Transcript: Political Economy, Plutonomics, Health Care

At one time in the distant past, economics and political science were a combined discipline called political economy. Employment, business, money, political power and relationships were studied together. Part of the irrelevance of modern orthodox economics has to do with its being split off into a separate discipline studying an aspect of social life as if it were a free-standing natural force.

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In a political economy, history is the laboratory. It is very convenient for modern economists when they say there are no experiments in economics. When all evidence is virtual evidence, then the hypothetical is king. When instead you have to explain why incomes stagnate, or climate change is ignored, observable facts, you have a problem. In the hypothetical, you can say, this is just the way things are and here are the numbers. When the milieu is human behavior, you look to policies and practice.

The practical people of Wall Street, in the main, bypass entirely the Neoclassical equilibriums and the elaborate hypothetical explanations and look for results. Let's combine history and Wall Street and look back a few years to the Plutonomy notes.

In 2005 and 2006, the highly paid strategists at Citigroup issued a series of notes, which may remind you of things we've talked about here. They held conferences with their investors to elaborate on these notes, but when they were leaked to the press and the public got wind of them, they were quickly muted. A great effort was made to take them down off the Internet where ever they may have surfaced, with legal threat and so on. But you can still see them. See the links online.

Quoting October 16, 2005.

Industry Note

Equity Strategy

Plutonomy: Buying Luxury, Explaining Global Imbalances

Summary:

The World is dividing into two blocs -- the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies -- economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.

Equity risk premium embedded in "global imbalances" are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary "global imbalances." We worry less.

There is no "average consumer" in a Plutonomy. Consensus analyses focusing on the "average" consumer are flawed from the start. The Plutonomy Stock Basket outperformed MSCI AC World by 6.8% per year since 1985. [It] does even better if equities beat housing. Select names: Julius Baer, Bulgari, Richemont, Kuoni and Toll Brothers.

[end summary]

Welcome to the Plutonomy Machine

In early September we wrote about the (ir)relevance of oil to equities and introduced the idea that the U.S. is a Plutonomy -- a concept that generated great interest from our clients. As global strategists, this got us thinking about how to buy stocks based on this plutonomy thesis....

[It is probably unnecessary for me to break in and explain that the strategists have no problem with Plutonomy on moral or ethical grounds, it is just a phenomenon they observe and hope to profit from.]

[later]

(1) the world is dividing into two blocs -- the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before, in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.

[...]

Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.

(2) We project that the plutonomies will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.

...

(4) In a plutonomy there is no such animal as "the U.S. consumer" or "the UK consumer," or indeed the "Russian consumer." There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich," the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits) oil price impacts, etc., that is focus on the "average" consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes.

...

[And this is the point we've been trying to make over the past couple of months, though we've not explained it so well as the CitiGroup folks, the average is not useful to understanding an economy. Inflation, Incomes, Savings, ... When there is a real economy and a financial economy ... The real economy in which people live is bouncing along the bottom, a bottom that is sloped downward and filled with risks.]

[continuing]

(5) Since we think the plutonomy is here, is going to get stronger, its membership swelling from globalized enclaves in the emerging world [read sweat shop owners of China], we think a "plutonomy basket" of stocks should continue to do well. These toys for the wealthy have pricing power, and staying power. They are Giffen goods, more desirable and demanded the more expensive they are.

[And I could go on, reading under headers such as "Riding the Gravy Train -- Where are the Plutonomies?" and "The United States Plutonomy -- The Gilded Age, the Roaring Twenties, and the New Managerial Aristocracy." But before we leave this, I want to make some points. Not that these amoral folks are bad people, or the plutocrats who they serve. Yes, they may rot in hell, if there is a hell, but on the other hand, they are operating according to their own self-interest, as they have been instructed by economists, and if the larger population begins to emulate them, operating in THEIR own self-interest, the plutonomists may have a hard time here on Earth.

