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Anglo Disease - a summary

by Jerome a Paris Sun Feb 3rd, 2008 at 10:02:53 AM EST

This is a new attempt at summarising what the "Anglo Disease" is about, in a format meant to be publishable as an Op-Ed, ie 800-1000 words. I hope, as usual, that eurotribbers will help me improve the wording, as well as, if they are so inclined, try for translations in other languages.

In the 70s, the Economist coined the label "Dutch Disease" to describe the economic travails of the Netherlands as the country's export-oriented industrial sector struggled with the increased exchange rates caused by the rapid growth in gas exports that followed the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.

Today, we can observe a similar phenomenon on a large scale around the financial industry, whose high profitability for many years has also caused weakness for other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I would propose to label this the "Anglo Disease."

While the Dutch managed to avoid the "oil curse" that has struck many oil exporting countries, I will also argue that the Anglo Disease carries its own curse, whose early symptoms are reflected in the current financial crisis.


The dominance of the financial world can be readily seen in the growth of the share of financial firms in total corporate profits (from below 20% in the 70s to above 40% today), in the capture by the richest few - most of them directly working in the financial industry, or benefitting from financial investments - of a large chunk of the net growth in total incomes, and by the concentration of foreign investment in the UK in mono-activity London.

Financiers, with their ability to monetize today future revenue streams, are able to generate instant profits which can be captured by them and, to a lesser extent, their clients and employers. That capacity to create apparent wealth out of thin air cannot be matched by any other sector in the economy, and sucks in talent, resources and money. Meanwhile, the investors that have made those immediate profits possible will want to ensure that the future flows that underpin them do materialise, and will impose their rules and discipline on the underlying economic activity.

Thus the financial world imposes its unrelenting focus on profits and shareholder value on all economic activities; the domination of "return on capital" criteria ensures that many activities outside finance are in decline, as they struggle to reach the required returns on potential investments. Financial analysis sees labor as a cost, reducing profits, and pushes for its reduction, either via outsourcing, offsorisation or wage stagnation. Similarly, government regulations are seen as restrictions on profit to be fought and eliminated, as, naturally, taxes.

To boost domestic demand in the face of flat incomes, debt has been pushed on households as the way to keep on increasing their spending, to the further benefit of the industry that provides the loans. The combination of expansionist monetary policies in the West and mercantilist policies in China has made it possible to find the holy grail of no inflation and rapid asset price increases, thus generating massive (and increasingly less taxed) corporate profits. The reality was, of course, that of huge global imbalances and a massive bubble, but for the longest time it looked like perfect growth, further validating the policies that underpinned it.

The model of financial capitalism is thus all-encompassing, not only grabbing an increasing share of the economic pie, but also dominating all politicial and economic discourse.

The reality, unfortunately, is that a massive inequality, declining or stagnant living standards for the majority, which spend more than they earn, and, as a consequence, a massive bill pushed out into the future. Well, that future is now, and the imbalances will only be unwound if incomes match spending, which can happen via lower spending or via higher incomes.

In the financial capitalism model, incomes are a cost and should not increase; if that logic prevails - if the Anglo Disease is not cured from our body politic - spending will crash and a recession is not only inevitable but likely to be very painful, as the real economy slows down brutally, and the financial bets that ride it suddenly look highly unreasonable, and turn into losses (as is happening already in the subprime sector).

If, to the contrary, policies are focused on propping incomes for the poor and the middle classes rather than profits, on investing in the real economy rather than in monetising its existing activities (for instance via plans to boost energy efficiency in the household sector and renewable energies), on taxing today's wealthy rather than tomorrow's citizens, then there is a chance to limit the crash.

Just like the Dutch disease was caused by a new sector providing temporary windfalls, the Anglo disease was made possible by the combination of technological progress in the financial world, the long bond bull market created by Volcker's successful fight against inflation and the successful promotion of the ideology of greed by the right (with the timely fall of the Berlin Wall providing an additional boost by discrediting the other extreme of the ideological spectrum). The great middle classes created by the keynesian policies of the New Deal have now been exploited for the past 30 years, and they are depleted. The economy will need to find another, more real, way to grow and prosper.

