Time for Barron’s to publish one of Jeremy Grantham’s quarterly missives to his GMO clients. As usual, boilerplate rules – great big sweeping issues on a massive macro scale. There’s no investment analysis or a hint of guru insight in sight. The text is composed mostly of unsupported assertions.
To wit, “In my opinion, the economy still has some spare capacity to grow moderately for a while.”
And how does Grantham know this? He doesn’t. Then again, you and I don’t know it either. After all, nonentities have no capacity, and the economy is a non-entity, though it has morphed into one through incessant lobbying by ill-informed economists.
The “economy” as an entity that grows, contracts, or stagnates is an odd and new conception in the history of economic thought, originating with macro-centric economists Irving Fisher and John Maynard Keynes. But the economy is not a thing unto itself. The “U.S. economy” is no more extant than the “U.K economy,” the “Colorado economy,” the “Chicago economy.” Within any geographic region you’ll find independent actors trading, borrowing, lending, saving, investing, producing, and consuming. That economists attempt to tally the dollar value of these actions into a numerical aggregate within this geographical region – labeled the economy – doesn’t bestow a separate identity to that which doesn’t exist separately.
A quibble on my part? Possibly. But my goal is to diminish Grantham's arguments to the extent I can. Through Barron’s perennial reprinting of a quarterly Grantham newsletter, I’ve become sufficiently familiar with his thought processes that I feel assured that his most feared bugbear – income inequity – would serve as an undercurrent that runs through the Barron's article.
I was right. Grantham wants income equality because he wants social cohesion. Grantham's obsession with income inequality and social cohesion is to be expected. Leftism loathes differences, uniqueness, deviations, heterogeneity, The word “one” is its symbol: one language, one class, one income, one ideology, one ritual, one culture, one flag. Grantham is true to form.
According to Grantham, we get to income equality ( and thus "oneness") reading The Spirit Level: Why Greater Equality Makes Societies Stronger by Kate Pickett and Richard Wilkins. If we do, we’ll all readily adopt Grantham’s position on income equality. “It [Pickett’s and Wilkins’ book] will make income equalizers out of all of you [us]," so Grantham asserts.
Color me skeptical. I have no plans to read The Spirit Level: Why Greater Equality Makes Societies Stronger cover to cover, because I’m reasonably assured Pickett’s and Wilkins’ nostrums won’t convert me to an income equalizer. How do I know this? The book’s forward is written by Robert Reich – closet socialist, shameless interventionist, lifetime bureaucrat, and putative Keynesian economist. (Reich’s avowed support of a $15 federally mandated minimum hourly wage ensures income inequality – a wide swath of low-skilled workers will have zero income.)
The Spirit Level: Why Greater Equality Makes Societies Stronger's first sentence is little more than a straw man. It further solidifies my belief that every college sociology professor’s first instinct is governments over markets. Pickett and Wilkins adhere to the script. Here’s the first paragraph of the first chapter The Spirit Level: Why Greater Equality Makes Societies Stronger:
“It is a remarkable paradox that, at the pinnacle of human material and technical achievement, we find ourselves anxiety-ridden, prone to depression, worried about how others see us, unsure of our friendship, driven to consume and with little or no community life. Lacking the relaxed social contact and emotional satisfaction we all need, we seek comfort in overeating, obsessive shopping and spending, or become prey to excessive alcohol, psychoactive medicines, and illegal drugs.“
Setting aside the implication that in some unknowable world in some faraway time that we were content, happy, and self-assured; that we were non-material and intricately woven into the fabric of community life, I have to ask, who is this “we”? Who are these faceless, nameless people with these unrelenting grotesque afflictions moving in unison, as a homogeneous desultory blob, through time?
I know that I am not part of the “we.” I am an I, and as an I, at any moment I can be content, sad, anxious, confident, eager, envious, satisfied, melancholy, optimistic, or one of a myriad of emotions. How do I ensure the positive emotions outnumber the negative emotions? Not worrying about the “we” is one way; being proactive is another.
