Thursday, November 29, 2007

The Great Unwinding

Writing in the Financial Times, Martin Wolf has pointed out why the US government's unofficial weak dollar policy isn't so smart. Although in recent quarters "net exports contributed a quarter of US growth," exports are "only some 12 per cent of GDP. They must grow by considerably more than 10 per cent a year, in real terms, if the contribution of net trade to the rate of growth is to be as much as 1 percentage point. It is likely to be much less."

Sounds technical, but it means that the U.S. can't replace the engine of consumer spending with the engine of exporting for foreign spending. Two reasons are obvious: most of the world's population does not have as much money as Americans do, and they aren't willing to spend all their savings and more to do it.

Wolf calls this the "great unwinding" - an end to the growth caused by spending based on borrowing against rising housing prices. He describes it as "a turning-point for the world economy." The question is whether the "emerging markets" will be the "demand engines" of the economy to replace the US consumer.

My own guess is not. The US consumer was able to be the little demand engine-that-could because of decades of prior social investment, housing price inflation, easy credit, and no saving for tomorrow. Most of the world's population lacks some or all of these things. In addition, though many of them are wealthier than ten years ago - China is the leading example, some of the Indian population is another - the manufacturing system depends not on their wealth but on their low wages.

The world needs social development spending as much - more really - than consumer spending. We should figure out how to get that!

Friday, November 23, 2007

Corrosions of Inequality

Last week the French strikes spread and hovered on becoming a general strike before the lead unions voted to start negotiations again. The strike is at bottom not for retiring at 55 but for labor having a decent piece of the economic pie in a "globalized" Western economy. The French are as a population more skeptical about "market economies" than any other similar public. The U.S. media likes to present this as a sign of French backwardness and selfish nostalgia, perhaps because they don't know any actual French people. It is in fact a sign that they understand that "markets" are used as an excuse for cutting labor's share. Someday the American suburbs will figure this out.

In the U.S., television and movie writers remain on strike. One of the best writers perspectives appeared this week in the Santa Barbara Independent. James Kahn does not mince words, and among other things he says that "Writers collectively get 55 million bucks a year in residuals. If the studios gave us everything we were asking for, that would go up to $75 million. Just one company —Viacom — has annual revenue of $18 billion, and its top execs make about $60 million apiece annually." In other words, one Viacom exec can make as much in one year as all the members of the writers' guild put together.

What is the possible justification for this kind of inequality? It's monarchical, where one person earns as much as tens of thousands. It's worse than the middleman strangleholds that started the Grangers' revolt on behalf of food producers against the food brokers, who, then as now, take the lion's share of the final revenues. American business leaders have used global changes to undo the post-World War II middle-class revolution, which I define as income advances that are the same or greater for the majority than they are for the top. Society was starting to advance as a whole. That common advance has stopped. And these business leaders are the reason why.

Most of the business press has slept through it. It's hard not to assume it's because writers don't want to be too rude about the self-serving beliefs of the top execs that control their outlets. Maybe this explains James Surowiecki's terrible piece, "Striking Out," ostensibly about the writers strike in the November 19th issue of the New Yorker. In general Surowiecki never met a boardroom theory he didn't like, but he is even more of the front-row teacher's pet this time around, taking the opportunity to sigh about how strikes never raise wages and to make the writers seem as self-interestedly deluded as any billionaire exec. Economics, history, sociology, personal stories all disappear in Surowiecki's likening of both sides to fans in a 1950s study of a Princeton-Dartmouth football game, players of "ultimatum" and capuchin monkeys who are rewarded for working together. Anything to avoid talking about the grotesque inequality between execs and writers.

Surowiecki is a longtime ideologist of the middle-class: he spent the 1990s selling the New Economy and its market forces to the white-collar working stiffs who in the great majority of cases were going nowhere in it. But for Jim's faithful readers it seemed both glamorous and inevitable, and he asked us to identify with the masters of the universe who were making the high-tech future for us, ready or not. Entrepreneurs wrestled with the market gods and won: from their loins sprang infinite riches which we gratefully received. This mighty union of entrepreneurs and markets was the highest, the most glorious, and the only road to the wealth and plenty that is America's alleged birthright.

Unfortunately, when you put down the writings of middle-class admirers of capitalists and read the work of the capitalists themselves, you discover the admirers were lying to you about markets.

Look at these sayings from investment books:

- I'm a 40% fundamentals / 60% technicals trader
- buy the company, not the stock price

Let's start with these two. The first is from some young guy with an MBA from NYU who trades currency for a living. His work is neither interesting nor socially valuable - he practices "scalping" and holds positions for about 15 minutes at a time, but he does note that he cannot make money by regarding markets as snapshots of economic reality - the "fundamentals" view. The behavior of market traders is "60%," and these folks are exploiting market spreads - gaps, holes, that is market inefficiencies and market failures, to make their numbers.

The second is a saying of Warren Buffett's. It means don't look at the market measure of a company, look at the company. Buffett's famously successful investment strategy in effect invests in specific social institutions and relationships with names like Coca-Cola. You invest in people, products, and financial measures of those things. You don't invest in market prices.

