Decline of Romanitas in the West: Society, Education & the Church.
The continued economic decline of the west
-
Upload
sven-kunsing -
Category
News & Politics
-
view
352 -
download
4
Transcript of The continued economic decline of the west
The continued economic decline of the West Diagnosis and prognosis
Jon Moynihan 23 February 2012
© PA Knowledge Limited 2012
Page 2
The continued economic decline of the West
The challenge Potential actions Likely outcomes
© PA Knowledge Limited 2012
Page 3
How has the West’s economic decline happened? Will it continue?
Source: IMF.
-20 0 20 40 60
China
India
Brazil
Russia
Germany
France
Japan
United States
United Kingdom
Real GDP per capita Change from 2007 to 2012 (forecast), %
70 100 130 160 190 220 250 280 310 340 370 400 430 460 490 520 550
1992
19
94
1996
19
98
2000
20
02
2004
20
06
2008
20
10
Real GDP per capita (1992 = 100)
China
India
United Kingdom
United States
Germany
Japan
Brazil
© PA Knowledge Limited 2012
Page 4
There are many competing explanations, some more persuasive than others:
20 30 40 10 50 60 0
0
1000
1500
2000
2500
3000
3500
500
% of men aged 25-34 living with parents
5Y C
DS
of fo
undi
ng E
uroz
one
coun
trie
s
R2 = 0.75282
5-Year CDS of Eurozone countries vs. percentage of men living with parents
Greece
Portugal
Italy Spain
Ireland
Austria Germany
Belgium France
Finland Netherlands
Source: EuroStat, Bloomberg, via Boaz Weinstein, Saba Capital.
© PA Knowledge Limited 2012
Page 5
The central dilemma facing ‘Western’ economies:
The paradigm for the 1900s
2%
3%
The paradigm for the 2000s
Negative
Negative
Average annual growth in
number of jobs:
Average annual growth in real
wages:
© PA Knowledge Limited 2012
Page 6
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
© PA Knowledge Limited 2012
Page 7
The global wage disparity, potentiated by the global adoption of capitalism, is driving an unprecedented loss of wealth and growth for the Western economies.
Wage disparities between OECD and emerging
countries result in an almost insuperable competitive advantage
for the ‘East’*.
As a result, a job drain continues and is indeed accelerating.
The jobs drained are not returning; rather, more will
be lost.
With no job supply, i.e. less
demand for labour, wages in the OECD must inevitably fall.
A global wage disparity…
* Includes Brazil etc.
© PA Knowledge Limited 2012
Page 8
This jobs drain is taking place, driven by the wage disparities that exist between West and East:
“Alarmist” worries about this were dismissed as overblown, even as many millions of jobs migrated (indeed continue to migrate) from OECD to Third World 1995-2011.
Sources: 1 OECD; 2 Estimated: UN World Urbanization Prospects, 15-64 year olds, assuming 65% LFPR.
Waiting to urbanise (rural)2
Advanced Economies1
Developing Economies
(urban)2
1.1 billion
$12 (China, 2008)
$135 (OECD, 2010)
500 million Labour pool
Average daily wage
1.3 billion
$1-2?
A global wage disparity…
© PA Knowledge Limited 2012
Page 9
The global wage disparity, potentiated by the global adoption of capitalism, is driving an unprecedented loss of wealth and growth for the Western economies.
Wage disparities between OECD and emerging
countries result in an almost insuperable competitive advantage
for the ‘East’.
As a result, a job drain continues and is indeed accelerating.
The jobs drained are not returning; rather, more will
be lost.
With no job supply, i.e. less
demand for labour, wages in the OECD must inevitably fall.
A global wage disparity…
© PA Knowledge Limited 2012
Page 10
100
110
120
130
140
150
160
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
USA
Since globalisation began in earnest in the 1990s, OECD economies have, despite government stimulus policies, been unable to sustain rates of job growth:
Source: OECD
Total employment (1983=100)
100
110
120
130
140
150
160
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Europe
A jobs drain continues…
© PA Knowledge Limited 2012
Page 11
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
40s 50s 60s 70s 80s 90s 00s
Compound annual jobs growth by decade (%)
The last decade was the first decade since the Great Depression to see no net job creation in the US:
2000s, -1.1%
10
1990s, 19.8% 1980s, 20.2% 1950s, 24.7%
1970s, 27.6%
1960s, 31.1%
1940s, 37.7%
2 3 4 1 5 6 -5
0
20
25
30
35
40 45
15
Year in decade
% c
hang
e in
non
-farm
pay
roll
empl
oym
ent (
%)
US job growth by decade, 1940s – 2000s
10
5
0
7 8 9
A jobs drain continues…
© PA Knowledge Limited 2012
Page 12
Wages have increased for those with the most education, while falling for those with the least:
High school dropout
High school graduate Some college
College graduate
Graduate school
Source: Acemoglu and Autor (MIT), Skills, Tasks and Technologies: Implications for Employment and Earnings (2010).
Changes in wages for full-time, full-year male U.S. workers 1963-2008
A jobs drain continues…
90
100
110
120
130
140
150
160
170
180
190
1963
19
65
1967
19
69
1971
19
73
1975
19
77
1979
19
81
1983
19
85
1987
19
89
1991
19
93
1995
19
97
1999
20
01
2003
20
05
2007
© PA Knowledge Limited 2012
Page 13
In 1955, the biggest company in the world by value was GM (revenues: $105bn).* Today it is Apple (revenues: $108bn). Employment patterns have, however, changed somewhat:
* At 2011 prices. At 1955 prices, revenues were $12.5bn.