I find that positive emotions soon manifest from production through habit: write 500 words daily, exercise an hour six days of the week, unearth one investable idea.
Whether the 500 words lead to a novel; the one hour of daily exercise leads to a slimmer physique; the investable idea leads to a windfall is secondary. The actions themselves lead to the desired results. Mood is elevated, as positive emotions are always internally generated, never externally. Leveling income equality changes nothing. Bring Bill Gates down to my level and you’ve done far more harm than good -- for both of us. I suspect these easy facts of life evade The Spirit Level: Why Greater Equality Makes Societies Stronger. Better for government and its academic retinue make you happy and cohesive than for you to figure it out yourself.
To Pickett, Wilkins, and Grantham, the solutions are external. The answer lies within government, sweeping macro machinations, and a lot of begging thy neighbor. Grantham tells us that Pickett and Wilkins found that Japan and the Scandinavian countries have the most income equality and, not coincidentally, greater social cohesion (which, of course, promotes social “happiness”). At the other end of the spectrum reside, as you’d expect, the United States and the United Kingdom. You’ve likely inferred that these two countries also have the greatest income inequality.
And things are terrible in both the United States and the United Kingdom. Grantham tells us so: “Economic growth, in fact, has been tilted sharply toward the better-off in both countries. In the US, which for once is worse than the U.K., there has notoriously been no material progress since 1970 (45 years) in the real hourly wage, even as the income of the top 1% has more than tripled.”
Grantham’s wage lament obfuscates more than enlightens; it implies that the 1% is a static percentage. Once in the top 1% of income earners, now and forever in the top 1% of income earners.
I beg to differ. Economists at Harvard and Berkeley crunched the numbers on 40 million tax returns from 1971 to 2012 They found that today 64% of the people born to the poorest fifth of society rise out of that quintile—11% rise all the way into the top quintile. (Oprah Winfrey was once on welfare.) Meanwhile, 8% of people born to the top quintile tumble to the bottom quintile
As for real hourly wages? Yes, it’s true enough. In fact, it’s even worse than Grantham tells us. The average hourly wage in real dollars has remained largely unchanged since 1964, when Bureau of Labor Statistics started reporting it, not 1970. But as is always the case when dealing in averages and aggregates, the meaningful details are lost.
Quality is one meaningful detail. Your real hourly wage buys much more quality today compared to 1970. Televisions of today are not only infinitely superior in every way to televisions of 1970, they’re also cheaper as well. Quality demands a lower percentage of wage income today than in 1970. Real hourly wages might have stagnated over the past 45 years, but you get more bang for your buck year after year.
If wages have stagnated, that still doesn’t mean that compensation has stagnated. Thanks to the centrifugal force of government diktats, much more of our compensations is in the form of non-monetary compensation: health benefits, pensions, paid leave. According to the BLS, nearly a third of compensation is composed of benefits.
Though the same person, earning the same real wage today, is comparatively better off in every way imaginable compared to his 1970 doppelganger, that’s beside the point in Grantham’s world. Temporal comparisons are irrelevant; intra-generational comparisons are all that matter.
The top 1% continue to increase the distance between themselves and the rest of the field. Grantham tosses and turns over the prospect of the gap becoming even more yawning. (This worry is oddly confined to those in the upper echelons of income earners. The hoi polloi is oddly silent on the point.) You’d think that one so obsessed would rush to expose the origins of his obsession, but Grantham fails to delve into the cause of income equality. Perhaps if he did, he and I could be one on the subject, so allow me to do the delving.
I, too, am against income inequality, but only a specific strain of income equality. If income equality arises through wanton political manipulation of markets, Grantham would need scant effort to recruit me into his movement. Zero interest rates and massive purchases of government debt directs wealth toward the first movers, those who receive the zero-cost funds first – namely banks and other financial intermediaries (hedge funds, money managers, primary dealers). Where money enters the economy matters. Wealth is diverted to one group and away from another (those who receive the money later). Zero interest rates force people to engage in activities they are ill-suited: The plumber, the auto mechanic, the deliveryman is forced to invest when he would be more inclined to save to earn a positive return that compensates for consumer-price inflation (itself a redistributor of wealth), taxes, and time value. Income in one segment of the market is augmented; income is another segment is diminished.
