CC BY
10ЭФФЕКТИВНОСТЬ И НЕСТАБИЛЬНОСТЬ РЫНКА: ПОЧЕМУ ЗАПАД ПРОВАЛИВАЕТ ТЕСТ НА КОРОНАВИРУС1
MARKET EFFICIENCY AND MARKET FRAGILITY: WHY THE WEST IS FAILING THE ECONOMIC TEST OF THE CORONAVIRUS
DOI: 10.38197/2072-2060-2020-223-3-577-582 ГЭЛБРЕЙТ Джеймс Кеннет
Член Международного комитета ВЭО России, профессор Школы по связям с общественностью им. Линдона Джонсона Университета Техаса James Kenneth GALBRAITH
PhD, Member of the International Committee of the Free Economic Society of Russia, professor of Lyndon Johnson School of Public Relations, University of Texas, USA
В статье обосновывается, что экономические последствия пандемии COVID-19 определяются главным образом структурными характеристиками затронутых стран, включая их положение в иерархии глобальных торговых отношений, характер потребительской корзины населения и долговую нагрузку с точки зрения обеспечения устойчивости поведения домохозяйств. Эти факторы способствуют объяснению устойчивости некоторых азиатских стран по сравнению с относительными неудачами Великобритании и особенно США.
This paper argues that the economic effects of the COVID-19 pandemic are determined mainly by the structural characteristics of the affected countries, including their position in a hierarchy of global trading relations, the nature of the consumption basket, and the burden of debts in sustaining household behavior. These factors help to explain the resilience of certain Asian countries in comparison with the relative failures of the United Kingdom and especially the United States.
Ключевые слова Коронавирус, COVID-19, биофизическая экономика, экономическая структура, ноо-номика.
1 «Статья публикуется по материалам доклада, представленного на Международном научном онлайн-семинаре «Глобальный кризис 2020: вызовы будущему (политико-экономический дискурс)», который состоялся 21 мая 2020 г. в рамках МАЭФ».
Аннотация
Abstract
Keywords Coronavirus, COVID-19, Biophysical Economics, Economic Structure, Noonomy.
CC TV Toonomy" in the usage of Professor Bodrunov [1], is a framework for the analysis
I and development of an industrial and economic system that is fit-for-purpose, in X ll the sense of meeting the essential requirements for a just and civilized society given the possibilities of technology and within the limits imposed by the environment. The construct entails the existence of "simulacra," a term I take to mean a range of activities based on wants that are in some sense constructed or artificial, and so inessential or superfluous, in the sense that they may be forgone without grave loss to welfare. This distinction, lost in neoclassical economics, has its roots in the classical dichotomy between productive and unproductive labor, and in the concepts of pecuniary emulation and conspicuous waste advanced by Thorstein Veblen [2], as well as his division between the industrial and the leisure class.
The COVID-19 crisis has brought these concepts into focus. It has differentiated countries with balanced and robust industrial systems from those with unbalanced and fragile systems. It has exposed the elements of superfluity, which are sources of economic fragility. It is revealing the consequences of precarity and inequality in the provision of those goods and services, including public services and amenities, that are essential to a civilized, secure and satisfactory life.
Real GDP in the United States is expected to fall 12 percentage points, the Congressional Budget Office predicts, in the April-June quarter of 2020, or at an annual rate of 40 percent [3]. Given the role of imputed values in the calculation of GDP, about 15 percent of the total, this would represent a decline of about half in actual cash transactions. Moreover, much of the remainder counts as fixed costs, such as for rent, utilities, and government spending; when one takes these into account the rate of collapse in the second quarter, had it continued for a full year, would have nearly eliminated private economic activity in the country. This is merely from the effects of the lock-down required to slow the spread of the virus; the fall has probably been arrested by the combination of "stimulus" and "reopening," and a partial rebound is likely in the third quarter. But even in the best case scenarios, US GDP will remain well below the levels of early 2020 a year hence, and unemployment of between ten and twenty million persons a fixture of the landscape.