:: ::

Previous "Anglo Disease" content: Earlier work:

Display:
With thanks to Migeru for pushing me to do this.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 10:06:06 AM EST
Excellent writeup!

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 10:34:10 AM EST
[ Parent ]
This text should be readable by people not familiar with my earlier texts and our other discussions of this topic. So if anything in it is unclear or is based on too many unsaid assumptions, please flag it.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 10:07:08 AM EST
Ah, I hadn't been thinking of the term "Anglo Disease" next to ones like "Dutch Disease" in that way.  It's a good description.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 10:58:24 AM EST
[ Parent ]
I, for one, recognize some references to your familiar themes:

. What we've been witnessing over the past 30 years or so is not as much wealth creation than wealth capture.

. Focus of the establishment (financiers, governments, media) has been to limit wage inflation (bad) while favoring assets inflation (good).

These are points where those not familiar with your earlier works may stumble a bit: you might want to add some intro/recap around these areas.

by Bernard on Sun Feb 3rd, 2008 at 01:45:42 PM EST
[ Parent ]
I think that it is quite understandable.

aspiring to genteel poverty

by edwin (eeeeeeee222222rrrrreeeeeaaaaadddddd@@@@yyyyaaaaaaa) on Sun Feb 3rd, 2008 at 02:04:44 PM EST
[ Parent ]
http://www.dailykos.com/story/2008/2/3/101644/4437/733/448799

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 10:30:47 AM EST
Where it's sinking into obscurity. You need to bad mouth some candidates in it to get some attention. Maybe you should title it "Why Obama will still run the economy into the ground" or something.
by Colman (colman at eurotrib.com) on Sun Feb 3rd, 2008 at 10:48:31 AM EST
[ Parent ]
You know, it might help if you (and Mig) recommended it...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 11:02:43 AM EST
[ Parent ]
Recommended over yonder.  I'm afraid Colman's right, though.  It's not going to get the deserved attention until after Super Tuesday.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:08:03 AM EST
[ Parent ]
I had not lost hope, but it was a toss up given the context.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 11:35:33 AM EST
[ Parent ]
Oh, I thought it had a good chance of hitting the rec list, but I didn't think it would command the level of attention it should, given the obvious obsession over at The Great Orange Satan with the primaries.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:40:59 AM EST
[ Parent ]
Well, did my part at DK. It's now #2 on the reclist.

Of course, our American friends are focusing on the upcoming presidential election. Considering the unmitigated disaster the present administration has been for straight eight years, who can blame them?

One question, Jerome: would you think it's also important to aim at publication in the Euro medias as well? The USA are not the center of the world any longer (didn't you quote Emmanuel Todd recently? :)

by Bernard on Sun Feb 3rd, 2008 at 01:23:37 PM EST
[ Parent ]
Yeah, I was pretty impressed by its strong showing on the rec list.  Kudos to Jerome for showing that substantive diaries can have a shot.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 03:10:51 PM EST
[ Parent ]
Where's the math? The summary reads nicely, but is there a model or simulation or set of statistics to back up the text? It would be more convincing if so...
by asdf on Sun Feb 3rd, 2008 at 10:40:23 AM EST
You're right. That is so what he needed to add to an 800 word op-ed.
by Colman (colman at eurotrib.com) on Sun Feb 3rd, 2008 at 10:46:34 AM EST
[ Parent ]
No, it doesn't need to be in the editorial, it needs to be behind the editorial.
by asdf on Sun Feb 3rd, 2008 at 11:02:05 AM EST
[ Parent ]
I think that's going to be my (and others') job in the next few months...

But this 800-word piece is the first step of at least 5 we envision:

  • summary diary
  • op-ed
  • chapter of Jerome's and afew's book on the French "decline" (or lack thereof)
  • outline for Jerome's book on the "Anglo Disease"
  • Jerome's book on "Anglo Disease".

Whoops, did I spill the beans?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 10:47:55 AM EST
[ Parent ]
If there is really to be a book, and if there is a historical chapter, it might be interesting to compare the anglo disease of the 21st century to the "anglomanie" of the 1730s and 1740s, "in which a universal fashion for English ideas, influences, and styles swept the continent from France to Russia." ('Radical Enlightenment', Jonathan Israel)

This is not the first time that the Brits have had an undue influence on European thinking...

by asdf on Sun Feb 3rd, 2008 at 11:06:47 AM EST
[ Parent ]
I was just rereading Bernal Vol I at bedtime last night. He attributes that periodization of 18th cen. European "anti-scientific philosophy" to intellectual historian Margaret Jacob.

cf either The Newtonians and the English Revolution (1976) or The Radical Englightment: Pantheists, Freemasons and Republics (1981); I've read neither nor J. Isreal.

