"....distributive justice without participative justice can only ever be coincidental."
W. Neil Adger, Jouni Paavola, Saleemul Huq and M. J. Mace, Fairness in Adaptation to Climate Change (MIT Press, 2006)
-->
Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning. If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc. This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way. Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.
That’s my reaction to Paul Seabright’s The Company of Strangers. The book came highly recommended to me, and since I’m working on a paper that touches on the theory of cooperation, I was looking forward to it. Cooperation from an evolutionary and behavioral perspective is Seabright’s thing, and there is some catchy writing about it. The bulk of the book, however, is essentially a rehash of mainstream econ which hardly adds anything to the standard textbook story.
What sealed the deal for me was the chapter on water. Here’s an opportunity to explore the fuzzy boundaries of economic reasoning: problems of complexity and the resilience of natural systems, the contributions and limits of markets, deontological versus utilitarian approaches to social justice, and so on. To do it, you would need two things, a strong background in the science and history of water systems management and a flexible, open-minded approach to economic assumptions and methods. Both, alas, are lacking.
Seabright’s only historical reference is Wittfogel, which suggests he is unaware of the flourishing modern literature on the political ecology of water. Where to start? If you’re in the US, read Cadillac Desert; if you’re in Europe, check out The Conquest of Nature. (You will learn that Frederick the Great was a true “oriental despot”; aside from warfare, the Prussian state’s main obsession was transforming the hydrology of the north German and Slavic swamplands.) This matters, because water and political power have been intimately related through history, and power is not an afterthought.
Even more crucially, though, Seabright shows no sign of having studied hydrology itself. He does not discuss aquifers and the messy patterns of groundwater withdrawal and recharge. He doesn’t consider the problems posed by the variability of water supplies or the issues connected to river channeling and floodplains. There is no mention of the ecological functions of surface water aside from their use in human enterprises like agriculture. The man has written a whole chapter on water without doing any real research into it.
The result is that disjunctures between economic theory and aqueous reality are never recognized, much less pursued. Water management, for instance is about both supply and demand, often in the same activities. You might be able to analyze important management questions using the tools of cost-benefit analysis, but standard supply and demand analysis is useless. (Go back again to the key management decisions described by Reisner.) This doesn’t mean that prices can’t help distribute resources rationally, just that they are more pertinent to what might be called retail rather than wholesale matters. And property rights can’t possibly be fashioned to encapsulate the interactions embodied in groundwater management. And ecosystem services? The point is not that economics is “wrong” in any absolute sense, just that economists must be humble: their tools can make only a modest contribution to better water policy, and, if they don’t understand them, they will end up doing more harm than good.
As for the issue of water and human rights, let me quote the passage that sums up Seabright’s opposition to guaranteeing a basic water supply to all people, rich and poor:
Just as disturbing is his displacement of the needs and interests of the poor by the interest of the non-poor in having convenient arguments for providing support. What matters, of course, is not how strongly the case for generosity can be made, but what sort of lives poor people are able to live. In fact, there is a double meaning to his final sentence. If water is priced out of reach of the poor, there is all the more reason to give more money to them. That does not mean that they will get this money; more likely than not they won’t, and therefore pricing water is bad for them.
In arguing against Seabright, my point is not that people should never be charged a price for using water. Quite the contrary: like most environmentalists, I see a lot of benefit in doing this, especially in contexts where water is not a primary good. But I also know there are other factors to consider, and that, in any case, prices are simply tools to align individual and social incentives. How could it not be society’s interest that poor people have access to enough water for drinking and sanitation?
In the end, the problem with most pop economics is not that it is pop, but that it peddles a simplistic view of the place of economics in the larger intellectual and moral enterprise. General readers, even if they aren’t yet in a position to recognize the difference, deserve an economics that is thoughtful and probing.
In the world of climate economics, Richard Tol is a major name. If his most recent post on the topic is any indication, he should pick another line of work. Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”. His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:
• sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population
• the extinction of species that cannot adapt at the rate at which their environment is changing
• an increase in the frequency and severity of severe weather events
• the loss of water storage in glacial formations
• shifts in rainfall patterns that could subject more regions to drought, fire and other hazards
• loss of agricultural productivity in tropical and many temperate regions
• and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.
Personal preferences for a few degrees of temperature more or less have nothing to do with it. Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else. Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?
This extraordinary singer died a few days ago at the age of 69. She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song. If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.
She was one of a kind.
The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.
Do you suppose there was a sudden outpouring of love for the Spanish right? More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside. The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition. Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.
There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection. The final tally would be the number of votes for minus those against. In a two party/candidate race the final result would be the same. In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative. In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.
My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones. They should have had that chance.
If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues. Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.
There are 50 US states (plus a few colonies), and each has its own budget. By law, this budget must balance in 49 of them, and the holdout (Vermont) doesn’t operate differently in practice. The logic behind this constraint has nothing to do with optimal fiscal policy—whether budget deficits are “good” or “bad” in any given context—but reflects the centralization of macroeconomic policy, monetary and fiscal, in Washington. Suppose, for the sake of discussion, that a state, even a large one like California, decides to go its own way and runs a large fiscal deficit. This would pose several challenges to federal-level policy:
• It would add to the stock of dollar-denominated public debt, whether or not policy-makers, or the public, elsewhere in the country wanted it. In other words, it would be undemocratic, imposing an outcome on a broader jurisdiction which that jurisdiction would be unable to decide on.
• It would put pressure on Washington to guarantee, explicitly or implicitly, state-level debt. As in today’s Eurozone debacle, it would be extremely costly to permit defaults by large members of the community; the effects would spill over to other state fiscal authorities. But if the federal level guarantees state debts, there need to be limits on the borrowing choices of the states. In this sense, there is some support for a German-style “hard” fiscal constraint on states.
• It would also put pressure on the Federal Reserve. Under normal circumstances, although not today’s liquidity trap, more public debt means higher interest rates, and this places a burden on all dollar-denominated public borrowers; it also has the potential to crowd out private credit creation. The Fed is then forced to decide how much of this pressure it wishes to relieve through monetization, thereby assuming the risk of inflation. Despite putative central bank independence, there is normally a loose coordination between monetary and fiscal policy, since the effects of each depend greatly on the other, but that would not be possible if it were state fiscal choices that were driving the aggregate public budget. In fact, the thought experiment of active California (or other state) fiscal policy makes clear how important it is to coordinate monetary and fiscal spheres.
Up to this point, it looks like fiscal orthodoxy is the takehome message: if the Eurozone wants to centralize its finances, it needs to impose something like a balanced-budget rule on its member states. If you are Wolfgang Schäuble, you can stop reading right now.
But it’s not so simple. There are two big caveats that have to be taken into account. The first is that the balanced budget rules at the state level apply only to operating expenses; these have to be financed out of current revenues (or surpluses set aside during balmier times). States routinely issue bonds to finance capital projects, and these are just as surely fiscal deficits as any other form of debt-financed spending. There is no statutory limitation on the capital budget in any state, although political resistance has usually kept bond issuance at moderate levels. (In many states new bond issues have to be put to a public vote.) One advantage of exempting capital projects from balanced budget rules is that, in theory, these project provide a stream of future benefits to offset future debt service. If you think that dividing state budgets into operating and capital components and treating each differently makes sense, you would want to look for an alternative to a simple hardening of the Stability and Growth criteria.
