Bulletin - February 2017
KMG's bulletin for February 2017
Bulletin – February 2017
2016 – in the context of recent history
I was born 60 years ago, in 1956, and in a recent review of the year of my birth I noted some extraordinary events which, given the significant outcomes of the American Presidential election and the European Referendum in 2016, help put our current concerns into context.
This was indeed a tumultuous year. Khrushchev admitted that Stalin had been a dictator, had brutalized his country and that the cult of the individual must not happen again the USSR; (a good note for Trump). What Khrushchev didn’t anticipate were the consequences of owning up to incompetence and brutal dictatorship which resulted in dramatic events in Poland (the Poznań uprising); in Hungary (the huge uprising and claim for independence), and of course the Prague debacle. All these conflicts resulted in monumental amounts of human suffering, death, destruction and on a scale that we could not conceive of in 2016 and yet, all of this happened on our door-step in Europe and in my lifetime! (Let’s hope the outwash of Trump is not the same).
America and South Africa
Martin Luther King rose to prominence through his campaign for racial equality and the segregation of black and white people, most notably on public transport. The way in which people were treated 60 years’ ago, simply because of the colour of their skin, is completely incomprehensible in today’s world. Yet 60 years’ ago, it was an established commonplace practice, not only in America, but in other parts of the world and in particular of course, South Africa. Nelson Mandela started on his long road to the abandonment of apartheid in South Africa and yet it took another 40 years before he achieved any semblance of normality for human beings of whatever creed, colour or race.
As you will read in the next chapter of this bulletin, the incompetence of the French and British political establishment and administration in recognizing and relieving their involvement in Colonial rule, particularly across North Africa was quite extraordinarily incompetent. The French management (mismanagement) of Algeria in 1956, let alone Tunisia and beyond, beggar’s belief yet the slaughter and destruction of human beings and civilisations centred on the greed and power of a tiny minority of human. This demonstrates how difficult it is to move the establishment towards the inevitable conclusion.
1956 saw probably the most spectacularly incompetent mismanagement by the British government of the Egyptian issue and the Suez Canal. Anthony Eden, in complete arrogance and ignorance, and his ministers including Harold Macmillan who, later on, was hailed as a superb prime minister under the slogan “you’ve never had it so good”, brought the world as close as it has probably ever been to nuclear conflict, Even more importantly, this set the scene for all the Middle East crises that currently afflict us, building upon the mismanagement of the Middle East by the colonial powers over decades.
Again, the slaughter of humanity to preserve an establishment that was completely out of touch with reality is completely incomprehensible by comparison to the way in which we think about the world in 2017.
1956 saw the arrival of Fidel Castro and the terrifying consequences of a Communist state in the backyard of the United States of America. Not only did America mishandle the whole process spectacularly but laid the foundations of terrifying childhood for me when we all lived with the fear of nuclear conflict as a result of “the Cuban nuclear missile crisis”. I was genuinely brought up in fear of ultimate destruction from week-to-week and from month-to-month during certain parts of the 1960s as a direct consequence of the way in which America and the establishment of Cuba mishandled the island’s population. The sadness with which Fidel Castro then mismanaged Cuba thereafter is all the more poignant; rebels are not always any better than the dictatorship they seek to overthrow.
The establishment problem (then and now)
The most fascinating confluence of thoughts from struggles in 1956 is of course the speed at which the so-called establishment of the day was prepared to adapt and change.
In Russia, Communism and the USSR were not about to let go of the European satellites even though within 40 years they were forced to do so. Fascism in Spain or Cuba and other parts of the world eventually crumbled under the inevitability that the system simple does not work. White supremacy whether it was in America or in South Africa was proved to be both pointless and totally unacceptable. Colonialism and all that had swept before it, was proved, tin the end, to be impossible and countries simply wished to live in their own way, ruled by their own leaders and managed in a way in which they wished to evolve and not in a way in which other powers wished to mismanage their economy primarily and only for their own benefits.