0
100000
200000
300000
400000
500000
600000
700000
800000 US employees Overseas employees Overseas contractors
A jobs drain continues…
GM 1955 Apple 2012
© PA Knowledge Limited 2012
Page 14
The US labour market is the most flexible in the world. Unlike in previous recessions, it looks as if lots of these jobs are not coming back:
-7
-6
-5
-4
-3
-2
-1
0
1
Number of years after peak employment
Percent job losses in US recessions
1974 1980 1981 1990 2001 2007
9 million jobs lost 6 million jobs lost
1 2 3 4
A jobs drain continues…
© PA Knowledge Limited 2012
Page 15
Whole industries – the ones the West was built on – are disappearing to the East:
Source: World Steel Association.
0
100000
200000
300000
400000
500000
600000
700000
800000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Crude steel production (megatons)
China USA Europe
A jobs drain continues…
© PA Knowledge Limited 2012
Page 16
Whole industries – the ones the West was built on – are disappearing to the East:
The commodity car industry is going the same way. Luxury cars will take slightly longer:
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Car production
USA Japan Europe China
Source: International Organization of Motor Vehicle Manufacturers.
A jobs drain continues…
© PA Knowledge Limited 2012
Page 17
With each stage of advancement up the industrial ladder in the East, there is a corresponding jobs drain from the West:
Low education Low capital investment
Low know-how Light manufacturing
Assembly
Medium and high capital
intensity Steel è Auto
Scientific and creative Design
Know-how Ecosystem growth
Professional services Financial services
Legal Accounting
Other high know-how High-tech IP
Entrepreneurialism Venture capital
Education
Innovation centres (universities)
Critical mass ecosystems
Western hostility to high earners
Time We are here
The industrial development cycle: from delivery to creation
Enablers of advancement:
Cash surpluses in developing
countries
A jobs drain continues…
© PA Knowledge Limited 2012
Page 18
The global wage disparity, potentiated by the global adoption of capitalism, is driving an unprecedented loss of wealth and growth for the Western economies.
Wage disparities between OECD and emerging
countries result in an almost insuperable competitive advantage
for the ‘East’.
As a result, a job drain continues and is indeed accelerating.
The jobs drained are not returning; rather, more will
be lost.
With no job supply, i.e. less
demand for labour, wages in the OECD must inevitably fall.
A global wage disparity…
© PA Knowledge Limited 2012
Page 19
At the same time, our own competitive advantages are steadily crumbling:
Barriers that could prevent job loss from the West to
the East
Competitive wage rates Unfeasible
Existing physical and intellectual capital base
Half-life is some 10-15 years
Propensity to invest new capital
Encouragement of VCs and entrepreneurs
Existing IP
Ability to generate IP
The jobs are not returning…
© PA Knowledge Limited 2012
Page 20
China has been investing almost half its GDP, while the West barely invests a fifth:
0
10
20
30
40
50
60
1970 1975 1980 1985 1990 1995 2000 2005 2010
Gross capital formation (% of GDP)
China United Kingdom United States Source: World Bank
The jobs are not returning…
© PA Knowledge Limited 2012
Page 21
“Just catching up”?
King’s Cross Hongqiao
Wuhan
The jobs are not returning…
Liverpool St
© PA Knowledge Limited 2012
Page 22
Barriers that could prevent job loss from the West to
the East
Competitive wage rates Unfeasible
Existing physical and intellectual capital base
Half-life is some 10-15 years
Propensity to invest new capital Vanishing
Encouragement of VCs and entrepreneurs
Existing IP
Ability to generate IP
The jobs are not returning…
© PA Knowledge Limited 2012
Page 23
Western attitudes to high earners contrasts with some other countries:
“We need to get tough on irresponsible and unjustified top remuneration”
Nick Clegg, UK Deputy Prime Minister
“To get rich is glorious”
Deng Xiaoping, Former Leader of the People’s Republic of China
致富光荣 zhìfù guāngróng
The jobs are not returning…
© PA Knowledge Limited 2012
Page 24
Barriers that could prevent job loss from the West to
the East
Competitive wage rates Unfeasible
Existing physical and intellectual capital base
Half-life is some 10-15 years
Propensity to invest new capital Vanishing
Encouragement of VCs and entrepreneurs
Western hostility to high earners
Existing IP
Ability to generate IP
The jobs are not returning…
© PA Knowledge Limited 2012
Page 25
Source: Frontier Economics, Estimating the global economic and social impacts of counterfeiting and piracy (Feb 2011)
The West has been haemorrhaging intellectual property, with little sign of abatement:
Global value of counterfeit and pirated goods (2015): $1.5 trillion… Known jobs lost due to counterfeiting and piracy: 2.5 million.
“The Chinese government has a national policy of economic espionage in cyberspace… Although a rigorous assessment has not been done, we think it is safe to say [this] easily means billions of dollars and millions of jobs. ”
Source: Mike McConnell, Director of National Intelligence (2007-09), Michael Chertoff, Secretary of Homeland Security (2005-09), William Lynn, Deputy Secretary of Defense (2009-11), Wall Street Journal (Jan 27 2012)
The jobs are not returning…
© PA Knowledge Limited 2012
Page 26
Barriers that could prevent job loss from the West to
the East
Competitive wage rates Unfeasible
Existing physical and intellectual capital base
Half-life is some 10-15 years
Propensity to invest new capital Vanishing
Encouragement of VCs and entrepreneurs
Western hostility to high earners
Existing IP Cyber and physical theft
Ability to generate IP
The jobs are not returning…
© PA Knowledge Limited 2012
Page 27
A fifth of Western school leavers are functionally illiterate:
0
5
10
15
20
25
30
Percentage of students who do not attain the essential reading skills needed to participate productively in society
Source: OECD PISA 2009.