The second caveat is the biggest: the federal government conducts fiscal policy. It oversees the lion’s share of automatic stabilizers, such as tax receipts and transfer programs. (Where it doesn’t, as in unemployment insurance, it tends to be more generous in backstopping the states—at least it was until the Republican Party decided it wanted to undo the New Deal.) In other words, the federal government assumes the majority of taxing, spending and transferring activity in the US; even combined, the states are second-tier. During 2010, for instance, and indulging in a bit of rounding, the federal government accounted for 70% of all government spending and 60% of all public revenues, with the rest going to all other levels of government. (The difference between these two shares reflects the federal assumption of deficits.) It would be presumptuous to claim that this is the right set of proportions, but it gives an idea of what the fiscal transformation of the Eurozone would entail. Clearly such a shift of financial wherewithal from the members to the center cannot be undertaken without a corresponding political transformation—the creation of a consolidated, Eurozone-level democratic space. (To his credit, by the way, Schäuble understands this.)
But it is not enough for the center to have fiscal capacity, it has to use it. When the financial crisis of 2008 struck, it was essential for the federal government to use its borrowing capacity to make up for the credit collapse in the private sector; without the big budget deficits we’ve seen since then, we would be very deep in a depression. In fact, as most reality-based economists recognize, the deficits should have been bigger; they should be bigger right now. A different way to put it is that the fiscal restrictions on the states only make sense if there is no such restriction at the federal level, and policy is free to be as expansionary or contractionary as needed. There must be no Stability and Growth criteria for center.
The link between these long-term considerations and the current negotiations over immediate measures is this: any pressure on governments to impose austerity in return for financial support should be balanced by fiscal expansion elsewhere in the system. It should be at least euro-for-euro simply to retain the existing fiscal stance. If you regard Eurozone-wide unemployment as too high or euro-denominated balance sheets too fragile, you would demand even more expansion than austerity. This would anticipate the sort of viable consolidated fiscal mechanism of the future. Imposing austerity without such a counterbalance anticipates a Eurozone whose consolidated fiscal account is simply the sum of member budgets, each subject to a deficit constraint—a US federal system without a US Treasury free to set policies as conditions require. That’s a bad idea in good times and a death wish in the midst of a slump.
I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.
That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008. Imagine how much worse it would be if the crisis that actually happened actually happened.
Let’s let the newt speak for himself:
But let’s not get hung up on details. Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?
Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks. He wears overalls. In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm. Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.
Am I reading in too much? (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)
As a footnote to the previous post, here is an observation about the German obsession with inflation. Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich. This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler. That trope should be buried once and for all.
More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization. Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.
The real reason is that Germany is a country of savers. The savings rate is high, and savings are distributed broadly. Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest. It is an act of self-denial that looks to the future—one’s own and that of the generations to come. To have savings is to be free. Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right. The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance. Germany is a savocracy.
The great threat to savings is inflation. Long before hyperinflation destroys savings altogether, modest inflation chips at their edges. Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality. Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.
Among other things, this perspective fails to take account of where savings come from. Yes, they come from choices people make, but they also come from the income that make those choices possible. Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit. And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US. In other words, the virtue of savings is inseparable from the vice of debt. Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.
Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....
European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries. This is why important policy decisions have to be unanimous. As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage. You know, the Finns, the Slovaks and their ilk.
In fact, the small and weak do not have this power. If they try to throw sand in the gears, they will be put in their place one way or another. A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly. Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?
The real threat to multilateral institutions has always been the veto power of the strong. This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis. As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.
Everyone except Germany. Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.
In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity. If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”. This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.
So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion. Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens. Will any of them start to crack before it's too late?
I’m slow to get up this morning after a concert last night by this great Swedish folk group. They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany. Although they’ve been together for 22 years, this was the beginning of their first German tour. (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)
On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys. He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs. While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.
Väsen’s virtuosity is exceptional. Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas. Toward the end of the night they started to fool around, and this was good too. Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?
They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events. Not to miss.
It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf. Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.
Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”). Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur. Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.
Let’s get to the core issue. Assume there are four individuals, A, B, C, and D. A and B are at the struggling end of the working class, C and D are rich. A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit. Suppose their annual incomes look like this:
A: $20,000
B: $30,000
C: $200,000
D: $2,000,000
If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression. But what would this have to do with the popular revulsion against an income distribution so skewed to the top? The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom. Think of that old Jesse Jackson speech:
To a large extent, the New York Times sets the news agenda for American journalism. Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press. So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street
Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers. The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way. Unfortunately, that was not all. Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones. Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.
But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest. Our story, whatever it was, had little to do with its representation in the media. We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.
Lessons? They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function. Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.
Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo. Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace. This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.
She is right that climate denialism has its roots in politics and psychology, not science, and that trying to make a serious response to the impending crisis look like business as almost usual (or even better than usual with green jobs for all) is misguided. No one really believes this. Dealing with a threat on this level means large-scale collective action, and its global ramifications require redistribution. I think Klein is exactly right that climate activists should accept the reality of the cultural divide and cook up effective strategies to deal with it.
But the economics is a mess. She rails against globalization, but this is a false target. The fundamental driver of carbon accumulation in the atmosphere is burning fossil fuels, and humanity has done this in ever greater quantities as the technology for extracting and converting these energy sources has developed. We have been doing it when there was less trade, more trade, and in-between trade. If we took the carbon-intensive industries in China that export to the US and moved them to North America, there would be hardly any difference in the planetary carbon trajectory. The bit about how much fuel is used to move goods between countries is a red herring. (I have been eating a lot of herring recently, but none of it is red. What gives?) Distances between countries are not necessarily greater than distances within them, and modes of transport matter more than kilometers. The carbon footprint of goods on a container ship chugging from China to the US west coast is less than short haul by truck. In any case, price carbon properly and the fuel/distance thing will sort itself out automatically.
Railing against economic growth is even more misguided. (1) The investments we need to make in a post-carbon future are enormous. A shrinking economy will not be able to afford them. (2) We also need to make investments in adaptation, since a lot of climate change is already baked in—literally. (3) There are billions of poor people around the world, and redistribution alone is not going to do the job, nor would there ever be a political base for such a level of collective sacrifice. (4) Our quality of life can be improved by doing much of what we do better: better food, better health care, a better built environment, even better gizmos. (5) Economic growth is measured in value, not stuff. Teaching someone how to play a musical instrument or a new language adds economic value. A well-crafted good that lasts a lifetime but costs more than a string of knock-offs that keep breaking down adds economic value. (6) If enviros denounce economic growth while the actually existing economy is stuck at stall speed and unemployment is rampant, they are clueless and deserve to lose.
Finally, she misses the key economic shift that has to take place for fast and effective reduction in greenhouse gas emissions: there has to be a permit system for taking fossil fuels out of the ground. Taxes are a start, but as I’ve argued in the past, they are weak tea compared to permits. (1) The debate over what’s the “right” tax takes us to the quagmire of calculating the social cost of carbon; the “right” number of permits is a matter of setting a quantitative emissions target for stabilizing the climate. (2) Tax increases will almost certainly overshoot: the level of tax necessary to get to a quantitative target will likely have to go beyond it. But because this increases the political problem of getting the tax approved, it makes reaching the target less likely. (3) Taxes can be gamed just as readily as any other kind of policy—perhaps more so because the link between the tax level (and all the loopholes and exemptions and credits) is obscure.
In any case, put a serious price on carbon by auctioning off permits, and the other policies, which are absolutely necessary, will follow. It is difficult to convince taxpayers to finance mass transit because driving is cheap. If driving becomes expensive, trains will look sexy. The same goes for the other investments we need to make in energy efficiency, urban redesign, infrastructure, R&D, etc. What’s so annoying about the Breakthrough Institute is that they have it exactly backwards: it’s not that there’s a groundswell for spending on economic redesign, but that we need a serious price on carbon to generate support for that spending.
