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Hullabaloo


Sunday, July 08, 2012

 
It's not personal, it's strictly business

by digby

Yesterday I linked to a post by Jonathan Schwartz featuring a loony quote from a misanthropic billionaire and which fatured a quote from David Frum pointing out that one of the reasons billionaires are loony is because they watch Fox News too.

They also hear from the financial and banking industry. Here's an email I received from a friend in the upper 1%:
I just received a 12-page analysis from my bank recounting the prevailing anti-Keynesian analysis of the 'Great Recession'. It directly states that wages have to go down in the USA, that it's inevitable, so draw your own political conclusions. It's a long 'apology' (in the sense of explanation) for Mitt Romney and Bain Capital. It ends with the conclusion that the November election is a crucial tipping point.

First, the big lie:
Despite massive fiscal and monetary stimulus, the global economy failed to rebound briskly from the “great recession.” Growth in the major developed economies remains mired at a pace that is insufficient to absorb excess labor.
This sums up their economic analysis: "Krugman is wrong." Truthfully, there hasn't been a "massive fiscal" stimulus; instead, government spending (aside from transfer payments) continues to shrink, and teachers and firefighters are still getting fired.

But I'm not to worry about my own role in this. It's not my fault that workers are getting screwed, it's inevitable. The blame, apparently, lies with the Chinese people, who save too much.
As noted above, China saves and invests far more of each unit of GDP than does the United States. More importantly, Chinese households save more than half of their disposable income while U.S. households save only a few percent of disposable income. From 2002 to 2010 the averages were 54.0% and 3.8%, respectively. [Not really. This is mainly due to the increased ability to own capital in China. Land, house, cars.] Combining this fact with the on-going transfer of income and wealth from the United States to China means that the global saving rate is rising. This has two key implications for the economy and the markets:

�� Global aggregate demand will tend to fall short of aggregate output, creating a deflationary bias in the economy. [So wages must continue to fall.]
Read on:
The Macro Impact of China

It can be argued that China and India were not fully integrated into the global economy until shortly before China was formally admitted to the World Trade Organization (WTO) in December 2001. With the integration of the world’s two most populous countries, the global supply of labor effectively doubled. In addition to its abundance, the new labor — both skilled and unskilled — was extremely cheap compared to labor in the major developed economies.

The textbook implications of such an event are fairly straightforward. [Actually not. Their textbook economic theory relies upon a mechanistic view of human beings. If you raise the minimum wage, people will quit because they don't really need the extra dough, and 'job creators' will become slackers if you raise their marginal income tax rates, make them more progressive. And so on and so forth.] Real wages around the world should converge, rising in the newly integrated economies (for simplicity we focus on China) and falling in the previously high-wage developed economies. Capital and production should shift to China, equalizing the cost of production and the return on capital. With labor now much more abundant in the global economy, the share of income going to capital should rise and the share going to labor should fall. [My emphasis.] The net effect, however, is a shift of income, output, and wealth toward the previously low-cost, labor-abundant economy of China. As we discuss below, this shift of income has important implications for the current situation.

In reality, these adjustments take substantial time.

�� Wages and prices are sticky, so real wages and relative prices adjust only gradually.

�� During the process of adjustment, employment in the high-cost, developed markets will be susceptible to both sharp contractions and slow recoveries as firms cut costs aggressively to become competitive in global markets.

�� With respect to capital, physical capital does not move readily from one location to another. Instead, the capital stock in the developed economies must be reduced through depreciation and low net investment while the capital stock in China is ramped up by vigorous investment. During this process, the return on capital (profits) should be strong and rising as a share of output in the developed markets, but the value of capital in place (i.e., stock prices) will be depressed by the need to compete with the higher returns available abroad. In effect, existing physical capital becomes obsolete, not because it is out of date, but because it is simply in the wrong place. [The bolded type is my emphasis.]
Summing up, long and painful recessions will be the rule from now on, far more people will be unemployed, and wages won't go up. The Masters of Capital (rich people like me) will get a larger and larger share of the nation's output. The US economy won't recover until we accept the fact that there have to be a lot more poor Americans. Industrial production has to be shifted to China. The 1% aren't to be blamed. The real culprits are the Chinese people, whose savings rate is over 25% while our nation of working class slackers is 5%. Vote Mitt.
The world is their oyster. The rest of us not so much.


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