Monday, February 13, 2012

Occupy movement’s missing message

            One of the most potent criticisms of the occupy movement, which is now looking like it is set to fade, is the charge that it is a movement that does not propose any viable alternatives to the way we do things now.  Furthermore, there was precious little in terms of providing a convincing argument to counter the stance of the right that redistribution, which it seems was the main argument of the ones protesting in the name of the 99%, will in fact hurt the 99%, because it will stunt economic growth due to decreased private investment.

            A few months back, my sister asked me to look at this short video about 300 economists who stand with the occupy movement, which she and others described as a powerful message.
Well, they may have done so, but out of the 300 economists, one would think that at least a few would have bothered to do more than just agree with the occupy movement on ideological grounds, and put forward some detailed proposals instead, just like right leaning economists do, in the form of their argument to lower taxes on the rich to provide incentives for them to invest in our own countries (the very fact that we are talking of right or left leaning economists is sad, because we need objective economists to provide fresh ideas).  No such proposal was put forward by them however.  I think they may be inclined to suggest higher taxes on the rich in order to increase spending on the poor.  I believe there are more important things we have to look at than tax policy, if we are to truly get to the bottom of things.  Tax policy seems to be the only thing that our increasingly polarized elites always seem to want to argue about.  It has become an obsession that they are simply unable to move past, in order to explore other avenues.

The missing message:

            There are two key ingredients missing from the occupy movement’s argument.  These two ingredients come in the form of explaining why, and then the all important how we are to pursue more equality. 

            The why, as explained by the wall street protesters and their supporters, centered mainly on the argument that the poor and middle class have become stagnant or even poorer, while the top earners reaped all the profits from the economic expansion we experienced in the past decades.  A recent study made by the CBO in the US, has found that the top 1% have indeed reaped most of the benefit.  Their income has risen by 275%, from 1979 to 2007, while the income of the bottom 20% of earners has remained stagnant.
The occupy movement assumed that this piece of data alone should be enough to win enough support in demanding more equality.  They were wrong.

            The upper middle class may not have fared as well as the top 1%, but their incomes have risen enough to make them content.  The middle class overall is struggling, and recently more and more people are struggling to remain in the middle class, but life is not unbearable by any means, for the majority of the population just yet.  Furthermore, the political right makes a pretty good argument against any attempts for more equality.  Essentially they argue that we have to continue to make it worth it for the rich to keep their money invested here, because through their entrepreneurial activities they create jobs, which allow many to remain in the middle class.  It is a flawed argument, because it neglects to address the fact that the main job creators are the consumers, because as long as demand is there, entrepreneurs will always invest in meeting that demand, as long as there is a profit to be made.  That profit need not be obscene either in order to convince people to pursue that profit.  While their argument may be flawed, at least the right provides a technical argument, while the left only provides an argument that pleads for fairness. 

            I am personally not in the habit of adhering to one side or the other in political partisan arguments, but in this case, the left and the occupy movement are right, and there is a valid economic argument to be made for their stance, even if it is not precisely the argument they made so far.  The one variable that I feel makes their argument for the pursuit of more equity in the share of income is the fact that as of 2006 we are in a new era for global economic expansion, mainly due to the peaking and plateau of conventional crude oil production as confirmed by the IEA in its 2010 report.  As I already explained in a previous article on my blog, this event has meant that there is a constraint to global economic growth, which was able to expand at 4% or more per year on average in past decades.  Since 2006, average global economic growth rate has slowed to less than 3%, which means that mature economies will only reach average growth rates of 1-1.5% at most.  Growth rates experienced in the western world so far confirm this trend.  Since 2007, average US growth rate has only been .63% per year, which compares rather poorly with average growth rates since the end of the Second World War of over 3%.  With conventional crude production stagnated, and only growth coming from unconventional sources of liquid fuels, this trend cannot improve much in the upcoming years or decades.  There is actually more chance of a further deterioration, because conventional crude production will not stay on a plateau forever.  At some point it will decline, and unconventional sources will only be able to keep total liquid fuels production stagnant at best.  At that point, if we do not make drastic changes to the global economy before the above mentioned event, we will be faced with a global economy stagnated at a 2% rate, which means that the developed world will be shrinking.

