Tuesday, January 26, 2010

The pursuit of Happiness

In his Eudomian Ethics, Aristotle believed that (ethical) virtues led to Happiness. But the happiness that Aristotle spoke of was not necessarily the same that we would think of today. Today our view of happiness tends to be hedonic. We want to feel good immediately and tend not to think too far ahead. So we see a night out or a pleasant activity as a route to happiness.

The ancient Greeks had a very different perspective on Happiness. Aristotle spoke about achieving eudaimonia. He thought that the practice of virtues would equate to happiness, in the sense of being all one can be. For him it was the act of living in balance and moderation that brought the highest pleasure. Not in the action itself, but in the way of life. It is this way of life that would lead to the greatest benefit rather than just a passing amusement. A modern illustration would be the difference between earning a high income, but spending it all and living in more moderation and having great wealth that will last you and provide security.

Happiness is also an issue for economics and politics. For utilitarism, a fair society is a happy society. No supreme authority can decide what is good and fair for mankind; utilitarists like Bentham think in terms of states of pleasure or pain that human beings experience in their daily lives. Stuart Mill has broadened the notion of utility to all areas of life, but in substance utilitarism represents individual interests maximizing (their) well being, not collective interest, which is nothing else than the sum of individual interests.

My question is a different one: Is Happiness a right? All human beings are born equal and should have the same rights. The US constitution refers to 'life, liberty and the pursuit of happiness '. Some believe that the famous phrase is based on the writings of English philosopher John Locke , who expressed that "no one ought to harm another in his life, health, liberty, or possessions. When Jefferson spoke of pursuing happiness, he had nothing vague or private in mind. He meant a public happiness which is measurable; which is, indeed, the test and justification of any government. But to understand why he considered the pursuit of that happiness an unalienable right, we must look to another aspect of Enlightenment thought - to the science of morality. In fact, as in the philosophy of Locke he meant property.

Gross internal product is traditionally used to measure economic performance but is rarely correlated with happiness. Rich societies are often unhappy as they pursue as their main objective the accumulation of goods and wealth. By essence, happiness is subjective, and it is therefore difficult to compare one person’s happiness with another. It can be especially difficult to compare happiness across cultures: are Buddhists happier than (Christian) Europeans?

Economists sought to determine from what source people derive their well-being. Historically, economists have said that well-being is a simple function of income. However, it has been found that once wealth reaches a subsistence level, its effectiveness as a generator of well-being is greatly diminished. This paradox has been referred to as the Easterlin paradox* : aspirations increase with income; after basic needs are met, relative rather than absolute income levels influence well-being. So income is not the only determinant of happiness. Children tend to decrease parental happiness, at least until they leave for college. Married people are happier, but it is unclear if this is due to the marriage or if already happy people tend to marry(!). Democracy and economic freedom bring more well being to individuals. Fair and free societies are the key to increased happiness, but a deteriorating natural and health environment with higher levels of stress, allergy, asthma, pandemics and so forth will bring those levels down.

The question of happiness in our societies is an ideological one. Many countries are developing a Happiness index since Bhutan did so in 1972 because the King (an economist) was concerned about the consequences of deforestation; the example was recently followed by Thailand after the military coup in 2006 and it now releases on a monthly basis a Gross National Happiness (GNH) index on a 1-10 scale with 10 being the most happy(!).

We tend to embrace some happiness myths quite willingly. We are in fact the product of our genes and our societies. From a societal and ethical point of view, it would be better to focus on economic and social progress and the ability of societies to meet the needs of their citizens. In this regard, the Stiglitz-Sen-Fitoussi Commission's “Report on the measurement of economic performance and social progress concludes that the notion of well being requires a multidimensional approach that includes the material conditions (income, consumption and wealth), health, education, personal activities (including work), participation in political and social life, environment and insecurity (economic and physical) which go beyond the traditional tools of measurement of income.

In fact, Happiness is a different thing !