Establishment take a long time to change. In America, change in attitude and approach to different races came more rapidly than it did in South Africa but in the end, both adopted new reasonable means by which humanity could be managed.
In 2017, we are faced with a struggle between the liberal establishment of free trade and collective globalization – whether it be the European Union, the World Trade Organisation, or the United Nations.
These liberal, relatively social organisations are under significant threat because they have not recognized that they have left vast amounts of populations in the developed world (be they in America or in Europe) far behind.
Far from the establishment, particularly in Europe, admitting that maybe the European project needs to change and adapt and to be more inclusive, the current power brokers simply wish to reinforce the old order to bring forward greater integration, and less and less accountability with perceived bureaucratic mismanagement. Are the liberal establishment just as guilty of mismanagement by over-promising and under-delivering, and by misrepresenting the facts and ignoring the inevitable evolution of humanity?
Here are some simple examples:
- A falling birth rate, a demographic change in average age and the inevitable consequences of making pension promises which could not be maintained, has now manifested itself spectacularly.
- A vested interest in pharmaceutical industries and the lobbying activities of food and agriculture industries has led us to a situation where our diets are compounding our inability to fund the NHS and/or to provide good, affordable healthcare for everybody in a reasonable manner.
- The knowledge about how we should be leading our lives – be it in terms of what we eat, how we exercise and our addiction to sugar, antibiotics, carbohydrates and processed food (all so-called normal foods) which are addictive and hugely damaging, is quite extraordinary; yet we ignore the knowledge.
- Poor education was just as much the case in 1956 as it is in 2017. By this we mean the whole gambit of economic and social responsibility. If successive governments lie to the voters and over-promise and under-deliver because they know the voters don’t understand and anyway, “it’s the next generations problem”, is it any wonder that the next generation has arrived and knows it has been misled?
People voted for Trump and for BREXIT in 2016 simply because they wanted change, yet without the insider knowledge or understanding of the inner workings of the system the people were led to make decisions that they were ultimately underqualified to make and opposing arguments were blighted by who may or may not be telling the truth. In 1956, the establishment was just as opaque and arrogant as the people who were trying to overthrow the establishment, but the difference between 1956 and 2016 is, of course, that the revolting masses in 1956 did have justification. In 2016, the establishment did not have the justification to maintain and hold onto power because they had lost the trust of the people.
The outcome of Trump and the outcome of BREXIT, let alone the outcome in the Middle East, all centre around one simple observation: How long will it take for the establishment to realise that the course that they wish to travel is simply not going to work?
The inevitable change, that most rational people can see, will occur. Protectionism in the United States will not work. The EU has to adapt and change. The Middle East will fight itself to a stand-still and at the same time may incur bloodshed across the world. But in the end, as is proven in history, armed conflict ends in mass destruction, with inevitable outcomes that could have been achieved without loss of life and property.
The most extraordinary thing is, we may think we live in a violent world, but by comparison to 60 years’ ago, violence around the world and within Europe as well as America is but a small fraction of what it was 60 years’ ago. Huge progress has been made in creating a more civilized society, and this is the bedrock of improved civilization. All is not lost. It is simply a case of persuading the establishment that it must adapt and change sooner rather than later. Trump may just be the catalyst for change that is needed: the wilder he gets, the faster civilisation will rise up and overtake him.
If the world does indeed catch a cold when the US sneezes, should we be preparing for a crippling does of influenza when Trumponomics takes hold?
In the months following the end of the US presidential campaign, the rhetoric of Donald Trump moved from boisterous statements on plans to build walls and ban Muslims, to more practical announcements about economic policy and now back to boisterous statements. This rhetoric reflects Trump’s understanding that the way to “Make America Great Again” is through economic prosperity, hence the need to articulate an economic plan which will soon become a reality. What does the plan look like? What effects will it produce?
On the basis of what we know, the centre-piece of Trumponomics is to restrict international trade to protect domestic manufacturing. He wants to implement a policy of import substitution whereby tariffs and/or quotas will be imposed on imports of manufacturing goods produced abroad, even if by US corporations.
