Thursday, October 10, 2019

Economic possibilities for our grandchildren with credit to Keynes

This article focuses on 100-year predictions made in 1930 by John Maynard Keynes (1883-1946), the British Depression-era economist, while challenges such as climate change, housing, automation and ageing are set to dominate the coming 100 years.

The British economist was a man for all seasons and in the early years of the 20th century, he was a member of the avant-garde Bloomsbury Group of writers, artists and intellectuals that rejected Victorian values and social mores. Members of the group mainly lived in the squares of Bloomsbury in Central London and they regularly met at Number 46 Gordan Square, home of the sisters Virginia and Vanessa Stephen — later known by their married names Virginia Woolf (writer) and Vanessa Bell (painter). In reference to the rejection of the conventional rules on sex, the novelist, Margaret Irwin in her 1928 novel 'Fire Down Below' wrote of a place called Gloomsbury, “It is a circle...composed of a few squares where all the couples are triangles” (Dorothy Parker, the American writer, is sometimes misattributed as the author of the quote). 

Keynes leased 46 Gordon Square from 1916 to his death in 1946. The house is now owned by the University of London.

The economist would be shocked by the current guide price of £4.2m for 52 Gordon Square — the 1920 inflation-adjusted value would be £95,750 [the First Lord of the Treasury (remains on the letterbox of Number 10 Downing Street) was the official title of the head of government until 1937 and he was paid  £5,000 annually in 1830 and 1930].

The 19th century was a period of low inflation/ deflation and £100 worth of goods in 1800 had the year 1900 value of £68  while £100 in 1900 had the year 2000 value of £7,300, based on Bank of England data.

Period since 1930 

Thomas Carlyle, a Scottish historian, in an 1849 essay, 'Occasional Discourse on the Negro Question,' called political economy "a dreary, desolate, and indeed quite abject and distressing [science]; what we might call ... the dismal science,” for its failure to justify slavery. Daniel Kahneman, the psychologist and Nobel economics laureate, in his book 'Thinking Fast and Slow' describes overconfidence as “the engine of capitalism,” while economists have a reputation for pessimism more than optimism. 

John Maynard Keynes in his obituary essay on the death of Alfred Marshall (1842-1924), the influential Cambridge University economist who had been a teacher of both Keynes and his father John Neville Keynes (1852-1949), noted:

“The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject at which few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”

In 1928 Keynes began discussing what would become the ‘Economic Possibilities for our Grandchildren’ essay in 1930 as Western economies were reeling from the impact of the Wall Street crash of October 1929. It is in 'Essays in Persuasion' which was published in 1931.

Keynes looked beyond the Depression to the coming 100 years and he was optimistic:

"From the earliest times of which we have record — back, say, to two thousand years before Christ — down to the beginning of the eighteenth century, there was no very great change in the standard of life of the average man living in the civilised centres of the earth. Ups and downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive, violent change. Some periods perhaps 50% better than others — at the utmost 100% better — in the four thousand years which ended (say) in AD 1700...There is evidence that the revolutionary technical changes, which have so far chiefly affected industry, may soon be attacking agriculture...I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day."

The upper limit of the economic prediction has been achieved (see chart above) both in "progressive countries" and at global level. However, Keynes' prediction of a 15-hour workweek has not materialised. “For the first time since his creation man will be faced with his real, his permanent problem,” Keynes wrote, “how to occupy the leisure.”

According to the Economist newspaper, in a typical year the average American works 100 more hours than a Briton, 300 more than a French employee and 400 more hours than a German. 

Jack Ma, the founder of the Chinese e-commerce site Alibaba, earlier this year defended the company's '996' work schedule  — which expects employees to submit to 12-hour shifts between 9am and 9pm during a six-day week.  Of the 168 hours in a week, Alibaba employees are expected to spend at least 72 of them at work.

Generally today, people who could be "idle rich" are addicted to a drug Thorstein Veblen, an American economist and sociologist, called in 1899 "conspicuous consumption," while lower-income workers tend to work less hours than in the past — it's not enough to be a millionaire when it's better to be known as a billionaire! — for example a Goldman Sachs millionaire director who had billionaire envy and topped up his income through insider trading! Trump's commerce secretary Wilbur Ross lied about being a billionaire and likely Trump has as well.