The crucial distinction between Enlightenment and Radical Enlightenment teleology which politicized institutional norms was all things French. 1660 to 1770 was a period of great economic expansion, technical and empirical validation, and concentration of political power among Europe's monarchal families from which the Bourbons emerged um golden.

Following the aftermath of the 30 Years War, Bernal identifies four literary "forces" that reconstructed power centers among the antagonists' elite, philosophers: (i) Christian hostility toward pagan and neo-platonic civilizations (Casaubon, Bruno, Bentley); (ii) primacy of "progress" or modernity, justified by dating knowledge (Banier); (iii) racism (Locke, Hume, Toland); and (iv) Hellenism (Napoleon). The reign of Louis XIV, the "New Rome," is said to glorify the alchemical past while symbolizing the antithesis of post-war German "identity" as elaborated by, say, Leibniz, Goethe.

Göttingen can well be considered the embryo of all later, modern, diversified and professional universities. It was established in 1734 by George II, King of England and Elector of Hanover, was well endowed, and as a new foundation was able to escape many of the medieval religious and acholastic constraints that persisted in other universities. With its British connections it was a conduit of Scottish Romanticism as well as for the philosophical and political ideas of Locke and Hume ... It is true to say that while exclusive professionalism was the distinctive form of Göttingen scholarship, the chief unifying principle of its content was ethnicity and racism. This, of course, was the result not merely of the English scholarly contacts but, much more importantly, of prevailing opinion in German cultivated society as a whole. [1987:215]

So you may need to get out your Weber as well to given Calvinism its due in promulation of (g).


Diversity is the key to economic and political evolution.

by Cat on Sun Feb 3rd, 2008 at 04:45:23 PM EST
[ Parent ]
Had I access to a competent English language research library, this would be one of the few areas I would be qualified to help with - at least, from the perspective of English language sources.

I do not know the professional or vocational leanings of many contributors to the site, but I would warn anyone considering a dip into the bottomless depths of British history against doing so as an amateur, for one is almost guaranteed to look like a fool.

by Zwackus on Sun Feb 3rd, 2008 at 05:12:36 PM EST
[ Parent ]
Another name for the Anglo Disease is 'The Plague of Wasps'

You can't be me, I'm taken
by Sven Triloqvist on Sun Feb 3rd, 2008 at 11:15:30 AM EST
[ Parent ]
It's a social science - which should focus on qualitative trends.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 10:55:01 AM EST
[ Parent ]
I thought the social sciences underwent a "quantitative revolution" back in the 1950s. At least Geography did.

This is actually one of my hot buttons. Anybody can write an editorial, but if there's no underlying analysis, it's just an argument. I'm sure you're aware of the great argument about whether global climate change is correlated (inversely, in fact) to the number of pirates.
http://www.venganza.org/

by asdf on Sun Feb 3rd, 2008 at 11:11:12 AM EST
[ Parent ]
The problem is that with mathematical models you often lose track of the intuition and the subtleties necessary to properly grasp what's going on, while additionally making the arguments inaccessible to the general public.  It's one thing to say "GDP growth was 2.2% in 2007."  But when you discuss the microeconomics that are the foundations of the macroeconomics -- how different people react in different ways, and to different degrees, given a set of incentives -- you can quickly find that words are simply the more effective means of explanation.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:34:08 AM EST
[ Parent ]
I can see glimmers of a Leontieff-type model behind what Jerome is saying, but the econometrics of that are a bitch, and the end result is in terms of linear algebra at a level which is not all that high but in most US universities is considered upper-undergraduate for science students and graduate for social science students.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 11:38:34 AM EST
[ Parent ]
So while the physics students are learning tensor analysis so they can understand GR, the economic students are...
by asdf on Sun Feb 3rd, 2008 at 11:42:17 AM EST
[ Parent ]
...not.

