Month: March 2017

How Will Capitalism End?  Wolfgang Streeck.  2016.

Professor Streeck, Director of the Max Planck Institute for Social Research in Cologne, begins with a review of the 2013 book Does Capitalism Have a Future?  He notes that post-World War II democratic capitalism was based upon the shotgun marriage of markets to pursue economic growth and democracy to prevent market excesses, such as soaring inequality, financial crises, hardship of market losers, and externalities like pollution.  Since the 1970s, the reasonable balance between these contradictory forces has shifted to market dominance that has resulted in decreasing legitimacy and increasing inequality and distributional conflict.  Consequently, the five authors of the book share the conviction that a structural crises bigger than the recent Great Recession looms for capitalist society, and each presents his view of how it may come about:

1. Wallerstein sees resource depletion, growing need for infrastructure, and demise of centrist liberal dominance as causing the final decline of the US-centered world order followed by a global confrontation between defenders and opponents of capitalism to determine what comes next. 2. Calhoun sees the possibility of a large-scale collapse of capitalist markets followed by a centralized socialist economy or Chinese-style state capitalism, although sufficiently enlightened capitalists could still intervene to save capitalism. 3. Mann sees US weakness leading to a shift of economic power from the West to the rest of the world with a move toward more statist economies that are jeopardized by unsustainable consumption and possibly even catastrophic change like nuclear war or escalating climate change.  4. Collins sees technological displacement of labor as having destroyed the manual working class in the twentieth century and about to destroy the middle class in the twenty-first century leading to unemployment of 50-70% finishing capitalism by mid-century and probably leading to socialism with or without violent social revolution.  5. Derluguian sees parallels with the decline of Communism due to internal political dysfunction from institutional and economic decline leading to fragmented social movements pitted against economic elites in the transition to post-capitalism.

The author sees all of these scenarios as contributing and reinforcing each other as capitalism collapses from its own internal contradictions.  He suggests that what comes after capitalism in its final crisis, now under way, is not socialism or some other defined social order, but a lasting interregnium.  This is defined as a breakdown of system integration that deprives individuals of institutional structuring and collective support and that shifts burdens for security and stability to the individuals themselves.  Neoliberal ideology glorifies this breakdown of structured order and de-institutionalization as the arrival of free society built on individual autonomy.  This neoliberal narrative neglects the very unequal distribution of risks, opportunities, gains, and losses that comes with de-socialized capitalism, including the “Mathew effect” of cumulative advantage.  When this narrative no longer works, perhaps some crisis in middle class employment, as predicted by Collins, or some other wide-spread disorder will bring about the end of the post-capitalist interregnium and the emergence of a new order.

The trajectory toward financial crisis began in the 1970s, after three decades of successful democratic capitalism, when the profit-dependent classes reacted to declining post-war growth by rejecting the redistribution that provided the system with its legitimacy.  With the loss of sufficient taxation, costs of dealing with the resultant distributional conflict were projected into the future, first by inflation in the 1970s, next by rising public debt in the 1980s, and then by increased private debt (with increased financialization) in the 1990s and 2000s, until the crisis of 2008.  This was followed by central banks turning private debt into public assets, while overall indebtedness remained higher than ever.

Thus the post-war standard model of democracy transitioned to the neoliberal Hayekian model that substituted economic discipline for political legitimacy.  This process was augmented by globalization that undermined labor’s bargaining power, increased the difficulty of taxation of mobile capital, and limited state control of finance.  Consequently, five systemic disorders have befallen capitalism, including stagnation, oligarchic redistribution, plundering of the public domain, corruption, and global anarchy.  With respect to oligarchic inequality, some of the rich already consider their fate as independent from the fates of the societies from which they extract their wealth.  Hence, they no longer care to contribute to those societies.  The ratio of average income between the top 400 taxpayers and the bottom 90% is 10,327 to 1, and the ratio of wealth between the top 100 households and the bottom 90% is 108,765 to 1.  Corruption extends beyond the legal definition to gross violation of rules, systematic betrayal of trust, and monopolization of political power by extreme wealth.

All of this is discussed in the introduction of How Will Capitalism End?  The following chapters are separate essays that considerably enlarge on these subjects and others, such as the European Union, the Euro, and the views of other authors.  Selected excerpts from these chapters that are listed below will generally be limited to new or incidental concepts rather than restatements of the main points already discussed in the introduction:

1. How Will Capitalism End? The “Matthew principle” governing free markets: “For unto everyone that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath.”  Crisis symptoms for the industrialized countries featured slowing growth, rising debt, and rising inequality.  Increasing government debt was related to declining overall levels of taxation rather than excess redistributive democracy, since it occurred during declining unionization, welfare-state cutbacks, and exploding income inequality.  The capitalist victory over democratic oversight is Pyrrhic because it has destroyed the only agencies that could save capitalism by limiting its excesses.
2. The Crisis in Democratic Capitalism. Standard economics is basically the theoretical exaltation of a political-economic social order serving those well-endowed with market power, in that it equates their interests with the general interest and hides the fact that the economy is also a moral economy. The average citizen will pay for financial stabilization in this system with his or her private savings, cuts in public entitlements, reduced public services, and higher taxation.  Today’s democratic states are being turned into debt-collecting agencies on behalf of a global oligarchy of investors.
3. Citizens as Consumers: Considerations on the New Politics of Consumption. The sustained growth after World War II was fueled by Fordist consumerism, which was satisfied by the mass production of standardized consumer durables like cars and refrigerators. By the 1970s, this market was saturated, and growth slowed.  Capital attempted to restore growth by making goods less standardized and by developing new markets—essentially commercializing social life from supplying needs to supplying wants.  Neoliberal capitalists have advocated this individualistic approach for politics, with the claim that privatization is superior to standardized collective action by government.  However, collective goods like distributive justice and general rights are indivisible and cannot be commoditized, particularly for people with limited purchasing power.  Citizenship demands generalized support to the community as a whole, particularly in paying taxes.
4. The Rise of the European Consolidation State. The growing state debt of the 1980s resulted from a general decline in progressive taxability rather than from increased citizen entitlements. Nevertheless, the fiscal consolidation state of the 1990s was inspired by neoliberal politics to cut taxes and the state in favor of the private sector by offering citizens private credit as a substitute for previously free public services.  Thus, the state shifted from protecting society from the vagaries of markets to protecting markets from the vagaries of democratic politics. This was facilitated in the US due to powerful anti-taxation politics and a constitutional commitment never to compromise its “full faith and credit.”  Compared to the US, the European consolidation state has the disadvantages of continued popular support for distributive democracy and the lack of a hegemonic currency.
5. Markets and Peoples: Democratic Capitalism and European Integration. The democratic states of the capitalist world have not one sovereign, but two: their people, below, and the international “markets” above. Globalization, financialization and European integration have weakened the former and strengthened the latter.  Authoritarian market liberalism is now entirely shielded from democratic pluralism and can only act as the guardian and guarantor of a liberal market economy.
6. Heller, Schmitt and the Euro. The European Union has moved the governance of the political economy to a multinational level where state democracy cannot follow. In this system, multistate authority protects markets from egalitarian-democratic infringement. Consequently, the European Central bank is the most independent central bank in the world with a mandate to protect the currency but no mandate for full employment.  Hence, growth through egalitarian redistribution in the Keynesianism social welfare state has been replaced by growth through stronger incentives for the winners and more severe punishment for the losers in the Hayekian system.
7. Why the Euro divides Europe. In Northern Europe, particularly Germany, growth came from exports, so those countries were wary of inflation and debt and had no need for currency devaluations. Indeed, the German economy has thrived despite numerous revaluations by competing on quality rather than price.  In Southern Europe, growth and social peace were driven by domestic demand supported by inflation, budget deficits, and labor unions at the cost of decreased international competitiveness, which was occasionally made good by devaluations of national currencies.  When the Euro replaced national currencies, southern countries acquired excessive debt but could no longer resort to individual devaluation.  Consequently, the European Union, controlled by northern countries, had the power to impose punishing austerity on southern countries, particularly Greece, in the name of reform, although neither side had a claim to superior economic morality.  This is in keeping with the finding of political economy that natural laws of the economy are in reality nothing but projections of social-power relations which present themselves ideologically as technical necessities.  Thus monetary systems, as in the European Union, conform first to power and only secondarily to the market.
8. Comment on Wolfgang Merkel, “Is Capitalism Compatible with Democracy?” Post-World War II democratic capitalism came about as a historical compromise between a then powerful working class and a then weakened capitalist class to restore markets and private property in exchange for steady economic improvement and social security for all. As capitalism recovered, it broke through this post-war democratic-institutional containment and gained primacy over the citizens it was supposed to serve well on the road to a “Hayekian dictatorship of the market.”  In a 2014 essay, Merkel identifies many problems, including privatization, deregulation, growing neoliberalism, financialization, retrenchment of the welfare state, and the victory of shareholders over workers.  He finds adverse consequences of asymmetric political participation by lower classes, rising inequality, financial pressures to turn countries into “market conforming democracies”, and transfer of power from parliaments to executives.  Professor Streeck adds to this list declining growth, decreasing concessions from the rich to the poor, and ease of tax evasion by corporations and the rich.  To restore democracy as a meaningful corrective to capitalism would require the daunting tasks of re-embedding capitalism in democracy (instead of the other way around) and de-globalizing capitalism, such as by finding a less destructive monetary regime than the EMU.
9. How to Study Contemporary Capitalism? Modern society is capitalist society; hence an understanding of both sociology and economics is required for its study. The extensive discussion of this interaction that follows is briefly summarized here according to four points: 1. Capitalism is a dynamically unstable social system driven by and dependent on expansion and accordingly often in critical condition.  2. Conceiving of capitalism as a regime of rational action in response to material scarcity underestimates the role of socially generated imaginaries, expectations, dreams, and promises.  3. Capitalism is a political system driven by tension between a moral economy (social justice) and an economic economy (market justice).  4. Capitalism is a way of life shaped by interactions between market expansion, collective social values, and government social policy.