Such sayings imply that major capitalists do not believe that markets are self-managing systems that return to equilibrium if you don't let governments money with them. This flatly contradicts the wisdom of TV hosts and politicians, who celebrate the "free enterprise system" and the "efficient market hypothesis" as though it is always the 1950s in America, not to mention the 1920s. Capitalists make money by seeing markets for what they are - social institutions with all sorts of problems that can be mended and milked, often at the same time.
Most of them find it convenient for the masses to believe otherwise - that markets must be left alone.

The blanket buy-in to this ideology may explain odd facts like how no disaster - Enron for example - ever actually gets us to reform our corporate governance system. Paul Krugman points out in his column today that this undone reform is the source of the ongoing "subprime" credit crisis, which sounds like it was caused by shady small-time mortgage brokers when it was caused by buying and selling asset-based securities by the wealthiest bankers in the world, they of the $40 million a year minimum paychecks. Congress may not reform the corporate world because the latter owns Congress - that's a big part of the story - but they also don't reform because business, B-schools, etc. have trained us to think that markets are wiser than all democratic intervention - that it is indeed undemocratic for the people to steer economies.

One last example of insider debunking of this Americanism. George Soros is one of the most successful currency traders in history, and in 1987 published a book called The Alchemy of Finance. I will say more about the overall theory of "reflexivity" in markets some other time. But my point here is simply to note that Soros rejects self-regulating markets categorically as what he calls "market fundamentalism." On page 52 he says, "I replace the assertion that markets are always right with two others:
  1. Markets are always biased in one direction or another.
  2. Markets can influence the events that they anticipate."
Thank you George for this reality check. Suburbs, take note - you've been had, you pikers! Inequality is something to intervene against, not something to embrace even as it drags you down.

Sunday, November 11, 2007

Democracy Is Over?

Fr. Frank outdoes himself in his Sunday sermon today. He mentions a new poll that shows that 24 percent of Americans think the country is "on the right track," a ten-year low and that folks hate the Democratic Congress as much as the Bushian exec. But the heart of the piece is a running comparison between the Presidents of the U.S. and of Pakistan as parallel tyrants. Which leads to this:
In the six years of compromising our principles since 9/11, our democracy has so steadily been defined down that it now can resemble the supposedly aspiring democracies we’ve propped up in places like Islamabad. Time has taken its toll. We’ve become inured to democracy-lite. That’s why a Mukasey can be elevated to power with bipartisan support and we barely shrug.

This is a signal difference from the Vietnam era, and not necessarily for the better. During that unpopular war, disaffected Americans took to the streets and sometimes broke laws in an angry assault on American governmental institutions. The Bush years have brought an even more effective assault on those institutions from within. While the public has not erupted in riots, the executive branch has subverted the rule of law in often secretive increments. The results amount to a quiet coup, ultimately more insidious than a blatant putsch like General Musharraf’s.
We had a coup d'etat! Yow! Oops - who knew?

Rich is right that representative democracy has ended at the federal level. Congress and the President can't even get up to 25 percent approval ratings, but, well, they don't really need our approval any more, do they?

Friday, November 09, 2007

Why Moguls Hate Writers

Pakistan is burning, and Sarkozy is making an ass of himself grinning in line with Bush and Cheney. But let's look at Hollywood for a minute. The Writer's Guild of America has been on strike since Monday, largely over the failure to get concessions from the studios about royalties on either DVD sales or "electronic sell-through" (EST), otherwise know as digital downloading or "new media." There are all sorts of ins-and-outs to this labor-management conflict, including the blurring of the lines between the two. I refer those not too exhausted by details of Hollywood to read Nikki Finke's blog for one of the best running commentaries; her regular column in yesterday's issue of L.A.Weekly offers a good overview for the latecomer.

But the deeper issue is why Hooy-wood honchos couldn't care less about writers. Some reasons:

They are orthodox American capitalists. This means they think all value comes from technology and not from labor - and of course from their "entrepreneurial" management of technology. They get this from old-school innovation economists like Joseph Schumpter, who make technological innovation the center of wealth creation and economic development. A million economists have echoed him since, including "new growth theorists" like Paul Romer at Stanford. This means that shifts from big to small screens, from broadcast to cable, from broadcast-cable to taping, from analog to digital taping, from VHS to DVD, from DVD to EST - these are the shifts that define the industry. Writers are irrelevant. They who master process innovation and assemble the giant corporate machine for technological control shall rule the universe.

Moguls assume labor doesn't matter. Market placement and network effects matter. Thus a tiny handful of writer-kings create nearly all of writer-value - the hit machines. More important are the producers who do the series concepts, especially the ones like American Idol that can avoid writers altogether.