Mercantilism and other forms of crony capitalism further exacerbate income inequality. Sugar tariffs ensure sugar farmers earn more than their production would be valued in an unhampered market. Ethanol mandates enhance farmer income and shrink the rest of our income. Wealth is transferred from sugar consumers to sugar producers, gasoline buyers to corn farmers.
Regulations (which The Spirit Level forward writer Robert Reich relentlessly champions) favor big established oligarchies over the small start-up. Entrepreneurial rent seeking takes precedence over pure entrepreneurial economic activity. Time and effort are diverted to solidify an established position instead of creating new venues to generate wealth and income. If this concerns Grantham, he and I are one.
If Grantham is concerned with the natural income inequalities that arise from talent and ability, and how talents and abilities are valued in a free market, then we are two.
John D. Rockefeller (a former clerk) and Sam Walton (a former farmhand) soar to the top 1% through stunning business acumen, relentless grit, elan, uncanny entrepreneurial abilities, and a dash of fortunate luck. That they would earn hundreds of times more than their lowest paid employee is beside the point.
Rockefeller and Walton made their lowest paid employees better off by continually driving down costs and driving up value for these employees, and, more importantly, for everyone else. Deflation was key to their success. They understood that demand curves slope downward and that the lower they could sell, the more they could sell.
Should it be legislated that someone without these exceptional skills be legislated an income within a set multiple of the highest value for those with these exceptional skill? Should it be legislated that those who have proven to be good stewards of capital and are sufficiently talented to perpetuate that capital then disgorge that capital to someone who has proven the opposite? I think not.
Income is a price of value created, and it should be as free to find its market-clearing level as possible. Income – all prices – are a signaling mechanism observable to all. If a ditch digger can earn no more than $5 an hour and a backhoe operator earns $25 an hour, a signal is sent to the alert mind: The ditch digger should upgrade his skills to those of a backhoe operator. The costs of subsidizing the ditch digger, and worst, encouraging him to remain in ditch digging, ensures the ditch digger is forever in the bottom quintile of income earners.
Grantham’s most grievous error in his income-equality lament is his failure to note that income is fluid within a person’s lifetime and in comparison to another person. He focuses on stock and ignores flow. As implied by the aforementioned Harvard study, the plumber’s son could very well develop the skills of a Fortune 500 CEO. And if the Fortune 500 CEO sires a son with the skills of the village idiot, nothing should stand in the way of that son disgorging his inheritance to those who can serve as better stewards of it.
Unfortunately, there is more.
Grantham’s focus in the second half of his missive widens to conflate income inequality, immigration, the Brexit vote, European Union, and voter ignorance. In short, the poor reader (in this case, me) is confronted with a baby’s mess of “what ifs” and “what could bes.” Most of it negative, but through it all, the undercurrent remains – income equality – except at this point the focus is imbued with stream-of-consciousness assertions infused with a depressing dose of Malthusian chicken littling.
With patience growing short and time allotted to deconstruction running long, I’ll simply pull random quotes (in italics) from the latter half of Grantham’s text and respond accordingly.
At times, this response appears to ignore the actual economic facts. The “Leave” vote in Brexit was uncorrelated with actual local wage gains over recent years, for example. Some towns with excellent recent wage increases still voted “Leave” and vice versa.
Why would the “leave” vote be necessary correlated with wage increases? Grantham can’t possibly prove that inclusion in the European Union leads to wage increases (or decreases). Freer trade is always preferred over more restrictive trade in promoting consumer well-being and comparative advantage, but it doesn’t automatically follow that inclusion in the European Union caused wages to rise.
With considerable (and understandable) ignorance of economic details, the Brexit voters were expressing commonly held views that were often based on skewed data and were also very easily manipulated by politicians and the press – which in the U.K. often has editorial bias in all reporting. For Americans, think Fox News.
