28 April 2008

Anglo Disease

The FT is inching ever closer to adopting my concept of the Anglo Disease, this time under the byline of John Plender, one of its regular editorialists. In a pretty long and detailed article about rising inequality, he has this to say, among other things:

Income inequality in the US is at its highest since that most doom-laden of years: 1929. Throughout the main English-speaking economies, earnings disparities have reached extremes not seen since the age of The Great Gatsby.

In the 1930s, it ended with bank failures and the Great Depression. Now, after decades of "financialisation" in the US and other Anglophone economies, whereby financial services have increased their share of gross domestic product, banks are being bailed out - using public money - in an effort to ensure the same does not happen again.


The question is what will happen to wealth creation, stock market valuations and economic growth if, as seems increasingly likely, the public's tolerance of income inequality and what is loosely called the Anglo-American model of free-market capitalism wears thin.

The name - Anglo Disease - fits like a glove to these repeated descriptions of the Anglo- American financial capitalism model.

But, more interestingly, the article provides explicitly, for the first time as far as I can ascertain, the explication that I've been using as to why this model was tolerated for so long:

Liberal economic policies looked attractive to pragmatic left-of-centre politicians because they appeared to deliver high rates of economic growth.


But what was it that made this long period of growing inequality and stagnant incomes for all but the few tolerable for the voters? The answer is that in all the big English-speaking countries, living standards became very detached from incomes. In a period of stable, low-inflationary economic growth known to economists as "the great moderation", low and middle income people readily took on more debt, while running down their savings.

Rising asset prices, especially in the housing market, created a sense of increasing wealth regardless of income.

The great swindle of the rich looting the economy by capturing real incomes while hiding it by encouraging people to take on debt is becoming understood as such. Well, it's not labelled as a swindle, but it's already described as what it is - a diversion, whereby consumption was made possible by debt instead of by income.

Suddenly all that has changed and, with it, the political calculus. The collapse of the American housing market has left negative equity in its wake. For many, the cost of living is rising faster than wages. Houses can no longer be used as cash dispensers and savings are having to be rebuilt. Financialisation is going into reverse and the financial sector is no longer able to supercharge economic growth.

This is the Anglo Disease: the moment of reckoning, the realization that the "supercharged economic growth" is no longer around. The next step will be to acknowledge that it never really existed, except for a happy few.

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