Tuesday, December 30, 2014

Animal Spirits


At a gathering at a friend's home last week, we had a fascinating discussion on how our consumption-based model keeps America's economy alive on the one hand; while on the other hand this is perpetuated by the dollar supremacy that seems destined to reign for the foreseeable future.

We all agreed that innovation in the future is the big bet we are placing on in order to enable the debt repayments on domestic and foreign holdings, not to mention the currency itself which is debt in its pure form. To be able to print more currency, we assume that innovation will continue forever. I asked my friend if that were the case, then if there was any place for contentment in our economy. He replied there wasn't.

We also talked about the apparently unfair trade advantage that China has over us, as well as the outsourcing in blue collar work (I would add white collar work as well), as to how this will impact our economy. We discussed the notion of unending innovation as being the answer to these issues as the following chart illustrates. A new product X is created, and this creates jobs in the American economy. Eventually parts of its lifecycle are outsourced, so America does not benefit from "full employment" to the extent this product could offer. However a new product Y (or X + 1) is created through innovation, and it continues this cycle of peaks and troughs in employment.


My friend, though, made the point that innovation will mean less blue collar work, and less opportunities for those with less relevant education. This seems true, even as large innovative companies like Facebook and Google employ less and less people than such a corporation would formerly have, given their revenues and share in the economy.

So we agreed that even as America as a country will continue to prosper, we cannot" (a) prevent shocks such as a the recent housing bubble and the resulting financial meltdown; and (b) ensure reasonably egalitarian growth. In short the domestic economy suffers from both inconsistency and inequality. These are related. The richest will recover faster and more spectacularly from such recessions, and inequality will continue to increase. The richest benefit in this way because the government's currency regime, hinging on its ability to print currency to repay debt and bail out the largest players in the economy, will ensure this. The poorest will continue to get scraps from the table in terms of loan modifications, tax cuts, etc.

This creates challenges for: (a) people below a certain income level measured over a few years, who cannot create enough personal income and wealth to hedge against contingencies or to remain competitive in the face of a highly educated elite class with new toys that help them compete; and (b) countries other than the US which are forced to use the US Dollar as their currency. 

In the first case, that of individuals, their 'basic needs' as defined by economists a century ago, namely, food, shelter and clothing, may be met, but the definition of basic needs as I mentioned in another post keeps changing. The above chart also illustrates this. An innovative product will either become irrelevant as soon as new technology replaces it; or it will go through a period in which it becomes a 'basic need'. For instance, a smartphone today is not a basic need, but it may soon become one even as it supports digital payments instead of credit cards,serves as a tool to prevent home break-ins,  controls access to cars, serves as a GPS device or as a tool to access repositories for documents, media, financial information and control. If traditional mechanisms for transacting merchandise and services make way for digital or virtual mechanisms via such devices, then a person who does not carry such a device becomes noncompetitive and therefore dangerously close to dire circumstances, the equivalent of a person who today does not know how to pay cash for food. This is why all innovations, such as in healthcare, communications, education and so on, eventually become human rights as economies progress, because though human rights are absolute in nature, they are dispensed via interactions and therefore relational (not relative). The need for a smart phone may not be a human right now, but the need for a certain level of education is- and this may call for a device such as a smartphone in the future. In other words, if human beings build up infrastructure for community, such as nations and economies, then each human being who has any part in such community (as a member, partner, beneficiary or an unrelated stakeholder) has levels of needs which must be considered basic human rights for that community, in that time and age.

In the second case, that of countries other than the US, it gets tricky. They cannot inflate the economy as wantonly and elaborately as the US does, because they will need to repay the debt that arises from it. Unfortunately for them, their debt is not denominated in US Dollars. So while economists like Paul Krugman who argue against austerity are right in that European countries which suffer from their levels of unemployment, low growth, low productivity, etc, should spend in order to recover, they need to be much more cautious (than the US) to ensure their debt does not get out of hand. These countries are also tied at the hip to the US via trade. This can help them immensely, as it has in the case of China, which has seen remarkable levels of growth and the redemption of millions of people out of poverty. While they have this benefit, they also are vested in the growth of the US as they hold US government debt which could be repaid only if the US grows enough to keep up. In the case of countries like Russia, we see that this economic relationship is a Faustian bargain which will turn on them if they misbehave, never mind that the US itself is guilty of similar behavior. Russia's options are limited in the face of the current gas price war and limited sanctions in the wake of their attack on Ukraine. Is this a good thing? Americans would say it is, but the price for such punishment is always borne not by leaders but by workaday human beings just like them in Cuba, Russia, Iran and other countries.

Years ago, John Maynard Keynes coined the term 'Animal Spirits' in economics to describe public mood or consumer confidence which drives consumption and therefore investment. People today believe, as my friend did, that the desire to "have", or the "wants", or as Gordon Gecko would put it, "greed", drives innovation. In other words, necessity is the mother of innovation. I think this is only one third of the story. If this were indeed true, why is it that human technological progress increased rapidly from the industrial revolution, and not in the previous centuries? Were human beings less intelligent prior to that time in history? It doesn't seem that way at all. The ancients did produce great works of mathematics, philosophy and literature. We tend to blame our institutions, such as religious or governmental, for stymieing progress. Maybe there is some truth to this. But I believe innovation stems from (a) our need; (b) our desire for truth; and (c) God's sovereign provision. All of these, I believe, are designed and given to us, which means that at some point, they could slow down as they did prior to the Industrial Revolution, or even stop altogether. Betting on unlimited innovation, simply because we seem to have unlimited greed, seems to be betting on fool's gold. Innovation stems first and foremost from a creative God who has blessed us with creativity.