The jobs are not returning…
© PA Knowledge Limited 2012
Page 28
The Chinese take advantage of the best education in the West:
Number of Chinese students returning home Number of Chinese students studying abroad
0
20000
40000
60000
80000
100000
120000
140000
160000
1978
19
85
1987
19
89
1991
19
93
1995
19
97
1999
20
01
2003
20
05
2007
0 5000
10000 15000 20000 25000 30000 35000 40000 45000 50000
1978
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
1978 - 2007
Source: National Bureau of Statistics of China, 2009; Tina Hsieh and Ershad Ali, Auckland Institute of Studies.
“When our thousands of Chinese students abroad return home, you will see how China will transform itself.”
Deng Xiaoping, Former Leader of the People’s Republic of China
The jobs are not returning…
© PA Knowledge Limited 2012
Page 29
And, indeed, they are innovating:
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
1995
19
96
1997
19
98
1999
20
00
2001
20
02
2003
20
04
2005
20
06
2007
20
08
2009
20
10
Patents granted to China
0
1
2
3
4
5
6
7
8
9
10
1995
19
96
1997
19
98
1999
20
00
2001
20
02
2003
20
04
2005
20
06
2007
20
08
2009
20
10
Global percentage of patents granted to China
China’s universities graduate more than 10,000 science PhDs each year.
The jobs are not returning…
Source: World Intellectual Property Organization, McKinsey Quarterly.
© PA Knowledge Limited 2012
Page 30
Barriers that could prevent job loss from the West to
the East
Competitive wage rates Unfeasible
Existing physical and intellectual capital base
Half-life is some 10-15 years
Propensity to invest new capital Vanishing
Encouragement of VCs and entrepreneurs
Western hostility to high earners
Existing IP Cyber and physical theft
Ability to generate IP Collapsing education set-up
The jobs are not returning…
© PA Knowledge Limited 2012
Page 31
The global wage disparity, potentiated by the global adoption of capitalism, is driving an unprecedented loss of wealth and growth for the Western economies.
Wage disparities between OECD and emerging
countries result in an almost insuperable competitive advantage
for the ‘East’.
As a result, a job drain continues and is indeed accelerating.
The jobs drained are not returning; rather, more will
be lost.
With no job supply, i.e. less
demand for labour, wages in the OECD must inevitably fall.
A global wage disparity… A global wage disparity…
© PA Knowledge Limited 2012
Page 32
In the West, average wages have plummeted - from 3% real annual increases to 3% real annual declines:
-4
-3
-2
-1
0
1
2
3
4 1995-2000 2001-07 2008-10 2011
Average annual growth rates of real average wages
United States United Kingdom Source: OECD; 2011: BLS and ONS.
OECD wages must fall…
© PA Knowledge Limited 2012
Page 33
Precisely as one would expect, it is the low- and medium-skilled workers who are losing out, while the most skilled retain their comparative advantage:
Note that inflation in the UK has been 5%, so wages are in fact plummeting.
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
10 20 30 40 50 60 70 80 90
2010
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
10 20 30 40 50 60 70 80 90
2011
Annual percentage change in nominal weekly pay in UK by pay percentile
Source: Annual Survey of Hours and Earnings (2009, 2010, 2011) UK Office for National Statistics.
OECD wages must fall…
© PA Knowledge Limited 2012
Page 34
We have every reason to think the trend will continue, leading to enormous downward adjustment, disruption and dislocation for Western workers:
Equilibrium price 2025*
$20
$2-12 China/India daily wage
OECD daily wage
2020? 2010
?
?
Beyond that?
Inflation and currency collapse seem to be the most likely ways by which this process will be managed in the medium term
$135 $100
$60
* Assumes annual world GDP growth rate of 5%; constant prices.
OECD wages must fall…
© PA Knowledge Limited 2012
Page 35
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
Starting with the Greenspan Put (1987),
governments, corporates and individuals have
sought to borrow to fund the maintenance of an unmaintainable lifestyle.
This has been elevated to a religion by the neo-
Keynesians.
Continued indefinitely, this will destroy our
economies.
© PA Knowledge Limited 2012
Page 36
Since 1987, the response to any economic downturn has been to flood the system with cheap money:
36
0
5
10
15
20
25
Fed Rate
Ineffectual governments…
© PA Knowledge Limited 2012
Page 37
Source: OECD.
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Surpluses and deficits (% GDP)
Japan United Kingdom United States Euro area
For today’s Keynesians, there seems never to be a good time to run a surplus: Ineffectual governments…
© PA Knowledge Limited 2012
Page 38
Source: McKinsey Global Institute (MGI), "Debt and deleveraging: Uneven progress on the path to growth," January 2012.
The result of low interest rates (‘easy money’) and government deficits is staggering levels of debt:
“The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.” Reinhart and Rogoff, ‘Growth in a Time of Debt’, American Economic Review (May 2010)
0% 100% 200% 300% 400% 500% 600% 700%
Germany Italy
United States France Greece
Spain United Kingdom
Portugal Japan
Ireland
Total debt in selected countries around the world as percent of GDP Households Nonfinancial business Government Financial Institutions
Ineffectual governments…
© PA Knowledge Limited 2012
Page 39
All are agreed: we should spend our way out of this.
“Unfortunately, with savings going up to 5, 6, 7 percent, aggregate demand is going to be weak. The only thing to fill it is government.”
Joseph Stiglitz, Aug 4 2010
“Standard macroeconomic analysis, applied in a standard way, says that aggressive tightening of fiscal policy, of the kind we are seeing now, is inappropriate and unnecessary.” Jonathan Portes, New Statesman Aug 24 2011
“The idea, amazingly widely accepted, that the UK cannot borrow any more seems quite absurd.”
Martin Wolf, Financial Times Nov 24 2011
“Isn't the truth of the matter, Mr Alexander, that you are collaborating in a doctrinaire Conservative experiment which is not working?” Jeremy Paxman, Newsnight Jan 25 2012
“That which cannot go on forever… won't.” Herb Stein's Law
Ineffectual governments…
© PA Knowledge Limited 2012
Page 40
Indebtedness becomes a vicious downward spiral, Keynes à la grecque
Government deficit
spending
Increase in stock of
debt
Higher level of interest payments
Greater funding
need
Worsened credit rating
Higher rate of interest
Credit market rebellion leads
to financial crisis
Keynesian monetary
tactics (e.g. QE)
temporarily lower interest
rates
Consumer borrowing
Corporate borrowing
Banking borrowing
Voila! Greece goes to Argentina
The doom loop accelerates
The pain of restructuring becomes increasingly impossible with every iteration
Keynesian voices warn against any pullback in spending as per prior point
Judgment day can be put off by devices such as QE (lowering the rate of interest)
Deficits suddenly massive
Calamity exposes those without swimming costumes
Deficit spending distorts economy
Debt-to-GDP levels begin to rise, but below Reinhart/Rogoff levels
Spending proves sticky (civil servants, benefits culture, etc.)
Starts with normal counter-cyclical deficit spending
Borrowing masks the problem
Ineffectual governments…
© PA Knowledge Limited 2012
Page 41
‘Entitled’ groups… The problems are exacerbated by the claims made on shrinking Western economies by an oddly disparate set of ‘entitled’ groups:
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
Bankers CEOs Public sector Benefit claimants
© PA Knowledge Limited 2012
Page 42
The problems are exacerbated by the claims made on shrinking Western economies by an oddly disparate set of ‘entitled’ groups:
Cheap funding from government stimulus
Oligopoly in many markets (corporate lending, mortgages, credit cards)
Foolish acceptance of high prices by customers where oligopoly does not exist
Excessive leverage
Inside trading knowledge
Willingness of boards and shareholders to countenance excessive rewards, in particular, because the previous points create excessive profits
Big bet culture
Bankers’ sources of excess profits (that also lead to massive socialised losses)
© PA Knowledge Limited 2012
Page 43
The financial sector has claimed a growing share of Western economies:
Financial sector compensation and profits as share of GDP 1929 - 2010
Source: Bureau of Economic Analysis (BEA) data on National Income and Product Accounts (NIPA), tables 1.1.5 and 1.1.4.
0
5
6
7
8
4
3
2
3.7%
6.9%
3.8%
7.6% $547 billion in 2010
dollars
1
Shar
e of
ove
rall
GD
P (%
)
Bankers…
© PA Knowledge Limited 2012
Page 44
Source: Philippon and Reshef, Wages and Human Capital in the U.S. Financial Industry: 1909-2006 (2008).
Historical excess wage in the financial sector relative to nonfarm private sector, accounting for
education level, skill premium and unemployment risk
1920 1930
0%
1910
30%
40%
20%
10%
1940 1950 1960 1970 1980 1990 2000 2010
The excess profits in turn lead to excessive remuneration: Bankers…
1933 Glass-Steagall Act 1933 Securities Act 1934 Securities Exchange Act 1939 Trust Indenture Act 1940 Investment Advisers Act 1940 Investment Company Act 1956 Banking Holding Company Act
2002 Sarbanes-Oxley Act
1980-84 Removed interest-rate ceilings (from Glass-Steagall Act) 1994 Riegle-Neal Interstate Banking & branching efficiency act (repeals parts of Bank Holding Co. Act) 1996 Investment Advisers Act amended 1999 Graham-Leach-Bliley Act (repealed Glass-Steagall & parts of Bank Holding Co. Act)
© PA Knowledge Limited 2012
Page 45
‘Entitled’ groups… The problems are exacerbated by the claims made on shrinking Western economies by an oddly disparate set of ‘entitled’ groups:
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
Bankers CEOs Public sector Benefit claimants
© PA Knowledge Limited 2012
Page 46
CEOs in the US and the UK have also ‘captured’ their companies’ remuneration processes:
Source: Adapted from Lawrence Mishel and Josh Bivens, Economic Policy Institute Briefing Paper #331 (2011).
0
50
100
150
200
250
300
350
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
24-to-1 35-to-1
126-to-1
100-to-1
299-to-1
185-to-1
277-to-1 243-to-1
Ratio of average annual CEO compensation to average worker compensation, 1965-2010
Rectifying this would be important to ensure a cohesive society, but the impact will be limited (too few CEOs).
CEOs…
© PA Knowledge Limited 2012
Page 47
‘Entitled’ groups… The problems are exacerbated by the claims made on shrinking Western economies by an oddly disparate set of ‘entitled’ groups:
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
Bankers CEOs Public sector Benefit claimants
© PA Knowledge Limited 2012
Page 48
With the exception of the highest skilled, public sector workers are significantly overpaid:
Source: ONS, Estimating differences in public and private sector pay (July 2011); CBO, Comparing the compensation of federal and private-sector employees (Jan 2012).