There is no GR to understand in economics, either. Keynes' theory is very rish but I don't think it has been comprehensively mathematised, and it's not like Keynes thought it was necessary either.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 11:46:03 AM EST
[ Parent ]
The economics students are generally learning shit until they at least get into the intermediate-level coursework.  But even at the graduate level, they're just reading textbooks with a bunch of mathematical models.  If you want to learn real economics, then, in my view, you've got to read Smith, Keynes, Friedman (the economist, not the political commentator), etc.  Most of the economists these days are just goofing around with interpretations of the work of these people.

Paul Krugman is a notable exception among the younger economists, as someone who, in my opinion, is razor-sharp on the intuition and on the strengths and weaknesses of the mathematics.  Same goes for Stiglitz and DeLong.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:48:22 AM EST
[ Parent ]
asdf:
This is actually one of my hot buttons. Anybody can write an editorial, but if there's no underlying analysis, it's just an argument.

Lots of maths in the FT and the Econo. It's not like they ever pull an argument out of thin air and try to make it convincing by repeating it over and over, even if it's nonsense.

If you're looking for quantitative support, consider:

  1. Relative incomes
  2. Relative taxation
  3. Relative debt burden
  4. Income changes over the last thirty years
  5. Practical - i.e. High Street and Main Street - inflation increases.
  6. Dot com, oil, and housing bubbles.
  7. The current credit crunch.
  8. Fradulent trading including BCCI, Enron, and the current crop of bandits.
  9. Cultural changes and increasingly abusive work practices.
  10. Union busting.
  11. Deliberate use of outsourcing and immigration to drive down wage prices.
  12. Constant media calls for 'reform' - juxtaposed explicitly againts worker income and job security.

I'm sure there's plenty there to keep you busy investigating real numbers.

Of course, apart from all of those - and it's not a complete list by any means - there's no evidence of a problem at all.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Feb 3rd, 2008 at 12:17:06 PM EST
[ Parent ]
Those measures also have the advantage of being accessible to the typical reader.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 03:05:11 PM EST
[ Parent ]
I don't think a model is the way to go at this point.  Jerome's right about economics being more of a qualitative study, especially in dealing with these large macro discussions.  You don't want the message to get bogged down in mathematical equations that will turn people off.  You want to explain the qualitative shifts, with the mathematics being implied by some stats and graphs, but not overshadowing the intuitive explanation.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:02:43 AM EST
[ Parent ]
Put another way, someone could work some mathematical models off of it, but it's the difference between The General Theory and models designed to show Keynes's theory mathemtically, like John Hicks's ISLM or one of the New Keynesian models.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:05:11 AM EST
[ Parent ]
Maybe it's just my own ignorance of modern economics, but I am yet to see a mathematical model that captures the rich theory I see outlined in Keynes' book.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 11:12:01 AM EST
[ Parent ]
I'm not an economist either, but I think there is considerable mathematical theory in modern economics...
http://www.ioe.ac.uk/esrcmaths/sheila1.html
http://econpapers.repec.org/article/oupcambje/v_3A14_3Ay_3A1990_3Ai_3A1_3Ap_3A29-47.htm
by asdf on Sun Feb 3rd, 2008 at 11:17:08 AM EST
[ Parent ]
This is from your second link.

EconPapers: Keynes on Mathematics: Philosophical Foundations and Economic Applications

Keynes's hostility was aroused not by mathematics itself, but by pseudo-mathematics, or the failure to respect the nature and applicability of formal methods. Underlying Keynes's views is his distinctive philosophical framework, and the principle that logic (or philosophy) should precede and supervise the application of mathematics.
I have not read a lot of mathematical economics, but as a mathematician trained in physics I was unimpressed with Samuelson's Magnum Opus "Foundations of Economic Analysis", for instance. It's just ugly stuff.

And this is from your second link.

THE USE OF MATHEMATICS IN ECONOMICS

Mathematical tools have allowed many advances in economic theory. But at the same time, the difficulty in combining pure theory with applied economics has allowed the two strands to proceed according to different agendas. Even so, there are elements in common (presumption of equilibrium, fixity of meaning of terms and of the objects of measurement, etc) which provide the basis for mathematical treatment, but which nevertheless are controversial. Much of this issue boils down to the question of how far a study of complex social systems is amenable to the (mathematical) methods of analysis adopted by the physical sciences.

