Monday, May 5, 2008

"Put Not Your Trust in Consultants"

If my last post came across as sermonizing about an economic crisis, then any good sermon should derive from Biblical text. On the basis of yet another report in the Financial Times (this time from yesterday), the best text may come from Psalm 146, verse 3:

Put not your trust in princes,
in a son of man, in whom there is no help.

In this case the "son of man" is McKinsey, at least on the basis of the Financial Times report filed by Bertrand Benoit from Berlin:

More than 10m Germans could fall into poverty by 2020 because of insufficient economic growth, McKinsey, the consultancy, warned in a study on Sunday.

The study coincides with the release of an Emnid opinion poll by the weekly newspaper Bild Am Sonntag showing three-quarters of Germans fear old-age poverty. It will add to a lively debate on the shrinking of the middle class.

Given annual gross domestic product growth of 1.7 per cent, those earning between 70 per cent and 150 per cent of the average income – the standard definition of the middle class – will make up less than half the population by 2020, compared with 54 per cent today, McKinsey writes.

I see the McKinsey perspective as further propagation of what I had called "The Growth Illusion" when I was writing about the meeting of the World Economic Forum in Davos last January. It is also a product of what I have previously called "that old cliché from the days of the first Reagan Presidential campaign about a rising tide lifting all boats," a cliché whose speciousness was revealed shortly after Ronald Reagan became President. This is not to assert that economic growth, in and of itself, is necessarily a bad thing; but it is to question whether or not mass poverty (by McKinsey criteria or any others) is an inevitable consequence of "insufficient economic growth." Even if we accept McKinsey's "middle class metric," the fact it that the effect of prodigious economic growth in the United States has led to a vanishing middle class by creating a bimodal distribution of wealth, creating an increasing gulf between the very rich and the very poor. One would think that Germans would be particularly sensitive to such economic conditions, since the awareness of those conditions was exploited by Adolf Hitler in the course of his rise to power.

This is not to deny that there may be hard times facing the German economy. Rather, it is to assert that too many "princes" of economic thinking sustain their own economic growth by serving up what I have previously called "the moral equivalent of Jonestown Kool-Aid." Ample servings of that Kool-Aid were being passed around at the World Economic Forum; but Davos is too much a "refuge for the power elite" to provide a good climate for cultivating a sense of reality. The German government has the opportunity to reestablish that sense of reality by weighing the business interests of McKinsey against the interests of their country's population. If they do so, then they may discover that there are other paths to general welfare than the one that requires consuming the Kool-Aid of the Growth Illusion.

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