Finally, I don’t see how mobilization to combat climate change will require more “planning”, at least in the economic sense. The uncertainties, qualitative factors and tacit knowledges that killed old-style planning are not going to disappear because we are struggling to decarbonize; if anything, in this transitional world they will be even greater. We will need more coordination, but that is a different matter. This calls for more participative institutions and less centralized, unaccountable power. That sounds “left” to me, but it has almost nothing to do with the vision of a planned economy. Yes, a public agency building a passenger rail system needs to plan, but so does a private corporation doing the same thing.
As I reread what I’ve written I fear I’ve come off as a curmudgeon, defending the sacred turf of economics against unlettered interlopers like Klein. That’s not it at all. I welcome everyone, whatever their background, to these issues, and I appreciate the new ideas I’ve picked up from people with vantage points different from mine. But Klein has remained stuck on a popular distortion of economics and uses her well-deserved influence to reinforce them. If political activists follow her down this road they will not just be wrong in some academic sense—they will waste the opportunities history is now handing them.
I sometimes carp about minor missteps, but this is big. In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.
The Times reporters and editors need a refresher in introductory economics. The fundamental identity that connects financial balances to a country’s international position is
BP + BG ≡ CA
where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).
Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany. At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves. Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government. Yet, as long as the trade imbalances grew, one or the other was unavoidable.
(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed. This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)
So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.
Skip the Times and get your news and views from the econ blogosphere.
Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems. They might as well sacrifice goats to the gods. The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.
What more is there to say? Europe is on a precipice, political as well as economic. Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback. Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.
And incantations of austerity and reform are pointless. Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done. Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.
Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense. Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke. Put aside this morality tale and there is no economic logic whatsoever. There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights. (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.) In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case. There is no argument to critique, no evidence to rebut. “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo. Receive a transfer and you must sacrifice.
Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.
Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt. It satisfies a craving for moral order. Unfortunately, the real universe is about to crash into it and smash it to pieces.
Let’s take a moment to sort out the euro mess.
First, there are two problem areas that have to be addressed. The immediate trigger, as it usually is, is finance: big borrowers can’t service their debt, and this puts their creditors at risk too. The underlying issue, however, is imbalances—large, persistent current account surpluses in some countries and offsetting deficits in others that created today’s debt problems and will create tomorrow’s with near certainty.
The financial crisis is a matter of arithmetic. Here are the numbers to keep in mind:
1. Debt service as a function of total debt outstanding and interest rates. Yes, there are maturity complications, but at a first approximation, and assuming payments are made only on interest and not principal, you can multiply the first by the second and get a rough idea of what borrowers have to come up with.
2. Debt service and a sustainable Debt/GDP ratio. Since this is most immediately a sovereign debt crisis, the core question is whether it is possible for debtor governments to run a large enough primary surplus to finance payments to creditors while also preventing debt from exploding. In the analysis that follows we will assume that the stock of outstanding debt is altered only by running fiscal deficits or surpluses; there is no effect operating through changes in the price level. (This is a reasonable simplification given that inflation is very low in the peripheral European economies, and the ECB is determined to keep it this way.) Specifically, and again assuming debtors pay only interest, the condition for servicing debt while maintaining debt stability is:
Debt service - primary surplus = total outstanding debt x growth rate of GDP
As a special case, if GDP remains constant, the entire interest payment must be financed by a primary surplus. Plug in the numbers from individual countries and see how that works.
3. GDP and primary fiscal surpluses. Unless offsetting changes in either consumer spending or business investment are triggered by fiscal austerity, increases in the primary fiscal surplus will reduce GDP. In theory, private spending could exhibit either positive or negative feedbacks, but as a starting point, assume a fiscal multiplier of one, i.e. no feedback. In that case, and maintaining the assumptions of price stability and debt service consisting only of interest payments, the sustainability constraint is:
primary surplus = debt service x 1/(1-d)
where d is the ratio of outstanding debt to GDP. Note that the primary surplus must always exceed debt service, and that it reaches infinity (fails to achieve sustainability) as d approaches 1. In other words, heavy debtors, whose debt load approaches or even exceeds GDP, cannot achieve sustainability without economic growth.
4. Debt relief and creditor solvency. If you do the arithmetic on sovereign debtors and find they need a reduction in debt service—a relaxation of terms or a reduction in principal—to remain viable, it is still an open question whether their creditors can sustain this haircut. Some creditors are public, such as the ECB and IMF, so set them aside. The critical issue is whether the banks that have made these loans can afford to write off as much as the sovereigns require. Banks within the debtor countries are most exposed but, in general, least systematic. (This does not apply to Santander.) Core country banks present deep system risk. There is arithmetic for this, but it is difficult to apply because there is little transparency regarding equity buffers and full (direct and indirect) exposure of creditor banks. If we find out, it will be in the actual course of events.
The second issue, imbalances, poses the question of adjustment. What will it take for persistent (current account) deficit countries to return to approximate balance? Let’s separate a few strands.
1. Devaluation is the most direct route, but it is blocked by adoption of a common currency.
2. Internal devaluation—deflation—is theoretically possible, but extremely costly and may fail due to the interaction between debt service sustainability and GDP. If the economy is shrunk to achieve deflation, this increases d in (3) above and requires even more austerity on the part of fiscal authorities. This can become a doom loop under plausible parameters.
3. Surplus country adjustment is far more feasible economically, but politically unlikely. Large wage and price increases in Germany, the Netherlands and Finland would do the trick, but how can they be induced to accept? There is no financial gun pointed to their head, nor is there any mechanism in the eurozone machinery for this sort of lifting. Note the preponderant influence of the surplus countries in ECB policy, for instance. It should also be remembered that exporters like Germany also face competition from outside the eurozone, and price inflation that balances the first set of accounts may put the second into deficit.
4. That leaves “structural reform”. This is the linchpin of troika conditionality: deficit countries must deregulate, liberalize their labor markets, privatize, modernize, etc. This perspective is echoed in media coverage of negotiations in Greece and Italy, where the question is understood to be, can the dysfunctional political regimes of these countries get their act together and meet the stern but reasonable demands for reform? The honest response, however, should be that there is minimal evidence that the reforms on the table will actually lead to rebalancing.
The most dubious demand is that labor markets be deregulated. While economists disagree about specific labor market institutions, it is fair to say that the consensus emerging from the last decade or so of research is that no general conclusion can be drawn from such simple notions as labor market flexibility. Different regulations function differently and in different national contexts. To take just one case: can you think of a less flexible labor market than Germany’s? There is an elaborate system for certifying who is permitted to perform which job. Most wages are set in centralized bargaining. The consent of unions and works councils is required for business decisions entailing layoffs, changes in work organization, etc. As mentioned in earlier posts, Germany also “suffers” from a largely public banking system that channels subsidized funds through politically influenced channels to firms. It persists in maintaining public and nonprofit ownership stakes in large parts of its economy, from housing to professional sports (Bayern München) to manufacturing (VW). According to conventional standards, Germany should be first in line to get reformed, but they are the ones who have the trade surpluses and are dictating terms to the peripherals. (Yes, I know about Hartz I-III, but this has left most of German labor market regulation intact; in fact, that was largely its purpose, to keep the core institutions through strategic trimming.)
