The Economics of Discontent: From Failing Elites to The Rise of Populism Kindle Edition

We have a fragmented political system where dissenters are now an emerging majority and unable to articulate a set of rational policies. Nor do we have a coherent understanding of Western societies' deep sources of frustration. It's time to confront the facts - we are facing the failure of Western elite. They are no longer the best of us, but a stagnant ruling class, wrapped in political correctness. Its chief concerns are preserving and increasing its power and privileges. In the process, it has severely limited the flow of social mobility, insuring its own decay and growing incompetence. This has led to an increasingly inefficient government, with no vision other than maintaining status quo and catering to special interests. It is simultaneously an abuse of free markets and a confiscation of resources from the many by a few for the few.Unsustainable social pressures come from real estate, health care, education, monopolies, over-financialization, unfair trade and uncontrolled immigration. The cumulative burden of choices made in these areas has fallen disproportionally on the lower and middle classes. Unwilling to tackle the causes of growing pain, successive governments have used and abused fiscal policy to buy political relief via inflated and unfinanced social spending that has left the state indebted. Monetary policy eventually became the only game in town - proppping up asset prices with interest rate cuts systematically enriched a few, reflated burst bubles, promoted speculation and encouraged moral hazard. Eventually, even monetary policy became inadequate --> quantitative easing and kicking the problems down the road.Dissenters within the Western world have progressively discovered they are a majority. Emboldened, they increasingly challenge their out-of-touch 'elite' and the world paradigm that has disserved them, frequently with short-term palliative 'gut'-driven policies often not been thought through.Wages have been stagnating for the lowest-paid and exploding for the highest; at the same time, children of lower classes have less ability to move up. Concentration of wealth and wages is increasingly unrelated to one's ability and contribution.Globalization has ratcheted up the pressure on wages from automation, rapidly enriching the capital-owning elite. Free Trade has forced Western workers to compete with the cheapest Asian factories operating without regard to the environment, minimum wage, or workers' rights. Lax border control has forced Western workers to copete with massive waves of low-skill migrants who have pushed down wages while competing with them for insufficient public services.In the U.S. losers of globalization tend to be either Tea Party or Bernie Sanders supporters.From 2010 to 2017, rents in the U.S. increased 30% while wages grew 0.5%/year. Between 2013 to 2016, the cost of rent, healthcare and education have risen 6%, 8.5%, and 5.4%/year on average.Between 1975 and today, household debt to income in G7 countries has roughly doubled - a transfer from the poorest indebted population to the better-off savers. Basic needs (housing, food, transportation, healthcare and clothing) represent 84% of low-income household expenditures, 78% for the middle income, and 68% for high-income. Labor's share of income has fallen from 55% (1972) to 39.5% (2014). Wages received by B.A. holders grew from 134$ of high-school graduates to 168%. In the 40 years from 1973 to 2013, productivity was up nearly 75% and hourly compensation less than 10%, even though growth halved from 2.7% to 1.45/year. Why - automation, globalization, and deunionization (from 20% to less than 11% in 2017). In the U.S. from 2001 to 2014, close to half the decrease in labor's share of income can be attributed to automation, 40% to globalization, and 15% to deunionizastion.Formerly local service jobs that were non-outsourceable offered protection - but immigration of overwhelmingly low-skill migrants has put pressure on that group also.Negative interest rates incentivize hoarding cash into goods with no investment purposes (eg. property vs. R&D), with the sole objective of preserving tomorrow's consumption. Quantitative easing has inflated the value of assets one can own directly, and encouraged hoarding. Since 2008, the amount of land owned by the 100 largest private landowners grew from 28 million acres to 40 million.Walthy people from around the world tend to buy real estate in developed world cities as a safe investment and let it sit unoccupied, driving up rents for actual residents.Piketty asserts developed countries' return on capital reliably exceeds the GDP growth rate, and this favors continued concentration of wealth. We are about to see the greatest transfer of wealth in history - over $2 trillion bequeathed by less than 500 billionaires alone over the next 20 years. Over half of Europe's billionaires have inherited their wealth, vs. about 25% for