The question that follows is, what will happen after the initial bounce? To many mainstream economists, the pandemic was a shock - like an earthquake or the 9/11 attacks. It was an interrruption in an otherwise prosperous and stable expansion, long past the phase of "recovery" from the previous debacle, the financial crisis of 2007-2009. It came as a surprise, which suggests that there was no prior underlying problem. So to "get America moving again" what is mainly necessary is once again "confidence" - for consumers return to spending, to use their pent-up demand, perhaps with the help of a distribution of dollars from the public fisc. CBO is explicit in relying on the consumer, and not business or government, to drive the recovery that it expects to begin soon. This they generally expect to produce a full recovery over time, with increased consumption eventually prompting an increase in business investment. We may call this the "shock-stimulus" way of thinking. It is consistent with the way mainstream economists and center-left policy makers have thought about recessions and recoveries since the Kennedy-Johnson tax cuts of the early 1960s.
But the shock-stimulus model ignores three features of the US economy that have changed. They are globalization, the rise of services (and relative decline of goods) in consumption and employment, and the rising burden of personal and corporate debts.
In the 1960s, the United States had a balanced industrial economy. It produced goods for both businesses and households, at all levels of technology, with a fairly small (and tightly regulated) financial sector. It produced largely for itself, importing mainly commodities. This is no longer true.
The United States and the United Kingdom are today leading examples of countries that built globalized economies centered on finance and advanced technology industries, such as aerospace, armaments, information technologies, energy services, advanced pharmaceuticals and the like. They correspondingly import a great share of their ordinary consumption goods, including clothing, consumer electronics, appliances and automobiles, from Asia but also Germany and its near neighbors in Europe. Specialization is a feature of globalization, and the prominence of finance and technology also means a concentration of incomes and wealth, yet in societies where real living standards are maintained for many by the strong position of the national currencies. Meanwhile a paucity of truly public goods, such as parks, libraries, security, clean air and potable water, especially in low-income communities, drives home and aggravates the inequality in private incomes.
Further, with rising incomes and new technologies there has been a change in the composition of household spending. In the 1960s, the American consumer (and her British counterpart, to a lesser degree) was still expanding her stock of household basics. Cars, televisions, kitchen and laundry appliances were the driving forces of demand, as everyone wanted what all the others were buying. A stock of physical possessions of good quality and modern design indicated social status; to lack them was a significant marker of economic failure. Today, the low cost of durables made in countries with much lower wages has diminished the status-content of such purchases. This has freed up incomes for services, from restaurants and bars to resorts and casinos, salons, gyms and trainers, salons, coffee shops, massage therapists and tattoo artists. Higher education and even shopping are likewise to be considered, not solely as investment in "human capital" or (in the case of shopping) as a chore, but as, in part, leisure-time and status-seeking activities. These are activities on which many millions, from college professors to checkout clerks, have relied for jobs and income. But they are also superfluous, in the sense that they may be forgone, with no grave harm to the buyer.
Third, in the 1960s, American household spending was powered by rising wages, and also by growing equity in homes as inflation drove up house values in relation to fixed-rate mortgages. Neither is true any longer. Wages are largely stagnant since at least 2000, while gains in spending have been powered by debt, both personal and corporate - the latter oriented toward stock buy-backs, pushing up corporate equity valuations and hence the purchasing power of high-net-worth households. House values, a major source of middle-class spending power, were hit by the 2008 crisis; lending against houses since then has no doubt diminished net equity, and increased the vulnerability of middle-class net worth to a decline in home values.
Mainstream economics pays little attention to such questions of structure. It treats all consumer spending as driven by equally valid wants, therefore equally necessary; the distinction between "essential" and "superfluous" does not exist. It ignores, by and large, the burden of debts, and overlooks the role of the global as opposed to the local
sources of demand for capital goods. Noonomy and its cousin, institutional economics, consider these issues to be fundamental. So does a third, closely-related body of thinking, biophysical economics, whose principles are drawn from the laws of thermodynamics and set out in three papers by Chen and Galbraith [4; 5; 6]. Biophysical economics stresses that the more efficient any system - biological, mechanical, or social - the higher the fixed costs and therefore the narrower the margin of safety.
What is the situation? In the COVID-19 crisis, the demand for advanced investment goods has collapsed. With air travel down by over 90 percent, half or more of all aircraft are parked on the ground. There will be little demand for new planes, and the major producers - already in trouble in the case of Boeing - are curtailing new production. For many other advanced goods, the demand collapse is a global phenomenon and national policy can do nothing, short of nationalizing the production lines, to stop it. But there are effects that are purely domestic as well. Drilling of new oil wells in the Permian Basin has stopped as those already drilled are unprofitable at present prices. Commercial offices stand empty, shopping malls are closed, so there is no need for construction of new ones.
On the side of households, faced with a radical increase in uncertainty, saving rises and spending falls. Households will save more even if the government replaces their lost incomes for a time. People know very well that stimulus is short-term. They know that job prospects are bleak. They expect their homes to lose value and their credit ratings to decline. They will cut back on things they do not need, in order to be prepared to provide the things they really do need. With less commuting, cars last longer and fewer new ones will be made and sold. Even in health care, some 18 percent of (normal) US GDP, demand for services is down, since with time off and an absence of routine accidents, the health of the population has improved and the desire to pay for health services, such as tests and diagnoses, even among those who need them, has declined. Massive intervention by the Federal Reserve, the interruption of investment projects and the rise of savings together explain the rise in the stock market after the initial panic: both companies and wealthy persons had money to place, no desire to spend it, and were not keen on leaving it at zero interest in the bank.
Some of the activities that previously drove the economy, such as sporting events, conventions, concerts and other mass gatherings, have been canceled and remain so for health reasons. Restaurants, bars, clubs, salons, retail stores and the like are being permitted to open, usually under restrictions to fifty percent or less of capacity. Airlines are flying, but with their middle seats empty and in many cases the rest of the plane as well. The people who run restaurants and airlines have two problems. One is that they can't cover costs with their capacity limited for health reasons; these are businesses with low margins that survive in ordinary times by packing people in. But the other problem is more fundamental. It is that very few people, in America at least, need these services as a condition of decent life. Middle- and upper-class Americans, the major repository of national purchasing power, can if necessary eat, drink, socialize and take their vacations at home. So under the circumstances demand would be down, even if the coronavirus went away. This explains why many services are not reopening even though they are legally permitted to do so. The tragedy of it is that without them, millions of jobs will not come back either.
Finally, though incomes and jobs are lost, household debts have continued to mount: rents, mortgages, utilities, interest on loans for cars, education, and ordinary expenses. Stimulus checks have helped for now: defaults and arrears have been modest, and many landlords have been accommodating. But as people face long periods
with lower incomes, they will continue to hoard funds, to be sure to meet their fixed debts. To all this, one can add the plight of state and local governments, which rely on taxes raised on sales and incomes. As these collapse, the response is to cut spending and curtail services, compounding the loss of jobs and incomes.
None of this is the consequence merely of incompetence under President Donald Trump. It is not the effect of poor political strategy by the Speaker of the House of Representatives, Nancy Pelosi and the Senate Minority Leader Chuck Schumer. It is not short-term or reversible in the course of few months or years. It is the result of systemic changes in the US economy over 50 years, as described early on in Galbraith [7]. The US has built an economy based on global demand for advanced goods, on domestic consumer demand for frills, and on ever-growing household and business debts. This market-driven economy was in many ways prosperous and successful; it was efficient, it delivered what people wanted, it had eliminated unemployment without bringing inflation, and many millions had jobs and incomes. But it was a house of cards, and the wind of the coronavirus has blown it down.
Meanwhile, on the other side of the world, we find economies that have not collapsed in the pandemic. Some of these, such as China and Vietnam, are nominally socialist. Others, such as Korea and Taiwan, are ostensibly capitalist. All experienced relatively low death tolls in the end, with varying degrees of popular mobilization and lock-down required to achieve this objective. All were able to muster and make use of a broad solidarity and a will on the part of large and densely-settled populations to do the job. And all survived the pandemic with manageable levels of economic damage.
