Humanity’s Stairway to Paradise II

May 10, 2009

How does upward redistribution work ?

The average consumer is under pressure to buy more goods than he can afford or needs. There is publicity, social and cultural factors that lead to an average spending of 140 % of the yearly income by each US citizen. This overspending explains the growing private debt ( sub prime, credit cards, individual credits) and it shows where the money flow is going. It went into volatile speculation and was partly destroyed, but it also found it’s way to the fortunate strata of the society. Through outsourcing to China manufacturing cost and jobs in the USA were reduced, China is also the major creditor (24 %), together with Japan (20%). Cheap liquidity was provided until interest rates started climbing due to mutual distrust among money lenders, and this led to the collapse of the system. This proves that this model is in contradiction with basic financial laws and is not sustainable.

After the crisis the administration is still following the advice of big finance, it is not acting in the higher interest of the US population. It avoids profound reforms and provides massive fresh liquidity again, to promote consumption rapidly. In the short term this is adequate and for the functioning of the economy, this is vital. In the longterm this will impose an intolerable burden on the US taxpayer and on the world economy. The consequence is either deflation ( no recovery), inflation ( in case of a recovery), if not stagflation.

What has to change

The change must happen at the level of the single citizen first. His spending pattern has to change. This is the inevitable prerogative. No more private debts should be produced, this means longterm austerity, leading to an expense of less than 100 % of the income. Of course, such an advice does not sound attractive. But is is practiced in other parts of the world with good result. People should spend only the money they actually possess and stop living on credits. All else is a recipe for disaster.

The second process is political. The US political system is taylor-made for the rich classes only, but this fact is a taboo wrapped up in images of the american way of life. The role of middle and lower classes is merely to finance the upper 10%, in political terms they are powerless. If 90 % ( 270 millions) of Americans are happy playing this role of living with unbearable debts for coming generations and with a continuous financial downward shift, then this may be fine.

Otherwise, the majority in the US population could seek a political change where the average income increases, job security is better, taxes get the money where it is and redistribute it towards those that really need it. Namely the middle and lower classes. They need effective instruments and measures against unemployment, a health care system for all, insurances for the disabled and provisions for retired people. And incentives to invest real money, (not debts) into longterm saving like the house, secure pension funds etc. I am talking about social security and a welfare-state that deserves this name.

The usual objection is : who will pay for this ? The typical question that only a millionaire can ask and answer. Does anyone object to billions being spent for a completely failed economic policy ?

Questions and Outlook

Does the wealth of the industrialized countries depend on the very poverty in developing economies ? Are they poor because we are rich ? Is the global toll of poverty ( malnutrition, diseases, war etc) indispensable for the good functioning of the global economy and particularly the US corporate and finance industry ? Would a less unjust, inhumane and arrogant world trade order destroy this world economy, does the affluence of a few depend vitally from 1 billion people living in apocalyptic misery ? The same question is valid for the US as a nation, where the mechanism is the same, but on a much higher material level.

Presuming that in the US the Gini coefficient became similar to the one in Japan, where there is much less economic inequality, how would this affect the economy ?

I start with a guess, that the GNP would remain the same, for simplicity. Now, if the middle class had a higher income and the upper class were „poorer“, I can conclude for sure that overall consumption would increase, benefiting the overall economy. This is because 10 persons earning 100 000 $ a year will consume more goods and services collectively than one person earning 1 million a year. Just consider food, housing, cars, clothes for 10 versus 1 households. The same holds true for any country.

From this fact I conclude, that without structural changes the present system in the US must and will increase the pressure on the classes indulging in mass consumption. This is the only way for your money to flow upward. The trend is inevitable : the poorer the people, the harder it is to make them spend. Because the middle class is getting poorer, the present system will simply offer new credits and push harder for consumption. This is the mentality of the governing class, they cannot exist without ever increasing gains and wealth, call it an ideological or mental problem. Because the US political and economical establishments are intimately linked, there is no democratic control over this mechanism. The natural limit of this development is a tiny rich society and an overwhelming poor mass, without any middle class, I expect this to happen in 50 years or so. By this time, low class Americans will know what is means to live in a third world country, back home…

Exactly for this reason, the US people will someday realize the striking parallel : the US and the world economy are both undergoing a process of wealth distribution that is sustainable neither economically nor ecologically. In the developing countries, the shocking consequences are apparent today. Famines are pushing people to hunger revolts. Rural populations are accumulating around cities, because traditional farming is not more possible. Epidemics, political instability, wars and mass emigrations into industrialized countries are the inevitable consequence. They can leave their ghetto for a richer country today, but can we leave our planet if we destroy it ?

Our iniquitous economic system is ransacking not only the American middle class, but poor populations worldwide.

The world economy should not be a poverty producing machine, it should allow people to live in dignity, just as the World Bank and International Monetary Fund are preaching on their websites as their mission.

A common effort is needed to force the WB, IMF ( and a few others) to do what they are supposed to do, and not exactly the contrary.

Useful links in the order used in the text :

en.wikipedia.org/wiki/File:Gini_Coefficient_World_Human_Development_Report_2007-2008.png

http://www.sustainablemiddleclass.com/Gini-Coefficient.html

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

http://pgpblog.worldbank.org/why_doesnt_capital_flow_from_rich_to_poor_countries

http://www.cepr.net/documents/publications/capital_flows_2003_03.htm

http://www.worldbank.org/depweb/beyond/global/chapter4.html

http://www.ilo.org/global/About_the_ILO/Media_and_public_information/Press_releases/lang–en/WCMS_099406/index.htm

http://moattari.info/2008/02/18/gini-index-a-measure-of-inequality/

http://en.wikipedia.org/wiki/Worldbank

http://en.wikipedia.org/wiki/Confessions_of_an_Economic_Hit_Man

http://en.wikipedia.org/wiki/International_Monetary_Fund

http://www.globalpolicy.org/socecon/bwi-wto/critics/stiglitzindex.htm

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One Response to “Humanity’s Stairway to Paradise II”

  1. […] Original post by ziusudra […]

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