the U.S.While the state is unable to pay for the higher education of young people, it is spending more than ever on the elederly. Public expenditures on old age benefits across OECD countries are now about 8% of GDP and rising - fertility in developed countries as decreased while life expectancy has risen. People 65 - 75 now are the least likely to live in poverty, while the highest rate (above 150% of the rate for the general population) is among those 18 - 25 (OECD).Real estate prices and rents have been inflated through overlending. In large metropolitan areas, rents now represent over 40% of the average person's earning net of tax. Buyers pay, not what they can afford, but what they can borrow.The AMA sets the number of doctors in the U.S. Pharmaceutical copanies spend 2X money marketing (branding, promoting consumption) than on developing new ones. 80% of the top 100 best-selling drugs have had their patent extended, 505 more than once. Pharmaceutical margins is higher than car, oil/ gas or media.Higher education refuses to select the most gifted for academic training. Student debt is now the 2nd-largest U.S. debt pool, behind home mortgages; it also experiences the highest serious delinquency rate (about 28% default rate). Costs of higher education have risn over 500% since 1985 - greater than the cost of healthcare. Higher education providers have no liability when their graduates and dropouts default.Maurice Allais, a French Nobel laureat, estimated the collective infrastructure investment needed (roads, transport, hospitals) for an immigrant to be about equivalent to his first five years' income, 20 years if he has a wife and three children. Sweden's Fiscal Council and Australia's government have made similar estimates. The highly educated favor more low-skill immigration and improves the relative rarity of their qualifications. In the U.S., those with postgraduate degrees are 40% less like than those with a high-school degree or less to favor a decrease in immigration. Labor intensive industries, such as agriculture, also support immigration.The sum of imports and exports has grown from 6% of GDP in 1960 to about 20% at the start of the millennium.In 1975, 109 companies collected half the profit captured by all publicly traded firms; in 2017 this was down to only 30. There is considerable evidence that whenever there are fewer than six competitors in an industry, prices rise.Insurance only allocates 30 - 50% of premiums collected to reimbursement of losses. Brokers, insurance, reinsurance costs at least double the risk they're protecting from. Insurance premiums average 8% of GDP across the OECD.Since the 1970s, financial crises have occurred with an increased frequency, average cost of 15% of GDP - with half that cost in the form of government interventions to bail out banks.While the cost of getting elected has increased, pay of elected and high-level officials has remained stagnant. Politicians receive board memberships, high conference appearance fees, inflated 'book dea.s, mssive contributions to the 'charities' and 'foundations' they run. Helps explain why societal needs go ignored.QE is an attempt to push into the financial system money until confidence can be restored; 'rebooting' the economy by pushing up asset pricing and creating a wealth effect to boost consumption. The Federal Reseerve 'printed' money with which they acquired by government bonds, government-backed debt - national central banks purchased large chunks of government debt and reduced interest rates on remaining debt. This QE was extended over ten years. Experts, such as Janet Yellen, wondered why it did not trigger substantial inflation. Her answer was that QE created wealth increase for the wealthiest, who consume little of their revenue, and the middle class and neediest largely gained no benefits --> failing to consume more and push prices up. (The 'cost of living well' index, a measure of inflation for luxury consumption, went up about 2X+ the overall consumer price increase in the U.K. It also inflated stocks and real estate prices --> rent increases that largely benefitted the wealthiest. Between 2010 and 2017 the percentage of global wealth owned by the top 1% increased from 36% to 46%.)On the other hand, prolonged low interest rates have pushed over-indebted companies into increased leverage, reduced banks' interest income, brought back excessive real estate prices, kept alive zombie companies and created financial bubbles.The author suggests nationalizing the profits of QE by cancelling debt owned by the central banks. We need to redefine societal objectives - eg. GDP growth. Limit banks' lending to real estate and favor lending to productive assets; stop subsidizing real estate lending via interest rate reductions or implicit guarantees. Increase real-estate supply. Uninhabited/unrented real estate should be taxed severely. Renters pay tax on income put towards rent, while owners have no income devoted to rent - this should be corrected.