What was your point again?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sun Feb 3rd, 2008 at 11:35:46 AM EST
[ Parent ]
I hear you. Unfortunately, lack of a decent mathematical foundation leads to, or at least allows, the Pirate-count based climate change model. Or whatever.
by asdf on Sun Feb 3rd, 2008 at 11:40:21 AM EST
[ Parent ]
No, of course not, because I think mathematics has a more difficult time expressing a complex theory like Keynes's properly, especially when it is boiled down into a simple model like ISLM.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Feb 3rd, 2008 at 11:26:19 AM EST
[ Parent ]
3rd last paragraph. This construction is awkward
- if the Anglo Disease is not cured from our body politic -

Either ;-If the body politic is not cured of Anglo-Disease
Or;- if the anglo-disease is not removed/expelled from the body politic.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Sun Feb 3rd, 2008 at 10:48:11 AM EST
A reference to 'offshoring' jobs?

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Sun Feb 3rd, 2008 at 03:20:35 PM EST
[ Parent ]
The structure is wrong imo. It is usually best to simply lay out at the beginning, a kind of promise to the reader -'This is the insight I'm going to give you if your read on'. Something to capture their attention.

This 'promise of insight' should be based on the following:

The model of financial capitalism is thus all-encompassing, not only grabbing an increasing share of the economic pie, but also dominating all politicial and economic discourse.

The reality, unfortunately, is that a massive inequality, declining or stagnant living standards for the majority, which spend more than they earn, and, as a consequence, a massive bill pushed out into the future. Well, that future is now, and the imbalances will only be unwound if incomes match spending, which can happen via lower spending or via higher incomes.

This is the core message. The paradox of capitalism.

Sorry i don't have time for more at the moment....

You can't be me, I'm taken

by Sven Triloqvist on Sun Feb 3rd, 2008 at 11:12:20 AM EST
I'll try to implement it in the next draft.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 11:19:59 AM EST
[ Parent ]
There's a pyramid-style school of journalism which suggests you hit the key points in the first few sentences and again in the conclusion, because those are most likely to read. Middle paras are often skipped.

I'm not quite convinced by this argument, but starting with a rhetorical like 'What do Enron, the credit crunch, shrinking real incomes, galloping inflation, (etc) have in common?' might be a punchier beginning for some markets.

Also - it could help to frame the argument in monetarist terms. We've argued on ET that energy and asset price bubbles are inherently at least as inflationary as wage pressures. If you could fit that point in and try to trojan horse the argument as a question about 'sound economic policy', it might be more likely to change minds than a full-on assault.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Feb 3rd, 2008 at 12:25:28 PM EST
[ Parent ]
I'm saying the same thing basically. You have to capture a non-captive audience. So you need something up top to convince them to not only read on, but be in the right frame of mind. Headlines are important - they catch the wandering eye. But the first couple of sentences really define whether people make the choice to read on - given that there are a lot of other things tempting to read on a page.

It is not crucial, in 1000 words, to end on a summary. But I think it always works to hit them with something to chew on in the last para. Especially if it invites dialogue.

You can't be me, I'm taken

by Sven Triloqvist on Sun Feb 3rd, 2008 at 02:12:27 PM EST
[ Parent ]
Well, if you don't address the "Twin Peaks" of conventional Capitalism:

(a) absolute property rights over Commons, without compensation to Society; and

(b) "Money as Debt";

then you identify the symptoms just fine, but not the cause of the Anglo Disease, still less the Cure.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 3rd, 2008 at 12:49:31 PM EST
[ Parent ]
Excellent text!

I think we should make versions in several languages, like we are doing for the petition, and send them to prominent newspapers like "Le Monde".

Here are a few remarks:

First, I think that, for a wider audience and to avoid knee-jerk nationalist rejection, we should avoid to use the term "Anglo Disease". I propose to use "Financial disease" and "Financial feudalism" instead.

Some suggestions (in bold):

The dominance of the financial world can be readily seen in the growth of the share of financial firms in total corporate profits (from below 20% in the 70s to above 40% today), in the capture of a large chunk of the net growth in total incomes by the richest few - most of them directly working in the financial industry, or benefitting from financial investments - and by the concentration of foreign investment in the UK in mono-activity London.

