Wednesday, March 31, 2010

Democracy and financial reform

Lots of interesting stuff going on in the States regarding financial reform: usual blogging guides to what's happening are Krugman and Simon Johnson. The story would appear simple: the financial sector got out of control, made lots of money and then lost most of it, but governments had to cover the losses with public money, thus bailing the banks out. To the extent that expectations of a government bailout - the 'too big to fail' problem - fuelled excessive risk-taking, there needs to be an institutional response to ensure that this doesn't happen again (apart from anything else because there's no money left for a second round of bailout on that scale). What issues does this institutional response raise (just the politics here: for details on the technical side look elsewhere, such as Deus Ex Macchiato and the other blogs mentioned above)?

1. Too big to fail, too complex to understand. Voters don't understand CDSs, CDOs, leverage and the Basle 2 Rules. And neither do I. So, regulating the financial sector is an issue displaying high levels of information asymmetry, making it easy to pull the wool over voters' eyes (see Krugman on this here).  If the issues are too complex for the electorate to figure out what's going on, we could end up with a regulatory system which will not solve any of the problems.

2. Politicians need money. We're leaving in a new age of plutocracy, where the rich have greater influence over the political process than at any time since the war. The reason for this is that mass political parties, with grassroots organizations and real contact with the electorate, are a thing of the past just about everywhere in the west. So instead, we have politicians competing from TV studios for votes, reliant on large donations to make up for the lack of volunteers willing to campaign for free. In these circumstances, it is far easier for wealthy interests opposed to reform to manipulate the political process to the detriment of the majority. If the majority is not organized, they can't do much to stop this.

3. We're all dependent on Obama. Until the US decides what to do with its financial system, nobody else will reform theirs. A strong EU would be a help in these circumstances, but its pathetic showing over Greece and internal trade imbalances doesn't bode well.

Sorry to be so depressing. Anyway, if Obama learns from the healthcare reform, he will go out and campaign. After all, the details may be complicated, but surely the electorate can figure out that if the bankers don't like it, it's probably along the right lines.

Fulham does it again

(Last Saturday) Hull City 2 Fulham 0

Last year, the Tigers avoided the drop in part thanks to a fluke away win at Fulham, their only victory after November in the Premiership. Could this first win for Iain Dowie save the Tigers this season? There's more to do this time round though with Wolves annoyingly running into form. Wigan and West Ham, the other big strugglers, surely are good enough to get the couple of wins needed to get to safety. If we don't go down, who will?
Staying up is looking increasingly a pre-requisite for the club's survival, if this report is anything to go by.

Monday, March 29, 2010

Incredible Commitments

So, after saying for months that his priority would be to cut the deficit, George Osborne announces that he will reverse much of the already inadequate fiscal squeeze planned by Labour.
He will pay for it by cutting £6 billion from public spending, mainly by freezing recruitment, which will of course be excellent news for the labour market. Just so we know what £6 billion means, it is rather less than the error in last year's budget deficit forecast, so another wrong forecast in a negative direction would make this a deficit-increasing tax cut.
There is really nothing left of Britain's economic policy credibility. Labour refuse to say what they will cut, and the Conservatives refuse to say what they will cut and offer tax cuts. They must be getting nervous about their inability to open up a significant polling lead.

Friday, March 26, 2010

Tory troubles

And now, after the media assuming for the last couple of years that Labour had no chance, the press is full of reports that the Conservatives could lose: for instance, here, here and here.

The most likely result still remains that the Conservatives will be the largest party, but short of an overall majority, giving us the first hung parliament for 36 years (see Simon Hix and Nick Vivyan's forecast here). But with the polls so close, it's time to start thinking of 1992 - Labour were in the lead in the polls for months, but lost, and in the event by a large margin. The polls are only a reliable measure of what people are thinking now, and talk is cheap, but when the election actually happens, decisions will have been considered more carefully. At the moment no potential Labour supporter is feeling that upbeat about the government, but there are a number of reasons why Labour could do better than expected.

For a start, David Cameron seems like a nice guy and Gordon Brown is widely detested, but does this mean the people will trust Cameron to handle a brutal crisis? After all, he and his family are rich and privileged, and cannot claim any experience of how ordinary people live. His commitment to bread-and-butter policies like tax credits, the minimum wage, and investment in health and education can be questioned. Labour has delivered in these areas, and if medium to lower income voters don't trust the Conservatives to protect these policies, they may hold their nose and vote Labour.

It's the economy, stupid. Sure, the economy is a mess, and Brown has been responsible for it since 1997. But does that mean Cameron is more qualified to get us out of the mess? Brown's biggest mistake was to believe the financial sector bubble was real economic growth. But guess what? Cameron made that mistake too - almost everyone did. And who do you trust to bring the bankers under control - a party of trade unionists and teachers, or a party of financiers and businessmen?

