Sunday, April 03, 2011

Crisis and plight of common man?

John Mauldin describes a letter sent by one of his readers. The reader, Bill, asks why is it that economists and analysts are promoting austerity implying pain for the common man. He particularly points to capitalism working for "have-gots" rather than the common man. John Mauldin answers well but I would like to add a few points.

The crisis is a problem for "have-gots" but the correct have-gots are ones who have got the debt. It is debt that is the problem for common person, not job or income. Somehow, we must realize that the mechanics of debt is not properly explained to the lay-person. Debt is good if it creates something that can repay the debt - a production asset. The collateral is just to allay the fears of the lender. Some how we created debt for assets that did not generate returns to repay the debt - like housing. These are, in my book, consumption assets and not production assets. 

The future for those with unpaid debt is bleak. Further, those who do not have enough savings, are likely to suffer next. To get through this phase of economic consolidation we need people to have strong backing of savings. These are usually the rich people, but this also includes those who were prudent with their money.

The question of austerity and jobs, to my mind, are mixed up. We need austerity in programs that are wasteful. However, constraining job-creating projects under the name of austerity is not a right remedy. Jobs are what will get the economy out of the woods.

The question, therefore, is why is there no job recovery. My sense is that we are undergoing a phase transformation in terms of employment profile of the economy. This is, in many ways, what Alwin Toffler calls "waves". The first wave created an agrarian-dominated employment profile. The second wave created a factory work-dominated profile. The third moved the profile to services and within services to technology driven services. We are awaiting the fourth transformation.

The problem with phase transformation is that individuals are often well-versed in older wave skills rather than new wave skills. To change this, we require extensive training and education. However, before we begin training, we need to know what the wave is. To survive this period of uncertainty we need savings and monetary solidity. The common person, almost always, does not have this. The dilemma, therefore, is how to assist the population while we determine what the next wave will be.

As a solution for this problem, Keynes suggested creating any job, even digging and filling ditches will do. Such a program goes against the principle of austerity. However, to my mind, Keynes' solution about  job creation represents way out.

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle