Doodling at Davos and how to save capitalism

editor's insight

Nevil Gibson

Doodling at Davos and how to save capitalism
The annual political and media ritual of a pilgrimage to Ratana fulfils a need for a story to get the year off to a “serious” start – but not much else.

In Europe, the rich and powerful go to Davos, a ski resort in Switzerland. There they will be met by igloo-dwelling Occupy Davos protesters vainly hoping for capitalism to collapse and be replaced with something else.

Never fear, it won’t, and neither does much of the discussion in Time magazine add to the debate, which the Teheran Times has summarised as:

The complex interplay between ethical and economic issues has become a matter of intense debate these days in the Western world, as the rage and contempt for the corporate “greed” and growing “income inequality” perpetuated by the financial industry and large corporations have led to a social revolution of sorts.

Economists have reported that income growth in the United States has been concentrated at the top of the scale in the past three decades. The share of total income going to the top 1% of earners, which was less than 9% in 1976, surged to nearly 24% by 2007. During the same time, however, the average inflation adjusted hourly wage declined by more than 7%.

CNN ‘s experienced financial reporter Richard Quest says after the crisis-ridden sessions of 2009 and 2010, Davos this year will be all talk and little do. “They have no other options,” he says, despite the World Economic Forum billing the summit as “The Great Transformation: Shaping new models.”

The roots of poverty
In his State of the Nation speech, President Obama has embraced the “greed” and “inequality” issues with the same enthusiasm he has displayed for adopting President Bush’s foreign policy and energy solutions (now that the US is headed for self-sufficiency through fracking).

But as has been aired in this column on several occasions, inequality is difficult to measure and isn’t just about high incomes for bankers and financiers (but not, of course, for film stars and musicians).

The true causes of inequality, as New Zealand’s figures demonstrate in the recent OECD report, lie in inability of welfare states to cope with social breakdown in a time of prosperity.

These have been spelled out by US social scientist Charles Murray, author of The Bell Curve and, more recently, in Coming Apart.

Murray’s argument, summarised by Niall Ferguson in this Newsweek article, “Rich America, Poor America,”  offers vastly different view to the conventional picture. Inequality arises from contrasting and polarised communities.

One, of course, is the middle and working class milieu in which most of us exist. The other is an under-class (supported by welfare) that is characterised by high marriage breakdown rates and single parents; low or non-existent work ethic; high crime rates and low church attendance; and a lack of civic values or engagement.

Murray urges his fellow Americans to avoid the high-taxing poverty traps of Europe, where the under-class is expanding rapidly with welfare-seeking migrants, and opt for an alternative conservative solution (in Ferguson’s words):

Scrap the failing welfare programs of the ’30s and ’60s before they bankrupt America. Ensure that everyone has a basic income. Then simplify the tax code to restore the incentives that used to exist for everyone to work hard. Finally, end the state monopolies in public education to launch a new era of school choice and competition.

[Note: Similar ideas are expressed in Anatole Kaletsky’s op-ed (from The Times) in today’s Dominion Post and online at The Australian – subscription may apply]

Iran feels the squeeze
On the diplomatic front, the squeeze is tightening on Iran with the European Union’s decision to stop buying oil and sourcing its from other suppliers, probably Saudi Arabia and Russia.

This is good chunk of Iran’s exports and even if China and India keep up their buying, while Japan and Korea go along with US requests, Iran will soon find the pips squeaking.

On top of the oil sanctions, the US has imposed a ban on any bank dealing in oil transactions with the central bank in Teheran. As North Korea has found, such financial sanctions are highly effective.

American diplomat Dennis Ross, interviewed by Foreign Policy magazine on a wide range of Middle East topics, describes Iran’s plight as follows:

Look at the degree of Iranian isolation now, internationally or regionally, and the scope of what's happening in terms of sanctions on them right now, where they can't do business with a reputable bank internationally, they can't do business in dollars and euros, they can't get insurance for their ships.

You have the Iranian president declaring a year ago when sanctions were being posed that the Iranians sneezed at the sanctions, completely belittling them, but now he describes them as the most severe economic onslaught that any country has experienced.

Meanwhile, two experts at the Washington Institute for Near East Policy have urged the US make more use of its generous economic and military payments to Egypt, where a post-revolution ballot has put Islamic politicians in the box seat.

Egypt is now in dire financial straits while oppression of secular and Christian minorities is being stepped up. Naturally, western tourism has collapsed and Egypt (with a population approaching 90 million) has few other sources (such as oil) of income.

Final thoughts on Japan
Like a beaten sumo wrestler going back for another round in the dohyo, Japan is resilient to hard knocks. It defies the business cycle, by appearing to have none.

This week’s announcement of the first annual trade deficit since 1980 was grim though expected news and was treated yet another example of Japan's declining export power.

The reasons were understandable: Japan is exporting fewer cars, semiconductors and other electronic goods while importing more energy, such as LNG, to fill the gap left by the shutdown of all nuclear power stations.

This could continue for some time but it is too easy to write off Japan. Reaction to last week’s column was surprisingly positive, as has been other material I’ve seen lately, including the rising sales and profits of industrial robot company Fanuc.

Profit for the nine months to December 31 rose 22% to ¥106 billion ($1.7 billion) while sales were up 23% to just over ¥400 billion ($6.3 billion).

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