NB: UK analysis excludes pension contributions, so greatly understates the already large pay gap (private sector companies mostly no longer have DB schemes).
The government’s own conclusion:
“Allowing for [job] differences as far as
possible, in April 2010, public sector
employees were paid on average 7.8 per
cent more than private sector employees.”
Source: ONS.
-8
-6
-4
-2
0
2
4
6
8
No qual. Other qual.
GCSE A-C
A-Level Higher ed. Degree
Average public/private sector pay gap by qualification
% Pay gap (public minus private sector)
Public sector…
-30
-20
-10
0
10
20
30
40
High School Diploma
Some college
Bachelor's degree
Master's degree
Prof. degree or PhD
UK (excluding pensions)
US (including pensions)
© PA Knowledge Limited 2012
Page 49
Public sector workers are also getting less productive, while the private sector company necessarily finds improvements, or closes down. Thus the public sector is becoming a heavier and heavier drag on the public purse:
Source: ONS, Estimating differences in public and private sector pay (July 2011).
90
95
100
105
110
115
120
125
130
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Annual growth in productivity in the UK (1997 = 100)
Private Sector Public Sector
Public sector…
© PA Knowledge Limited 2012
Page 50
‘Entitled’ groups… The problems are exacerbated by the claims made on shrinking Western economies by an oddly disparate set of ‘entitled’ groups:
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
Bankers CEOs Public sector Benefit claimants
© PA Knowledge Limited 2012
Page 51
Real spending on welfare continues to outstrip GDP growth:
0
200
400
600
800
1000
1200
Social Security GDP
CAG: 3.87%
CAG: 2.39%
Source: HMT, IFS
Growth rates in GDP and welfare spending
Benefit claimants…
© PA Knowledge Limited 2012
Page 52
Under Blair and Brown, spending on benefits should have fallen as the economy boomed. It didn’t – becoming a redistribution rather than a safety net.
Source: HMT, IFS.
UK welfare spending and unemployment 1974 - 2011
0.0
2.0
4.0
6.0
8.0
10.0
12.0
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
14.5
Benefit claimants…
Welfare spending (% GDP, LHS)
Unemployment rate (%, RHS)
© PA Knowledge Limited 2012
Page 53
0
500
1000
1500
2000
2500
3000
Job Seeker ESA and incapacity benefits
Lone Parent Carer Others on income related
benefit
Disabled Bereaved
Caseload (1,000s) of working age clients by type of claim and duration (May 2011)
Up to 3 months 3-6 months 6-12 months 1-2 years 2-5 years 5 years and over
The system really has broken:
Source: DWP.
Benefit claimants…
© PA Knowledge Limited 2012
Page 54
The cost is exacerbated by the large amount of money spent on those not in need, as the state seeks to develop a dependency mentality in its clients:
0
10
20
30
40
50
60
70
80
90
Maternity pay Child benefit Disability living allowance
Retirement pension
Housing benefit Student support
Percentage of benefit expenditure going to middle class households
1998-99 2008-09 Source: Reform, The money-go-round (Oct 2010).
Benefit claimants…
“With universal suffrage, it becomes impossibly expensive to bribe all of the electorate.”
© PA Knowledge Limited 2012
Page 55
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
HMRC Department for Work
and Pensions
Home Office
Department for
Education
Department of Health
DEFRA Department for
Transport
HM Treasury
DECC
Employees by Government Department (2011)
Source: ONS, DWP.
Managing the welfare state is, in itself, a very expensive operation:
Stop climate change
Manage the
economy
Give it back to you
Take your money
DWP salaries in 2011: £3.5bn
Benefit claimants…
© PA Knowledge Limited 2012
Page 56
The continued economic decline of the West
The challenge
Global wage disparity
Ineffectual governments and credulous voters
‘Entitled’ groups Poor allocation of tax monies
Potential actions Likely outcomes
© PA Knowledge Limited 2012
Page 57
Source: ONS. Compound annual growth calculated from crossover point (1993).
Since 1992, spending on health has ballooned (mostly on salaries), while growth in education spending has fallen behind:
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1953-54 1958-59 1963-64 1968-69 1973-74 1978-79 1983-84 1988-89 1993-94 1998-99 2003-04 2008-09
UK public spending (real £bn) NHS Education
CAG: 4.89%
CAG: 3.14%
Poor allocation…
© PA Knowledge Limited 2012
Page 58
The continued economic decline of the West
The challenge Potential actions Likely outcomes
Reform the banks Tax properly Develop new
technologies Reorient
government spending
Accept immediate cuts
in living standards
© PA Knowledge Limited 2012
Page 59
Potential actions
Reorient government
spending
Education
Infrastructure
Tax properly Develop new technologies
Accept immediate cuts
in living standards
Reform the banks
© PA Knowledge Limited 2012
Page 60
Reallocating public spending towards infrastructure and education has a large and highly statistically significant effect on the long-run growth rate.
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Transp & Comms
Education Health Defence Econ services
Housing Gen. pub. services
Welfare
Effect of public spending mix on the long-run growth rate
Source: Gemmell, N., Kneller, R. and I. Sanz, “The Composition of Government Expenditure and Economic Growth: Some Evidence from OECD Countries”, European Economy (2008).
Education and infrastructure the key
Reorient spending…
© PA Knowledge Limited 2012
Page 61
The importance the West assigns to good teachers has plummeted:
0 10 20 30 40 50 60 70 80 90
100
1930 2012
Percentage of new American teachers who graduated in the upper third of their classes
Source: McKinsey & Company, “Closing the talent gap” (2010); Milken Institute.
