Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘Ron Robins’

• Short Term Gain, Long Term Pain

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 31, 2011, in his weekly economics and finance column at alrroya.com

Unacknowledged as key causes of most developed countries’ growing and unsustainable debt is their citizens’ lack of happiness and well being. This induces people to seek immediate comfort in material goods, drugs, and activities and lifestyles that eventually cause them, and their societies, great harm, ill health, and massive debt!

After decades of study, Robert E. Lane, the Eugene Meyer Professor Emeritus of Political Science, at Yale University in the US, found that it is a lack of happiness and well being that is eating away the moral fibre of the populations in advanced market democracies. In Professor Lane’s seminal book, Loss of Happiness in Market Democracies, he writes, “amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world, a spirit that mocks the idea that markets maximise well-being and the eighteenth-century promise of a right to the pursuit of happiness under benign governments of peoples choosing.”

Continuing, “the haunting spirit is manifold: a postwar decline in the United States in people who report themselves happy, a rising tide in all advanced societies of clinical depression and dysphoria [anxiety, malaise], especially among the young; increasing distrust of each other and of political and other institutions, declining belief that the lot of the average man is getting better, a tragic erosion of family solidarity and community integration together with an apparent decline in warm, intimate relations among friends.”

It is these conditions which Professor Lane observes that give rise to individuals seeking immediate comfort anyway they can. Hence, most developed countries’ populations gravitate to instant solutions that might ameliorate their lack of happiness and anxieties. This, no matter the long term monetary, psychological, or physical consequences and costs to themselves or society. Professor Lane believes it is imperative for western democracies to give the highest priority to improving the happiness and well being of its individuals. And this means their focus should be on human psychological health and relationships—not about income levels.

By looking for hedonistic joys in the present, many developed countries’ individuals seek excessive material consumption which then creates unsustainable levels of consumer debt. In the US, though to a lesser degree in other developed countries, consumer debt has grown far faster than individual earnings gains over the past several decades. Despite a respite in consumer debt growth during the past two years, signs are emerging that US consumer debt might well begin to outpace actual earnings gains again in 2011, thereby creating conditions for yet another future financial crisis.

Also, and again much ignored in the debate concerning debt, are other individual behaviours that induce it. For example, to provide a modicum of happiness and to make life more bearable, people in America (and in many developed countries) consume drugs (legally and illegally) in extraordinary amounts. These drugs—alcoholic beverages, marijuana, cocaine, cigarettes, prescribed and non-prescribed medications, etc.—often create dependencies that impair health, brain and psychological functioning. These dependencies then lead to greater crime to support drug habits, increase prison populations and criminal/legal costs, raise the number of accidents everywhere, and encourage unhealthy lifestyles that in turn produce epidemics of obesity, diabetes, heart disease and all manner of health problems.

Americans spend more on healthcare, by far, than anyone else. In 2009, according to the Centers of Medicare and Medicaid Services, Americans spent $8,086 per person on healthcare, equal to 17.6 per cent of their economic output or gross domestic product (GDP). And such expenditures continue spiralling 4 to 10 per cent a year, far faster than GDP itself. Thereby they add inexorably to future unfunded US federal government medical liabilities that Boston University’s Professor Laurence Kotlikoff believes is about $125 trillion over an infinite timeframe. To fund that liability would require every man, woman and child in America to pay about $407,000 to the US federal treasury!

And among public companies a short term focus on near term profits that potentially create longer term costs and debt has been endemic. Consider this 2001 quote by Maryann Keller on the US automobile industry. In Forbes magazine, she said, “[That] Chrysler, GM and Ford spent billions of dollars to buy their stock in the open market… It was always obvious that product spending [developing new autos] was being sacrificed to provide trading liquidity [ease of selling stock] for big investors while boosting earnings per share. GM, Ford and the Chrysler Group today [in 2001] find themselves with growing gaps in their product portfolios as they lose market share…”

Thus, the US automobile industry preferred to spend profits on supporting their near term stock prices rather than developing new products for longer term profits. By 2009 all but Ford were bankrupt. After losing tens of thousands of jobs and engaging in a massive automobile industry restructuring program, the US government bailed out the industry (for now?) at a cost of about $85 billion. (Canadian governments also supported GM and Chrysler to the tune of $13.5bn CAD.)

Total societal US debt (private, corporate and government) is now likely to continue moving higher again as consumers are forever encouraged to spend now while saving is discouraged due to artificially mandated low rates. Increasing employment, though welcome, is not likely the answer to mounting unsustainable societal debt. In fact, it might well exacerbate it if former long term trends of debt growth outpacing income gains continue.

The US, like most other developed countries, is on a path to increased human suffering and tragic financial circumstances unless it deals with the fundamental issue: enabling individuals and families to become intrinsically happier and experience feelings of greater well being. Only then can the compulsion towards short term thinking and gratification—which builds huge unsustainable long term debt—be stopped.

Copyright alrroya.com

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Posted in Consciousness/Psychology, Economics, Labour Issues, Spiritual | Tagged: , , , , , , , , , , , , , , , , , , , | Leave a Comment »

• America’s Economic Rebirth

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 24, 2011, in his weekly economics and finance column at alrroya.com

A rebirth of the American spirit and economy is probable. It would be founded on huge reductions of societal debt and consumption. It will arise on re-invigorated American entrepreneurship, a revamped government and healthcare system, new energy sources, local manufacturing and a growing working age population, amongst many other changes Americans will embark on.