The next 100 years

The biggest challenge of the next 100 years is climate change and it's likely that the goals of cutting global greenhouse gas emissions by half by 2030 and zero by 2050 will not be met.

Last month the United Nations'Intergovernmental Panel on Climate Change (IPCC) issued its latest report, on areas of Earth that have 670m in high mountain regions and 680m people in low-lying coastal zones while 4m people live permanently in the Arctic region, and small island developing states are home to 65m people.

Global warming has already reached 1°C (Celsius) and 1.8°F (Fahrenheit) above the pre-industrial level. Most of the Arctic region has warmed by 3°C and IPCC benchmarks of 1.5°C or 2°C are targets to aim for rather than tipping points

The huge costs of adjustment in rich countries would need to be complemented with aid to poor countries. However, this would meet significant resistance among voters.

The International Atomic Energy Agency says that the use of nuclear power reduces carbon dioxide emissions by about two gigatonnes per year. That is the equivalent of taking more than 400m cars off the road – every year. The global stock of passenger cars is about 1.2bn.

Some 70% of the world’s electricity comes from burning fossil fuels, according to the International Energy Agency. By 2050, if climate change goals are to be met, around 80% of electricity will need to be low-carbon.

The International Monetary Fund (IMF) said in a report published this week on carbon pricing:

"Limiting global warming to 2°C or less requires policy measures on an ambitious scale, such as an immediate global carbon tax that will rise rapidly to $75 a ton of CO2 in 2030. Under such a scenario, over 10 years electricity prices would rise, on average, by 45% cumulatively and gasoline prices by 15%, for households, compared with the baseline (no policy action). The revenue from such a tax (1.5% of GDP in 2030, on average, for the Group of Twenty [G20] countries) could be redistributed, for example, to assist low-income households, support disproportionately affected workers or communities (for example, coal-mining areas), cut other taxes, fund investment in clean energy infrastructure or United Nations Sustainable Development Goals, reduce fiscal deficits, or pay an equal dividend to the whole population."

“If you compare the average level of the carbon tax today, which is $2 [a ton], to where we need to be, it’s a quantum leap,” said Paolo Mauro, deputy director of the fiscal affairs department at the IMF.

In 2018, global energy-related CO2 emissions rose 1.7% to a historic high of 33.1 Gt CO2 according to the International Energy Agency (IEA). While emissions from all fossil fuels increased, the power sector accounted for nearly two-thirds of emissions growth. The IEA said coal use in power alone surpassed 10 Gt CO2, mostly in Asia. "China, India, and the United States accounted for 85% of the net increase in emissions, while emissions declined for Germany, Japan, Mexico, France and the United Kingdom."

Seventeen countries and 34 major companies are planning to or have already set targets to reach net zero emissions by 2050, according to research by UK non-profit the Energy & Climate Intelligence Unit.

That accounts for roughly 16% of global GDP being covered by targets — or $13.7tn.

The reason for the urgency is that carbon can stay in the atmosphere for thousands of years.

According to a writer in the National Geographic, "The world technically has only one-fifth of its "carbon budget" — the total is 2.8tn metric tons — remaining in order to avoid warming the Earth more than 1.5°C. Halting the trends in motion will require more than just phasing out fossil fuels. In fact, the paths to halting global temperature increases of 1.5 or 2°C, the two goals outlined by the IPCC (Intergovernmental Panel on Climate Change), rely in some way on adopting methods of sucking CO2 from the sky. Those include planting trees, conserving existing forests and grasslands, and capturing CO2 from power plants and factories."

Brookings Institution notes that a 2°C or, if at all possible, a 1.5°C path, requires a huge commitment:

"There are a few key aspects of this challenge: a dramatic retooling of the global production and consumption toward low or zero greenhouse gas approaches by roughly 2030; a likely build out of untested carbon removal technologies at large scales toward mid-century; and widespread measures to adapt to climate change...The overall message (from the IPCC) is that the math can actually work, but the mechanism for realizing such rapid and dramatic transformations is, well, just not part of the report, and of course is the biggest question of all. In other words, the report tells us that these pathways are physically and technologically possible, but it is up to us to figure out what social and political approaches we have to take to implement those pathways."