Capitalism legitimizes competition that deprives one’s peers of their livelihood by outbidding them and that has no ceiling for legitimate economic gain.  The resultant fear and greed provide superior motivation for innovation that leads to continuous uncertainty, which in turn leads citizens to demand political intervention to stabilize their social existence against market pressures.  This conflict is the very substance of politics in contemporary capitalism.  Social justice claims that workers should have recourse to due process and should receive a good day’s wage for a good day’s work and that nobody should starve, be unattended when ill, live on the streets, or be poor because of old age.  In recent decades, these claims have been trumped by market justice claims based on marginal productivity that has led to soaring inequality and undermined social justice.  A key concept is “investor confidence” which is capital owners’ pronouncement of their self-diagnosed psychological condition to signal whether expected returns conform to what they feel entitled to.  Political economy should be able to expose the market mechanism for what it is: the outcome of a struggle between conflicting concepts of and claims to justice, rather than between subjective morality and objective laws of what is technically possible.

10. On Fred Block, “Varieties of What? Should We Still Be Using the Concept of Capitalism?” Post-war democratic capitalism with democracy to contain the excesses of markets was fragile from its beginning. Capitalism is powerfully capable of protecting and extracting itself from political control. When social constraints led to the profit squeeze of the 1970s, political control over capitalism began to decay with increasing globalism because democracies at the level of the nation state were helpless against capitalism’s new international opportunities for evading those constraints.  Fred Bock’s view of capitalism as embedded in democracy and subject to its political control is not supported by the experience of the last four decades.  This raises the question of whether intellectuals should spend their time developing reasonable ideas for governments to repair democratic capitalism or to cease looking for better varieties of capitalism and instead begin to seriously think about alternatives to it.
11. The Public Mission of Sociology. The author believes the moment is approaching in which the foundations of modern society will again have to be rethought, like they were in the New Deal and after the Second World War.  Since the 1980s, the victory of advocates for market-liberalism over the market-correcting capacity of popular democracy has had disastrous results.  Financial deregulation has exacerbated distributional conflict and imposed unprecedented uncertainty.  Consumption and destruction of nature in service of capital accumulation have threatened the global commons that is the very basis of life on earth.  The political defeat of labor by capital has resulted in growing polarization between a large, impoverished surplus population of losers, overburdened middle class families, and a small elite of winner-take-all super-rich whose greed knows no limits.

The issues of democratic capitalism discussed in this book represents a blend of social and economic concerns.  Yet sociology remained on the sidelines while market-liberalism economics (that happened to serve elites) dominated policy with the claim that it was a skilled trade like dentistry with a toolkit of proven techniques.  Sadly, this brand of economics lacks concern for the social impact of its policies and overstates its status as a science, given its simplistic rational choice theory, unrealistic assumptions for models that lack empiric validation, and almost complete inability to foresee the 2008 financial crisis.  Obviously, a balance must be struck between the needs of people and the needs of capital.  Sociologists and political scientists, in alliance with heterodox economists of different stripes, have begun working on a new sort of political economy, a socio-economics that would again make the economic subservient to the social rather than vice versa.  It is high time for the mainstream of the discipline to remember its roots and join the battle.

Rise of the Robots: Technology and the Threat of a Jobless Future.  Martin Ford.  2015.

The just right “Goldilocks” period of the US economy after World War II ended in the 1970s when growth slowed and capital began to take a larger share of gains than labor.  Consequently, inequality soared from 1973 to 2013, when productivity gains of 107% were almost all retained by business owners and investors while production workers’ wages fell by 13%.  This era marked a fundamental shift in the relationship between workers and machines made possible by enormous advances in digital technology.  This shift is just beginning.  Due to accelerating advances in computers and artificial intelligence, machines are now poised to move from merely enhancing the productivities of workers to actually becoming workers themselves.  Resultant massive unemployment could cause the collapse of the feedback loop between productivity, rising wages, and increasing consumer spending that supports our economy.  Thus the author asks if accelerating technology could disrupt our entire system to the point where a fundamental restructuring may be required if prosperity is to continue?

In the Goldilocks years after World War II, technological progress markedly increased productivity but did not adversely affect labor because it occurred in areas like mechanical, chemical, and aerospace engineering that allowed workers to become more valuable and command higher wages.  This pattern was transformed in the 1980s when the increasing roles of information technology and automation displaced or deskilled workers and led to decoupling of the historical correlation between rising productivity and rising incomes. (See fig. 2.1)  This resulted in the following seven deadly trends:

1. Stagnant wages—from 1973 to 2013 weekly wages fell from $767 to $664 in 2013 dollars, and the increase of median household annual income from $50,000 to only $61,000 (compared to $25,000 to $50,000 from 1949 to 1973) was due to women entering the workforce. Since the 1960s, the inflation-adjusted minimum wage has actually fallen by 12%. 2.  Income share decreasing for labor and increasing for corporations (See fig. 2.3).  3.  Declining labor force participation—consistent decline for men from 86% to 70% from 1950 to 2013 but increased combined rate for men and newly arriving women, which peaked at 67% in 2000, then declined.  4.  Diminishing job creation, lengthening jobless recoveries, and soaring long-term unemployment (See fig 2.6).  1998 to 2013 saw increases of US output by 42% and population by 40 million with no increase in hours of employment.  5.  Soaring inequality—95% of income gains were by the top 1% from 2009 to 2012, with the obvious risk of political capture by financial elites.  6.  Declining incomes and underemployment for recent college graduates—for those with only bachelor’s degrees, income fell by 13% from 2000 to 2010, and only half found jobs utilizing their education.  7.  Job market polarization and part-time jobs—solid middle income jobs destroyed are mostly replaced by lower-wage service jobs and a smaller number of high skill jobs.

Practitioners of economics and finance point to earlier overstated warnings about technology and tend to dismiss anyone who argues that this time might be different.  They point out that previously new jobs were created as old jobs were destroyed, as with the transition from horses and buggies to motor vehicles, and they offer globalization, financialization, and politics as alternate explanations for the deteriorating status of workers.  The author counters that there is a fundamental difference between the earlier innovations that displaced workers from older industries to newer ones with similar jobs and the more recent rapidly accelerating digital innovations that are just beginning to eliminate enormous numbers of workers at all skill levels without generating replacement jobs.  Occupations amounting to nearly half of US total employment may be vulnerable to automation within the next one to two decades, according to a 2013 Oxford University study.

With respect to globalization, the fraction of US workers in manufacturing has fallen steadily due to automation since the 1950s, long before NAFTA in 1990 and the rise of China in the 2000s (See fig. 2.8).  Also, in 2011, 82% of goods and services purchased in the US were produced in the US, and only 3% were imported from China.  With respect to financialization, its share of GDP has increased from 2.8% to 8.7% since 1950; its share of corporate profits has increased from 13% in 1978-1997 to 30% in 1998-2007, and its employees have 70% higher salaries—with much of this activity geared toward rent-seeking.  However, this may be viewed as a ramification of the growth of information technology.  Powerful computers now account for nearly two-thirds of stock trading and are essential for innovations like exotic derivatives and CDOs.  With respect to politics, conservative business interests have successfully conducted a sustained and organized assault on forces that counter inequality, including regulations, high marginal tax rates, and private sector unions.  If a nation fails to implement policies designed to mitigate the changes brought on by advancing technology, should we label that as a problem caused by technology or politics?

Information technology has evolved to a general purpose technology that is simultaneously transforming many sectors of the economy.  Automation has replaced workers with devices like ATMs and self-service check-out systems and has the potential to replace 50% of fast food workers.  On-line retailers like Amazon and Netflix, have moved jobs to the internet and warehouses where they are much more easily automated.  Retail employment is threatened by fully automated vending systems like Redbox movie-rental kiosks that now serve Chicago with seven employees rather than the seven for each of dozens of previous Blockbuster stores.  Expansion of business on the internet also increases inequality because the income from on-line activity nearly always follows a winner-take-all distribution.

Commercial software already produces automated articles in sports, business, and politics and has the potential to produce 90% of news articles within fifteen years.  Commercial software is available to almost completely manage most aspects of the execution of business projects.  IBM’s Deep Blue computer used AI, machine learning, and enormous capacity to defeat world chess champion Gary Kasparov in the 1990s, and its successor Watson accomplished the more difficult task of defeating the Jeopardy champions in 2011.  The migration of these capabilities into the cloud is almost certain to be a powerful driver of white-collar automation.  Only the health care and education industries are relatively resistant to these changes, with the result that their relative costs are accelerating.  (An excellent brief discussion is provided for why health care is simply not comparable to other markets.)

In the near future, rapidly increasing capacity in fields like big data, artificial intelligence (AI), machine learning, artificial neural networks, and 3D printing is poised to replace human employment as never before.  Advancing AI and machine learning will eliminate many white collar positions, such as in middle management and the professions, even in the fields of computer science and engineering.  As a result, even increasing education, which is advocated for students as protection against automation, is experiencing diminishing returns.  With up to 50% of jobs at risk to automation and up to 25% at risk to offshoring (presumably with some overlap), the potential impact on employment is staggering.

These examples point to the theoretical catastrophic endpoint of relentless progression toward automation—at least in the absence of policies designed to adapt to the situation.  Members of the non-elite general public are already well into this trajectory due to rising inequality, stagnant wages, a decreasing education premium, and loss of worker power from globalization and automation.  Their ability to face the coming crisis is further jeopardized by the rising political power of those elites who have promoted policies to limit business responsibility and to lower taxes by weakening the safety net.  As a result of the transition from defined benefit pensions to often under-funded 401K plans, 50% of American households aged 65-69 have retirement balances of $5,000 or less.  Their plight could be compounded in coming decades by another severe financial crisis or by dislocations from global warming, since the same elites are determined to prevent or reverse policies designed to lessen those possibilities.