Incidentally, the poverty of the “reform” discourse should be apparent from the now-indisputable failure of structural funds. These funds were supposed to bring the less productive regions of the EU up to the leaders, but the current crisis showed they have not done this. Whether the money was not enough, whether it was misspent, or whether the entire idea was an illusion is a topic worth discussing. The one thing we can be certain about is that Europe has a track record in pursuing futile remedies for its imbalances. (The funds may have accomplished other purposes, of course. I run along a nice canal path financed by my benefactors in Brussels.)
Adjustment is needed; the problem is that the eurozone honchos do not have a recipe for it. For now, the only reasonable conclusion is that adjustment will remain out of reach for the foreseeable future. Either Europe recycles surpluses through transfers, or the euro is toast.
They are gathering in coffee shops, gyms and multiplexes, conspiring to wreak havoc on the US economy. You know who they are: the boomers and near-boomers, the demographic bulge that will rip a giant hole in fiscal budgets and push working-age taxpayers into martyrdom or worse.
Don’t take it from me. David Leonhardt, in today’s New York Times, talks about the impending collision of slow economic growth with “sharply increasing claims” that “come from the aging of the population”. He quotes Benjamin Friedman of Harvard: “These are very difficult moral issues. We are really talking about the level at which we support the elderly retired population.”
This is common wisdom, one I’ve heard more times than I care to remember. Does it matter that it’s wrong?
1. Aging, and increases in the proportion of the population no longer active in the labor force, is nothing new. The US and other industrialized countries have been adapting to this trend for generations. In fact, the increase in retirees we face in the future is not nearly as dramatic as those we’ve dealt with in the past.
2. The secret weapon against the attack of the seniors is not growth per se but productivity growth, output per worker. As long as this increases faster than the ratio of retirees to active workers—and it has ever since we started gathering statistics on it—we can afford to take of our elders and improve living standards for the young and spry simultaneously.
Demographics is a false issue. I’ll trust the motives of those who pound that drum when I start seeing articles about how the economic burden of the defense (i.e. war) budget poses a moral issue that demands courage and sacrifice, etc. The demographic bulge I worry about is predator drones.
Home > Archives for November 2011
Tuesday, November 29, 2011
The Genealogy of Occupation
Much has been written recently on the question of where the Occupy Wall Street movement came from. The assumption seems to be that it represents a new manifestation of the counter-globalization ethos that first showed up in Seattle, 1999.
In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.
Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.
In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.
Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.
The Problem with Pop Economics, Paul Seabright Edition
Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning. If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc. This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way. Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.
That’s my reaction to Paul Seabright’s The Company of Strangers. The book came highly recommended to me, and since I’m working on a paper that touches on the theory of cooperation, I was looking forward to it. Cooperation from an evolutionary and behavioral perspective is Seabright’s thing, and there is some catchy writing about it. The bulk of the book, however, is essentially a rehash of mainstream econ which hardly adds anything to the standard textbook story.
What sealed the deal for me was the chapter on water. Here’s an opportunity to explore the fuzzy boundaries of economic reasoning: problems of complexity and the resilience of natural systems, the contributions and limits of markets, deontological versus utilitarian approaches to social justice, and so on. To do it, you would need two things, a strong background in the science and history of water systems management and a flexible, open-minded approach to economic assumptions and methods. Both, alas, are lacking.
Seabright’s only historical reference is Wittfogel, which suggests he is unaware of the flourishing modern literature on the political ecology of water. Where to start? If you’re in the US, read Cadillac Desert; if you’re in Europe, check out The Conquest of Nature. (You will learn that Frederick the Great was a true “oriental despot”; aside from warfare, the Prussian state’s main obsession was transforming the hydrology of the north German and Slavic swamplands.) This matters, because water and political power have been intimately related through history, and power is not an afterthought.
Even more crucially, though, Seabright shows no sign of having studied hydrology itself. He does not discuss aquifers and the messy patterns of groundwater withdrawal and recharge. He doesn’t consider the problems posed by the variability of water supplies or the issues connected to river channeling and floodplains. There is no mention of the ecological functions of surface water aside from their use in human enterprises like agriculture. The man has written a whole chapter on water without doing any real research into it.
The result is that disjunctures between economic theory and aqueous reality are never recognized, much less pursued. Water management, for instance is about both supply and demand, often in the same activities. You might be able to analyze important management questions using the tools of cost-benefit analysis, but standard supply and demand analysis is useless. (Go back again to the key management decisions described by Reisner.) This doesn’t mean that prices can’t help distribute resources rationally, just that they are more pertinent to what might be called retail rather than wholesale matters. And property rights can’t possibly be fashioned to encapsulate the interactions embodied in groundwater management. And ecosystem services? The point is not that economics is “wrong” in any absolute sense, just that economists must be humble: their tools can make only a modest contribution to better water policy, and, if they don’t understand them, they will end up doing more harm than good.
As for the issue of water and human rights, let me quote the passage that sums up Seabright’s opposition to guaranteeing a basic water supply to all people, rich and poor:
The great merit of charging a price for water is that we no longer need to argue who deserves it more: if people are poor they may deserve our help, but if water can be priced to reflect its scarcity relative to other goods, we no longer need to argue the case for helping them separately when we consider food, housing, water, clothes, and all the other aspects of their lives. Proper pricing strengthens rather than weakens the case for helping the poor. (Emphasis in the original.)What strikes me most about this statement is its moral obtuseness, verging on narcissism. The problem for the poor turns out to be the ease with which Seabright can make an argument for helping them. Specifying rights in kind takes more time and effort and is therefore inferior to just giving people money and letting them spend it themselves. No doubt this is true in some cases, but there is a reason decent societies specify entitlements to specific, essential goods like health care, education, legal representation and basic infrastructural services—like water. The idea that there are primary goods to which all people should have a right, distinct from goods in general, is widespread and has received plenty of support from philosophers and political theorists. What is lamentable in this passage is not that Seabright disagrees, but that he is so immersed in shallow Econ 101 doctrine that he is unaware that there is an alternative point of view.
Just as disturbing is his displacement of the needs and interests of the poor by the interest of the non-poor in having convenient arguments for providing support. What matters, of course, is not how strongly the case for generosity can be made, but what sort of lives poor people are able to live. In fact, there is a double meaning to his final sentence. If water is priced out of reach of the poor, there is all the more reason to give more money to them. That does not mean that they will get this money; more likely than not they won’t, and therefore pricing water is bad for them.
In arguing against Seabright, my point is not that people should never be charged a price for using water. Quite the contrary: like most environmentalists, I see a lot of benefit in doing this, especially in contexts where water is not a primary good. But I also know there are other factors to consider, and that, in any case, prices are simply tools to align individual and social incentives. How could it not be society’s interest that poor people have access to enough water for drinking and sanitation?
In the end, the problem with most pop economics is not that it is pop, but that it peddles a simplistic view of the place of economics in the larger intellectual and moral enterprise. General readers, even if they aren’t yet in a position to recognize the difference, deserve an economics that is thoughtful and probing.
Monday, November 28, 2011
Quote of The Day
I am currently making my way through Hume's History of England - a pure joy - and ran across a quote to share. In his discussion of the 1640 Long Parliament and the execution of Lord Strafford, he has this to say about the Puritan leaders Pym, Hambden and Vane:
Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.
Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.
Saturday, November 26, 2011
Some Like it Hot. So What?