Almost 70% of Americans, including a majority of Republicans, want the United States to take “aggressive” action to combat climate change — however, only a third would support an extra tax of $100 a year to help, according to a Reuters/Ipsos poll released last June.

Selling tax increases to deal with a distant threat is a challenge and many rich countries have high public debt.

Poor countries will be the most exposed to climate change while China says the old industrialised countries should pay the highest price.  

Ageing

More than 80% of global GDP is produced by countries with rapidly ageing populations.

Healthcare costs will likely continue rising in real terms (allowing for inflation) but automation and robotics could be antidotes to economic peril.

Japan’s population dropped by 448,000 in 2018 and is on track to dip below 100m in 2050, or 21% from current levels. In September 2018 it was reported that 28% of the population is 65+ while one in five were 70 or over. 

Japan is one of the world's most innovative nations and it is responding with artificial intelligence and robotics.

Bloomberg reports that "robot receptionists welcome guests at Tokyo department stores and hotels, and bots will be dispatched at the 2020 Summer Olympics in Tokyo to help fans find their seats and carry food and drinks."

The country has doubled the number of foreign workers to 1.5m, over the last five years and has brought more women into the workforce. Laws to protect temporary workers have also been enacted.

Japan has its challenges but in contrast with other big countries its centre is holding — read an IMF report here.

It has a 236% public debt/ gross domestic product ratio but most of it is domestic. External assets are valued at $3tn while China's GDP per capita is at a quarter of Japan's $41,000.

City housing

The recovery from the Great Recession has coincided with an affordable housing crisis in many big cities across the world. Developers have focused on upmarket developments while investor groups searching for yield in a low-interest environment, have focussed again on facilitating rental demand from higher earners.

This year the Organisation for Economic Cooperation and Development (OECD) — a think-tank for 36 mainly rich countries — said in a report that "the middle class has shrunk in most OECD countries as it has become more difficult for younger generations to make it to the middle class, defined as earning between 75% and 200% of the median national income. While almost 70% of baby boomers were part of middle-income households in their twenties, only 60% of millennials are today."

Across the OECD area, except for a few countries, middle incomes are barely higher today than they were ten years ago.  

Last June Google announced that it will invest $1bn toward efforts to develop at least 15,000 new homes in the San Francisco Bay Area and more recently the company has also suggested that it could also invest in Dublin housing.

It's a revival of the 19th-century model where a Guinness, one of Dublin's biggest employers, provided housing for lucky staff families (while over a third of the city's population lived in one-room tenements), and in Britain, Lever Brothers (later Unilever) developed Port Sunlight, Wirral, Cheshire for its workers. (On October 10, 2019, Leo Vardakar, Irish taoiseach, met Boris Johnson, British prime minister , at Thornton Manor, near Liverpool to discuss Brexit. It is the former home of William Hesketh Lever, 1st Viscount Leverhulme, (1851-1925) , who built the soap and detergent business.)

Across 32 major cities around the world, Knight Frank, the London real-estate agency, has estimated that real home prices on average grew 24% over the last 5 years, while average real income grew by only 8% over the same period,

According to the Wall Street Journal, "Over the past decade, Japan has consistently built almost 1m new homes and apartments each year, according to official statistics. In the US, where the population is more than double Japan’s, 1.25m new homes were built in 2018.

Japan’s home prices finished last year around the same level as they were nearly a decade ago, according to data from Japan’s Ministry of Land, Infrastructure, Transport and Tourism. In Tokyo, home prices finished 2018 around the same level as they were near the turn of the century."

The central government has control of Tokyo housing with no rent controls and fewer restrictions on height and density.

Unlike in other countries, Japanese homes become valueless over time and it's site value that eventually counts as old houses are demolished rather than refurbished.

Planning restrictions such as bans on high rise, existing resident objections, a growth in single-person homes,  land supply, and shortages of public funding, are common issues across the world.  

In Sweden, Stefan Löfven, the prime minister, following an inconclusive general election agreed to deregulating rents for tenants in newly constructed buildings, to encourage new supply.