Grantham asserts that the Brexit voters were ignorant of the economic details. And Grantham knows the economic details better than most? Here’s an economic detail – one Grantham may or may not know: The economic detail is that Continental European companies trade with British-based companies not because they want to but because they have to. To do otherwise would result in economic auto-asphyxiation. The British bring marketable skill sets that other people value. This is evinced by the British ability to sell its goods and services on a world market. It’s also evinced in the $2.8-trillion UK economy – the fifth-largest in the world.
And what does it mean for a product to be produced in the UK, the EU, or any other politicized land mass? Not much. Any product above a pure commodity will be composed of an amalgam of international inputs. A BMW is labeled “German” only because of historical association. Its steel might originate in Brazil, its plastics in the UK, its rubber in Indonesia, its electronics in the United States. The world is too intricately integrated to be undone by bureaucratic edict. The UK will continue to trade freely with the EU; it will because there is no other choice for either the EU or the UK.
The Brexit vote was about sovereign control, which includes control of one’s own borders and immigration policies, among other aspects of local sovereignty and decentralization. Simplify, but don’t oversimplify.
If Brexit holds, pretty clearly Scotland will leave the U.K. as might Northern Ireland.
Not every slope is slippery. It’s far from clear that Scotland or Northern Ireland will leave the United Kingdom. For one, both countries are net tax receivers. They pay less to the national treasury than they receive from the national treasury.
More relevant, the United Kingdom leaving the European Union isn’t analogous to Scotland or Northern Ireland leaving the United Kingdom. The United Kingdom as a state and a solitary. It, as a unit, paid remittances to the European Union. Individuals in Scotland and Northern Ireland pay taxes to the national treasury. Their tax pounds flowed to the national government first, before being sent up to Brussels. Thanks to the regime of direct taxation used in the transition to independence would be far more difficult than it would be for a country that withdraws from the European Union. Scotland and Northern Ireland and the remainder of the United Kingdom would have to untangle a skein of government services, subsidies, payments, and remittances.
Parents now widely believe for the first time (ex the Great Depression) that their children will not be better off than they themselves are. In these circumstances, social cohesion has rapidly decreased and immigration has risen in importance, which we see in both the Trump campaign and the pro-Brexit arguments.
I’m skeptical of this assertion; pollsters are notorious for asking finagled questions to elicit the answers they seek. But for argument’s sake, I’ll defer to Grantham. Parents might believe their children will fall behind, but that doesn’t make it true. Life in 2016 is materially better than life in 1996; life in 1996 was materially better than life in 1976. As long as we don't outright imprison entrepreneurs, I’ll wager dollars to cents that life in 2036 will be materially better than life is in 2016
Yes, immigration is a variable in the Trump and Brexit calculus. But is it unnatural to rebel against a detached central authority that willingly admits entrants who practice beliefs, mores, and practices antithetical to the local culture? Whether it's ass-grabbers in Cologne or suicide-murders in Paris, you reach a point where enough is enough. The local citizens get it; they confront the malcontents daily. This can hardly be said for the coddled, secluded government bureaucrats. For them, it’s all a vague abstraction. The bureaucrat deals only in masses and large meaningless numbers.
In total, if Brexit occurs, the U.K. economy will be hurt for several years. In the longer term, though, there may be some offset for the U.K. economy by virtue of having a smaller financial sector and a more balanced, less London-centric economy.
Guessing. That’s all Grantham is doing. Worse, it’s equivocating guessing. I’ll guess that the U.K economy will be fine within several years, if not several months. I have no idea if the U.K. economy will be more balanced longer term. I have no idea what’s “balanced” and what’s “imbalanced.” The composition of a market, the economy, if you will, is predicated on comparative advantage and a slew of other incalculable variables.
The U.K. press, the most egregiously editorialized in the developed world. The broad circulation papers goaded and badgered their readers toward Brexit.
Wrong. The U.K press isn’t “egregiously” editorialized; it’s honestly editorialized. When you open the pages of the Guardian or the Telegraph, you know which side of the political aisle the newspaper stands.