Reorient spending…
© PA Knowledge Limited 2012
Page 62
Korea
Finland
Japan
Australia
Netherlands Belgium
Norway Estonia
Poland Iceland
United States
R² = 0.61227
495
500
505
510
515
520
525
530
535
540
545
0 0.5 1 1.5 2 2.5
Mea
n re
adin
g sc
ores
Ratio of teacher salaries to GDP per capita
The strongest performers among high-income countries tend to invest more in teachers:
OECD analysis “In general, the
countries that perform well in PISA attract the best students into the
teaching profession by offering them higher salaries and greater professional status.
High-performing countries tend to
prioritise investment in teachers over smaller
classes.” Source:
OECD Does Money Buy Strong Performance in PISA?
Reorient spending…
© PA Knowledge Limited 2012
Page 63
Quality of teaching matters above all:
Source: Raj Chetty (Harvard), John N. Friedman (HKS), and Jonah E. Rockoff (Columbia), The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood, NBER Working Paper No. 17699 (Jan 2012).
Impact on student lifetime incomes by class size and teacher effectiveness (compared to average teacher)
Class size
Impa
ct o
n st
uden
t life
time
earn
ings
$1,000,000
$500,000
-$500,000
-$1,000,000
$0
90th percentile teacher
75th percentile teacher
60th percentile teacher
40th percentile teacher
25th percentile teacher
10th percentile teacher
Reorient spending…
© PA Knowledge Limited 2012
Page 64
Quality of teaching matters above all:
A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion. Source: Eric A. Hanushek (Stanford), The Economic Value of Higher Teacher Quality, NBER Working Paper No. 16606 (Dec 2010).
Reorient spending…
© PA Knowledge Limited 2012
Page 65
Quality of teaching matters above all:
Replacing a teacher whose value added is in the bottom 5% with an average teacher would increase the present value of students’ lifetime income by more than $250,000 for the average classroom. Source: Raj Chetty (Harvard), John N. Friedman (HKS), and Jonah E. Rockoff (Columbia), The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood, NBER Working Paper No. 17699 (Jan 2012).
Reorient spending…
© PA Knowledge Limited 2012
Page 66
Quality of teaching matters above all:
With an annual discount rate of 5%, the parents of a classroom of average size should be willing to pool resources and pay an 84th percentile teacher considering quitting approximately $130,000 ($4,600 per parent) to stay and teach their children during the next school year. Source: Raj Chetty (Harvard), John N. Friedman (HKS), and Jonah E. Rockoff (Columbia), The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood, NBER Working Paper No. 17699 (Jan 2012).
Reorient spending…
© PA Knowledge Limited 2012
Page 67
Potential actions
Reorient government
spending
Education
Infrastructure
Tax properly Develop new technologies
Accept immediate cuts
in living standards
Reform the banks
© PA Knowledge Limited 2012
Page 68
Opportunities for high-return infrastructure investment abound: Reorient spending…
A B C D nil nil Solid waste (+)
Bridges Public parks and recreation (-) Rail (-)
Energy (+) Aviation Dams Hazardous waste Schools Transit Drinking water (-) Inland waterways (-) Levees (-) Roads (-) Wastewater (-)
Exemplary infrastructure needs in the UK
Wolfson’s ‘Brain Belt’ Oxford-Cambridge motorway/science ecosystem
Other university/science/business ecosystem infrastructure
Manchester-Sheffield motorway
Other removal of congestion through building new roads and improving efficiency of existing roads
Local bypasses
Boris Island
Universal WiMAX or fibre broadband
Infrastructure needs in the US
Source: American Society of Civil Engineers.
US infrastructure ‘GPA’
© PA Knowledge Limited 2012
Page 69
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
© PA Knowledge Limited 2012
Page 70
Make them pay for that through tax,
levies, ringfencing bonuses
Split commercial from trading; don’t subsidise trading/
investment banking
The multiple ways in which banks make excess profits, and how that might be reversed:
* Traditional high beta in trading business.
Possible progress
Only slow progress
Essentially no progress
Reform the banks…
Cheap funding from government
stimulus
Oligopoly in many markets (corporate lending, mortgages,
credit cards)
Break them up
Foolish acceptance of high prices and risk by customers
even where oligopoly does
not exist
Get customers to behave better and
think harder
(for retail) Educate the populace and
force far more, and better disclosure
Excessive leverage*
Require more capital
Ban abuse of derivatives: better
regulation
Prevent concealment of
true size of assets; punish auditors for
allowing OBS vehicles
Prevent other arbitrage of capital
regulation
Pass ‘duty of care’ legislation
Manage ratings agencies better
Manage regulators better
Manage auditors better
Remove too big to fail
Excessive remuneration
Pressure the banks
Reform board behaviour
Pressure investing institutions
Inside trading knowledge
Ban front running
Throttle or tax flash trading
Enforce insider trading laws
Big bet culture
Require more capital
Better transparency on daily exposures
Remove profit element of subsidies
Ban exploitative behaviour
Eliminate politically biased decision
making
© PA Knowledge Limited 2012
Page 71
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
© PA Knowledge Limited 2012
Page 72
Taxes affect the determinants of growth:
GDP per capita
Labour utilisation
• Employment
• Hours worked
Labour productivity
• Physical capital
• Human capital
• Total factor productivity
Taxes • Consumption
• Property
• Income
• Corporate
Tax properly…
© PA Knowledge Limited 2012
Page 73
A significant reorientation of tax policy to less populist methods is needed:
* Note that punitive taxes on the richest don’t help much as the base is always relatively small.