We are not against profit and return on equity, but against excessive profit and unrealistic ROE, so:

Thus the financial world imposes its unrelenting focus on short-term profits and shareholder value on all economic activities; the domination of unrealistic (or unsustainable) "return on capital" criteria ensures that many activities outside finance are in decline, as they struggle to reach the required returns on potential investments.

Financial analysis sees any regulation as bad, not only government ones.

Financial analysis sees labor as a cost, reducing profits, and pushes for its reduction, either via outsourcing, offsorisation offshoring or wage stagnation. Similarly, government regulations are seen as restrictions on profit to be fought and eliminated, as, naturally, taxes.

Here, I think we should mention the decrease in labour income share of the GDP, too.

To boost domestic demand in the face of flat stagnant incomes, debt has been pushed on households as the way to keep on increasing their spending, leading to negative saving rates to the further benefit of the industry that provides the loans.

Just like the Dutch disease was caused by a new sector providing temporary windfalls, the Anglo disease was made possible by the combination of technological progress in the financial world, the loosening of regulations in the financial sector, the long bond bull market created by Volcker's successful fight against inflation and the successful promotion of the ideology of greed by the right (with the timely fall of the Berlin Wall providing an additional boost by discrediting the other extreme of the ideological spectrum).



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Sun Feb 3rd, 2008 at 11:53:18 AM EST
Thanks for the detailed feedback, which will be incorporated.

As to the name of the disease, I've alredy had the occasional reaction to it (Armando found it racist, for instance), and I think it should stay:

  • the ideology underpinning it does undoubtedly come from the US and the UK, and they still are its main proponents, even when they have supposedly leftwing governments; the pushback should include any ideas coming from the elites in power over there, which need to be thoroughly discredited;
  • the explicit reference to the similar Dutch disease makes it recognisable as a label, and easier to understand;
  • I do hope that a side result of this will be to give more credibility to the alternative that will be left standing: Europe.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Feb 3rd, 2008 at 12:11:43 PM EST
[ Parent ]
I tend to agree with Sven that some reconstruction may be necessary. Before looking at that, here's my edit of  Jérôme's whole first draft (sorry if I haven't yet seen some suggestions in the thread, but I'll be back later):

In the 70s, the Economist coined the label "Dutch Disease" to describe the economic travails of the Netherlands as the country's export-oriented industrial sector struggled with increased exchange rates. These were caused by the rapid growth in gas exports following the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.

Today, a similar phenomenon, but on a larger scale, concerns the financial industry, the high profitability of which over a number of years has weakened other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I suggest calling this the "Anglo Disease."

Along the lines of the "oil curse" that has struck many oil exporting countries,  the Anglo Disease carries its own curse, of which the early symptoms can be observed in the current financial crisis.

The ascendancy of the financial world can readily be seen in the growth of the share of financial firms in total corporate profits (from below 20% in the 70s to above 40% today), in the capture by the richest few - most of them directly working in the financial industry, or benefitting from financial investments - of a large chunk of the net growth in total incomes, and by the concentration of foreign investment in the UK in mono-activity London.

Financiers, with their ability to monetize future revenue streams today, generate instant profits which they and, to a lesser extent, their clients and employers, can capture. That capacity to create apparent wealth out of thin air cannot be matched by any other sector in the economy. It is not surprising that it sucks in talent, resources and money. Meanwhile, the investors who have made those immediate profits possible still want to ensure that the future flows that underpin them do in fact materialise. To this end, they will impose their rules and discipline on the underlying economic activity.

Thus the financial world imposes its unrelenting focus on profits and shareholder value on all economic activities; the domination of "return on capital" criteria ensures that many activities outside finance are in decline, as they struggle to reach the required returns on potential investments. Financial analysis sees labour as a cost, reducing profits, and pushes for its reduction, either via outsourcing, offshorisation or wage stagnation. Similarly, government regulations are seen as restrictions on profit to be fought and eliminated, as also, naturally, are taxes.

