third.

Comments along the lines of “send in the clowns” were predictable. Only slightly less disdainful was the description of the two parties as “populist”.

When pushed to explain why these two parties did well there were broadly two theories. The most obvious was that the Italian people were reacting against austerity. This was the line favoured by Joseph Stiglitz, a Nobel-prize winning economist, and the Guardian newspaper.

There is probably a little truth to this explanation. According to the Organisation for Economic Cooperation and Development, a rich country think tank, real household disposable incomes started falling as far back as 2008.

However, this is far from the whole story. It certainly does not explain why the reaction to austerity should take such an apparently eccentric form.

The centre-left Democratic Party also did relatively badly in the election even though it won more votes than any others. The Partito Democratico (PD) gained 8.6m popular votes compared with 11.9m in the 2006 election.

A more serious explanation it that it is at least partly a reaction against a dysfunctional political system and corruption. M5S in particular has pitched itself as a “clean” organisation. For instance, it refuses to take any political funding from the state.

No doubt there is a strong sense among ordinary Italians that their country’s politics is corrupt. But again this is an insufficient explanation. For instance, it struggles to account for why Berlusconi, who to many is closely associated with Italy’s political failings, did relatively well.

The inadequacy of these explanations helps account for the exasperation of the commentariat. They are reluctant to say so explicitly but they blame ordinary Italians for the success of the populists.

In the eyes of many commentators the electorate is simply not sophisticated enough to understand modern politics. From this elitist perspective the obvious solution is to put clever technocrats in charge where possible.

The problems with the technocratic view are seldom recognised by politicians or in the media. Those with an affinity for this perspective are remarkably unaware of their own side’s failings.

In particular the electoral success of Berlusconi and Grillo can best be understood as an anti-political reaction against technocratic rule. Many voters were apparently keen to support anyone whose presence was likely to annoy aloof politicians and technocrats. In this respect Grillo’s comedic past and Berlusconi’s well-known antics were electoral assets rather than liabilities.

In Italy technocratic rule had gone as far as an unelected national government led by Mario Monti, an economist and former European Union commissioner. When Monti finally stood as a candidate in the recent election his party only received about 10 per cent of the popular vote. It is hardly surprising that many Italians were disdainful of their former unelected leader.

More broadly the eurozone itself can be seen as a technocratic project. Experts decided to tie the region into a monetary bloc without securing political consent or fiscal union. Under various treaties member countries are forced to follow rules that are imposed from outside.

In many respects the eurozone’s rigid structure is itself the cause of the region’s instability. Tying such economically diverse countries together inevitably created severe imbalances. The flow of relatively cheap credit to southern Europe and the subsequent bursting of the bubble was not an accident.

Yet rather than accepting blame for the mess their favoured scheme created the technocrats congratulate themselves for avoiding a total meltdown. Their hubris is staggering.

Italy may be an extreme case but it is not unique. In Britain the United Kingdom Independence Party (Ukip) is probably the greatest beneficiary of this reaction to the aloofness of mainstream politics. British voters have not yet had to suffer the indignity of an entirely unelected government but the political class is widely seen as divorced from people’s real concerns.

No doubt many core Ukip supporters are disgruntled Conservatives who feel particularly strongly about the EU. But in recent by-elections it has also gained protest voters from all the main political parties. For them Ukip was a vehicle to express their disgruntlement with mainstream politics.

Indeed there are many parties across Europe that could be defined as populist. These include the Golden Dawn and Syriza in Greece, the Danish People’s Party and the Swedish Democrats. Although these organisations are far from identical, there are important differences between them, they all represent disaffection with the mainstream.

Perhaps the most interesting development is the imminent creation of a eurosceptic party in Germany under the name of “Alternative for Germany”. It is expected that the party will argue that Germany should no longer guarantee the debts of other member states and the euro should be abandoned.

If the party receives a lot of protest votes in the federal elections in September, it could shake things up across Europe.

Tags: Europe, Fund Strategy, Germany

The end of work?

11 Mar 2013

This is a box attached to my cover story from this week’s Fund Strategy magazine.

The debate about robots, particularly their purported negative effects, has close parallels with discussions of the end of work.

In itself the reduction in working hours or the elimination of work entirely can be seen as either welcome or as dangerous. It can be viewed as harnessing technology to set humanity free from toil or alternatively as machines, including robots, robbing us of work and even purpose.

Historically more optimistic social thinkers were generally positive about humans having to spend less time working and engaging in less physical toil. Nineteenth century economic writers such as David Ricardo and Karl Marx raised the spectre of machines replacing human labour.

Over the very long term the world has moved some way in the optimists’ direction. Robert Fogel, a Nobel prize-winning economist, has estimated that average working hours in the US fell from 182,100 per lifetime in 1880 to 122,400 in 1995 (The Escape from Hunger and Premature Death 1700-2100, p71).

Even the more recent figures indicate at improvement. According to the Bureau of Labor Statistics the average annual hours worked by employed person in the US fell from 1,829 in 1979 to 1,758 in 2011.

Of course such averages can mask divergent trends. In recent decades more women have entered the labour force and more people are employed in part-time work. The latter category includes many who are on poor pay overall. In any case the world is still a long way from the end of work despite the welcome long-term trend.

More pessimistic thinkers have usually taken a more negative view of such trends either raising the spectre of forced idleness or the decline of community. For example, Andre Gorz, a French green, wrote on the “end of the working class” in 1980 while Jeremy Rifkin, a high profile American green, had a book published on “the end of work” in 1995. More recently Ross Douthat, a New York Times columnist, wrote of the dangers of “a world without work” (New York Times, 23 February 2013).

Tags: Fund Strategy, technology, work

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