But there are a couple of historical points to make. One is that the plutonomy in the US began its rise in the late 1970's and took off under Reagan, and has not looked back. The second is that this phenomenon tracks the rise of the financial sector as a proportion of the economy. As the financial sector has extracted more and more of the profits of the whole, so the plutocrats have prospered. The third historical point is this was written in 2005, and its follow-up notes in 2006. The economy crashed in 2008. Yet today the richer you are the more of the pie you are getting each year.

So when the CitiGroup folks say plutonomies "will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization," they should leave out the technology-driven productivity part and emphasize control of the government and extraction through the financial sector. In fact, it is low tax rates and the monetary policy that puts banks and stocks ahead of actual investment in real stuff that has continued the well-being of the plutocrats even through the crash

And again, we want to emphasize, the decline and stagnation of the real economy, employment, investment, and the rest is masked by the plutonomy, by the averaging of the very wealthy few and the more and more insecure many.

But check out those links online and add your own commentary. There are lots of details. Tables, charts, anything you want to know about income disparity, where it has been and where it is going.

A last comment, from the third note, on September 6, 2006. "What could go wrong? beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more equitable share of wealth."

Again, throw out the technology and productivity, as we've displayed elsewhere these are not the drivers. And throw out financial collapse. Not a threat. War doesn't seem to dent things. Inflation? The price of bling is always going up, otherwise, not a threat. I guess that leaves a more equitable share of wealth.

So I guess plutonomy is still a good play.

Now, on to health care. We have to comment, since everybody else is, on the roll out of the Affordable Care Act. The political and technical complexity of the Act, along with the fact that it does not control costs, but only expands subsidized coverage, make the ACA not the answer. Rather than get further into the weeds on that, look at single payer.

Single payer is not socialized medicine. That would be, as we hear from Public Citizen, the Veterans Administration, where the government pays for the doctors and hospitals. The VA is socialized medicine.

Under single payer, you get a health care card and you can go to any doctor or hospital. Call it Medicare for all. Doctors are not employees of the government. Hospitals remain in private hands.

As to costs. Currently Medicare covers the senior population, that group that is most expensive. It pays $600 for an MRI. You can get charged, as a friend's nephew did recently, $12,000 for an MRI. The mega-corporations that are the sellers have to deal with a mega-buyer. It balances the market.

Drugs would be cheaper. Research might be higher, since most of it is funded by the National Institutes of Health and through public universities, not in Big Pharma laboratories.

Single payer would mean no more bills, no more deductibles, no more co-pays. And instead of paying enormous health insurance premiums and then the first $5,000 in deductibles, you will pay a universal fee, or tax, that will be less. And the single payer will be motivated to enforce preventive medicine.

So. Obamacare is not single payer. It is not simple. It is not universal. It does not control costs. Control of costs is the key point. When the political debate says we have to cut entitlements, like Medicare, because we cannot afford them, it is really saying we have to shift medical costs into the private economy, where the market is making a mess of things. Eugene Fama, whither thy efficient market? This does not solve the problem. The problem is health care costs. Single payer is the way to get to those costs.

So, you may have noticed this week's podcast is later than usual. Very sorry. We are getting into our second book and time gets away from us. We wrote Demand Side Economics, the book, in 2011. Check it out. It has a forecast section that is still good. Find it at DemandSideBooks.com or on Amazon. The next one is "A Pundit's Guide to Economics." We've gotten tired of media talking heads just accepting the nonsense that is shoveled at them because "I am not an economist." This will be short, broad, and pungent.

More than that, we are in the process of forming the Institute for Dynamic Economic Analysis, with the very cute acronym IDEA. Idea. It is a nonprofit to expand and support the work of Australian economist Steve Keen. The current board pro-tem is composed of tech guys, economists and others here in the Northwest. We hope to have that incorporation complete later this month. It is more work than we have time for, but hopefully we'll get it up and running and funded. Steve's Minsky project, the dynamic economic modeling software, is one key mission. Another is getting him to finish his Finance and Economic Breakdown, his magnum opus. Otherwise the mission is simply the complete reformation of economics. We'll let you know when we pass a milepost. And Steve is an inveterate Twitterer. If you're into that, you should get on and follow him.