But flat incomes debilitate domestic demand. Easy credit -  to the further benefit of the industry that provides the loans - has been the means to keep household spending on the increase. The combination of expansionist monetary policies in the West and mercantilist policies in China has offered rapid asset price increases at the same time as no inflation, thus generating massive (and increasingly less taxed) corporate profits. The reality, of course, was that of huge global imbalances and a massive bubble, but for a long time it looked like the holy grail of perfect growth. That illusion further appeared to validate the policies that underpinned the system.

The model of financial capitalism is thus all-encompassing, not only grabbing an increasing share of the economic pie, but also dominating all political and economic discourse.

The unfortunate result has been massive inequality, declining or stagnant living standards for the majority, who spend more than they earn, and, as a consequence, a colossal bill passed on to the future. Well, that bill is coming due. The imbalances will only be unwound if incomes match spending. There are two ways for this to happen: lower spending, or higher incomes.

In the financial capitalism model, incomes are a cost and should not increase. If that logic prevails - if our body politic is not cured of the Anglo Disease - spending will crash and a recession is not only inevitable but likely to be very painful, as the real economy slows down brutally, and the financial bets that ride it suddenly look highly unreasonable, and turn into losses (as is happening already in the subprime sector).

If, to the contrary, policies cease their focus on profit support and instead seek to increase incomes for the poor and the middle classes, to invest in the real economy (for instance via plans to boost energy efficiency in the household sector, and renewable energies) rather than in monetising its existing activities, to tax today's wealthy rather than tomorrow's citizens, then there is a chance of limiting the crash.

Just as the Dutch Disease was caused by windfalls from a new sector, the Anglo Disease was made possible by the combination of technological progress in the financial world, the long bond bull market created by Volcker's successful fight against inflation and the successful promotion of the ideology of greed by the right (with the timely fall of the Berlin Wall providing an additional boost by discrediting the other extreme of the ideological spectrum). The great middle classes created by the Keynesian policies of the New Deal have now been exploited for the past 30 years, and they are depleted. The economy will need to find another, more real, way to grow and prosper.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 3rd, 2008 at 01:14:40 PM EST
I agree with ThatBritGuy and Sven's suggestion to begin with short a introductory paragraph presenting the main idea.

For the rest of my remarks, see  my comment above.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Feb 3rd, 2008 at 02:53:07 PM EST
[ Parent ]
And BTW, the first sentence of the last paragraph is too long.

Suggestion:

Just as the Dutch Disease was caused by windfalls from a new sector, the Anglo Disease was made possible by the combination of technological progress in the financial world, the loosening of regulations in the financial sector and the long bond bull market created by Volcker's successful fight against inflation. It was supported by the successful promotion of the ideology of greed by the right (with the timely fall of the Berlin Wall providing an additional boost by discrediting the other extreme of the ideological spectrum). The great middle classes created by the Keynesian policies of the New Deal have now been exploited for the past 30 years. Today, they are depleted and impoverished. The economy will need to find another, more real, way to grow and prosper.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Sun Feb 3rd, 2008 at 03:06:41 PM EST
[ Parent ]
I agree with the others that a reworking is necessary for the MSM, particularly the statement of salient points at the beginning and the end.  I am glad to see this "getting out there".  

I see your critique running parallel to an earlier critique of capitalism.  It was informed by ideas of class struggle but was not Marxist; it is a history I have been trying to understand.

Hannah Arendt in the chapter The Political Emancipation of the Bourgeoisie in Origins of Totalitarianism writes of imperialism in foreign lands by economically motivated capitalists:

Here, in the backwater regions without industries and political organization, where violence was given more latitude than in any Western country, the so-called laws of capitalism were actually allowed to create realities.  The bourgeoisie's empty desire to have money beget money as men beget men had remained an ugly dream as long as money had to go the long way of investment in production; not money had begotten money, but men had made things and money.  The secret of the new happy fulfillment was precisely that economic laws no longer stood in the way of the greed of the owning classes. Money could finally beget money because power, with complete disregard for all laws- economic as well as ethical- could appropriate wealth.

