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:
- Martin Wolf edges ever closer to the 'Anglo Disease' concept by Jerome a Paris on February 6th, 2008
- Anglo Disease - a summary by Jerome a Paris on February 3rd, 2008
- Tiptoeing around the Anglo Disease by Jerome a Paris on January 26th, 2008
- La Vie Londonienne by afew on January 23rd, 2008
- The Next Domino by Jerome a Paris on January 21st, 2008
- LQD: Anglo Disease: Another Symptom? by ChrisCook on January 16th, 2008
- Anglo Disease - symptoms of failure by Jerome a Paris on January 14th, 2008
- Anglo Disease - Wall St's solution: the Bush way by Jerome a Paris on January 3rd, 2008
- The FT worries about the Anglo Disease by Jerome a Paris on December 10th, 2007
- Anglo Disease: Optimism and Dismay in the Narrative by Jerome a Paris on December 8th, 2007
- Rewriting economic history by Jerome a Paris on December 3rd, 2007
- Anglo Disease: LQD - the Economist is worried by Jerome a Paris on December 1st, 2007
- Anglo Disease - early signs of hangover generate denial by Jerome a Paris on November 22nd, 2007
- Anglo Disease: Dollar Dump & Boom-n-Bust by Jerome a Paris on October 30th, 2007
- Anglo Disease: hangover in Manhattan by Migeru on October 15th, 2007
- Anglo Disease fever by Jerome a Paris on August 28th, 2007
- Anglo Disease - Fools and Bourses by ChrisCook on July 9th, 2007
- Anglo Disease watch (5) - just break the thermometer and all is well by Jerome a Paris on July 5th, 2007
- Anglo Disease watch (4) - No industry is vital - except finance by Jerome a Paris on July 4th, 2007
- The Anglo Disease (3) - an introduction for non-economists by Jerome a Paris on June 24th, 2007
- Anglo-Disease Sidelights (1): UK = Tax Haven by afew on June 22nd, 2007
- Anglo Disease (2) - Martin Wolf's take by Jerome a Paris on June 19th, 2007
- The Anglo Disease - Financiers worried about end of great bull run by Jerome a Paris on June 18th, 2007