            Going back to the current reality of 1% growth prospects for the developed world, we have to realize that in the absence of a mechanism to create an environment that allows all social strata to share in that flimsy 1% yearly increase more or less evenly, there is a serious danger of systemic risks plaguing the economy, which may prevent us from even reaching average growth of 1% in the long-run.

            The reason there is a danger of systemic risks developing is simple.  If the top 1% which currently takes 17% of total income in the US, continues to rake in yearly income growth in the 4% range as they do currently, they will take fully one third of all real income growth from the US economy.

$1.3 trillion x .04 = $52 billion yearly increase in income for top 1% of earners
$15 trillion (size of US economy) x .01 (1% GDP average) = $150 billion GDP growth
$52 billion/$150 billion = 1/3 of income growth rate going to top 1%

            That means that two thirds will be left to be distributed among the 99%.  This means that only .7% growth in income will be available to the rest of the population.  That is not even enough to keep pace with population growth of .9%, so in effect real income per family is set to shrink by .2% per year.  This slow grinding down of an increasing number of households (the trend will not be uniform as some, especially in the upper middle class will still fare well, while the income of many others will shrink by a greater margin), can only mean that we will continue to experience explosions in loan defaults.  At some point consumption will grind to a halt, and the entire 100% will end up suffering a permanent decline.

Note:  This chart takes into account the assumption that US GDP growth will decline to around 1% per year, as should be expected assuming I am correct to factor in continued stagnation of global conventional crude supply growth, as indicated by IEA report from 2010.  Continued population growth of roughly 1% per year was also factored in, as well as a continuation of income growth patterns established in the last few decades, of the above mentioned economic demographic as indicated by the CBO.
It is not visible on the graph, but the net income of households from the bottom 90%, in 2012 dollars, will most likely drop to $25,800, from about $31,000 currently.

            So this is the answer to the why question.  Given that so far, the stats show that the global economy has indeed entered into a lower growth rhythm, which reflects the drag on growth due to resource constraints, it is a perfectly valid argument to make for greater equality.  If the 1% yearly increase in national income in the US will be shared more or less uniformly, at least it will help the average family keep a stagnated level of real income.

            Now to get to the more important question of how this greater level of equality in sharing in economic growth should be achieved?

            The main suggestion so far coming from most, who already support the need for greater equality is to do it through taxation.  The answer from the right, which is actually a valid counterargument in current circumstances, is to point out that higher taxation of capital, or an increase in the cost of labor will drive investment away, making the situation of the working class even worse.

            The first step as a solution is to remember that we live in the global economy, so the solution has to be on a global scale (just like the solution to most other problems we have).  As such, I am proud to say that I already proposed a viable solution in the form of the sustainability trade tariff, which is the central subject of my book "Sustainable Trade".  Reality is that at the moment, the owners of capital are in the driving seat when it comes to dictating the terms of investment.  They have us engaged globally in a race to the bottom in wages, worker and environmental protection, and we are undermining the state’s ability to provide the necessary infrastructure, both human and physical for long term social health and stability, through their increasingly aggressive demands for tax breaks.  My suggested standardized global trade tariff is designed to penalize the practice of engaging in undercutting each other to attract investment, breaking the current source of high returns on investment for the top 1%, at the expense of the producers and consumers of the world.

            This is the missing message of the occupy movement and their supporters.  The 300 economists, who declared their support, did not provide for a similar approach as a justification for the demands of the movement.  It may seem to some that the issue of social justice may be enough as an argument, but it is clearly not.  After all, how many of us were told when we grew up that life would be fair?  The important thing is to make sure that it is sustainable; otherwise the result will be unfair to all.

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