For Arendt this was the reason capitalists fought against the state's control of wealth accumulation and why capitalists seeking markets and resources overseas fought the state for the control of the means of violence.  She would have seen the Iraq war with Bush's planned transformation of Iraq and his resistance to national institutions, and the well-being of the national common wealth, as a classic example of expansionistic capital.

by bellumregio on Sun Feb 3rd, 2008 at 02:36:58 PM EST
Financiers, with their ability to monetize today future revenue streams, are able to generate instant profits which can be captured by them and, to a lesser extent, their clients and employers.

I don't know how to work it in or even if it is worth 'going there' but once the stream of payments have been incorporated using PV or NPV calculations the entire future has been included in the present.  The problem is the ignoring of the actual cash affect on the future.  

Let me explain.

Borrowing $100,000 over 10 years at 7.5% gives a quarterly payment of $2,509.15.  According to theory the stream-of-payments of $2,509 per quarter has the exact same value as the $100,000 in the hand.  But the actual cash-out of the loan, to the borrower, is $100,366.  

Now let's look at a mortgage.

A $225,000 home at 6% over 30 years with a monthly payment of $1,342.28 means a cash total of $483,219.82 for the property, $258,219.82 of cash-out above the selling price.  That $258k is money already spent, as it were, unavailable for other purchases.  This means the $258k is legally bound to go into the Financial Sector, increasing the total capital available to that sector, privileging the Financial versus the Manufacturing Sector.  

Further, since the Financial Sector can monetarize the debt payments, and the Manufacturing cannot, the former can effectively deploy 30 years of Sales (Capital) to the latter's 1.  The Financial Sector also removes the potential of the $258k being spent 'in' the Manufacturing Sector.

After all a buck, a yen, a euro, or a pound held by a consumer can only be spent once.

The more consumer spending, the majority of economic activity in an economy, is captured by the Financial Sector it must follow the less flows into other areas thus a positive feedback loop is established.  This feedback loop implies, to shorten the analysis, a lowering of total economic activity in direct proportion to the Financial Sector's percentage of the economy.

[As always, criticisms requested and appreciated.]

 

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Feb 3rd, 2008 at 03:26:48 PM EST
This is why I keep calling them "parasites."  It's not hyperbole; it is, IMO, a statement of fact.  

Or if that gives you hairballs ;-) "a result of analysis."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Feb 3rd, 2008 at 03:31:39 PM EST
[ Parent ]
. . . Sven and others, who I believe suggested that a striking sentence describing the dire effects of the "Anglo disease" on today's economies should be right up there at the top, probably in the first paragraph and no later than the second, to catch people's attention.  Something like:

Paragraph 1:  In the 1970s the Dutch economy was . . . (describe most striking symptoms of "Dutch disease"--in one sentence, if possible).  Today, by contrast, the financial sector in western economies is . . . (describe most deleterious effects of financial sector weakening other economic sectors, widening inequality, stagnating incomes--in one sentence, if possible).

Paragraph 2:  The Economist coined the phrase "Dutch disease" to describe . . . .  I propose [for the reasons you already give in paragraph 2] to call the current phenomenon "the Anglo disease."  

Then go on from paragraph 3, more or less "as is."  I think it's a splendid piece on the whole!

I also find the chart especially striking, not least in the fact that it's almost perfectly symmetrical--as if the financial sector actually battened on the manufacturing sector, like leeches or a vampire, gradually draining out its victim's life force.  Maybe I'm "over-interpreting" here, but it makes a very striking image, all the same!

by keikekaze on Sun Feb 3rd, 2008 at 07:36:03 PM EST
Just a small two cents' worth:

The phrase "just like the Dutch disease was caused..." should read "just as the Dutch disease was caused..."

Excellent article. Just want to make the grammar perfect.

by psyched (railtravel [at] gmail dot com) on Mon Feb 4th, 2008 at 03:13:57 AM EST
Welcome to European Tribune, psyched!

I hope this is the first of many contributions!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Feb 4th, 2008 at 04:11:53 AM EST
[ Parent ]
Well, I hate it when my contributions are zero substance and all nit-picking, but I believe that there:
The reality, unfortunately, is that a massive inequality, declining or stagnant living standards for the majority, which spend more than they earn, and, as a consequence, a massive bill pushed out into the future.

is a grammar error. It could be rephrased as, for example, "the reality, unfortunately, is a massive inequality...". Losing the "that" seems to work.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Feb 4th, 2008 at 05:52:35 AM EST


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