From the November 4, 2007 Sunday Times (London)
November 5, 2007
by Irwin Stelzer
YOU have probably spent the week sorting through the fluctuations in share prices and interest rates, the ups and downs – well, mostly downs – of the dollar, and who’s in and who’s out at Merrill Lynch and other troubled banks and brokerages. So for a change, let’s look at some trends that will affect the world economies long after today’s ups and downs are forgotten.
Perhaps most important is the huge shift in wealth from the developed economies of the West to the developing economies of Asia and the Middle East. China and India have finally integrated their workforces into the globalised economy, and have become export engines – the new workshops of the world. Meanwhile, Russia and Middle Eastern nations that float on a sea of oil are parlaying $90-a-barrel prices into vast accumulations of wealth, deposited in funds that are under the control of governments. These holdings are to be invested in pursuit of both profits and influence – which profoundly changes the nature of the world trading economy.
The very underpinning of the argument in favour of free trade – that it directs resources to their most efficient use – is undermined when noneconomic, nonmarket considerations such as those that drive China, Russia and Venezuela, among others, dictate the international flow of capital. Moreover, the balance of power between Western capitalists and government investment vehicles that hold huge piles of dollars and other currencies has been altered (witness the hat-in-hand trek of Wall Street dealmakers to China and the Middle East in search not of silks, spices or oil, but capital).
Some experts predict that the so-called sovereign wealth funds – the government investment vehicles – will have $10,000 billion in assets in a decade. At that size, “they are the global financial system”, says Ken Rogoff, former chief economist of the International Monetary Fund. That will be grist for the mill of protectionists, already flexing their muscles. For proof look no further than Hillary Clinton’s attacks on the Nafta trade pact, considered by her husband one of the major accomplishments of his presidency.
That is only one way in which the world of business is changing. Another is the enduring consequence of the problems in the credit and mortgage markets. Bankers have traditionally failed to learn from history, and may well soon forget what their reckless lending has done to their income statements and balance sheets. But the forced retirement of prominent bankers is a lesson their successors are likely to remember for some time. The result will be more expensive mortgages, and a continued decline in home ownership. In 1994 some 64% of American families owned their homes; that rose to 69% in 2004. But the rate has since declined to 68%, and is headed down.
The Federal Reserve Bank of Atlanta estimates that somewhere between 56% and 70% of the increase in the home-ownership rate in the 1990s was due to the new, exotic mortgages that are now in disrepute, and therefore unlikely to be resurrected. So renting is likely to rise and home ownership to fall for a good long while. This means that many Americans will have to find a new vehicle to accumulate wealth. My guess is that the rate of saving from current income will begin to inch up, and that the political pressure to put the social security (pension) system on a sound basis will become irresistible.
Adding to that pressure will be the increase in longevity, in turn a result of a new emphasis on what is called “wellness”. There can be no denying that the smoking and food police will extend their reach. In America, that process will accelerate when a Democratic-controlled White House and Congress – almost a certainty – make government an increasingly important player in healthcare markets. When an obese person has to pay for his own gluttony, there is little moral case for denying him the sustenance he feels he needs. When the cost of his care is borne by taxpayers – which would be the case under most of the Democratic plans – society has good reason for inducing him to replace his burgers with salads. So look for a long-term trend toward less satisfying, healthier eating, along with increasing sales of gym equipment and trainers.
Then there is the green revolution, which has been with us for some time, to little effect. But now the nation’s – indeed the world’s – politicians have decided that global warming is enough of a threat, or at least has captured the imagination of a sufficient number of voters, to warrant their attention. So, too, corporate chieftains, who no longer see green only as in “greenback”, but as in greener operating policies demanded by customers, investors, the workforce and regulators. In short, this green will not fade as quickly as have past environmental fads.
Which is both good and bad news. Good because the hunt for more efficient, cost-effective ways to use energy is accelerating; bad because hare-brained schemes such as ethanol-from-corn are leading to deforestation and higher food prices, with no appreciable net reduction in carbon emissions.
So we may be on the way to a world in which nondemocratic governments dominate capital markets, protectionists interfere with the free flow of capital and goods, the dream of home ownership becomes more difficult to realise, bureaucrats decide what we can eat, and the greening of the world shoehorns us into smaller cars and dimly lit rooms. Unless, of course, America decides once again to rely less on government intervention, and more on efficient economic growth to propel its living standard ever upward.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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