Archives for: June 2011
Three Elephants in the Situation Room
The unemployment situation is not getting any better. Two years after the recession officially ended, the job creation has stalled and there is little hope that it will pick up any time soon. While the economists point their learned fingers at each other's theories, the vertebrates of the political circus inside the beltway focus on what they do best: running around in circles like a claque of clueless clowns, facing the crisis with protracted smiles and unwavering sense of bewilderment. "There won't be any real jobs without the housing recovery" declaims one half of the choir, while the other one intones: "there won't be any housing recovery without jobs".
Unfortunately most of our elected ephemera use the heat of the current debate to warm up their own political soup. Private agendas are being huckstered for short term gain. No issue is far fetched enough not to be hitched to the glimmering bandwagon of job creation. But instead of rationally addressing the problem, our beloved public servants hide behind platitudes and vapid tautologies, parrot the phrase 'job creation' ad nauseam and beg the central bank to print still more money, hoping that a miracle will mysteriously transpire. Of course, the less they understand the problem the more they bang their gelatinous fists against the table. Shockingly, to no avail. Yet despite of all the verbal and theatrical fireworks, three root causes of the present crisis are conspicuously missing from their ruminations.
1. Global wage arbitrage. We cannot place Asian workers willing to work for a slave wage in the same market place with Western workers who expect safety standards and a basic health care coverage. Something has to give. Globalization has certainly lined up pockets of the top economic elites, whose only innovation consisted of sending the manufacturing to cheaper labor markets, but it did very little to improve the life of the working stiff. Exploiting foreign work force at the expense of your own is subpar. We are no longer in Dark Ages. None of the obvious solutions will be popular or painless, but this question needs to be addressed. We will either protect our work force or throw it out to wolves. Globalization and its profit distribution have to become a part of a new paradigm, Adam Smith 2.0 so to speak.
2. Income inequality. Sorry supply side gurus, but we need a vibrant middle class to generate consumption. The income distribution is way too lopsided at the moment. The ultra rich people are cool and cultured and all, but they can't consume enough basic goods and they park too many of their funds in passive assets and overseas markets where they get much better return on investment. No matter how many times John Boehner beseeches us to give the financially obese folks even larger share of the common pie, jobs won't be created unless there is an organic demand for goods. The trite song about trickle down economics needs to be retired. If the wealth gap continues to widen at the pace of the past few decades, we'll soon end up being the world's largest banana republic, and those - as is widely known - have much better track record generating bananas than generating jobs.
3. Education reform. We have to produce and export more to offset our consumption. By now it must be clear to everyone that we can't globally compete in the area of low skilled jobs. Our best chance rests in retraining the population for technologically advanced manufacturing; new materials, new technologies, renewable energy - you get the picture. To wake it up from its slumber we need more designers, machinists, technicians, scientists, engineers and less lawyers, politicians and financiers. The public schools are in disarray. The basic pay of teachers in math and hard sciences is pitiful. We cannot waste potentially brilliant minds just because their parents cannot afford private schools.
Global wage arbitrage, income inequality, and education reform. Would it be too much to ask for a politician to stand up and coherently address those three crucial points? For once, forget the posturing and positioning and pandering and prevaricating and politicking and just acknowledge the real problems and maybe suggest what we could do about them. This is not the first time this nation has been in a bind. And it won't be a first time it pulls itself out of it - if only it can find a Churchillian character on the Capitol Hill who won't be afraid to add a pinch of blood, toil, tears and sweat into our collective soup. Adding more and more water won't do - the pot is already overflowing.
I guess for politicians having to walk the fine line between well being of their constituents and financial interests of their deep pocketed sponsors presents a confusing dilemma. Perhaps, the first thing we need to do is vote them out of the office in the next election. Something is telling me that a little first hand experience with unemployment would make them see the whole job situation rather clearly.
There is a little tiger inside me. It must have been a really bad tiger in its previous life, because for a tiger to be reincarnated as a mathematician - that must be some kind of ultimate humiliation. Maybe it was pushing less affluent tigers into subprime lairs, or maybe it ate one Indian villager too many. Who knows. But now it dwells inside me. Most of the time it sleeps soundly behind my spleen, but the moment I take off my shoes it wakes up. It twitches its ears, growls in disbelief, sniffs around a bit and starts pacing up and down in expectation. I can feel it. Whenever I go barefoot, an invisible spark of feline instincts shoots through my spine. Echos of long forgotten animal spirits start reverberating in my skull. I have to touch my cheeks to make sure I haven't grown whiskers.
The first time I noticed it was in High School. We were on a field trip and playing volleyball on a grass court in front of some old gym. I was never particularly fond of this sport, but this time I took off my shoes and whoa - what a difference it made! First thing I noticed that my natural leapiness had increased at least threefold. I was jumping around the net like a kangaroo on a sugar diet. My memories of that game are so vivid that I still remember the shape of the court, the scaly gray wall behind it or the juicy tone of its green surface lit by a street lamp. I became an animal hopping and bouncing and hitting the ball from all possible angles, including from above.
Being barefoot confers certain freedoms. It is liberating. Take off your shoes and walk across a lawn if you don't believe me. It's like getting an extra sense rendered through our soles. It brings certain metaphysical grounding to our being. As if we have reconnected to this Earth through a root system and gained some of its energy straight from the soil. Much like trees and plants and grasses and everything else that grows from it.
Deficits for Dummies
When you view economy through the prism of common sense, it is really not all that intimidating. I give you something, and you give me back something of equal value. Pretty simple, isn't it?
