Musings Report #8 2-23-13 Rising Inequality and Poverty: Can they be fixed?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Rising Inequality and Poverty: Can they be fixed?
Is this the result of capitalism, globalization, political capture by financial Elites, all three, or are there even deeper forces at work?
Foreign Affairs (published by the Council on Foreign Relations) often acts (in my view) as the mouthpiece of the status quo; in other words, if a topic is covered in depth in Foreign Affairs, it is a semi-official recognition by the ruling Elites that this is indeed a serious subject.
"For most of history, the prime source of human insecurity was nature. In such societies, as Marx noted, the economic system was oriented toward stability -- and stagnancy. Capitalist societies, by contrast, have been oriented toward innovation and dynamism, to the creation of new knowledge, new products, and new modes of production and distribution. All of this has shifted the locus of insecurity from nature to the economy."
"As the economist Friedrich Hayek pointed out half a century ago in The Constitution of Liberty, the main impediment to true equality of opportunity is that there is no substitute for intelligent parents or for an emotionally and culturally nurturing family. In the words of a recent study by the economists Pedro Carneiro and James Heckman, "Differences in levels of cognitive and noncognitive skills by family income and family background emerge early and persist. If anything, schooling widens these early differences."
The dozens of comments penned by readers reflect the great confusion of opinions that swirl around the topics of inequality and poverty. Politically, it is generally verboten on the Left to discuss the role of family, parenting and cultural values in income inequality, just as it is verboten on the right to discuss this in terms of political capture by the financial Aristocracy.
Readers of the blog know I have been absorbing histories and critiques of capitalism that "connect the dots" from the 1300s to the present. In general, I agree with the author of the above article that capitalism's dynamism and constant flux of capital, labor and innovation place great demands on individuals, enterprises and governments to keep up. Stagnation can be a less stressful choice, but inequality rises as fast or even faster in stagnant economies, which tend to excel at widely distributing repression and poverty.
So getting rid of capitalism per se does not serve to eliminate poverty so much as distribute poverty to everyone not in the Elite. (Cuba appears to a fine example of this quasi-feudal dynamic.)
Just as clearly, financial manipulation that serves political and financial Elites has greatly expanded income/wealth inequality (see the links above for examples), as the top 5% pulls away not just from the bottom 40% but from the 55% below the top 5%. I call this the neocolonial/neofeudal financialization model, as it generates extreme concentrations of wealth in the political and financial Elites and a vast class of debt-serfs whose income mostly goes to debt service, absurdly costly housing/healthcare/education and taxes/fees.
Yet as any resident of a multi-ethnic, immigrant-friendly U.S. city knows from observation, the standard causes of poverty--poor education, little family wealth and low social status--do not necessarily impede recent immigrants who have strong families and a specific set of cultural values centered around education, thrift and investing the resulting savings in productive assets.
Though it is un-PC to make this observation, it is painfully obvious that values, parenting and family have a great deal to do with wealth inequality and poverty. In a less politically charged (and less centralized) environment, common sense would suggest that the values that lead to rising income/wealth should be part of what is considered essential education.
Though the Foreign Affairs article makes a closing reference to the robotics/software revolution often discussed here, very little is said about the obvious result of these trends, which is a radical reduction in the need for human labor.
My study of global capitalism leads me to suspect there is another dynamic in play that has been masked by massive credit/debt expansion: finance capitalism and government are both on an S-Curve of diminishing returns. This means the return on money invested is declining virtually everywhere, meaning the pie of surpluses that can be consumed, saved or invested is shrinking.
In broad brush, societies can choose between two forms of relatively stable but impoverishing feudalism--stagnant ossified backwater or financialization--or accept the existential risks of embracing innovation and experimentation, not just in narrow fields but across the entire economy, society and government.
Also in broad brush, incentivizing and teaching the values that favor wealth creation--thrift, investing, lifelong improvement of skills, entrepreneurial drive, flexibility, strong families--may be just as important as leveling the playing field, i.e. maintaining opportunity via maintaining access to education and social capital.
I think we can also conclude that ideologically derived beliefs about inequality and poverty do not shed much light on the actual dynamics, which are clearly multi-dimensional and well outside the narrow confines of the usual Left-Right rigidities. For example, the growth of nearly-free educational resources on the web that I term The Nearly Free University are dismantling all institutional barriers to quality education.
The single greatest way to reduce inequality would be to radically lower the cost of basic living to where it was affordable to even those of low income. This idea remains the focus of much of my work: radically reducing the cost-basis of a high-quality, low-energy-consumption life. For an example, see my post on the Pareto Economy.
Market Musings
As you know from previous Musings, I sold my calls and bought puts (bet on a market decline) on 2/8. I exited my puts for gains of 25% and 70% 10 trading days later on 2/21 and began building a long position in junior gold miners and natural gas. I am poised to re-enter the short side of the SPX in the days ahead.
Take a look at this chart of the NYA50 (the percentage of stocks above their 50-day moving averages) and note how closely this aligns with market tops and bottoms. It has clearly rolled over, and if the past is any guide, the next bottom lies quite a ways down.
Some analysts are looking for a bottom as early as next week. Maybe, but this chart suggests the next move is unlikely to be up, though anything is possible. In terms of news flow, the political hot potato of sequestering is heating up, China's economy could start flashing an inflation warning, and Italy's election could roil the faux-calm waters of Europe.
What I am doing: building long positions in natural gas and junior gold miners, holding cash and looking to re-enter the short trade on SPX.
What I would do if I were managing $1 billion: build on the 4% short position begun 10 trading days ago, start building positions in JO (coffee), natural gas and gold miners.
From Left Field
worth clicking through for amusement: You had one job--errors in the built world (via Maoxian)
Amusing Ourselves to Death: Huxley vs Orwell (via Gregg B.) an excellent summary of the two dynamics of the modern world
Thanks for reading--
charles