Contrast that to any major U.S. metropolitan newspaper; nearly all adhere to a leftist ideology. They promote the ideology in the reporting, which more often than not is opinion masquerading as reporting. That said, there was no goading or badgering. No one was forced to read the damn thing.
Referenda are dangerous. They allow for the true will of the people to be voiced, informed or ill-informed, manipulated or not. Dangerous. As Churchill said (now much quoted), “The best argument against democracy is a five-minute conversation with the average voter.” He might also have commented about the willful laziness of the one-third who never vote.
Let’s set aside that the “will of the people” is a demagogic fiction: two opinions fail to produce a third overriding opinion. Does Grantham want fewer or more voters? If referenda are dangerous, the fewer the voters the better. Should you not be happy if the population that couldn’t care to vote doesn’t? After all, they’re likely to be ill-informed or manipulated. Better that they remain on the sidelines. (By the way, the concept of the “informed voter” is also a fiction. You can’t possibly anticipate your representative’s future actions, his or her support or drafting of legislation, or all the consequences of any piece of legislation on the nation.)
As an aside, not-voting isn’t a sign of laziness; it’s the result of cost-benefit analysis. Here’s a simple example: Three million people will vote for pizza – cheese or pepperoni. I’m not voting. It’s not worth my time. My vote is meaningless. Three people, including me, vote for pizza – cheese or pepperoni. I’m voting. In the latter example, it matters.
On the other hand, and perhaps more likely, Brexit may cause the failure of a noble experiment that above all has brought peace to Europe. Germany just experienced 70 years of peace for the first time in its entire history.
For 45 of those 70 years, Germany was an occupied country: The Soviet Union occupied the east; the United States occupied the west. To this day, the United States retains a large military presence in Germany. I’m unsure what casualty of peace Grantham is attempting to tease out of what noble experiment.
Germans have been subjected to a perpetual “guilt trip” for the past 70 years, and thus they have been pressured to continually transfer their already limited sovereignty to the EU in Brussels. Germany abandoned a “strong” currency, the Deutsche mark, in favor of a “weak” Euro, issued by a European Central Bank (ECB) composed overwhelmingly by politically connected central bankers from traditionally “weak” currency countries. Is this
the noble experiment to which Grantham refers?
When combined with steady increases in income inequality (as they are in both the U.K. and the U.S.), weakened social cohesion, and high levels of dissatisfaction, immigration issues become very significant.
Vague, subjective assertions couched in mealy language: “Income equality,” “social cohesion,” “dissatisfaction, “very significant.”
Now those Brexiters that haven’t run away can reap what they have sown, as unfortunately will the whole U.K. If you will, the pack of dogs can now try to work out what to do with that darned car.
God forbid that if you’re dissatisfied that you should try something different. Better to remain insane and tirelessly repeat the same nonsense in perpetuity. Grantham reveals that underneath the heart of an income inequality theorizer resides the soul of a one-world statist – someone who favors large centralized bureaucracies over anything else. Procrustean rules for all.
Though Grantham doesn’t explicitly say it, a sense of Social Darwinism pervades his logic: The strong survive, the weak fail.
Most everyone gets Social Darwinism wrong. Social Darwinism is not a matter of the strong trampling the weak, thus the weak need to be subsidized. It’s a matter of economic evolution, which those who rail most loudly against Social Darwinist believe resides in socialism. Ironically, socialism continually and always has proven itself to be devolution at its core. (See recent proof in Venezuela.)
The real version of Social Darwinism is human advancement. That’s evolution. That occurs one way, and one way only: through property rights, entrepreneurial activity, through creative destruction, through inequality, and most important, through evermore atomistic division of labor. Decentralization, the antithesis of Grantham’s disdain for the “leave” vote on Brexit, is key. The more we are allowed to focus on what we do best, and the more we allow others to do the same, the more we benefit. Decentralization promotes comparative advantage and trade. Decentralization promotes competition for scarce resources, including labor.
Grantham’s quarterly letter to his clients would be perfectly at home at the New York Times, the Washington Post, or the Huffington Post. I’m unsure why it has found a home at Barron’s.