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2 Corporate income taxes Personal income taxes Consumption taxes Property taxes
Effects of the tax mix on long-run GDP per capita
Source: OECD
Tax properly…
© PA Knowledge Limited 2012
Page 74
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
Support manufacturing Help industry ecosystems to flourish
Encourage development of new technologies
© PA Knowledge Limited 2012
Page 75
“Obama’s surrender to the ‘manufacturing fetish’ is a disaster.”
Jagdish Bhagwati, Professor of Economics, Columbia University Financial Times, 6 Feb 2012
Consensus states that manufacturing is no more important than any other sector of the economy:
Manufacturing…
“A persuasive case for a manufacturing policy remains to be made.”
Christina D. Romer, Professor of Economics, UC Berkeley New York Times, 5 Feb 2012
© PA Knowledge Limited 2012
Page 76
But in fact, manufacturing is crucial to economic growth:
Economies of scale more likely to be
realised
Substantial and disproportionate role in
innovation
Primary source of middle-class jobs
(especially for workers without a college
degree - 75% of UK workforce)
Manufacturing…
It’s also vital that we rebalance growth away from consumption and imports financed by foreign borrowing toward exports.
© PA Knowledge Limited 2012
Page 77
The proof: employment multipliers
Every job in manufacturing supports 2.91 jobs elsewhere in the economy, compared to only 1.54 in business services and 0.88 in retail trade: Supplier effects (e.g. car plant sustains jobs in steel industry); Respending effects (where workers spend their paycheques); Government effects (taxes that support jobs in government).
“Almost every industry within manufacturing supports much more secondary employment than other sectors.” Source: Economic Policy Institute, Updated Employment Multipliers for the U.S. Economy (2003).
0 1 2 3 4 5 6 7
Manufacturing
Services
Manufacturing…
© PA Knowledge Limited 2012
Page 78
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
Support manufacturing Help industry ecosystems to flourish
Encourage development of new technologies
© PA Knowledge Limited 2012
Page 79
Policies need developing to support existing ecosystems, and develop new ones:
• Local micro-industry ecosystems drive innovation:
– London’s Square Mile: bankers, lawyers, accountants.
– Birmingham’s F1 ecosystem: a huge ‘driver’ of innovation and economic success.
– China found concentration key for e.g. semiconductor success.
Agglomeration economies
Source: Reserve Bank of Philadelphia Working Paper No. 11-42, 'The Agglomeration of R&D Labs’.
30
25
20
15
10
5
0 90 80 70 60 50 40 30 20 10 0 100
Radial distance
z-sc
ore
Physical encounters best
at ¼ mile
Skills pool peaks at c. 40 miles
35
Ecosystems…
© PA Knowledge Limited 2012
Page 80
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
Support manufacturing Help industry ecosystems to flourish
Encourage development of new technologies
© PA Knowledge Limited 2012
Page 81
Technology holds the promise of massive, early breakthroughs:
Source: Adapted from Raymond Kurzweil, The Singularity Is Near: When Humans Transcend Biology.
The
Kurzweil
prediction
The accelerating pace of change
New technologies…
1900 1920 1940 1960 1980 2000 2020 2045
2015: Computer that surpasses brainpower of mouse
2023: Computer that surpasses brainpower of human
2045: Computer that surpasses brainpower equivalent to that of all
human brains combined
© PA Knowledge Limited 2012
Page 82
• Neuroceuticals • Genetic
engineering
• Thin films • Fine particles • Chemical
synthesis • Advanced
microlithography
• Networking • Telecommunic-
ations
• Humanoid robotics
• Humanoid computation
• Human cognition • Human emotion
Bio Nano Info Neuro/ Cogno Anti-carbo
• Energy storage • Electric cars • Battery tech • Renewables
Technology is subsidised by every government. In Europe and the UK, the process seems to be ineffective and insufficient:
“State Capitalism is on the march, overflowing with cash and emboldened by the crisis in the West.” The Economist, January 21st 2012
“Our industrial policy was meant to be the government picking winners. Instead, the losers picked government.” Peter Mandelson, Today, January 26th 2012
“Today, a car emits less pollution traveling at full speed than a parked car did in 1970 from leaks.” Matt Ridley, The Rational Optimist
New technologies…
© PA Knowledge Limited 2012
Page 83
A 20-50 year view, and a cross-party consensus that this is needed, is essential:
Selected technologies
Innovation centres (universities)
R&D support
Ecosystem support
Manufacturing policy
An integrated industrial policy
New technologies…
© PA Knowledge Limited 2012
Page 84
Potential actions
Reorient government
spending Tax properly Develop new
technologies
Accept immediate cuts
in living standards
Reform the banks
© PA Knowledge Limited 2012
Page 85
Accept lower living standards:
The bureaucrats’ own conclusion
“The relentless increase in the
sustainability gaps suggests the
urgency in considering in
earnest profound reforms in social
protection systems.”
Source:
European Commission, Sustainability Report 2009
Reductions in primary spending or increases in revenues in various years needed to close the 25-year fiscal gap in the US
(% GDP)
Increase the retirement
age Lower
entitlements Lower wages
Act immediately
4.9 5.9
8.1
12.5
0 2 4 6 8
10 12 14
Actions begin in 2012 Actions begin in 2015 Actions begin in 2020 Actions begin in 2025
Source: Congressional Budget Office.