In the world of climate economics, Richard Tol is a major name. If his most recent post on the topic is any indication, he should pick another line of work. Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”. His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:
Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.Yes, people move to warmer climates. They lie under sun lamps and bake in saunas. Thermo- and phototropism have nothing to do with the risks of climate change, of course. The major risks are:
• sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population
• the extinction of species that cannot adapt at the rate at which their environment is changing
• an increase in the frequency and severity of severe weather events
• the loss of water storage in glacial formations
• shifts in rainfall patterns that could subject more regions to drought, fire and other hazards
• loss of agricultural productivity in tropical and many temperate regions
• and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.
Personal preferences for a few degrees of temperature more or less have nothing to do with it. Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else. Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?
Friday, November 25, 2011
Montserrat Figueras
This extraordinary singer died a few days ago at the age of 69. She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song. If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.
She was one of a kind.
Critique of the Political Scene Today?
As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.--Charles Davenant. 1698.
Wednesday, November 23, 2011
Is The Italian Crisis A Possible Self-Fulfilling Prophetic Negative Bubble?
Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?
Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?
Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.
What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.
The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.
That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.
Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?
Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.
What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.
The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.
That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.
Tuesday, November 22, 2011
In Politics, Let No Mean No
The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.
Do you suppose there was a sudden outpouring of love for the Spanish right? More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside. The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition. Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.
There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection. The final tally would be the number of votes for minus those against. In a two party/candidate race the final result would be the same. In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative. In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.
My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones. They should have had that chance.
Lessons for the Eurozone from US Fiscal Federalism
If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues. Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.
There are 50 US states (plus a few colonies), and each has its own budget. By law, this budget must balance in 49 of them, and the holdout (Vermont) doesn’t operate differently in practice. The logic behind this constraint has nothing to do with optimal fiscal policy—whether budget deficits are “good” or “bad” in any given context—but reflects the centralization of macroeconomic policy, monetary and fiscal, in Washington. Suppose, for the sake of discussion, that a state, even a large one like California, decides to go its own way and runs a large fiscal deficit. This would pose several challenges to federal-level policy:
• It would add to the stock of dollar-denominated public debt, whether or not policy-makers, or the public, elsewhere in the country wanted it. In other words, it would be undemocratic, imposing an outcome on a broader jurisdiction which that jurisdiction would be unable to decide on.
• It would put pressure on Washington to guarantee, explicitly or implicitly, state-level debt. As in today’s Eurozone debacle, it would be extremely costly to permit defaults by large members of the community; the effects would spill over to other state fiscal authorities. But if the federal level guarantees state debts, there need to be limits on the borrowing choices of the states. In this sense, there is some support for a German-style “hard” fiscal constraint on states.
• It would also put pressure on the Federal Reserve. Under normal circumstances, although not today’s liquidity trap, more public debt means higher interest rates, and this places a burden on all dollar-denominated public borrowers; it also has the potential to crowd out private credit creation. The Fed is then forced to decide how much of this pressure it wishes to relieve through monetization, thereby assuming the risk of inflation. Despite putative central bank independence, there is normally a loose coordination between monetary and fiscal policy, since the effects of each depend greatly on the other, but that would not be possible if it were state fiscal choices that were driving the aggregate public budget. In fact, the thought experiment of active California (or other state) fiscal policy makes clear how important it is to coordinate monetary and fiscal spheres.
Up to this point, it looks like fiscal orthodoxy is the takehome message: if the Eurozone wants to centralize its finances, it needs to impose something like a balanced-budget rule on its member states. If you are Wolfgang Schäuble, you can stop reading right now.
But it’s not so simple. There are two big caveats that have to be taken into account. The first is that the balanced budget rules at the state level apply only to operating expenses; these have to be financed out of current revenues (or surpluses set aside during balmier times). States routinely issue bonds to finance capital projects, and these are just as surely fiscal deficits as any other form of debt-financed spending. There is no statutory limitation on the capital budget in any state, although political resistance has usually kept bond issuance at moderate levels. (In many states new bond issues have to be put to a public vote.) One advantage of exempting capital projects from balanced budget rules is that, in theory, these project provide a stream of future benefits to offset future debt service. If you think that dividing state budgets into operating and capital components and treating each differently makes sense, you would want to look for an alternative to a simple hardening of the Stability and Growth criteria.
The second caveat is the biggest: the federal government conducts fiscal policy. It oversees the lion’s share of automatic stabilizers, such as tax receipts and transfer programs. (Where it doesn’t, as in unemployment insurance, it tends to be more generous in backstopping the states—at least it was until the Republican Party decided it wanted to undo the New Deal.) In other words, the federal government assumes the majority of taxing, spending and transferring activity in the US; even combined, the states are second-tier. During 2010, for instance, and indulging in a bit of rounding, the federal government accounted for 70% of all government spending and 60% of all public revenues, with the rest going to all other levels of government. (The difference between these two shares reflects the federal assumption of deficits.) It would be presumptuous to claim that this is the right set of proportions, but it gives an idea of what the fiscal transformation of the Eurozone would entail. Clearly such a shift of financial wherewithal from the members to the center cannot be undertaken without a corresponding political transformation—the creation of a consolidated, Eurozone-level democratic space. (To his credit, by the way, Schäuble understands this.)
But it is not enough for the center to have fiscal capacity, it has to use it. When the financial crisis of 2008 struck, it was essential for the federal government to use its borrowing capacity to make up for the credit collapse in the private sector; without the big budget deficits we’ve seen since then, we would be very deep in a depression. In fact, as most reality-based economists recognize, the deficits should have been bigger; they should be bigger right now. A different way to put it is that the fiscal restrictions on the states only make sense if there is no such restriction at the federal level, and policy is free to be as expansionary or contractionary as needed. There must be no Stability and Growth criteria for center.
The link between these long-term considerations and the current negotiations over immediate measures is this: any pressure on governments to impose austerity in return for financial support should be balanced by fiscal expansion elsewhere in the system. It should be at least euro-for-euro simply to retain the existing fiscal stance. If you regard Eurozone-wide unemployment as too high or euro-denominated balance sheets too fragile, you would demand even more expansion than austerity. This would anticipate the sort of viable consolidated fiscal mechanism of the future. Imposing austerity without such a counterbalance anticipates a Eurozone whose consolidated fiscal account is simply the sum of member budgets, each subject to a deficit constraint—a US federal system without a US Treasury free to set policies as conditions require. That’s a bad idea in good times and a death wish in the midst of a slump.
Monday, November 21, 2011
A Business Cycle Theory Suitable for a Parallel Universe
I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.
That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008. Imagine how much worse it would be if the crisis that actually happened actually happened.
Saturday, November 19, 2011
Education with a Twist—An Oliver Twist
Let’s let the newt speak for himself:
You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors? If the school was failing it wasn’t their fault. According to Gingrich, it’s the teachers who can’t make the grade. So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.? There would be as much pride in this as in cleaning toilets.
But let’s not get hung up on details. Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?
Friday, November 18, 2011
Piggy No. 3: German?
Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks. He wears overalls. In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm. Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.
Am I reading in too much? (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)
The German Obsession with Inflation
As a footnote to the previous post, here is an observation about the German obsession with inflation. Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich. This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler. That trope should be buried once and for all.
More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization. Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.
The real reason is that Germany is a country of savers. The savings rate is high, and savings are distributed broadly. Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest. It is an act of self-denial that looks to the future—one’s own and that of the generations to come. To have savings is to be free. Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right. The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance. Germany is a savocracy.
The great threat to savings is inflation. Long before hyperinflation destroys savings altogether, modest inflation chips at their edges. Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality. Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.
Among other things, this perspective fails to take account of where savings come from. Yes, they come from choices people make, but they also come from the income that make those choices possible. Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit. And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US. In other words, the virtue of savings is inseparable from the vice of debt. Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.
Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....
The Power of One
European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries. This is why important policy decisions have to be unanimous. As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage. You know, the Finns, the Slovaks and their ilk.
In fact, the small and weak do not have this power. If they try to throw sand in the gears, they will be put in their place one way or another. A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly. Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?
The real threat to multilateral institutions has always been the veto power of the strong. This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis. As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.
Everyone except Germany. Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.
In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity. If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”. This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.
So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion. Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens. Will any of them start to crack before it's too late?
Thursday, November 17, 2011
Strike at California State University
Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.
Wednesday, November 16, 2011
Väsen
I’m slow to get up this morning after a concert last night by this great Swedish folk group. They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany. Although they’ve been together for 22 years, this was the beginning of their first German tour. (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)
On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys. He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs. While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.
Väsen’s virtuosity is exceptional. Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas. Toward the end of the night they started to fool around, and this was good too. Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?
They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events. Not to miss.
Monday, November 14, 2011
Paperback version of The Confiscation of American Prosperity
I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.
The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.
In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.
The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.
Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.
The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.
In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.
The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.
Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.
The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'
In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."
Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.
Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.
Discipline, Hard Work and Obscene Wealth
It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf. Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.
Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”). Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur. Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.
Let’s get to the core issue. Assume there are four individuals, A, B, C, and D. A and B are at the struggling end of the working class, C and D are rich. A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit. Suppose their annual incomes look like this:
A: $20,000
B: $30,000
C: $200,000
D: $2,000,000
If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression. But what would this have to do with the popular revulsion against an income distribution so skewed to the top? The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom. Think of that old Jesse Jackson speech:
I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor? Like I said, I’m embarrassed for Tyler Cowen.
Saturday, November 12, 2011
OWS and its “Leaders”: A Lesson from the 60s
To a large extent, the New York Times sets the news agenda for American journalism. Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press. So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street
An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America. On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks. It had a visceral distrust of leaders and authority, of having others speak for you.
Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers. The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way. Unfortunately, that was not all. Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones. Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.
But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest. Our story, whatever it was, had little to do with its representation in the media. We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.
Lessons? They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function. Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.
Naomi Klein on the Politics and Economics of Climate Change: Hit and Miss
Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo. Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace. This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.
She is right that climate denialism has its roots in politics and psychology, not science, and that trying to make a serious response to the impending crisis look like business as almost usual (or even better than usual with green jobs for all) is misguided. No one really believes this. Dealing with a threat on this level means large-scale collective action, and its global ramifications require redistribution. I think Klein is exactly right that climate activists should accept the reality of the cultural divide and cook up effective strategies to deal with it.
But the economics is a mess. She rails against globalization, but this is a false target. The fundamental driver of carbon accumulation in the atmosphere is burning fossil fuels, and humanity has done this in ever greater quantities as the technology for extracting and converting these energy sources has developed. We have been doing it when there was less trade, more trade, and in-between trade. If we took the carbon-intensive industries in China that export to the US and moved them to North America, there would be hardly any difference in the planetary carbon trajectory. The bit about how much fuel is used to move goods between countries is a red herring. (I have been eating a lot of herring recently, but none of it is red. What gives?) Distances between countries are not necessarily greater than distances within them, and modes of transport matter more than kilometers. The carbon footprint of goods on a container ship chugging from China to the US west coast is less than short haul by truck. In any case, price carbon properly and the fuel/distance thing will sort itself out automatically.
Railing against economic growth is even more misguided. (1) The investments we need to make in a post-carbon future are enormous. A shrinking economy will not be able to afford them. (2) We also need to make investments in adaptation, since a lot of climate change is already baked in—literally. (3) There are billions of poor people around the world, and redistribution alone is not going to do the job, nor would there ever be a political base for such a level of collective sacrifice. (4) Our quality of life can be improved by doing much of what we do better: better food, better health care, a better built environment, even better gizmos. (5) Economic growth is measured in value, not stuff. Teaching someone how to play a musical instrument or a new language adds economic value. A well-crafted good that lasts a lifetime but costs more than a string of knock-offs that keep breaking down adds economic value. (6) If enviros denounce economic growth while the actually existing economy is stuck at stall speed and unemployment is rampant, they are clueless and deserve to lose.
Finally, she misses the key economic shift that has to take place for fast and effective reduction in greenhouse gas emissions: there has to be a permit system for taking fossil fuels out of the ground. Taxes are a start, but as I’ve argued in the past, they are weak tea compared to permits. (1) The debate over what’s the “right” tax takes us to the quagmire of calculating the social cost of carbon; the “right” number of permits is a matter of setting a quantitative emissions target for stabilizing the climate. (2) Tax increases will almost certainly overshoot: the level of tax necessary to get to a quantitative target will likely have to go beyond it. But because this increases the political problem of getting the tax approved, it makes reaching the target less likely. (3) Taxes can be gamed just as readily as any other kind of policy—perhaps more so because the link between the tax level (and all the loopholes and exemptions and credits) is obscure.
In any case, put a serious price on carbon by auctioning off permits, and the other policies, which are absolutely necessary, will follow. It is difficult to convince taxpayers to finance mass transit because driving is cheap. If driving becomes expensive, trains will look sexy. The same goes for the other investments we need to make in energy efficiency, urban redesign, infrastructure, R&D, etc. What’s so annoying about the Breakthrough Institute is that they have it exactly backwards: it’s not that there’s a groundswell for spending on economic redesign, but that we need a serious price on carbon to generate support for that spending.
Finally, I don’t see how mobilization to combat climate change will require more “planning”, at least in the economic sense. The uncertainties, qualitative factors and tacit knowledges that killed old-style planning are not going to disappear because we are struggling to decarbonize; if anything, in this transitional world they will be even greater. We will need more coordination, but that is a different matter. This calls for more participative institutions and less centralized, unaccountable power. That sounds “left” to me, but it has almost nothing to do with the vision of a planned economy. Yes, a public agency building a passenger rail system needs to plan, but so does a private corporation doing the same thing.
As I reread what I’ve written I fear I’ve come off as a curmudgeon, defending the sacred turf of economics against unlettered interlopers like Klein. That’s not it at all. I welcome everyone, whatever their background, to these issues, and I appreciate the new ideas I’ve picked up from people with vantage points different from mine. But Klein has remained stuck on a popular distortion of economics and uses her well-deserved influence to reinforce them. If political activists follow her down this road they will not just be wrong in some academic sense—they will waste the opportunities history is now handing them.
A first time investigation of the architecture of the international ownership network
It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.
“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”
"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."
The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.
It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.
“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”
"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."
The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.
It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.
Friday, November 11, 2011
Major Economic Reporting Breakdown at the New York Times
I sometimes carp about minor missteps, but this is big. In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.
The Times reporters and editors need a refresher in introductory economics. The fundamental identity that connects financial balances to a country’s international position is
BP + BG ≡ CA
where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).
Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany. At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves. Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government. Yet, as long as the trade imbalances grew, one or the other was unavoidable.
(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed. This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)
So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.
Skip the Times and get your news and views from the econ blogosphere.
Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems. They might as well sacrifice goats to the gods. The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.
Thursday, November 10, 2011
Moral Mythology and Economic Reality in the Eurozone
What more is there to say? Europe is on a precipice, political as well as economic. Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback. Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.
And incantations of austerity and reform are pointless. Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done. Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.
Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense. Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke. Put aside this morality tale and there is no economic logic whatsoever. There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights. (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.) In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case. There is no argument to critique, no evidence to rebut. “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo. Receive a transfer and you must sacrifice.
Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.
Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt. It satisfies a craving for moral order. Unfortunately, the real universe is about to crash into it and smash it to pieces.
Wednesday, November 9, 2011
Only Once In A Century: 11/11/11/11/11/11
At eleven seconds past eleven minutes after 11 AM this Friday, November 11, 2011, the time/date in succeeding digits will be for the only time this century a sequence of a single digit repeated a dozen times, 11/11/11/11/11/11. Enjoy it while it lasts.
Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.
While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.
Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.
So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.
Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.
While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.
Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.
So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.
Tuesday, November 8, 2011
Bribing Doctors to Abandon the Poor
Do I have this right? The New York Times has an article today about the Cuban medical mission in Haiti. After describing the modest perks doctors get for signing up, it says:
If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.
They are not allowed to bring their families with them, but the other incentives make it “a pretty good deal,” she [Katrin Hansing, a Baruch College professor] said, that has helped keep down defections. Still, a program the United States has run since 2006 that is tailored to attract Cuban medical professionals abroad has enticed several hundred to defect.Does the US really have a program to bribe Cuban doctors who are serving the poorest and most at risk populations in the world to quit, emigrate, and join the dysfunctional American medical establishment? Is this cynical or what?
If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.
Tomorrow’s News Today
Care to know the future? Then read Michael Pettis, who has been on top of things for many years running. Nothing is certain, but I think his scenario, where a bank run crashes eurozone policy and forces Greece (for starters) out of the common currency, is the one we’ll probably see.
Euro Clarity
Let’s take a moment to sort out the euro mess.
First, there are two problem areas that have to be addressed. The immediate trigger, as it usually is, is finance: big borrowers can’t service their debt, and this puts their creditors at risk too. The underlying issue, however, is imbalances—large, persistent current account surpluses in some countries and offsetting deficits in others that created today’s debt problems and will create tomorrow’s with near certainty.
The financial crisis is a matter of arithmetic. Here are the numbers to keep in mind:
1. Debt service as a function of total debt outstanding and interest rates. Yes, there are maturity complications, but at a first approximation, and assuming payments are made only on interest and not principal, you can multiply the first by the second and get a rough idea of what borrowers have to come up with.
2. Debt service and a sustainable Debt/GDP ratio. Since this is most immediately a sovereign debt crisis, the core question is whether it is possible for debtor governments to run a large enough primary surplus to finance payments to creditors while also preventing debt from exploding. In the analysis that follows we will assume that the stock of outstanding debt is altered only by running fiscal deficits or surpluses; there is no effect operating through changes in the price level. (This is a reasonable simplification given that inflation is very low in the peripheral European economies, and the ECB is determined to keep it this way.) Specifically, and again assuming debtors pay only interest, the condition for servicing debt while maintaining debt stability is:
Debt service - primary surplus = total outstanding debt x growth rate of GDP
As a special case, if GDP remains constant, the entire interest payment must be financed by a primary surplus. Plug in the numbers from individual countries and see how that works.
3. GDP and primary fiscal surpluses. Unless offsetting changes in either consumer spending or business investment are triggered by fiscal austerity, increases in the primary fiscal surplus will reduce GDP. In theory, private spending could exhibit either positive or negative feedbacks, but as a starting point, assume a fiscal multiplier of one, i.e. no feedback. In that case, and maintaining the assumptions of price stability and debt service consisting only of interest payments, the sustainability constraint is:
primary surplus = debt service x 1/(1-d)
where d is the ratio of outstanding debt to GDP. Note that the primary surplus must always exceed debt service, and that it reaches infinity (fails to achieve sustainability) as d approaches 1. In other words, heavy debtors, whose debt load approaches or even exceeds GDP, cannot achieve sustainability without economic growth.
4. Debt relief and creditor solvency. If you do the arithmetic on sovereign debtors and find they need a reduction in debt service—a relaxation of terms or a reduction in principal—to remain viable, it is still an open question whether their creditors can sustain this haircut. Some creditors are public, such as the ECB and IMF, so set them aside. The critical issue is whether the banks that have made these loans can afford to write off as much as the sovereigns require. Banks within the debtor countries are most exposed but, in general, least systematic. (This does not apply to Santander.) Core country banks present deep system risk. There is arithmetic for this, but it is difficult to apply because there is little transparency regarding equity buffers and full (direct and indirect) exposure of creditor banks. If we find out, it will be in the actual course of events.
The second issue, imbalances, poses the question of adjustment. What will it take for persistent (current account) deficit countries to return to approximate balance? Let’s separate a few strands.
1. Devaluation is the most direct route, but it is blocked by adoption of a common currency.
2. Internal devaluation—deflation—is theoretically possible, but extremely costly and may fail due to the interaction between debt service sustainability and GDP. If the economy is shrunk to achieve deflation, this increases d in (3) above and requires even more austerity on the part of fiscal authorities. This can become a doom loop under plausible parameters.
3. Surplus country adjustment is far more feasible economically, but politically unlikely. Large wage and price increases in Germany, the Netherlands and Finland would do the trick, but how can they be induced to accept? There is no financial gun pointed to their head, nor is there any mechanism in the eurozone machinery for this sort of lifting. Note the preponderant influence of the surplus countries in ECB policy, for instance. It should also be remembered that exporters like Germany also face competition from outside the eurozone, and price inflation that balances the first set of accounts may put the second into deficit.
4. That leaves “structural reform”. This is the linchpin of troika conditionality: deficit countries must deregulate, liberalize their labor markets, privatize, modernize, etc. This perspective is echoed in media coverage of negotiations in Greece and Italy, where the question is understood to be, can the dysfunctional political regimes of these countries get their act together and meet the stern but reasonable demands for reform? The honest response, however, should be that there is minimal evidence that the reforms on the table will actually lead to rebalancing.
The most dubious demand is that labor markets be deregulated. While economists disagree about specific labor market institutions, it is fair to say that the consensus emerging from the last decade or so of research is that no general conclusion can be drawn from such simple notions as labor market flexibility. Different regulations function differently and in different national contexts. To take just one case: can you think of a less flexible labor market than Germany’s? There is an elaborate system for certifying who is permitted to perform which job. Most wages are set in centralized bargaining. The consent of unions and works councils is required for business decisions entailing layoffs, changes in work organization, etc. As mentioned in earlier posts, Germany also “suffers” from a largely public banking system that channels subsidized funds through politically influenced channels to firms. It persists in maintaining public and nonprofit ownership stakes in large parts of its economy, from housing to professional sports (Bayern München) to manufacturing (VW). According to conventional standards, Germany should be first in line to get reformed, but they are the ones who have the trade surpluses and are dictating terms to the peripherals. (Yes, I know about Hartz I-III, but this has left most of German labor market regulation intact; in fact, that was largely its purpose, to keep the core institutions through strategic trimming.)
Incidentally, the poverty of the “reform” discourse should be apparent from the now-indisputable failure of structural funds. These funds were supposed to bring the less productive regions of the EU up to the leaders, but the current crisis showed they have not done this. Whether the money was not enough, whether it was misspent, or whether the entire idea was an illusion is a topic worth discussing. The one thing we can be certain about is that Europe has a track record in pursuing futile remedies for its imbalances. (The funds may have accomplished other purposes, of course. I run along a nice canal path financed by my benefactors in Brussels.)
Adjustment is needed; the problem is that the eurozone honchos do not have a recipe for it. For now, the only reasonable conclusion is that adjustment will remain out of reach for the foreseeable future. Either Europe recycles surpluses through transfers, or the euro is toast.
