Tax Break

Who said tax is boring?

Blessed are the consumers (part 2)

Hard Times

When former US President Herbert Hoover flew down to Argentina in 1946  it was to request that the newly elected President Juan Peron  order a massive grain shipment to Europe aimed at staving off a post-war famine. Following his successful mission, he commented that Peron’s young wife, Eva, had the brains of Eleanor Roosevelt and the looks of Hedy Lamarr. Fortunately for Europe, Hoover was more astute at organizing famine relief than identifying imminent Great Depressions or dumb blondes. Hedy Lamarr, although unquestionably a Hollywood bombshell, had a few years earlier patented a wireless concept that is today used in cellular technology.  Her hair, incidentally, was brown.

After World War II, the problem was not that there was not enough food to go round but rather that it was in all the wrong places. In fact, apocalyptic predictions by the Reverend Thomas Malthus during the 18th century that population growth would outstrip increased food production had long ago been proven wrong by the Industrial Revolution that Malthus had failed to take into account (which was probably because it hadn’t happened yet). So once the 20th century had managed to put two world wars behind it, it was ready for the patter of lots of baby booming feet.

Well babes, it looks like things got a bit out of hand and, now, with a world population of 7 billion, predicted by the UN to hit at least 9 billion before (possibly) tapering off somewhere between 2040 and 2075, the late Malthus is firing on all cylinders. Somebody has decided that current food technology can support up to 10 billion on the planet which, depending on the accuracy of UN statistics, could mean that world citizen number 10,000,000,001 might be very hungry.

GDP Growth In 7 Easy Lessons

Meanwhile, economists and politicians look aghast at China’s one child policy and bemoan their own falling populations resulting from average family birthrates of one child and a bit. Although all the bits add up to whole people (vicious and entirely unfounded rumour has it, those with earrings in their mouths and spikes in their hair), this is not enough to ensure that countries’ gross domestic product can be kept at sufficient levels to support increasingly aging populations and payment of debt resulting, in part at least, from the excesses of their ancestors.

The orthodox approach to the world economy appears to be to encourage an increase in the birthrate in developed economies (Nobel laureate Paul Samuelson advocated tax breaks for having children and sired six of them himself), and encourage increased consumer demand around the globe (Nobel Prize Laureate Paul Krugman and just about everyone else) within the constraints of sound fiscal policy. Whenever I think of this set up, apart from the moral ambiguities involved, I get nervous. My thoughts invariably drift to an Aston Martin DB5 (what the only REAL 007 drove 50 years ago), its brake cable cut,  hurtling down a zigzagging mountain road. It might make it and it might not. There is just too much risk in the model. Will population growth taper off in time in the developing world as those countries develop a large middle class? Will developed countries manage to clear enough debt for taxation and other components to cover spiralling pension costs? Will unchecked, ever-increasing consumer demand blow the whole system apart? And we have not even touched on the whole Sustainability thing.

“If you mention Ricardian Equivalence once more, we will invade you”

Of course, not all is black. For example, Okun’s Law (otherwise know as Okun’s Rule of Thumb because, like so much in economics, it is just an observation of what happened) says that as GDP increases unemployment does not decrease proportionately. Why not? Because there is increased productivity in the workforce. Now, while this might not be good news for a President seeking re-election it is good news for a country with a declining birthrate and lots of golden-agers. On the other hand there are economic concepts floating around like Ricardian Equivalence that suggests that there is no difference between financing government expenditure through debt or taxation. Fortunately for the sane at heart, the first person to express doubt about the validity of this theory was none other than David Ricardo after whom it is named. It was left to a bunch of junkies in the ’70s and ’80s who believed that mankind operates with rational expectations to hallucinate that it might actually be true.

The time has come to be reminded  that economics is about maximising welfare, not GDP. As developed economies successfully put the current world financial crisis and  their pockets of poverty behind them, they need to move away from the Holy Grail of  per capita GDP growth uber alles and look to what America’s Founding Fathers cutely called “the pursuit of happiness”.

It is widely considered that the engine for increased consumer demand in the coming years has to be China and India. Both have disappointed until now. If, following the changing of the guard in Beijing in November and the recent cautiously optimistic statements of the new/old Indian Finance Minister, their consumer and capital markets open up, there will be the opportunity for demand to be slaked in the developed world by purchases from the developing world while developed world countries could invest more massively in the developing world. If this was not achieved by the market  it could be achieved by governments encouraging or forcing residents to save and then investing the proceeds in, effectively, sovereign wealth funds the profits and proceeds of which could be used to cover pension and social welfare costs. In other words, rather than relying on increased population at home either due to increased fertility or politically unpopular immigration, developed countries would effectively benefit from a bigger part of the growth of the developing world than the current demand-crazed system allows for. In the meantime, as the developing world gradually settles down into bourgeois living, there will have been time for the developed world to substantially increase the retirement age and repay its sovereign debt.

At that point (in my dreams) the world could embark on an era of prosperity with  calmer consumer demand which would discourage, as we  saw a few days ago,  the launching of a new iPad every seven months.

When my beloved Volvo (see last post) came back from the puncture place  – I don’t know what they are officially called –  it did not, of course,  have one new tire but three. This initially gave me some comfort in that, perhaps the  workers at the tire factory would also give me a thumbs-up for admittance through Heaven’s door when the time eventually came. Then I noticed that they were Michelin. French. Fat chance.

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