To Save Capitalism, We Need to Save Communities
Comment of the Day

February 26 2019

Commentary by Eoin Treacy

To Save Capitalism, We Need to Save Communities

This excerpt from Raghuram Rajan, former head of the Reserve Bank of India, new book may be of interest to subscribers. Here is a section:

When it comes to trade, on the other hand, the losers are clear: In developed countries, they are the workers with a moderate education. When manufacturing supply chains were entirely contained within those nations, their jobs were safe; the indivisibility of the production process allowed them to bargain for higher pay, lower and more pre­dictable work hours, and more safeguards at work. As the production process has fragmented, though, with each segment undertaken in the most appropriate country, they have been exposed to the full force of competition from cheaper, more flexible, and equally competent labor elsewhere.

Well-paying unionized jobs in low-tech manufac­turing industries have been most adversely affected. Such jobs have typically been located near smaller towns and rural areas in the interior of countries, where the cost of living and thus of labor has been low. The incomes these jobs provided also helped
keep local hairdressers, laundries and shops in business.

Moderately educated workers whose firms close because of trade competi­tion typically have few palatable alternatives. With few new jobs near the small towns or semirural areas where they live, and most such jobs to be found in companies beset by the same competitive woes, workers have bleak prospects if they stay put. Yet, according to one U.S. study, that’s exactly what
they do.

Why? Retraining is hardly easy, espe­cially for manufacturing workers who went to work after high school many years ago and who really have not used computers at work or at home. Cities offer service jobs but also demand higher rents. For many, not moving and hoping old jobs return seems the best bet; after all, there are still friends and family nearby.

Eoin Treacy's view

I consider this to be a very accurate characterisation of the root causes of populism. Rajan knows this better than most since he was forced out of his job at the RBI because he was unwilling to acquiesce to the demands of Narendra Modi’s populist administration.

As an aside the bombing of a site in Pakistan overnight is as much about retribution for the February 14th attack as it is about boosting support for the BJP at home ahead of the election. 

The identity of communities has been under attack for decades and the loss of industry, religious belief and faith in the best intentions of politicians has created a powder keg of discontent all over the world. The biggest point is that even in emerging markets which are among the beneficiaries of globalisation, inequality, graft and deceleration in the improvement of living standards has resulted in similar movements arising.

The primary conclusions from this evolution is that we can expect additional lurches to the extremes of political theory, both left and right. We can also expect that deficits are going to become an increasingly large factor in many national budgets. Modern Monetary Theory (MMT) is the academic rationale for the view that deficits don’t matter.

This additional excerpt from Warren Buffett’s annual letter is topical:

Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 31⁄4 ounces of gold with your $114.75.

And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.

Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.

The increase in debt has been possible because of the growth of the economy, productivity growth, asset price appreciation, inflation, technological innovation, risk taking, the Dollar’s reserve status and winning the Cold War

The evolution of technology particularly in the communications, energy and health care fields represent the best bet for the situation to continue. However, I agree with Rajan that the root causes of the populist revolt are non-trivial and would be best dealt with now rather than later. Unfortunately, there does not seem to be much evidence of a concerted plan to tackle these issues in any country that I am aware of.

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