Monday, November 7, 2011
Science and Random Trials
Don't read this while drinking coffee, as you might snort it out your nose laughing !
http://www.bmj.com/content/327/7429/1459.long
http://www.bmj.com/content/327/7429/1459.long
Sunday, November 6, 2011
Attack of the Killer Seniors
They are gathering in coffee shops, gyms and multiplexes, conspiring to wreak havoc on the US economy. You know who they are: the boomers and near-boomers, the demographic bulge that will rip a giant hole in fiscal budgets and push working-age taxpayers into martyrdom or worse.
Don’t take it from me. David Leonhardt, in today’s New York Times, talks about the impending collision of slow economic growth with “sharply increasing claims” that “come from the aging of the population”. He quotes Benjamin Friedman of Harvard: “These are very difficult moral issues. We are really talking about the level at which we support the elderly retired population.”
This is common wisdom, one I’ve heard more times than I care to remember. Does it matter that it’s wrong?
1. Aging, and increases in the proportion of the population no longer active in the labor force, is nothing new. The US and other industrialized countries have been adapting to this trend for generations. In fact, the increase in retirees we face in the future is not nearly as dramatic as those we’ve dealt with in the past.
2. The secret weapon against the attack of the seniors is not growth per se but productivity growth, output per worker. As long as this increases faster than the ratio of retirees to active workers—and it has ever since we started gathering statistics on it—we can afford to take of our elders and improve living standards for the young and spry simultaneously.
Demographics is a false issue. I’ll trust the motives of those who pound that drum when I start seeing articles about how the economic burden of the defense (i.e. war) budget poses a moral issue that demands courage and sacrifice, etc. The demographic bulge I worry about is predator drones.
Thursday, November 3, 2011
Question
How can the right wing blame unemployment on educational (skill) deficiencies and then shortchange the entire educational system?
Tuesday, November 1, 2011
This day in 1963 - The President of South Vietnam assassinated.
1963 was a pivotal year. It was the year that OPEC acted unilaterally to raise prices for the first time. It was a time when a charismatic new American president, John Fitzgeral Kennedy, presented his proposals for tax reform for his nation. Included was a plan for the removal of the special-privilege oil depletion allowance enjoyed by large oil companies. He also issued Executive Order 11110. Its aim was to strip the US Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. Kennedy ordered the printing and release of $4.2 billion in US notes, paper money issued through the Treasury Department ‘without paying interest’ to the Federal Reserve System.
In 1963 E Howard Hunt, Chief of Covert Action in America's Central Intelligence Organisation's Domestic Operations Division was involved in the subsidizing and manipulation of news and publishing organisations. Hunt was eventually implicated in the November 1963 assassination of President Kennedy .
But on this day, 2nd November, of that year, the assassination of the President of South Vietnam was another careless step toward the long drawn-out Vietnam War that cast such an ugly shadow over the decade that followed.
A White House tape of President Kennedy and his advisers, published in 2003, confirmed that top U.S. officials sought the coup against Ngo Dinh Diem "without apparently considering the physical consequences for Diem personally." [2]
The previous month US President John Fitzgerald Kennedy had been insisting that one thousand U.S. troops in Vietnam, "euphemistically referred to as advisers", be recalled.
[1] http://en.wikipedia.org/wiki/Ngo_Dinh_Diem
[2] JFK and the Diem Coup, by John Prados
Posted - November 5, 2003
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB101/index.htm
[3]Arthur Schlesinger
http://www.spartacus.schoolnet.co.uk/JFKschlesinger.htm
[4] 'Kennedy', Theordore C Sorenson, special counsel to the late president. Hodder and Stoughton 1965. Page 652-653.
[5] INTERVIEW WITH WALT ROSTOW
http://www.gwu.edu/~nsarchiv/coldwar/interviews/episode-9/rostow1.html
In 1963 E Howard Hunt, Chief of Covert Action in America's Central Intelligence Organisation's Domestic Operations Division was involved in the subsidizing and manipulation of news and publishing organisations. Hunt was eventually implicated in the November 1963 assassination of President Kennedy .
But on this day, 2nd November, of that year, the assassination of the President of South Vietnam was another careless step toward the long drawn-out Vietnam War that cast such an ugly shadow over the decade that followed.
"The coup was very swift. On November 1, 1963, with only the palace guard remaining to defend President Diem and his younger brother, Ngô Ðình Nhu, the generals called the palace offering Diem safe exile out of the country if he surrendered. However, that evening, Diem and his entourage escaped via an underground passage to Cholon, where they were captured the following morning, November 2. The brothers were executed in the back of an armoured personnel carrier by Captain Nguyen Van Nhung ...Diem was buried in an unmarked grave in a cemetery next to the house of the US ambassador.
...
Upon learning of Diem's ouster and death, Ho Chi Minh is reported to have said, "I can scarcely believe the Americans would be so stupid." ....After Diem's assassination, South Vietnam was unable to establish a stable government and numerous coups took place during the first several years after his death...."[1]
A White House tape of President Kennedy and his advisers, published in 2003, confirmed that top U.S. officials sought the coup against Ngo Dinh Diem "without apparently considering the physical consequences for Diem personally." [2]
The previous month US President John Fitzgerald Kennedy had been insisting that one thousand U.S. troops in Vietnam, "euphemistically referred to as advisers", be recalled.
"He was a prudent executive, not inclined to heavy investments in lost causes. His whole presidency was marked precisely by his capacity to refuse escalation-as in Laos, the Bay of Pigs, the Berlin Wall, the missile crisis. [3]"Indeed, Kennedy was deeply skeptical of the recommendations presented by his Joint Chiefs of Staff for military intervention in South Vietnam.
"The military proposals for Vietnam, he said, were based on assumptions and predictions that could not be verified - on help from Laos and Cambodia to halt infiltration from the North, on agreement by Diem to reorganisation of his army and government, on more popular support for Diem in the countryside and on sealing off Communist supply routes. Estimates of both time and cost were either absent or wholly unrealistic. [4]"In an interview with one of America's cold war warriors, Dr Walt Rostow was asked to comment about the consequences of "the war for South East Asia?"
WR: Well, for South East Asia it's turned out to be fine, because at last Indonesia has gone in to take off very fast, seven per cent now, and Singapore, Malaysia, Thailand, Taiwan, Hong Kong, South Korea are doing fine, even Philippines is coming along. So, South East Asia is... Lyndon Johnson achieved what he was after in South East Asia. ...As a development economist I have to say, when a country does well, like South Korea or Taiwan or something, it's because of the people in the country, otherwise you're pushing on a string. But we did play a very useful part in helping them. It's amazing, but in this period of 1960 to, what 1975, '80, they were going on average at eight per cent a year for wages. That means they more than doubled in ten years. So they're four times the size, as it were, GNP per capita at the end of this period and the beginning. They were different countries....[5]"War to increase GNP: 'managed' capitalism.
[1] http://en.wikipedia.org/wiki/Ngo_Dinh_Diem
[2] JFK and the Diem Coup, by John Prados
Posted - November 5, 2003
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB101/index.htm
[3]Arthur Schlesinger
http://www.spartacus.schoolnet.co.uk/JFKschlesinger.htm
[4] 'Kennedy', Theordore C Sorenson, special counsel to the late president. Hodder and Stoughton 1965. Page 652-653.
[5] INTERVIEW WITH WALT ROSTOW
http://www.gwu.edu/~nsarchiv/coldwar/interviews/episode-9/rostow1.html
Subscribe to:
Posts (Atom)