Saturday, December 13, 2014

My Christmas Cocoa Message- December 13- to Emma's Friends

Exactly 30 years ago- in December 1984- I was about your age. I grew up in Southern India, Southwestern India, to be exact. Southwestern India is a tropical place, full of coconut palms, beautiful lakes, beaches and cottages. I grew up at a time when neighborhoods celebrated festivals like Christmas together. Each home would have very carefully arranged nativity scenes, lights on trees, huge paper stars hung up everywhere, on trees, rooftops, on strings hung between trees and so on, in different colors, all lit up with bulbs inside, and in some places, made entirely by hand with pieces of wood, string, glue and paper!

Christmas of 1984 was very special to me because the previous year my granddad was diagnosed with cancer and after long treatment in a faraway city, he had come home. Relatives from all over came to visit and in fact stay at my granddad’s house (and in nearby relatives’ homes) for 3-4 days, during Christmas. Uncles, aunts, first and second cousins, my granddad’s closest relatives, all came together to celebrate. I think everyone felt that he had been saved from cancer by God’s grace, but he was very old, so he only had a little more time to live on earth, so they wanted to come and celebrate with him.

As you can imagine I found it a wonderful time. We all played our part in decorating the house, in building a huge nativity scene, playing games with cousins and friends, listening to carolers who were common in our part of the country in those days. Carolers would come and perform small plays, besides singing. One of the songs that was popular in those days went something like this (in translation):

God is being born
As a human being in Bethlehem
In a mountainous valley filling up with snow
Joyful laughter filling hearts in heaven and on earth
From a sweet, angelic melody


I felt very sad when Christmas day came to an end and everyone left the following day. I’d received a toy drum whose skin I’d broken by poking it hard with the end of the drumsticks- it was a cheap drum! Besides that we were done with all the fun! On the evening of the 26th, granddad’s brother saw a crow (raven) which was struggling to fly. It was on the ground and he realized it was wounded someplace. So he took it and placed it in a cage we had and gave it some food. Sadly it died in a couple of days. Everyone thought it looked sad, refusing to eat, probably wanting to be with other crows and not in captivity.

In the years that followed, I’ve tried to remember that Christmas and wondered what made it so special. I’m sure when you grow up you will have lots of memories about Christmases that were the most fun. So what made it really special? Was it because of the kindness shown by family and friends to my granddad? Was it because this was the first time I thought seriously about who Jesus was and why he came to earth to be born into a feeding place for animals, in poverty and squalor, in fact even threatened by a king who wanted him done? Was it because of the gifts? Was it because of the joy I remember on the faces of my family that I have not seen so clearly in the years to come? I’m not sure. But each time I hear that song I remember the joy:

God is being born
As a human being in Bethlehem
In a mountainous valley filling up with snow
Joyful laughter filling hearts in heaven and on earth
From a sweet, angelic melody


Our carols tell the Christmas story clearly, don’t they? We have heard these songs so many times, so we may not spend much time thinking about what they are saying:

Joy to the world, the Lord is come, let earth receive her king. Let every heart prepare him room, and heaven and nature sing.’

Or:

Hark! The herald angels sing, "Glory to the newborn King! Peace on earth, and mercy mild, God and sinners reconciled

Or take our readings in the Advent season: ‘The people who sat in darkness have seen a great light. And those who dwelt in a land of deep darkness, on them has light shined.

Or:

‘Arise, shine, for your light has come, and the glory of the LORD has risen upon you.’

Why do these songs talk about light, joy, glory, triumph, peace, mercy, a new born king (though he was born in poverty)? You’ve heard the Christmas story many times, about the star that guided wise men to a manger- a feeding place for animals in a stable, angels singing praises to God and guiding shepherds also to this place, about Mary and Joseph who did not find any room to stay in Bethlehem to which they were traveling, and finally giving birth to Jesus in the stable and laying him in the manger in swaddling clothes. I would like you to think about this event and why it was so special that over 2000 years after this event, people around the world are still singing about this and talking about it, some with doubt and anger, others with joy and peace. I’d like to close with the words of a newer song called ‘Welcome to our World’ that captures the meaning of this joy and peace:

Tears are falling, hearts are breaking
How we need to hear from God
You've been promised, we've been waiting
Welcome Holy Child
Welcome Holy Child

Hope that you don't mind our manger
How I wish we would have known
But long-awaited Holy Stranger
Make yourself at home
Please make yourself at home

Bring your peace into our violence
Bid our hungry souls be filled
Word now breaking Heaven's silence
Welcome to our world
Welcome to our world

Fragile finger sent to heal us
Tender brow prepared for thorn
Tiny heart whose blood will save us
Unto us is born
Unto us is born

So wrap our injured flesh around you
Breathe our air and walk our sod
Rob our sin and make us holy
Perfect Son of God
Perfect Son of God
Welcome to our world