* http://graphics8.nytimes.com/images/2008/04/16/business/Easterlin1974.pdf
** www.stiglitz-sen-fitoussi.fr/en/index.htm

Do not forget Keynes' lesson about the euthanasia of the rentier

Classical economists (A.Smith, D.Ricardo, etc.) distinguished between productive and unproductive labour. Some incomes are not earned such as the rent. The rentier economy is that some economic agents, say banks derive their income through speculation rather than from the productive economy. The source of the present crisis is the rentier system that the last financial revolution engineered since the 1980s. Savings have been lent out without increasing production or living standards to finance speculation and debt leveraging. But the big picture is that the debt overhead has soared without corresponding means in the ability to pay this debt.
In the last chapter of the General Theory (Chap.XXIV), Keynes outlined a vision of capitalism in which he figured out the euthanasia of the rentier:
«Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating,that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution".
However, Keynes does not explain how this process will be accomplished. As Paul Krugman explained in his introduction* to the General Theory,  this rentier aspect was not transitional neither its euthanasia was gradual.
By that, Keynes meant a debt write-down. This is the only ultimate solution. As Adam Smith noted in 1776, no government ever has repaid its foreign debt. Today one can say the same thing about the private sector. Bankruptcy seems to be the indicated way to wipe it out. Governments are postponing this resolution by bailing out creditors – not debtors. This was not the solution suggested by Keynes: he wanted to minimize debt overhead, not bail out the financiers and builders of debt pyramids.
A key feature of the current global crisis is that we have not learnt the lessons from the past crisis. The excessive share of finance in capitalist economies has led to the formation of asset bubbles and therefore to a dramatic increase of inequalities to the advantage of capital holders (rentiers) and to the detriment of the working class. Rentiers continue to experience an increase in the rentier income share in average in the second half of the 20th century in developed countries**. This phenomenon is clearly related with the accumulation of capital and interest rate reduction.
We need a radical change in the finance, insurance and real estate sector – the rentier system -. The recent Obama experience shows how difficult it is.

* http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html
** Trends in the Rentier Income Share in OECD Countries, 1960‐2000  by Dorothy Power, Gerald Epstein and Matthew Abrena.

Thursday, January 14, 2010

Banks should pay for the crisis

Despite the anger of public opinion, the warnings of governments and the threat of imposing new taxes, the banks continue on a business as usual basis to provide gigantic bonuses for their financial agents. According to Le Monde (16 January), more than a billion euro will be given to traders based in Paris, which equates to about 62000 people getting the minimum wage during a year.

On 14 January, Pdt Obama has announced the instauration of a special levy on financial transactions that banks should pay as a fee for their responsibility in the crisis. However, this tax should bring around 117 billion dollars over ten years to the national budget . This amount corresponds to the estimated amount of losses resulting from the TARP (Troubled Asset Relief program) put in place in October 2008 and revised in February 209 by the Obama administration.

Initially, the TARP had foreseen that a plan to recover financial losses to the Treasury would then be set up before 2013. But, in view of the spectacular profits showed by the largest financial institutions, Pdt Obama has decided to anticipate his decision to set a new tax on financial transactions which will come into force on 30 June. It is clear that the largest companies will generate most of the tax revenue and that the tax will be proportional to the debt ratio; in other words, banks having more deposits and less debts will pay less whilsts banks more exposed to risks will pay more. Those which promote security in their financial operations will therefore be favoured.

This measure is set to open the wider debate about financial regulation and how to deal with excessive risks for the real economy. It is an encouraging signal sent by the US to the rest of the world. Of course, it will not solve all the problems; it might also have some adverse effects if consumers will eventually bear the cost of the tax in the purchase of financial services and if banks will be reluctant to increase their lending activity.

In past years, taxation on capital gains decreased under Clinton from 28% to 20% and Bush brought it further down to 15%. The new tax represents no more than 0,15% of total financial assets held by banks. Is this the price to pay by Wall Street for its responsibility in the crisis? It is probably more, but the important thing is that we put an end to moral hazard. Banks should not be bailed out anymore with tax payers money and should pay for their mistakes.

Tuesday, January 12, 2010

The world should learn from Europe

The recent crisis has highlighted the strength of the European social model. It would be unreasonable to throw it away in the name of competitiveness as an absolute imperative for Europe. It is a costly system and sometimes inefficient and inequitable, especially in Southern Europe. However, the Nordic model shows that it is affordable as the Scandinavian countries are considered the most competitive economies in the world.

So, what's wrong? The main argument is that demographic decline with an ageing population put in serious question the long term sustainability of public finance. This is true, but the impact on labour market and future generation of workers is even more dramatic. It means that Europe will have to import workforce from other countries.

From the other side of the Atlantic ocean, Europe is not regarded as the old continent. The crisis has changed mindsets even in the conservative camp; Obama is struggling to get a final approval of his healthcare bill which will not be as radical as previously thought, but at least it could relieve some urgent social problems among the most disadvantaged people who cannot afford social insurance. Inequality has soared as never before and will have to be tackled through income redistribution.