Stockholm, capital of Sweden, had a backlog of 630,000 people last December waiting for rent-controlled apartments with first-hand contracts, which are allocated through a queueing system — and the waiting time for a city centre apartment is currently 30 years according to the Financial Times. The city has added about 113,000 to its population since 2015, that is now 1.6m. Savills, the real estate agents, expect about 65,000 more by 2023.

The first-hand contract is seldom relinquished and there is a big market in sub-lettings. The city authorities are trying to get a handle on the black market. The National Board of Housing has reported that second-hand rentals cost on average 65% more than first-hand rentals 

In the US, more young people are living with their parents than at any time since 1940, according to a recent Pew Research Center analysis of census data. The BBC says a 2019 study by British think tank Civitas found that the proportion of 23-year-olds living with their parents in the UK had risen from 37% in 1998 to 49% a decade later. However, in Sweden, the custom is for late teens to leave home and in 2018 the typical age was 18.5 years according to Eurostat compared with Germany at 23.7 years; Ireland at 26.5 and Italy at 30.1 years.   

In 2018 40% of Swedish households had single people with no children and the ratio is 63% when cohabiting without children is added.

In the United States in 2018, there were 35.7m single-person households, comprising 28% of all households. In 1960, single-person households represented only 13% of all households.

One-third of households in the EU were single-person households in 2018.

Thirty to 40% of a worker's income spent on housing is unsustainable.

A Federal Reserve study by Elliot Anenberg and Edward Kung, 'Can more housing supply solve the affordability crisis?' found that building more housing does not result in affordability in the market. Since dwellings are seen by investors as assets they are no longer homes. A solution is obvious: pass a law so that no one and no corporation or partnership could own more than one dwelling unit. Then dwellings could again become homes.

Robin Harding of the Financial Times has written

"The number of dwellings is not supply: it ignores location, quality, size, age, tenure, transport links, amenities and everything else that matters to a house. When you take a family home and divide it into grotty leasehold bedsits, you sharply increase the number of dwellings. Yet you reduce the amount of living space. At the same time, the number of households is not demand. As people become richer, they want bigger houses, and quite a lot of them want second homes. A family of five in a two-bedroom flat is housed but not satisfied. Nor is the 20-something living in their parents’ basement who would rather have a place of their own." 

Keynes saved Britain twice from financial ruin 

John Maynard Keynes (1883-1946), a native of Cambridge, England, is commonly recognised as the most influential economist of the 20th century. While the French introduced the term  'économie politique' (political economy), the two most influential economists since the dawn of the Industrial Revolution were called philosophers in their times: Adam Smith (1723-1790) of Kirkcaldy, Scotland, author of the 1776 'An Inquiry into the Nature and Causes of the Wealth of Nations,' and Karl Marx (1818-1883), a native of Trier, Rhine province, Prussia (Germany), who collaborated with Friedrich Engels, to produce 'The Communist Manifesto' — in German 'Manifest Der Kommunistischen Partei' ('Manifesto of the Communist Party') — to serve from 1848 as the platform of the London-based Communist League. It began, "A spectre is haunting Europe — the spectre of communism...The history of all hitherto existing society is the history of class struggles."

Richard Davenport-Hines, the British historian, in his well-received 2015 biography of Keynes, ‘Universal Man: The Seven Lives of John Maynard Keynes,’ writes that Keynes saved Britain from financial ruin twice 1) in 1914 at the beginning of the first world war, Keynes, a young Cambridge don/ lecturer who was an unofficial assistant to the Treasury team during the crisis, wrote a memorandum that persuaded David Lloyd George, chancellor of the exchequer,against the suspension of the gold standard. Keynes argued that as a huge creditor to the world, London would be the recipient of gold flows once the crisis abated, as proved the case 2) his partial success in persuading the US in reducing Britain’s second world war debts.

Vanessa Bell's (1879–1961) The Memoir Club: The Bloomsbury Group in middle age in 1943: Duncan Grant; Leonard Woolf (his wife Virgina who had battled with depression had taken her own life in 1941); Vanessa Bell; Clive Bell; David Garnett; Baron Keynes; Lydia Lopokova (Keynes' wife); Sir Desmond MacCarthy; Mary MacCarthy; Quentin Bell; E. M. Forster — National Portrait Gallery, London

Davenport-Hines also details Keynes' busy gay life and his support of the arts as a founder of the Arts Council.

In the nine months to February 1909 Keynes recorded that he had 61 gay encounters, with 65 more the following year.

It was risky given the misfortune of Oscar Wilde, the Dublin-born writer and some 40 years before the disgraceful treatment of Alan Turing (1912-1954), the head of the team that broke the German Enigma code during the second world war. Turing has also been credited as a pioneer of modern computing and he theorised about artificial intelligence.

Oscar Wilde had foolishly sued the father of his lover, Lord Alfred Douglas, for libel, after a card was left at Wilde's London club with the message 'For Oscar Wilde posing Somdomite' [sodomite]. What's intriguing is that John Douglas, 9th Marquess of Queensberry, also believed that Archibald Philip Primrose, 5th Earl of Rosebery and the British prime minister from March 1894 to June 1895, also had an affair with another son, who was the politician's private secretary until an apparent suicide.

The assumption is that the criminal prosecution of Oscar Wilde by the Liberal party's solicitor general in May 1995 resulted from blackmail.

John Maynard Keynes became a public figure after his book 'Economic Consequences of the Peace' was published from 1919 in many countries. Keynes had been a member of the British delegation in France and the book was a scathing indictment of the Treaty of Versailles' claimed vengeful settlement with vanquished Germany.

Jan Smuts of South Africa — a member of the British Imperial Cabinet — had written to Lloyd George, the British prime minister, in March 1919 and he called the reparations demand a "Carthaginian Peace." Keynes used the same term in his book.

According to the Economist:

"The reparations imposed in 1921, in what Germans called the 'London ultimatum,' were large, but not impossibly so. Germany was asked to pay 132bn German marks, but this included 82bn marks in bonds that were never likely to become payable. The remaining 50bn marks — worth about $12.5bn then, or $185bn today—was less than what Germany itself had earlier offered to pay. It was about 160% of the country’s GDP, similar to British national debt at the time and only slightly larger than the $10bn that the recipients of the reparations owed the United States...Neither did reparations cripple Germany’s economy. Despite the hyperinflation in 1921-23 and allowing for changes in the map of Europe, Germany produced 30% more iron and 38% more steel in 1927 than it had in 1913, the previous record. By 1930 the tonnage of German merchant navy was about 4m tonnes, only a little less than the 5m of 1913."

Elizabeth Wiskemann, a correspondent for the Economist, in her memoirs, describes how she met Keynes in London in 1936: ["I do wish you had not written that book,” I found myself saying (meaning “The Economic Consequences”, which the Germans never ceased to quote) and then longed for the ground to swallow me up. But he said simply and gently, “So do I."]

Keynes' tax returns in 1918/19  showed an income of £1,800 rising to £5,156 in 1919-1920 with the help of royalties from the controversial book. In 2018 pounds the values are £100,600 and £261,500.

Keynes married a Russian ballerina in 1925 and his best man Duncan Grant (1885-1978), a well-known painter, had been Keynes' former lover. 

John Maynard Keynes's magnum opus, 'The General Theory of Employment, Interest and Money,' was published in 1936 and he knew that it would have a big impact. In 1935 he wrote to George Bernard Shaw, the Dublin-born writer, “I believe myself to be writing a book on economic theory which will largely revolutionise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about its economic problems.”

...and so it did.

Conclusion

There is no certainty that the incomes and lifestyles that are now taken for granted in advanced countries and among the new middle classes in emerging economies, will be maintained in the lower carbon growth of the future.

Some areas of the world may become uninhabitable in summer times. The devastating civil war in Syria has been partly a reaction to the effects of climate change

Think of a Middle East/West Asia now over-dependent on fossil fuels, coping with change?

"What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914!" Keynes wrote in 'Economic Consequences of the Peace' on the outlook of a well-off inhabitant of London.

"But, most important of all, he regarded (the) state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice." 

Related

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Idiots reject compelling science of climate change

Average Irish housing size lowest of EU's rich countries — and related links