Unfortunately for elites, future decades will likely be precarious for them as well, even for the portion who are pushing for oligarchy (see the main post in darkcashnet.net for their identities).  The demand required by the economic system to generate their riches comes mostly from consumer spending—more than two-thirds in the US and more than 60% in other developed countries.  If jobs are automated away, consumers will lack the purchasing power necessary to drive this demand, and a fundamental restructuring of our economic rules will be required.  If this occurs, some form of direct redistribution of purchasing power will become essential if economic growth is to continue.

The author, a Silicon Valley CEO, believes the most likely solution to restore purchasing power is likely to be some form of basic income guarantee, such as by returns from a centrally managed sovereign wealth fund.  For example, a $10,000 annual basic income would require new revenue of about $1 trillion after adjustment for reducing or eliminating numerous antipoverty programs.  Since ever more taxable income is rising to the very top, taxation should be restructured to mirror the income distribution.  In addition to concern for the health of an economy with extreme inequality, there is the moral question of whether a tiny elite should be able to, in effect, capture ownership of society’s accumulated technological capital.  Today’s innovations do not really compare to the groundbreaking work of pioneers like Alan Turing and John von Neumann.  The computer technology that makes automation possible exists in some measure because millions of middle-class taxpayers supported federal funding for basic research in the decades following World War II.  Hence, the general public has a legitimate claim on the returns of decades of enormous incremental development that it supported, particularly when the dysfunctional nature of the alternative is considered.

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World.  Ruchir Sharma.  2016.

Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, spent 25 years traveling to analyze the economies of the world for investment.  In his introduction, he lists the principles he formulated for this task, which include the following: impermanence is the norm; forecasts are limited to 5 to 10 years; biases are stifled; ideological single factor theories are avoided; economies are likely to return to long-term averages; multifactor growth should be balanced, and dynamic indicators used should be manageable and not subject to political or marketing manipulation. As an unsentimental businessman, he then presents ten rules, each with its own chapter, to use in identifying the next big winners and losers in the global economy.

1. People Matter: Is the talent pool growing? Population gains together with productivity gains determine the rate of economic growth. For much of the post-World War II era, the rate of global economic growth has been almost 4%—half from population growth and half from productivity gains.  However, population growth since 1990 and productivity gains since 2005 have each decreased to about 1%.  Hence, overall growth has decreased to about 2%, and this lower rate is projected into the foreseeable future.  In the US, working age population decreased from 1.7% to 0.5% and productivity decreased from 2.2% to 1.3% after 2005.

Changing demographics exacerbate this trend for working age population.  Since 1960, average life spans have increased from 50 to 69, with the fastest growing portions over 65 and particularly over 80.  At the same time, due to aggressive birth control policies, births per woman have decreased globally from 4.9 to 2.5, even in India and Mexico.  The fertility rate is actually less than the replacement rate of 2.1 in 83 countries, including the US, Japan, and much of Europe. Consequently, the portion of working age people (15-65) who drive the economy is decreasing, while the portion of nonproductive older people is increasing.

This problem has been partly offset in some developed countries like the U.S., Canada, Germany, and Australia by immigration.  In the US, immigrants account for only 13% of the population but 25% of new businesses (30% in Silicon Valley).  Increased participation of retirees and women in the workforce also helps.  Automation, which is viewed as a threat to jobs (47% at risk in the US in one to two decades), may actually be important to counter workforce shortages.  Government programs, such as baby bonuses in Russia or extensive paid leave for mothers in Sweden, have had little effect on fertility.

2. The Circle of Life: In national politics, particularly in developing countries, crisis forces reform, reform leads to growth and good times, and finally, good times encourage arrogance and complacency that lead to new crises. The bold new leaders who emerge often have early successes from reform, but if they stay for long, this is followed by staleness and corruption. Many examples of this pattern are reviewed, such as Putin in Russia, Erdogan in Turkey, Suharto in Indonesia, and Mohamad in Malaysia.  Even worse, populists without reform arise in some countries, such as Chavez in Venezuela and Kirchner in Argentina.

Vladimir Putin is an example of this sequence.  He was elected president in 2000 during the severe depression after Russia’s transition to a market economy.  His reforms of taxation, debt reduction, management of Russia’s oil wealth, and reigning in oligarchs led to doubling the size of the economy and increasing average Russian annual salaries from $2,000 to $12,000.  However, by 2008, he transitioned to demagoguery, corruption, and aggressive nationalism, with the result that average income fell to $8,000, the economy slowed to negative growth, inflation increased to 16%, and billionaire wealth connected to government was 70%.

3. Good Billionaires, Bad Billionaires: “…Whatever one’s ideology, it is hard to dispute the growing view that low levels of inequality fuel long runs of strong economic growth, and that high or rapidly rising inequality can prematurely snuff out growth.” Moreover, inequality is presently very high and getting higher.  In 2014, the top 1% had 48% of global wealth (50% of financial wealth in the U.S.).  The much smaller fraction of super wealthy is getting an even more disproportionate share.  The number of billionaires has doubled in the last 5 years and tripled in the last 10.  Good billionaires are not necessarily bad for the economy, but bad billionaires are.