Now let's take a look at the national deficit. When government distributes its dollars, borrowed or otherwise, it is not just handing out pieces of paper of some theoretical phantom currency. Those little greenbacks represent value and people who put them in their wallets, be they army officers, federal employees or Medicare recipients, may convert that value into useful things. And I am not talking about monetary abstractions trumpeted up in the hallowed hallways of the Federal Reserve Bank. They buy apples and oranges, car mufflers, Alaska cruises, even ping pong tables. Now where does the value to buy all these things come from? Well, if you think about it, it can really come from only three sources.
First, it can come directly from taxpayers. People who worked hard all year long give away some of the value of their labor in the form of taxes. This is the most honest form of producing the value, because it is completely transparent and burdens different segments of the society according to some predetermined scheme. Second, it can come from the similarly hard work of our children whose taxes in the future will have a component that will pay for the debt our generation accrued. And third, the central bank can simply print a little extra money, which in turn dilutes the value of the existing currency, so in this case the value comes from those who put some of their value away for the rainy day. In short, from the savers, from people who lived within their means.
That third way of producing the value is a bit tricky, but you can think of it this way. Imagine you have a gallon of cranberry juice. You pour a glass of water into it (that's the extra "money" that the central bank prints out of thin air) and mix it with the juice. The juice is now a bit less pure, but there is more of it. You have just "produced" a glass of juice, which you can extract from the bowl, and most people who will drink the rest of it won't probably know the difference. As long as you don't overdo it.
Now let's make it even simpler: if we are running deficits - i.e. if we have to borrow because we are spending more than we collect in taxes - the value of the goods and services that these deficits offer comes from exactly two sources - the children and the responsible people. How does that qualify as a reasonable economic policy is beyond me. OK, so we enslave our children and become totally irresponsible - we all buy 3 SUVs and a house we cannot afford. And then what? We sell Yellowstone to the Chinese?
The problem is that the Mighty Warriors of the financial sector don't like things simple or transparent. They don't want you to ponder how things balance out or who actually pays for what. They don't want you to wonder where is the value of their obscene bonuses coming from. Complexity is a perfect smoke screen for turning the global banking system into a bloodthirsty parasite, which must be the reason why the financial sectorians are so well trained in all sorts of smokes and mirrors: opaque derivatives, statistical models, arcane financial statements, quantitative easings, and in general, any mathematical gimmick that can be helpful in muddying the waters. Their machinations have always been best conducted in a murky twilight of the rational limbo, so they gradually turned the field of economy into a chaotic spaghetti bowl that no humans (including the Wall Street depredators themselves) can possibly disentangle. Only in a world completely divorced from common sense can they push more and more debt to unsuspecting suckers. Their long term business plan seems clear: increase the lending exponentially to generate growth that would pay for the interest already due. In the theory, there is a name for that kind of economic model. It is called "Ponzi scheme".
If people were running their finances the way governments run theirs, our courts would be flooded with bankruptcies. But if you try to point out the dangers of living above one's means to the global wizards of Oz, they'll roll their eyes, put on a smooth avuncular tone #37 and inform you politely that personal and national finances are very different animals and cannot be easily compared. And sure enough - they are, and they can't. But guess what - a cow and a hamster are also very different animals that cannot be easily compared. Yet when you toss them out of the window from the 34th floor of the Empire State building, they'll both end up on the pavement in a very dead state. So yes, national finances can utilize a few tricks that individuals can't, they may redistribute the value within the larger society for instance, but at the end of the day they cannot escape the laws of economy any more than arbitrary animals can escape the laws of gravity.
The economy really is simple. In small quantities debt is like grease. It lubricates the cogwheels of production. But if you base your whole economy on binge borrowing, you may wake up in a bathroom one day with a serious hangover. Like Greece.
Under the Lollipops
The soccer stadium in my hometown, Hradec Kralove, is called "Under the Lollipops" for the characteristic shape of its lights. I haven't been there in 25 years. Either the team was floundering in the Czech second league, or my schedule left me stranded elsewhere in the world. Last year the team finally made it back into the first league, so during my regular summer trip back home, I took a trolleybus #2 and visited the old stadium in the Malsovice district. It hasn't changed much. The lollipops were still there, and with them most of the infrastructure built in the heyday of communism. When I sat down at the spot I used to take in my high school years, an eerie sensation swept over me. I felt strings that haven't been played for a while sounding out from deep under the hood.
Every musician will tell you that bass line is critical for the harmony. No matter what your solo guitarist may think, if the bass player starts riffing in F, there is no point fiddling with any other key. In a sense, our psychology is like that, too. We may have various predilections, experiences, fears and ambitions, but at the end of the day what determines our personalities are our own bass strings - the rafters of our inner harmony - the oldest memories reaching deep into the past, often partially obscured by the horizon of childhood.
I used to come here with my grandfather from whom I got my soccer genes. We would sit in these stands and watch our little provincial team struggle against the big sides from Prague. They haven't always prevailed, but they were our boys nonetheless and we were their loyal fans. Forever connected in some fundamental way that psychologists love to write thick tomes about.
My hiatus from this stadium was so long that one of the old team's best strikers had a grown son on the field. A quarter century is a quarter century. But every now and then it is important to return to the places from our far past and tune those all important bass strings in our soul. Or, more precisely, let the memories do the job. And so as I sat on the familiar cheap plastic benches and watched my favorite team eke out a 1-0 victory, somewhere deep in my mind the giant lollipops were working their magic like prods of a tuning fork.