Ben Fine on the Material Culture of Financialisation

A FESSUD Working paper by Ben Fine.

From the abstract:

The purpose of this paper is threefold. First is to comment upon the nature of financialisation. Second is to frame how this leads financialisation to be understood whether consciously or otherwise. And, third, is to draw out implications for surveying households as their experiences and understandings of, and reactions to, financialisation without specifically designing a questionnaire itself for this purpose. As should already be apparent, underpinning this contribution is the presumption that financialisation is a characteristic of contemporary capitalism (and that the term is also an appropriate category for representing this characteristic). The material culture of financialisation is addressed by drawing upon the 10 Cs approach that was developed for the study of consumption, highlighting how it is Constructed, Construed, Commodified, Conforming, Contextual, Contradictory, Closed, Contested, Collective, and Chaotic.

Read rest here.

Michael Pettis on Chinese Liberalization Reforms and Economic Growth

Two posts worth reading by Michael Pettis (here and here; might need subscription). He suggests in the first one that reports that consumption in China is much higher than previously thought are exaggerated (Ken Peng suggested here that consumption levels are 10% higher than what is often assumed, i.e. closer to 45% rather than 35% of GDP). He argues that if China is to continue to grow, even at a slightly reduce pace, then it:

"must find a way to grow without even faster growth in credit, and the best way to do so... is to boost consumption growth by sharply increasing the household income share of GDP and to shift investment from the state sector to far more efficient smaller businesses."

No problem with the first part. Not sure about the second, i.e. the notion that small private businesses are more productive than large public firms. In fact, public investment has been central for Chinese growth all along, and if anything it is the decline in public spending that has hurt the recovery in developed countries.

A note of clarification on why he argues that credit expansion is dangerous in China. He says in his most recent post that:

"A recent China Beige Book survey suggests that a large and rising share of new loans is being extended simply to roll over old loans that cannot be repaid out of operating earnings. China needs credit growth, in other words, just to avoid recognising bad loans, and any attempt to constrain money growth is likely to cause a surge in financial distress."

Fair enough, but as noted before here, these bad loans are in Chinese currency and do NOT represent a real threat to economic growth, since the central bank can always act as a lender of last resort in domestic currency. The solution he proposes makes even less sense, namely: interest rate liberalization, which was in the list of measures proposed by the infamous Washington Consensus (point 4 in Williamson's original decalogue).

The idea is that market determined interest rates would be higher and preclude excessive debt accumulation, I imagine. Also, higher interest rates would reduce investment, particularly in housing, again in my interpretation of what Pettis suggests. Yet, the experience in countries that actually liberalized interest rates, and the whole financial system, was not to reduce debt and tame excessive speculation.

The demand for credit depends on real economic activity and if consumption and investment (in particular public investment that is autonomous) continues to expand it will increase even with higher rates of interest. The effect of interest rate/financial liberalization is to increase the share of the pie that goes to creditors and capital in general, which according to Pettis' correct logic would reduce the redistribution towards wages and slowdown growth.

Mind you, although Pettis seems to think about credit creation in mainstream terms, with credit driving economic activity, he can be read as suggesting that growth is demand-led, which is pretty radical.

Scenes from the Class Struggle

Dean Baker recent critique of Krugman is right on the mark (see the K-man reply here; yes he agrees with Dean, so nothing to see here really). What Dean suggests is that this (the 2007-9) recession was not a typical financial crisis and the financial sector is not precluding the recovery. And consumption is not being held by debt deleverage, being at below peak, but still quite high levels. Dean suggests that only government spending and exports would allow the economy to get out of the hole now.

As much as I agree with Dean that we need more government spending (I'm more skeptical about exports and the need for a devalued dollar, but that's a different story), I think that there is something to be said about consumption. Dean is looking at consumption as a share of disposable income, and measured that way consumption seems fine. However, when you look at the data on consumption expansion (at the BEA here) you see a few things. First, consumption is not consistently growing above GDP, in fact it is below in the last two quarters. Also, consumption of durable goods has never recovered since the crisis and still has negative growth rates. Finally, and more importantly, disposable income (in particular wages, that have been stagnant) could grow faster, and allow for faster growth of consumption rates without changing the consumption to disposable income ratio.

So I would argue that better income distribution and more consumption would be good too. Note that I'm not very fond of the 'New Puritan' argument against consumption, that sees consumerism as one of the worst things in modern society. In particular, the levels and patterns of consumption of the masses can and should expand, and not just in the US. Also, the logic of consumption is one of the few areas in which popular common sense ideas do get effective demand right.

Like Marge Simpson in the episode titled "Scenes from the Class Struggle in Springfield" (from 1996) when Lisa discovers a Chanel suit for Marge, but she is reluctant to buy it. But the Puritan in Marge eventually gives in to the Keynesian-consumptionist desires though.

Marge: It wouldn't be right to buy something just for me. If it were a suit we all could wear, maybe... -- Marge tries on a Chanel suit.
Lisa: Come on, Mom, you never treat yourself to anything.
Marge: Oh sure I do. I treated myself to Sanka not three days ago. -- You were out of Montreal Morn, I presume?
Lisa: Just buy [the suit]. You don't have to rationalize everything.
Marge: All right, I will buy it. It'll be good for the economy. -- All Keynesian models considered.

Chanel suits for the masses, that's a rallying cry one can believe in.