Good billionaires are in industries like technology, manufacturing, pharmaceuticals, telecoms, retail, e-commerce, and entertainment.  These industries make the most positive contributions to productivity, have fewer corrupt ties to government, and are less likely to generate popular backlashes.  Bad billionaires are in rent seeking industries like construction, real estate, gambling, mining, metals, oil, and gas that may compete for access to national wealth and that may be tied to government corruption.  The 70% portion of bad billionaires in Russia is by far the largest.  Bad billionaires are also more likely to have inherited wealth from families with close ties to corrupt government, such as in Indonesia.

4. Perils of the State: The checklist for governments includes the following: 1) the level of government spending, which can be too much or too little, and whether it goes to productive investment or giveaways, 2) misuse of state companies and banks to pump up growth and contain inflation, 3) activities that are either choking or encouraging private business.

For spending in developed nations, France tops the list with 57%.  Greece’s bloated spending has decreased to 47% after forced reforms.  Sweden, Finland, Belgium, Denmark, and Italy have around 50% spending, but mostly with better management.  The US, Austria, and Australia at 35-40% are light spenders.  For spending in developing nations, Russia probably tops the list at close to 50% (official figures claim only 36%).  Other big spenders from 41-35% include Brazil, Argentina, Poland, Saudi Arabia, and Turkey.  Light spenders include Mexico, Taiwan and South Korea at 22%.  Too much spending may include lavish subsidies, wasteful state corporations, and other inefficiencies.  Too little spending, as in Mexico, Pakistan, Nigeria, and Egypt, may include inadequately funded law enforcement, large black markets (more than 30% in Pakistan Venezuela, Russia, and Egypt compared to 8% in the U.S.), and civil war (62 conflicts from 1979 to 1997 averaged 15 years duration and 30% decreased GDP).

State-owned companies and banks may be sources of artificial creation of jobs, artificial suppression of prices, inefficient subsidies, and bad or corrupt loans.  For government and state company employment, highest levels are 33% in Norway, Saudi Arabia and Russia and 30% in China, and lowest levels are less than 10% in Japan, Korea, and Taiwan.  Wasteful Energy subsidies (gas, oil, etc.) amount to more than 10% of GDP in Saudi Arabia, Iran, Iraq, and Turkmenistan and 28% of GDP in Uzbekistan.  Enthusiasm for state companies has faded in emerging stock markets from 30% in 2008 to 15% in 2013. In China their share of GDP has decreased from 70% to 30%, and 73 million state jobs have been eliminated in the last few decades.  Assets controlled by state banks are 75% in India, 50% in Russia, Hungary, Taiwan, and Malaysia, and 40% in China, Thailand, Indonesia, and Brazil.  Reportedly, China’s recent stimulus to maintain unrealistically high growth targets has generated $6.8 trillion in wasted investment, including a great deal of empty real-estate.

5. The Geographic Sweet Spot: Nations that qualify as geographic sweet spots combine the pure luck of an advantageous location for trade with the good sense to make the most of it. For the largest emerging nations, combined import and export trade account for 70% of GDP. Profitability from proximity has occurred between Dubai and Iran, Hong Kong and China, Eastern Europe and Western Europe, Southeast Asia and the US, and Mexico and the US.  To benefit from their locations, countries must open their borders to trade with their neighbors, the wider world, and their own provinces and second cities.  Also, nations have redrawn trade routes to their advantages, such as when China created six of the world’s ten busiest ports, all of them man-made.  Other regions, such as parts of Africa and South Asia, have lost out due to inadequate policies and infrastructure.
6. Factories First: Is investment rising or falling as a share of the economy? Investment is the strongest driver of economic growth. Best investments to support growth are in new technology, new roads and ports, and especially new factories.  However, investment becomes increasingly nonproductive above about 35% and results in slower economic growth.  This is particularly concerning for China, where investments have grown from 37% of GDP in 2002 to a remarkable 47% in 2014 to maintain unrealistic growth targets.  Investment binges that lead to crashes can be good or bad depending upon what they leave behind.  In the US, the dot-com bubble of the late 1990s, funded by venture capital and stocks rather than debt, left behind a vast network of fiber optic cables important for future growth, but the housing market bubble of the 2000s, funded by staggering debt, left behind the deepest post World War II recession.

For emerging countries, investments are optimal at 25-35% of GDP and weak at 20% or less, and manufacturing ranges from 10% of GDP in Chile to 30% in China.  South Korea, Malaysia, China, and Indonesia are four of the top five for both investment and manufacturing.  For developed countries investments average only about 20% of GDP, from 17% in Italy, to 20% in the US, to 26% in Australia.  For these countries, manufacturing amounts to about 20% or more in only a few, particularly Germany, which has increased exports from 26% to 46% of GDP since 1995 and which is ranked in the top three for 27 of the top 51 global industries, compared to 21 for the US and 19 for China.

