Popular discontent in Brazil

A recent article about middle class protests in Brazil had some interesting explanations for the events, which I’d like to share. The analysis cited three main reasons for the protests.

First, infrastructure improvement didn’t keep pace with improvement in people’s homes & offices i.e. growth rate of people’s income exceeded growth rate of economy. This caused discontentment in middle class.

A high growth rate of purchasing power implies fast income growth and/or higher credit availability. Then there are two ways discontent can grow. One, when economic conditions stop improving. This can be via stagnation in wages, or reduction in credit availability. Discontent can also brew if rate of improvement of economic conditions is not sufficient i.e. growth rate of economic conditions could be positive, but slower than negative forces, so that overall situation deteriorates. E.g. wage growth rate could be positive but still lower than consumer or asset price inflation. So the situation is effectively contraction in income. A salient feature of US style capitalism is an increase in inequality. A few people benefit from asset price inflation, while majority pays the price. This produces a sense of injustice, thereby exacerbating discontent.

Second, income of boom years was consumed and not invested. So a lot of improvement in people’s condition was short term and didn’t carry through in lean period. People also borrow more to keep the party going as long as possible, which means that when the party ends, not only do wages get pressured, debt burden hurts too.

Third, related to previous two, is consumerism, wanting to consume more and more. People got everything they want easily (via credit) and not being able to do that any longer made them angry.

It is interesting to note significant role of credit in this story. Looked one way, credit provides an ability to consume more than one can afford. Governments of major countries are promoting the same with easy money. However, we already know how this movie ends. If we compare the response of governments with what an individual would do, most countries do not fare very well:

		US	EU	JP	CN
1	Increase income (Create production capacity)	X	X		√
2	Control costs	X	√	X	X
3	Save money	X	X	X	X
4	Reduce debt	X	√	X	X
	Else
5	Get more debt	√	√	√

Wage Story

Last Monday morning I was sitting at airport, seeing off my better half, when I chanced upon a small advertisement for a shoe shine service. Like everything else at airports this also seemed a bit overpriced. My thoughts moved to broader topic of high minimum wages in certain countries. Are they beneficial for economies or harmful? Do high wages impede economic growth?

 

One can argue from both sides. Disadvantages of high wages include reduced efficiency in the system, higher manpower cost for companies and higher hurdle rate for starting new companies. Thus higher wages can impede job growth. However, on the positive side, higher wages promote more equitable distribution of wealth. By putting more money in pocket of poor they help increase domestic consumption (since poor spend a greater proportion of their income than the rich).

 

Okay, so what are the conditions where higher wage system is more appropriate? If a country has higher wages, then companies will need to charge more to offset manpower costs. So prices will be higher (Price levels only. Inflation may or may not be high). A rich society will be able to afford these elevated prices, poorer society will find cheaper alternatives (informal economy). Additionally, in most cases the society with high price levels would need to have relatively low population growth rates. This is because high wages would lead to relatively slower rate of job creation. (This assumes that the economy is not dominated by fast growing high value add industries). Then, one can conclude that high minimum wages are more appropriate for developed economies (high GDP per capita, high PPP, slow population growth), while low wage system is more appropriate for developing economies (low GDP per capita, faster population growth, need for more job creation).

 

A high wage system, however, is more difficult to maintain in recessions and slow growth periods. High price levels imply more difficulty for poor to survive. Thus a need for government support programs like social security, unemployment benefits etc. However, if this support is removed or reduced then it’ll have direct implications for society in magnitude (roughly) proportional to number of unemployed. Variants of results are visible in developed economies all over – political tilt towards socialism (US), increase in support for extremist parties (Netherlands, France), breakdown in social order (Greece), and governments avoiding reforms (taking short term measures to solve long term problems) to appease masses (France).

 

Efforts to counter this via money printing can have only limited success. In fact, certain amount of deflation would help, by bringing prices down to affordable levels. Of course, economic activity would still need to accelerate to avoid a downward spiral.

Mexican Puzzle

Prostitution doesn't pay in Mexico

Mexico's prostitutes must be very poor. Dear reader, if you were to have some spare time and decided to leisurely skim through Mexico's national accounts tables, you will also come across a table 'Household consumption and private non-profit, total spending on the domestic market', classified by purpose showing household spending categories. In this table, within the section 'Total miscellaneous goods and services', is a sub-heading - 'Prostitution'. Obviously it must be a fairly important industry in there. However, the recorded expenditure in this category for last few years has consistently been zero. Does that mean that Mexico's prostitutes are the most underpaid in work and they do their job just for the love of God? The reality is probably that prostitution is big business but mostly in informal sector. Thus a big expenditure category with zero official expenditure.