Europe is not a defunct system. It has much to tell to other nations if we just to take the time to get the facts right. It's true that Europe had economic troubles over the past 30 years where job creation was sluggish contrasting with vigorous employment growth in the United States. In the 1990s, Europe lagged behind in the adoption of new technology with few homes with personal computers and connected to the Internet. But since 2000- the launch of the Lisbon agenda- employment has grown a bit faster than in the United States, and since Europe has a lower rate of population growth, this has translated into a substantial rise of the employment rate , i.e. working age population having a job. The gap in employment rates between the US and Europe has narrowed in that period. So, Europe is not a place where a lot of adult people just sit at home with their welfare benefits. Likewise, Europe's Internet lag has also been overcome in a few years. The number of broadband connections per 100 people in Europe (before the enlargement in 2004) is slightly higher than in the US and connections are faster (at least in large urban areas) and faster than in the US.

It's true that Europe continues to have many economic problems like many other nations. But the fact is that Europe's economy- despite the call for reforms- looks better now than it did a decade ago. This might sound a bit provocative from a European perspective. Europe's broadband success owes to the combination of competition and regulation, preventing a 'far west' situation where telecom and cable companies would monopolize the broadband market.

But what European countries have not done is dismantle their social insurance system. Universal healthcare is provided almost in every country, together with a large variety of social programs in support of families most in need, poverty and so on. All this is paid with tax payers' money and European taxes are high compared to the US.

According to the free market' ideology, the route to prosperity is to have low taxes and weak social systems. The argument which is used by the conservatives is to say that if individuals are given more protection, this would undermine the economy, just as Europe named as the symbol of inefficiency and waste. Progressive economists like Krugman are in fact very critical on these views.

We should be aware not to throw the European model just because it is expensive. Actually, it is a safety net against economic insecurity, especially in times of crisis. Europe's economy needs a boost, but not at the expense of our social model, defined by J.Delors by three words 'competition, cooperation, solidarity'. The world has a lot to learn from the European experience, from its merits as well as its mistakes.

Wednesday, January 6, 2010

The lost decade

In his last editorial (NYT 27 Dec. ), Paul Krugman has decided to call the last decade the Big Zero. Indeed, It has been a decade of zero economic gains for average families whose median income adjusted for inflation has decreased. It has been a negative decade for homeowners who contracted mortgages and now owe more than the actual price of their houses. It was also a decade with basically zero job creation, with significant decline of private sector employment . Also, for most Americans (and probably Europeans), it was also a decade of zero stock gains even without taking inflation into account.
In the Bush years, there was a sense of economic triumphalism, especially in America's business and political establishment based on the alledged superiority of the financial system. But the incredible thing, as Krugman points out, was our unwillingness to learn from past mistakes. After the dotcom bubble, investors and bankers started inflating a new bubble in housing; then, Worldcom and Enron revealed that there was no 'honest' corporate accounting; banks went on taking excessive risks and to make investments into highly speculative products. After triggering the global crisis, and having to be rescued by governments with tax payers money, banks continued with their old habits of excessive leverage and gigantic bonuses.
Nothing has happened in terms of economic progress nor in social terms. So we were wrong to call a period of boom what actually was artificial growth fuelled by speculative bubbles in the housing sector, a model which was replicated in a number of European countries, such as Spain, and Ireland.
Is Europe doing better? The Lisbon Strategy's aim to make the union "the most competitive knowledge-based economy in the world" by 2010 is widely acknowledged to have failed, while its two headline targets of 70 percent employment and research and development spending equivalent to 3 percent of GDP are both set to be missed. Yet the aims of the new economic plan called 'EU 2020' may not differ radically from aspirations in the outgoing decade, although there is likely to be a considerably stronger emphasis on 'green growth'. It will include three broad themes: 'Creating value by basing growth on knowledge', 'Empowering people in inclusive societies', and 'Creating a competitive, connected and greener economy'. Achieving greater growth and higher employment levels through improved education, tailored towards industry needs, and greater levels of research and innovation is unlikely to face major opposition from member states, although many stakeholders, including trade unions, NGOs and members of the European Parliament are keen to see real steps towards securing social inclusiveness.
The next few months will be decisive for the European Union's economic future, with the forthcoming agreement on a new 10-year economic plan to address the consequences of the global crisis , and set a new course towards sustainable growth and job creation. Rising inequalities, high unemployment together with increasing poverty, an ageing EU population and soaring budget deficits form the backdrop for policy makers involved in laying the foundations for future growth and development.