It is becoming tougher and tougher for developing nations to get in the manufacturing game and stay there.  The entire manufacturing sector has shrunk from 24% to 18% of global GDP since 1980.  In addition, rich nations have a big lead in advanced manufacturing, have less need for cheap labor due to automation, and have learned to block tricks like export subsidies, undervalued currencies, and reverse-engineering.  Consequently, some developing countries have tried to replace the manufacturing escalator to growth with a service escalator.  However, the rise of these service industries has been insufficient to drive mass modernization.  Even India’s IT services employ only about two million people, or less than 1% of the workforce.

7. The Price of Onions: Is inflation high or low? In the postwar era, low inflation has been a hallmark of every long run of strong economic growth. Of the fifty-six nations that, since 1960, have had runs of GDP growth greater than 6% for at least a decade, 3/4 had inflation rates lower than the emerging-world average.  The miracle economies of South Korea, Taiwan, Singapore, and China had booms lasting three decades or more and rarely saw inflation at greater than the emerging-world average.  In recent times, a boom cannot last if inflation is rising because the central bank will have to raise interest rates and likely choke off growth.

Global average annual inflation was 1% from 1210 to 1933, but this concealed sharp and frequent swings between high inflation and deflation.  After 1933, deflation disappeared and was replaced by unbroken inflation.   For developed countries, inflation peaked at 15% in 1974 (with the OPEC embargo), then fell to 2% since 1991.  In developing countries, inflation peaked at a staggering 87% in 1994 (with Russia, Turkey, and Brazil in triple digits), then fell to 6% since 2002.  Inflation was tamed largely by the rise of politically independent central banks that enforce inflation targets of around 2% for 92% of global GDP.   Outliers in 2015 include Argentina at 30%, Russia at 16%, Nigeria at 9%, and Turkey at 8%.  After World War II, extended bad negative demand-driven extensive deflation has occurred only in Hong Kong from 1998 to 2005 and in Japan for two decades after 1990 when high debt and oversupply of everything resulted in steadily falling consumer prices and prolonged low growth.  Good positive supply-driven deflation occurs as well, such as in the English industrial revolution when prices fell by half and output rose sevenfold and in the digital revolution when prices plummeted as quality skyrocketed.

Today, importance is decreasing for consumer prices and increasing for asset prices (stocks and real estate) as signals of sharp economic downturns.  Globalization has stabilized consumer prices by international shopping but destabilized local asset markets by introduction of foreign high end buyers that lead to bubbles.  Every major economic shock in recent decades has been preceded by an asset bubble, with increased severity when fueled by debt.  Five years later, the economy will be below its previous trend by 1-1.5% for a bubble not fueled by debt, by 4% for a stock market bubble fueled by debt, and by 9% for a housing bubble fueled by debt.  Consequently, the Fed needs to consider asset markets as well as consumer goods when stabilizing prices, particularly since the composite valuation of stocks, bonds, and houses in the US is now at a fifty year high, well above the highs of 2000 and 2007.

8. Cheap is Good: Does the country feel cheap or expensive? An overpriced currency will encourage locals and foreigners to move money out of a country and sap its economic growth. A currency that feels cheap will draw money into a country and boost its economic growth. The critical category to watch is the current account, which captures how much a nation is producing compared to how much it is consuming.  This consists of the trade balance (exports minus imports) plus other currency flows, such as interest payments to foreigners, foreign aid, and remittances from locals working abroad.  Cross-border capital flows were $280 billion or 2% of GDP in 1980, increased to $9 trillion or 16% of GDP in 2007 with globalization, and decreased to $1.2 trillion or 2% of GDP in 2014 with deglobalization.

A country with a current account deficit of 5% for five years is highly likely to have a significant slowdown and some kind of crisis.  To predict changes, watch whether the locals are moving money into or out of the country, including by illicit channels that show up in the errors and omissions column of the balance of payments.  China is the leading exporter of illicit capital at $125 billion per year until 2013, increasing to an annual rate of $320 billion at the beginning of 2015—an alarming sign.

The collapse of an overpriced currency in Thailand in the 1990s provided an example of a currency crisis. The strong baht led to extravagant spending, real-estate and stock bubbles, and heavy borrowing in foreign currencies.  The current account hit 8% in 1995-6.  When the bubble burst, investors pulled money out of the country, the baht fell 50% against the dollar, and foreign loans couldn’t be repaid.  Subsequent events provided an example of a currency contagion, when investors pulling money out of Thailand triggered a pullout from neighboring countries that could pay their bills and eventually from emerging countries everywhere.  For developed countries the current account deficit as a percent of GDP was 6% for the US in 2006 and 1.6% for the Eurozone in 2008 but has fallen to 2.5% in the US and a surplus of 1.6% for the Eurozone.

Conversely, devaluation to encourage exports usually does not lead a country to prosperity.  Negative consequences include higher prices for foreign goods, difficulty repaying foreign debt, and possibly even a trade war if others retaliate.  China was a rare exception when it devalued the yen in 1993.  But China had little foreign debt, little reliance on imports, and, most important, a strong manufacturing sector.  Japan and Germany in the 1980s and 1990s showed a path to strong growth despite massive currency appreciation by engaging in high quality advanced manufacturing for which customers were willing to pay a premium.

9. The Kiss of Debt: Is debt growing faster or slower than the economy? Economic slowdowns and financial crises are most often preceded by excessive growth of private debt (companies and individuals) not government debt, as shown by studies of 30 credit binges in 150 countries and of 430 severe financial crises. The usual pattern is excessive private sector borrowing (credit mania), often in response to some invention or innovation, which leads to overproduction, such as of fiberoptic cables in the late 1990s, and careless extension of credit, such as in the subprime lending of the 2000s.  Eventually, some financial accident occurs, typically after the central bank is forced to raise interest rates, and the bubble bursts.  As a result of the financial crisis from excessive private debt, government debt subsequently increases due to decreased tax revenues, increased public safety net spending, and shifting of bad debt to government books.  Hence, there is no historic basis for the idea that financial crises typically have their roots in fiscal government borrowing.

Obviously, credit is essential for economic expansion but only at a rate that is reasonably proportionate to growth of GDP.  The magic number for spotting coming trouble is a five year increase in private credit of 40% as a share of GDP (or 20% per year).  For instance, the Thailand financial crisis of the late 1990s was preceded by five years of robust 10% annual economic growth but an excessive growth of private debt of 67% of GDP.  After the financial crisis of 2007, a few countries and industries cut back, such as in the US, but total global debt (combined private and public) has continued to grow from $142 trillion to $199 trillion or from 269% to 286% of GDP.  In 2015, the US total debt of around 250% of GDP (150% private, 100% public) is pretty normal for a developed country with a per capita income over $50,000, but the Chinese total debt of over 250 % of GDP (232% private, 40% public) is by far the largest for an emerging nation with a per capita income of $10,000.

The most alarming credit binge is in China, which accounted for $21 trillion of the $57 trillion increase in global debt since 2007 and resulted in a record 80% five-year increase of private debt by 2013 with associated real-estate and stock market bubbles.  This is a threat to the global economy.  One possible outcome would be like that of Taiwan, which crossed the 40% threshold in the late 1990s.  Taiwan responded by sharply pulling back on lending and reigning in crony capitalism, which limited the damage to slowed growth from 9% to 7% for the next five years.  An alternate worse outcome would be that of Japan in the 1990s after rising debts led to collapse of its stock market and real-estate bubbles.  Rather than sharply reducing debt, Japan increased borrowing to subsidize failed companies, which resulted in two decades of stagnating growth and increased total debt from 250% of GDP in 1990 to 400% today.

10. The Hype Watch: How is the country portrayed by global opinion makers? The basic rule: the global media’s love is a bad sign, and its indifference is a good one. From 1980 to 2010, 122 Time magazine covers featured the economic status of a country or region.  When the story was upbeat, economic growth slowed in 66%, and when it was downbeat, it increased in 55% in the next five years.  A similar pattern was found in other publications, with the exception of the Economist, which did somewhat better with improvement in two-thirds after an optimistic cover and slowing in more than half after a pessimistic cover.

This pattern occurs because periods of rapid or slow growth are often near the ends of their runs and about to return to baseline by the time they come to the attention of the media.  Mainstream opinion about which nations are rising or falling typically gets the future wrong, because it extrapolates recent trends into the unknowable future and gets more convinced the longer a trend lasts.  IMF extrapolation for continued high growth at a slightly more modest rate for China and India predicts quadrupling in size for a combined expansion of $53 trillion by 2030.  The historically much more realistic expectation of return to baseline (regression to the mean) would result in only doubling for an expansion of $11 trillion.  This results in an enormous $42 trillion gap between predictions by the two techniques.  Also, poor economies have much more potential for rapid “catch-up” growth, which encounters the likelihood of slowdown when per capita GDP reaches 75% of that of the US.

11. The Good, the Average, and the Ugly—Summary. For three decades before 2008, global economic annual growth was 3.5%.  However, the future potential growth rate is estimated to be limited to 2.5% due to structural changes of depopulation, deglobalization, and the need for deleveraging.  Although the post 2008 recovery has been weak, recovery in the US has been stronger than in most developing nations and needs to be judged by the new standards.  The “kiss of debt” rule of growth of debt by over 40% of GDP in five years is the single most reliable indicator of a coming major economic slowdown. China’s economic growth prospects now rank among the ugliest in the emerging world and are a threat to the global economy, since China has displaced the US as the leading source of global growth.  Selected countries are listed below according to the author’s view of their economic prospects:

Good:  US, Germany, India, Mexico, Peru, Argentina, Poland, Romania, Pakistan, Vietnam, and the Philippines.

Average:  Japan, South Korea, Taiwan, UK, Spain, Italy, Czech Republic, Hungary, Kenya, Sri Lanka, and Columbia.

Ugly:  China, Russia, France, Turkey, Canada, Brazil, Saudi Arabia, Nigeria, South Africa, Thailand, Malaysia, and Australia.