Potential actions
Living standards…
© PA Knowledge Limited 2012
Page 86
Germany
Portugal
Italy
France
UK
Ireland US
Japan
Greece
-15
-10
-5
0
5
10
15
0 25 50 75 100 125 150
Net
bor
row
ing
(% d
ispo
sabl
e in
com
e) 2
008*
Household debt (% GDP) 2011
Households
A decline in living standards of between 10 and 15% is needed to rebalance Western economies today. Tomorrow's continued job loss and wage pressure will mean more of that pain in the future…
Size of bubble, non-proportional but directionally correct, represents (L) overall size of government expenditure 2011 (% GDP); (R) household final consumption expenditure 2010 (% GDP). Source: IMF, OECD, MGI, World Bank. * Greece 2006, Japan 2007 (latest available).
Reinhart-Rogoff threshold
Living standards…
Germany
Portugal Italy France
UK Ireland
US
Japan
Greece
0
2
4
6
8
10
12
14
16
18
20
0 30 60 90 120 150 180 210 240 270 Def
icit
(% e
xpen
ditu
re) 2
000-
10 (w
eigh
ted
avg)
Debt (% GDP) 2011
Governments
© PA Knowledge Limited 2012
Page 87
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Workers per retiree
US Japan UK
…as will demographic challenges.
Source: UN Population Projections.
Living standards…
© PA Knowledge Limited 2012
Page 88
In the short term, America is better positioned to recover:
America has successfully kicked the can down the road:
It has the firepower
It is more resilient
Much less is nationalised
The nationalisations are less political
Debt restructuring (reduction) has been far more responsive and swift
Much smaller government so less impact
Europe (incl. the UK) has not:
Less firepower
Deeper and different problems
More public ownership
Germany unwilling to socialise the problem
Less ability to restructure
Less determination to restructure*
* Automatic ‘stabilisers’ = big unrestructured government that continues to batten on the corpse.
© PA Knowledge Limited 2012
Page 89
The biggest challenge – to transcend wanting and acquiring:
Economic growth and the future of the West: ‘happiness’ studies
Neuroscience shows that
wanting, striving and acquiring are major and fundamental
drivers of human
behaviour.
An equilibrated world would
have few Western
‘necessities’ (cars, flat screens, etc.) per capita
[at current prices]
Continued growth means
further strain on global
resources.
Can insights from
neuroscience, coupled with education, reengineer
human behaviour
towards less consumption?
Living standards…
© PA Knowledge Limited 2012
Page 90
The continued economic decline of the West
The Challenge Potential actions Likely outcomes
Short term
Long term
© PA Knowledge Limited 2012
Page 91
The continued economic decline of the West
Potential actions Likely outcomes
Reorient government spending Not happening
Curb the banks 50/50
Tax properly Little sign
Accept immediate cuts in living standards
10% - mob resistance more likely
Educate better Promising signs (but only in some countries, e.g. UK)
How it looks now
No sign in most countries of electability of Grinches
50/50
Worsening: ‘soak the rich’
Cuts will happen only through inflation, currency depreciation
Privatisation of education?
How it may be (10-30+ year view)
© PA Knowledge Limited 2012
Page 92
The pressing short-term issue is whether the neo-Keynesian disaster can be
avoided. Probably not…
© PA Knowledge Limited 2012
Page 93
Broad money falling
Severe risk of deflation
Money multiplier suspended
Money multiplier restored
QE: What they understood…
BoE buys gilts off private bondholders
BoE credits their reserves
Commercial banks lend out a little of the money
Broad money soars
Mild inflation
Growth rebounds Accelerating inflation
1. BoE raises interest rates
BoE owns £325bn gilts
Gilts plunge in value
BoE tightens monetary policy
2. BoE reverses QE
Assets Liabilities
BoE credits £325bn
to commercial bank reserves
HMT still on hook for £325bn
HMT indemnifies Asset Purchase Facility
Auctions gilts, gets ?£175bn
Gilt yields soar to e.g. 8%
Broad money still bloated
3. Even higher interest rates
…and what they (apparently)
didn’t.
Growth does not rebound
BoE does not tighten monetary
policy
Hyperinflation
Deflation
Deflation-driven recession
Households default
Wage rises not enough to service
debts
Household debt
accelerates rapidly
Households default
Eurozone Armageddon?
Inflation-driven recession, Taxpayer loses £150bn In addition, government debt overhang permanently limits growth
Alternative scenario
Capital flight from ‘Western’ government bonds and currencies
© PA Knowledge Limited 2012
Page 94
In summary: things don’t look great.
We’re teetering on a balance between:
V.
Wilful disregard
Recession
Deflation
Acceptance
Growth
Inflation
Long-term catastrophe Short-term pain
…In the short term, the outcomes are unknowable. For the long term, as things stand, the continued economic decline of the West is highly predictable.
* * * * *
© PA Knowledge Limited 2012
Page 95
Further reading
• “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems”, Presidential Address to the American Finance Association, originally published in the Journal of Finance (July, 1993) pp. 831-880 – Michael C. Jensen
• Lost Victory – Correlli Barnett
• This Time is Different – Carmen Reinhart, Ken Rogoff
• Once in Golconda – John Brooks
• The Big Short – Michael Lewis
• World on Fire – Amy Chua
• Shall the Religious Inherit the Earth?: Demography and Politics in the Twenty-First Century – Eric Kaufmann
• The Rational Optimist – Matt Ridley
• Stumbling on Happiness – Daniel Gilbert