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- Measuring GDP using the Income Approach and the Expenditure Approach - HD
- Exercises 1-3 p. 239
- Exercises 4-7 p. 241
From the blogosphere
The individualistic ethos of the era of financialisation has affected wealth transfer over time in other ways. The American economist Laurence Kotlikoff created the concept of ‘intergenerational accounting’ to describe the government’s transfer of wealth over time. 15 The journalist Tom Brokaw coined the phrase ‘the greatest generation’ to describe my parents and their contemporaries, who grew up during the Great Depression, fought in the Second World War and (in Europe) suffered privation in its aftermath. 16 Another author might term my generation of ‘baby boomers’, ‘the luckiest generation’ or perhaps just ‘the most selfish generation’. We have not only been successful— and perhaps this is to our credit— in enjoying a time without major armed conflict or deep economic depression; we have also been effective in transferring wealth from both past and future generations to ourselves.
We reduced the debt we owed to our predecessors by rapid inflation. We promised ourselves generous state and occupational pensions, and then argued that the burden of providing them for subsequent generations could not be afforded. We sold assets that had been accumulated in the past, and would yield prospective benefits in the future, for our own current benefit, privatising state industries and monetising the goodwill in Goldman Sachs and Halifax Building Society. We let house prices and share prices rise to new highs in real terms, forcing our children to buy the nation’s assets from us at prices much higher than those we had ourselves paid. To add insult to injury, we seem to have been inadequately mindful of the national infrastructure: enjoying shopping malls, to be sure, but building few houses and allowing the transport system to decay.
The John Kay of the 1980s, transported twenty-five years forward in time, would not be able to afford to buy the house I still live in, would have incurred substantial debt in higher education, would have to make greater provision for his own retirement and would look ahead to a tax burden inevitably rising to meet the costs of an increasingly adverse demography. When Jeff Skilling toasted the capitalisation of energy contracts in champagne, he was celebrating the twin benefits of the prudence of his predecessors and his own imprudence in relation to his successors. And I could join him in that toast. Lucky indeed to have lived through the era of financialisation. (Kindle Locations 4541-4560)
The newer hedge funds were, in fact, little more than trading funds with high fees: typically 2 per cent of assets as annual management fee plus 20 per cent of profit. Some sought-after funds charged more. Taken as a whole, although some particular hedge funds have been very successful, the hedge fund industry has been very profitable for hedge fund managers, but not for their investors. (Kindle Locations 1875-1878)Many of these funds have a million dollar minimum to invest with them. With 100-200 clients, that totals 100-200 million dollars in assets. A two percent annual management fee translates into two to four million dollars a year before taking the 20 percent of profits, which might be anywhere between 5-20%, depending on the firm. A five percent return on 100 million dollars is five million dollars in profit, which the manager then takes 20 percent of, or an extra one million dollars. Between the two percent and 20 percent fees, that could mean a manager is making three million dollars on a normal year without much effort.
In most Western economies today, the assets and liabilities of banks exceed the assets and liabilities of the government and the aggregate annual income of everyone in the country. But these assets and liabilities are mainly obligations from and to other financial institutions. Lending to firms and individuals engaged in the production of goods and services— which most people would imagine was the principal business of a bank— amounts to less than 10 per cent of that total. In Britain, with a particularly active financial sector, that figure is less than 3 per cent. (Kindle Locations 181-185)
I will refer to the combination of institutions, rules, norms, and organizations of a country as its social model. Even among high-income countries social models differ considerably. America has particularly strong institutions and private organizations, but somewhat weaker public organizations than Europe, and Japan has much stronger norms of trust than either of them. But though they differ in detail, all high-income societies have social models that function remarkably well. Quite possibly, different combinations work well because the components adapt so as to fit each other: for example, institutions and norms may gradually evolve so as to be well suited given the state of narratives and organizations. But such adaptation is not automatic. On the contrary, hundreds of different societies existed for thousands of years before any of them happened upon a social model capable of supporting the ascent to prosperity. Even the Glorious Revolution was not undertaken with the objective of unleashing prosperity: it was triggered by a mixture of religious prejudice and political opportunism. The English social model that emerged in the eighteenth century was replicated and improved in America. This in turn influenced social revolution in France, which exported its new institutions by force of arms across western Europe. The key point I wish to convey is that the present prosperity enjoyed in the Western world, and which is belatedly spreading more widely, is not the outcome of some inevitable march of progress. For thousands of years until the twentieth century ordinary people were poor, everywhere. A high living standard was the privilege of extractive elites rather than the normal reward for productive work. Had it not been for a fortuitous combination of circumstances that relatively recently produced a social model conducive to growth, this dreary state of affairs would most likely have continued. In poor countries it continues still.
If the prosperity of the high-income world rests on this platform, it has crucial implications for migration. Migrants are essentially escaping from countries with dysfunctional social models. It may be well to reread that last sentence and ponder its implications. For example, it might make you a little more wary of the well-intentioned mantra of the need to have “respect for other cultures.” The cultures— or norms and narratives— of poor societies, along with their institutions and organizations, stand suspected of being the primary cause of their poverty. Of course, on criteria other than whether they are conducive to prosperity these cultures may be the equal of, or superior to, the social models of high-income societies. They may be preferable in terms of dignity, humanity, artistic creativity, humor, honor, and virtue. But migrants themselves are voting with their feet in favor of the high-income social model. Recognizing that poor societies are economically dysfunctional is not a license for condescension toward their people: people can as readily earn the right to respect while struggling against a hostile environment as while succeeding in a benign one. But it should put us on our guard against the lazier assertions of multiculturalism: if a decent living standard is something to be valued, then on this criterion not all cultures are equal. (pp. 33-35)