Focusing strictly on the economics, what they share is more important than the ideological and historical issues that divide them. All four have relatively balanced national economies, the product of a concerted industrial development strategy, having retained most of the core industries providing basic consumer goods. They achieved this with a combination of stable advanced industrial firms, with long-term perspectives and assured financing, in the model of the American industrial corporations of the mid-1960s [8], and also large sectors of small enterprises producing low-technology consumption goods such as garments and paper products. Thus they were not suddenly short of medical supplies and protective equipment when global supply chains were disrupted, or were able rapidly to make up shortages that did occur. Chinese production of face masks rose from 15 million to about 110 million per day over three weeks in February, as 3,000 SME's converted production lines.
Further, the services sectors in Asia evidently do not operate in the same cost environment as in the West. Obligations with respect to rent and interest and profit are more elastic, and demand by the population is less so. Small Asian firms are generally not at the mercy of commercial landlords; in China and Vietnam, hardly at all. Their banks work to keep them afloat, even during periods with little or no profit; this is deemed necessary for social stability. Moreover, what they provide is not thought of as "inessential." Asian families live in very small spaces and need to go outside; they have smaller kitchens and they cannot substitute as readily as in the West against the restaurant trade. Their debt burden is relatively light, savings are relatively ample, and the drive to save to meet fixed costs is mitigated by the public provision of provision of basic health care and education, and by strong family structures that provide a backstop for retirement and emergencies. These factors help account for economic resilience in the face of the disruption that has knocked the leading Western economies to the ground. And that resilience made it
possible for governments in Asia to move quickly, with great social solidarity, to get the virus under control so that things could, quite quickly, return to "normal."
A peculiar conclusion emerges, behind which a general principle may be found. It is precisely those countries which are not at the top of the global hierarchy of trading relations, and that have not made the transition to the most advanced systems of financial relations and household access to credit, that have proved most successful in dealing with the coronavirus, both in their capacities to defeat the pandemic and their ability to retain the full function of their economies and the stability of their social order. It is clear now in the case of the United States that this has not been achieved.
A short paper cannot cover the full spectrum of economic structures that have been obliged to react to the COVID-19 pandemic. I have made no attempt to describe the variations present on the continent of Europe, nor in Russia, nor the situation in the poorer regions of the world, such as Latin America and Africa. But the contrast between the polar cases of the US and UK on one side and the PRC, DRV, ROK and Taiwan on the other is sufficient to illustrate the roles that structure and finance play in determining the economic consequences of the coronavirus. The concept of noonomy tells us that in moving forward, those who design and plan an economic system must balance the new technologies with the requirements of stability, solidarity, fairness and public purpose. The failure to do so may appear profitable and even prosperous for a time. It may meet the ideological test of conformity to the model of the free market. It may be a paragon of cost reduction and profit maximization, of relentless search for a competitive edge. But market efficiency and market fragility are duals. One purchases them in a package, and the bill comes due in the course of time.
References
1. Bodrunov, Sergey (2018). Noonomy, Moscow-St. Petersburg-London.
2. Veblen, Thorstein (1899). Theory of the Leisure Class, New York: MacMillan.
3. Congressional Budget Office (2020). CBO's Current Projections of Output, Employment, and Interest Rates and a Preliminary Look at Federal Deficits for 2020 and 2021, Washington, April 24, 2020: https:// www.cbo.gov/publication/56335 Accessed June 1.
4. Chen, Jing and James Galbraith (2011). Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective, Journal of Economic Issues, Vol.XLVNo. 2 June, 301-309.
5. Chen, Jing and James Galbraith (2012a). A Common Frameworkfor Evolutionary and Institutional Economics, Journal of Economic Issues, Vol XLVI No. 2, June, 419-428.
6. Chen, Jing and James Galbraith (2012b). Austerity and Fraud under Different Structures of Technology and Resource Abundance," Cambridge Journal of Economics, Volume 36 Issue 1 January, 335-343.
7. Galbraith, James K. (1989). Balancing Acts: Technology, Finance and the American Future, New York: Basic Books.
8. Galbraith, John Kenneth (1967). The New Industrial State, Cambridge: Houghton Mifflin.
Contact information
Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin
Austin, TX 78712, USA
Гэлбрейт Джеймс Кеннет / James Kenneth Galbraith
+1 512-471-34-34, galbraith@mail.utexas.edu