However, before America can begin its rebirth, it has to deal with its debts. Total US societal debt may well have reached a tipping point and many investors are wondering when US government bonds will be abandoned. In fact, this process might already be underway. Reuters’ Jennifer Ablan reported on March 9 that Bill Gross’s $237 billion Pimco Total Return Fund, the largest bond fund in the world, had sold all its US government bonds over the past few months.

The most likely cause for wholesale abandonment of US government bonds is when there is broad recognition that the US economic recovery is not self-sustaining—as Bill Gross believes—and that the fiscal stimulus packages and Fed quantitative easing (QE) programmes have been ineffective in righting the US economy. One major result of US bonds being dumped will likely be much higher US interest rates and restrictive credit market conditions. Such conditions could give rise to dramatic falls in consumption as happened in 2008-2009.

In such circumstances, facing a stark new reality, Americans will be forced to look within themselves for guidance. As they do, I believe they will regain their ‘can do’ attitude and surprise the world with a regenerated spirit and incredible enterprise and entrepreneurship. Gerald Celente, probably the most accurate trends forecaster of our time, predicts an ‘American Renaissance.’

More than likely the economic and social circumstances of the next few years will cause a total re-organisation of US governments: federal, state and local. With greatly restrictive finances, many of their services will no longer be available. This will leave room for numerous private entrepreneurs to fill the gaps. Perhaps the area where this will be most felt will be healthcare. As I have written in US Healthcare Delivering a Heart Attack!, financial conditions will force major reductions in Medicare and probably private insurance plan coverage as well. Individuals will have to pay directly for many more services.

With patients in the drivers’ seat by having to pay directly for numerous healthcare services, doctors and healthcare service providers will have to compete in ways they never had imagined before. Alternative therapies such as Chinese medicine, homeopathy, ayurveda, meditation, etc, will compete on a more equal footing with established healthcare practitioners, drug plans, and so on, to provide health remedies. It will be messy and likely finally force down the prices of many healthcare services that had been rising in prices far faster than incomes. Finally, healthcare will become more affordable to Americans. But as in any competitive marketplace, those that offer the most cost-effective services and products will gain most.

There is also the opportunity for eventual US energy self-sufficiency, particularly as many forecasters believe that oil will become ever more expensive—most especially in devalued dollar terms. Renewable energy systems—wind, sun, geothermal, etc —all have the capacity to vastly increase output. An article by Karin Rives on February 18, on the website United States Mission referred to a Bloomberg New Energy Finance report that said US onshore wind power electrical generating costs are now about the same as for coal-generated power. The gradual transfer to electrically driven vehicles is also just beginning.

Furthermore, if environmental safeguards can be found, shale gas deposits in the US could go a long way to ensuring US energy self-sufficiency. In “Facts About Shale Gas”, Washington DC based API states that the US has over 100 years of supply at current gas consumption rates. Moreover, an MIT study reviewed in the New York Times by Matthew L. Ward on June 25, 2010, foresaw natural gas usage doubling over the next several decades to 40 per cent of the US energy market.

Thus, US ingenuity in energy production could substantially change its energy mix. The US could become much more self-reliant while dramatically decreasing its oil related imports that today account for more than 50 to 70 per cent of its trade deficit.

The financial conditions that will befall the world when the US dollar crumbles will probably lead to trade restrictions and tariffs in the US and in many countries. US manufacturing, behind a tariff wall and ‘buy America’ policies, together with a shortage of imported goods, will re-invigorate American manufacturing and technological prowess. Mr Celente predicts an ‘elegance trend’ and the need for durability in all things manufactured.

Similarly, Mr Celente forecasts a rebirth of American agriculture. Americans will demand real, natural food and it will also be grown abundantly in numerous urban and roof gardens.

Looking out over the next few decades, the US has another advantage over other large developed countries. It is expected to have the most favourable demographics as well. By 2050, according to the UN’s 2008 population database projections, the US dependency ratio is forecast to be 63 dependents per 100 working age individuals, compared to 96 for Japan and 74 for Europe.

The next few years will be difficult for America. But beyond that is its revival. Its unsustainable debt burden will be substantially reduced and US governments—federal, state and local—will be financially forced to live within their means. This will entail a huge restructuring of what they do and in the process provide major opportunities for new entrepreneurial activities.

Healthcare, energy, food, manufacturing and technology, will be among the areas that will undergo transformations that will lead America and the world into a new era. A new American spirit probably arising sometime this decade will give rise to the birth of a new US economic paradigm.

Copyright alrroya.com

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• India, Ancient Economic Behemoth, to Overtake China

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 20, 2011, in his weekly economics and finance column at alrroya.com

When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world’s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.

In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9 times that of Britain’s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.

Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India’s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.

Furthermore, the US Census Bureau projects India’s population becoming the world’s largest and surpassing China in 2025. And by 2050, the Bureau sees India’s population at 1.66 billion compared to China’s 1.3 billion.

Population demographics are crucial in another sense. In Ed Dolan’s, India’s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, “rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support… India is just entering its Goldilocks period while China, like the United States, is already leaving.”

While considering demographics, Mckinsey & Co expects India’s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India’s consumer market becoming the world’s fifth largest by 2025, up from twelfth place in 2007.

Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.

However, for now it is India’s service sector that is its real star. Relative to China, and given its state of development, India’s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.

Mr Ghani also says, “productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector… that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth… India’s growth experience suggests that a global service revolution—rapid growth and poverty reduction led by services—is now possible.” Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.

And services continue to grow rapidly. In a February 21 article in India’s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.

India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, “the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China.”

Also, the world’s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India’s legal, political, financial and commercial framework is more familiar to developed countries’ businesses that would like to do business with or invest in India.

India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world’s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.

India is rising again to become a global economic behemoth.

Copyright alrroya.com

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