Moguls see inequality as natural. the Writers Guild of America is a poster-child white-collar union enjoying forms of inequality that would make Darwinian selectionists blush. A good piece by Brooks Barnes points out that "Among the Writers Guild’s 12,000 members are television writer-producers like Shonda Rhimes, the creator of Grey’s Anatomy and Private Practice, who take home up to $5 million a year. On the other extreme are junior writers who — if they work at all — make $50,000 or less. About 48 percent of West Coast members are unemployed." The whole industry is like this - billionaires and millionaires on one side, the mass unemployed on the other, plus a small and unstable "middle-class." Is tis America's overall future economy? Yes, if we all think this is normal. On this point, an LA Weekly piece by Steven Mikulan quotes one picketer as saying that "There’s this myth that it’s millionaires versus billionaires. But the median income of a WGA member is $5,000. I rent an apartment in Sherman Oaks. I have a 4½-year-old son and a baby due in December. The only reason my wife and I can live in a nice part of town is because of the union contract." (On the other hand, "The average working writer in Hollywood takes home about $200,000 a year, according to the studios and networks, which are represented by the Alliance of Motion Picture and Television Producers." Note the difference in source, and also between "median" and "average" - the later can be skewed up but huge packages at the top.)

Moguls live in the world if truly insane legal and financial fees. Lawyer contingency fees can run 33-40 percent for major civil lawsuits. The law firms in the successful Vioxx suit against the pharmaceutical giant Merck will run over $2 billion of the $4.85 billion settlement. Hedge funds operators get "2 + 20," meaning a straight 2 percent of assets under management put 20 percent of profits.

Of course all this makes moguls think like a lot of middle-America. Too bad the latter make zero money from it - less than zero, to be exact.

Thursday, November 08, 2007

How Do You Know When You're Dead?

When you don't fight what's hurting you. I've blogged before about the Pakistani lawyers and judges. Here they are last March standing up, after decades of passivity, for law and against their tyrant. Pretty simple. Now there's martial law, a suspended constitution, continuous riots. Tariq Ali has an excellent short summary of what happened.

Something similar is happening in France. There were the big rail strikes last month, and the Air France flight attendants strike that stranded us in Berlin for about 12 extra hours on October 27th, and the Bretagne fishermen who have been protesting fuel price hikes and, when le Jogger, aka le president de la Republique showed up, confronted him face to face and said he wasn't doing a damn thing for them. It was an amazing spectacle for an American, raised on our deference to our executives and their vast security forces, to see le Jogger surrounded by local folks listening but dishing it right back to him.

Americans generally don't see why the French make such a fuss about everything, including little stuff like cuts in pensions - in this case, in the "special" pension systems that affect employees of the Paris metro, the national train system, and the national gas company. The reason is simple: the public pensions are much better than the private ones. le Jogger et al want to cut the public pensions down to the private level, because that will save the state and its high-income tax base money. The employees don't want to give their pension money back, so that le Jogger can give it to business and wealthy people in the form of tax cuts.

As in the States, the language of necessity is always trotted out. Globalization means we can't afford your luxury pensions any more. Here are the actual figures, from Le Nouvel Observateur (table not on line): the average monthly pension (I'm assuming after tax, which is how salaries are usually expressed in France) for train folks is 1683 Euros, and a little over 2000 for EDF-GDF (electricity and gas folks). The highest average is RATP (Paris metro & bus), at 2136 E / month. That's 24000 E / year after tax, or what, maybe 40,000 E gross per year. That means that a retiree from those operations in France has an income that is somewhat below average for a family income in the United States (around $50,000 /year, depending on how calculated). FAT!

The private sector average is the big scandal: 827 E / month for non-cadres, meaning roughly blue-collar and other non-professionals, and a whopping 1429 E average/ month for professionals. Who wouldn't fight to keep their pensions from dropping by 1/3 to 1/2 if, as most think, le Jogger wants to shift the public onto the private model and get the final pension as an average of the last 25 years of salary rather than of the last 6 months.

Bush wanted to privatize Social Security in the US after his 2004 re-election. Arnold tried to do the same to CalPERS and other public pensions in California in 2005. It's a trend in Western countries for leaders to try to get money out of funds controlled by labor - and that go into employees' pockets - and into the investment system and corporate revenue streams that they control. How could employees NOT fight this?

The nurses and firefighters fought in California in 2005. But no thanks are owed to the political system. The Dims can't lie down fast enough. They can't manage to pass a law taxing hedge fund managers income - in come cases hundreds of millions of dollars a year - as actual income (it's 15% rather than 35% or so). Will the Dims get as radical as mondo-billionaire Warren Buffett in complaining about the gross injustice?

No. On another front - take the Bush Administration's nominee for Attorney General. He's opposed to torture but won't condemn waterboarding. The context for is the secret 2005 Justice Department memo the New York Times reported on in which, in the wake of Congress prohibiting “cruel, inhuman and degrading” treatment, declared waterboarding to be none of those things. Michael Mukasey inserted himself in exactly this space, opposed to torture, not opposed to waterboarding. Sens Sens. Fienstein and Schumer created an 11-8 majority that moved Mukasey's nomination out of the relevant Senate committee.

In California, Gov. Arnold Schwarzenegger has responded to a likely downturn in income tax receipts by asking all state agencies to plan for budget cuts of 10 percent. It's a habit among US political and business leaders to cut jobs and services as a first resort. The response? not a peep.

If we define life as acting in history, it's not clear that the US middle class is still alive.