Import substitution is not a new idea, as we well know from the past. It has been used many times in many countries to drive industrialisation. Whilst the circumstances and practical implementation of this policy significantly differ across time and countries, one thing is absolutely common: import substitution does not, in the end, ever work. In countries that have tried it, it always proved to be a very expensive, failed economic experiment. If it is the case that important substitution would work in order to help suffering manufacturing from a temporary loss of competitiveness, then in this case, protectionism could provide the sector with the necessary time to adjust to a new environment and regain competitiveness.
The problem is that in a digital world, old industries simply aren’t required and new industry, and new skill-sets are desperately needed. Thus, in most advanced economies, manufacturing is now structurally uncompetitive: a declining sector that tariffs and quotes would keep artificially alive for some time but at the cost of higher domestic prices on manufactured goods. Furthermore, if tariffs and quotes were accompanied by some sort of subsidisation for the manufacturing sector – be it tax discounts, direct payment of subsides of transfers etc, the import substitution policy would also place a heavy toll on all tax budgets.
Another undesirable effect of important substitution is that it will trigger responses from other countries. One immediately thinks of China and of course the rest of Asia. One option for China and other US creditors including Japan would be simply to stop financing the US debt. (This could be an extremely exciting event in all sorts of ways).
Obviously, loss of work in declining sectors in America is of great concern, however, rather than trying to save these jobs through costing import substitution destined to fail, Trumponomics should think of more structural and dynamically-efficient interventions such as infrastructure investment. As an entrepreneur, Trump should know that whilst some sectors and activities decline, others emerge. Workers who lose their jobs should be helped to move to new ones in emerging sectors of the economy.
To this end, an active labour market policy that supports requalification and an upgrade of workers’ skills ought to be implemented via the federal budget. Unfortunately, there appears to be no intention on these policies by the Trump rhetoric.
Trumponomics is a combination of corporate tax cuts and investment infrastructure. This package is becoming more and more popular across many governments in the world, yet Trumponomics belief that infrastructure and lower corporate taxes will stimulate private sector activity and economic growth is, I am afraid, questionable. We only have to look at our own Hinckley Point nuclear power station to wonder whether this is really of much benefit to the UK economy in the longer-term. In the short-term, may employ people, but in the long-term, it produces expensive energy which may not be necessary given the speed at which we are developing alternative sources of energy whilst simultaneously finding ways to consume less and less energy.
Global economic growth is essentially a process of innovation that leads to productivity gains and to the emergence of new sectors and industries. Infrastructure and tax cuts across the board do not automatically facilitate innovation and hence do not guarantee growth. Indeed, in many cases, they simply allow unproductive industry to remain in place far longer than should be the case. This is clearly the outwash of ludicrously low interest rates and generous banking allowances. These have maintained a wide range of businesses in place when they should, under normal circumstances, have either completely re-engineered their economic process or (and more likely) have gone bust.
Unfortunately, we also see the possible likely candidates for a cut in federal budgets in America and across Europe as being social welfare, public health and education. This in turn will increase the disparities and inequalities in income distribution. A classic example, however, for the way out of this conundrum would simply be to spend huge amounts of time educating people around healthcare. If we could reduce, by example, sugar consumption, we could dramatically change the economic dynamic of the NHS albeit that it would take a generation or two to achieve this outcome.
In a previous article I observed that sugar kills three times as many people as famine, and sugar now kills three times as many people as wars, revolutions, murders and crime across the world. How long will it take for the establishment to understand and get this message on board? After all, one would have thought in a liberal society this should be the first port of call for all those well-meaning people.
As inequality increases, innovation becomes less likely because middle classes progressively disappear. At this point, Trumponomics will achieve the opposite of what it was meant to achieve – less innovation and slower long-term growth.
The conclusion therefore, is that Trumponomics is more likely to damage the US economy and if the US economy is hurting, the rest of the world is destined to feel the pain just as much as Americans.