Growth at whose expense?

Oct 6, 2011

Raymond Woo

Singapore's former Prime Minister Lee Kuan Yew  believed so much in the concept of growth and the power of market self-correction, that he spurned any notion of the welfare state within his microstate's borders. Indeed, he once said that a country must first focus on growth, and everything else will somehow fall into place.

Let us break down LKY's thought process into bite-size pieces. The first question we should ask is: what growth, and at whose expense? People tend to forget that an investment or an input always carries a cost, and is in fact considered a cost at the beginning of the business cycle. Unfortunately, the cost is not borne equally; some risk-takers are more equal than others, or in other words, a set of actors can move and package risk around to avoid being financially liable, even though these actors are responsible for decisions that carry those risks in the first place. For example, the annual bonuses of fund managers depend on the amount of their business profits, meaning that the higher the growth of their business the higher their bonuses. This is all well and dandy, until you ask whether they bear the cost and risk when their investments suffer loss. Of course, the answer is negative. Even if the fund managers are sacked due to poor investment returns, many enjoy huge severance payments, euphemistically called "golden parachutes" as is often agreed upon in their employment contract beforehand. It is thus no wonder why Wall Street shenanigans like the top management of Lehman Brothers could take unreasonable risks for the sake of growth and more growth, as those most responsible for poor "growth-at-all-costs" decision-making were not personally liable for their actions! Economists have since coined a euphemism, "moral hazard" to describe this behaviour.

The second question we should ask is, what has happened to the pet theory of neo-liberal Chicago Boys' (i.e. University of Chicago economists whose group included Milton Friedman) advocating market self-correction since the 2008-2009 "Great Recession", and how has this sea-change in economic thinking affected economic policy-making? For as long as anybody can remember, the fundamental assumption of economics is that people are self-interested rational actors, and will only make decisions that can increase their utility and achieve personal well-being. Unfortunately, in reality people are not always rational (married people, you should know), and furthermore optimal decisions can only be made when every single information is made available to the decision-maker, which of course is not possible in reality. Thus, this rational-choice theory which has been the foundation of the thinking that the market can constantly correct its inefficiencies because all market actors are rationally self-interested, is flawed. In the process of promoting a narrow band of political ideology and economic thinking, the Chicago Boys have simply ignored the great strides behavioural economics stemming from something as simple as Herbert Simon's concept of "satisficing", and so have the Chicago Boys' fanboys in Wall Street. Nowadays, economists have sneered at this mode of thinking, and some behavioural economists have even partnered with neuroscientists and clinical psychologists to see how people think and make decisions.

The debt crises in the Euro-zone and the US are chiefly, in my opinion, a problem of pushing the "growth-at-all-costs" agenda. Back in the early 2000's, the US was just emerging from a tech bubble-created recession, and policy-makers had to do something. Americans were getting agitated at low growth and high-employment, and people needed to feel good again after their country was humiliated and its psyche utterly crushed in the 9/11 terrorist attacks. Naturally, the government followed classic Keynesian thinking - spend more to create growth! At the same time, the Federal Reserve wanted to encourage private spending by pursuing a rigorous regime of lowering interest rates and making available cheap credit not seen in decades. In the Euro-zone, policy-makers and businesses simply ignored the gross fiscal and monetary mismanagement and low productivity in the PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries, and cashed in on the party of the century of booming property prices and construction, and other non-productive economic activities fuelled by cheap credit. Bankers in the UK, France and Germany took no notice, assuming that the market will eventually correct itself, and more importantly, their bonuses will keep on increasing with high credit and GDP growth.

Eventually, all this debt-induced growth will eat into private and public assets, and it is not wrong to think of this episode as cannibalising oneself to grow bigger. We must remember that high growth often always comes with high borrowing, and such unsustainable growth leads to misplaced confidence, or in other words, a bubble. After the bubble crashed following the Greek debt crisis and fiscal disarray in the US, people started to remember that nothing beats growth like that done though sheer hard work and living within ones' means.

The Malaysian government has just recently passed a "people-friendly" budget, yet another euphemism for more debt  and encouragement of cheap credit to pay for government expenditure. I certainly hope that all this induced growth in this country will not bankrupt us eventually.