The book has a great cover, a good hook that enticed me into a now familiar quagmire: why are things the way they are, in particular, economically? On the cover is Marianne, the symbol of (French) revolution, leading “les gilets jaunes” (the yellow vests), the modern-day manifestation of discontent in France. The visceral anger. Proper credit for the cover is provided to Pascal Boyart, a street artist, who painted this nine-meter wide mural. Boyart adapted Eugène Delacroix’s famous painting, “Liberty Leading the People,” celebrating the 1830 revolution that deposed King Charles X. The cover also provides an indication of some of the book’s shortcomings: in Delacroix’s painting, Marianne is bare-breasted; in Boyart’s, they are covered (so as not to disturb any sensibilities?).Jean-Michel Paul is a Professor of the Brussels School of Economics, appears to be a Belgium native and has had considerable practical experience with senior level positions in finance. He holds a PhD from UC Berkeley and currently resides in Singapore, which he calls the best run country in the world (an assessment I tend to agree with).Paul nails it and says so, precisely. But what would he say about it a year later? QE stands for Quantitative Easing. Pleasant-sounding term, like shedding some fusty and unnecessary rigor. Mix in some technical jargon and a few equations and one (we’re talking about the Fed, and other central banks) has erected a curtain behind which The Wizard is furiously printing money, the solution to any economic crisis now. As Paul says, we can no longer use fiscal policy, an exhausted game; we only have monetary policy. Faith in the Temple is absolutely essential. Those pictures of a German woman pushing a wheelbarrow full of deutschmarks to buy a loaf of bread in 1923 are absolutely verboten. As Paul wryly notes, if printing money is the solution to our woes, then Venezuela and Zimbabwe should be brilliant economic success stories.Paul published this book in June 2019, thus before The Time of COVID. Subsequently, we have had the Mother of all QEs. Every depiction of the growing problem of wealth inequality that Paul describes has only grown exponentially. The Fed quietly announced that they would print four trillion greenbacks (electronically, of course) to support the financial markets and “expand its balance sheet” (another wonderfully positive-sounding term) to buy up any failing bonds and turn them into “solid assets.” Sure ‘nuf, the stock market soared and continues to soar, almost embarrassingly so. Financial writers are hard-pressed to identify the reason for this euphoria, wedging in, and glossing over “QE” in a sentence about vaccines and infrastructure. Bill Gates, whom I’ve admired for his honest and plain speaking about the pandemic, which he predicted in 2015, has demonstrated a remarkable lack of candor about why he has become so much richer: he claims he just doesn’t know that much about how Wall Street works. Hum. QE has increased the wealth of about 200 Americans by one trillion dollars in one year. If you were one of the two hundred, would you ever want the pandemic to end?The author provides a reasonable workman-like critique of the various aspects of why things are the way they are: real estate, health care, education, immigration, globalization, over-financialization, and a failing political process. But he can be annoyingly redundant. A good editor, or even just one reasonable reader could have eliminated virtually the same sentence in one section and the next.But never once does he mention one of the greatest problems that humans face, and from his vantage point in crowded Singapore, it would be hard to miss: overpopulation!At the end Paul provides fifty or so “thoughts for debate.” These are constructive ideas on how we can improve the current situation, and I agree with the vast majority, and strongly disagree with a few. Tellingly, like the top-covered Marianne, he does not mention eliminating the “carried-interest” tax loophole, that turns some Wall Street hedge fund managers into billionaires in a single year, for the heavy-lifting of holding up the curtain, for The Wizard and maintaining the Faith. How any of these thoughts will be actually debated or implemented is another matter though I think Paul again nails it when he says:“Perhaps our societies have reached a point where they can no longer evolve sufficiently to adapt to changing circumstances. In that case, history teaches us that the majority of dissenters will make erratic decisions – sometimes positive, but all too often not – until our political-economic system collapses and a new one emerges sometime in the distant future, following an intervening ‘medieval’ period marked by chaos.” Hum. Second amendment rights, anyone? 4-stars.

The middle and lower classes' standard of living has been static, in financial terms, over the last 50 years. This trend has existed while the rich or the 10% highest earners have seen their percent of national assets increase. It is likely that there are limits to the quality of life in the US and EU with the current industrial system. For example, one tax may be increased, while another may be decreased, and one social group may be favored and one less favored, but in general not all taxes can be greatly increased nor all taxes greatly lowered in a modern liberal democracy. The fact that democracies are large economic and social systems and resist change make it very difficult for protest movements to either improve life for the majority of citizens, or to permanently damage the society, as movement in one direction meets resistance and runs out of steam while other movements focused on other issues gain adherents.Large amounts of energy, water, materials, and manufacturing have occurred just to maintain middle class living standards, which the author and various social critics decry. Yet for the very large middle class and lower class populations of the US, EU, China, and India to improve their standard of living, as recognized by economists, much greater energy use (from larger homes, more numerous cars, faster travel, better services) are required. Social critics who seek long-term improvement for the middle class must also reform and improve the energy, water, materials, and agricultural systems that are the foundation of economic life.

The scope and breadth of the economic, sociological and political analyses of the vast array of challenges facing developed and developing societies would be sufficient to provide content for at least two semesters of graduate level study. Well worth reading by anyone interested in seeing ways out of the many messes we have gotten into.