Finally, people don't just hate the government, they hate the establishment in general. They may not vote Labour, but that no longer means they will vote Conservative instead. The Lib Dems, Greens, UKIP, nationalists, and - sadly - the BNP will all benefit from popular disillusionment. This will cost the Conservatives seats, as will the pro-Labour bias in the constituency boundaries.

Anyway, the Tories may still win, but it is starting to look like they'll have a wafer-thin majority, if any. And that's not a great place to start when you're looking to cut £70 billion in public spending and regulate the financial system.

Thursday, March 25, 2010

Polls, polls, polls

The polls are starting to show some evidence of the gap between Labour and the Conservatives in voting intentions shrinking a fair bit - check out the collection of polling results on UK Polling Report. Their current prediction is that the Conservatives will be a good 40 seats short of a majority. That would mean coalition government, and maybe electoral reform... At least DC would not have to explain how he could cut the deficit without touching what the government spends a quarter of its money on.

Tuesday, March 23, 2010

Universities need to pay their staff well

Well, actually the article in the Guardian Education supplement had a slightly different title: Universities Need to Pay their Senior Staff Well
Amazingly the article, justifying the levels of pay enjoyed by university Vice-Chancellors, was written by... a Vice Chancellor: Malcolm McVicar of the University of Central Lancashire.
The usual suspects are trotted out: VCs don't paid as much as the CEOs of large private companies, universities are competing in a world market for talent, American and Australian VCs get paid more, blablabla.
The problem with all of this is that I just don't imagine Malcolm McVicar and his peers getting offers from universities and businesses around the world, battling with the University of Central Lancashire and the like for their services. The market for skills argument probably does work for the Director of my school, given his CV of high-powered work experience, but he doesn't actually get paid significantly more than other VCs, funnily enough. It certainly doesn't work for Edward Acton, who before becoming VC at the University of East Anglia, was a Dean at the University of East Anglia, and before that Professor of History at the University of East Anglia.
I hope that one day, what is left of humanity will look back at this era and laugh heartily at the seriousness with which the rich and powerful justified their privileges with F grade labour economics.

Friday, March 19, 2010

Ever think they're all saying the same thing?

If it's political parties you're thinking of (OK, it probably isn't), then you would be right.
Here is a record of the presence of commitments to economic interventionism in party programmes since the Second World War in western democracies:

After the war, socialist parties pushed for significant government intervention in the economy, whilst christian democratic and conservative parties resisted this. Over time, the socialists gradually adapted their position to the extent that on this key political dividing line there is now almost no distance between the main parties of the left and right. We (Mark Blyth, Riccardo Pelizzo and I) call it a cartel.

Any wonder voters are increasingly turning to extremist parties?

Social mobility and the free market

In a previous post a few days ago I pointed out that Italy and the UK had both the worst inequality and worst social mobility in Europe. I then blamed this on Britain's excessively 'liberal' economic institutions. But I need to qualify that. Some of my recent research is about the existence of two different paths towards entrenched inequality: a liberal one, as in the UK, but a very illiberal one (in economic terms), as in Italy and most of the rest of Southern Europe.
Here's what it looks like:


The x axis is a factor score for various measures of economic liberalization. Inequality seems to be associated with very high, and very low measures of this score. The interesting point is that Denmark, Holland, Finland and Sweden score almost as highly as the UK, yet have low inequality. The obvious explanation is higher welfare spending and stronger trade unions.
The optimistic reading of this is the economic liberalization need not have inegalitarian effects, provided it is accompanied with strong institutions to counter-act the inequalities created by markets. A key part of the process of liberalization in the UK was the destruction of these institutions (particularly trade unions), and that is why the resulting inequality is so high.
And what about Italy?
That's another post...

Thursday, March 18, 2010

Viva Keynes

Yes, unemployment is actually falling, but all of the new jobs are being created in the public sector. All the more reason to keep going with the automatic stabilizers, especially since the deficit is looking slightly less catastrophic now.

Wednesday, March 17, 2010

Why not Mourinho?

The 'special one' announced, after his Inter side humbled Chelsea at Stamford Bridge, that he intends to come back to the Premier League one day.

Well, why wait, Jose? There's just the opening for you: just like Porto, Hull is a Northern port on an estuary with a strong industrial tradition and lots of fresh fish. Sure, in the beginning there is a tough struggle to avoid relegation, but think of the potential!

You know it makes sense.

Tuesday, March 16, 2010

More deficient deficit talk

This time by Jeffery Sachs (surprisingly) and George Osborne (unsurprisingly). Although Sachs, despite his high-profile work promoting action on world poverty, also has to his name partial responsibility for the Russian transition from communism to gangster capitalism, so maybe we should not be too surprised.
So, the story is that we need to start cutting spending straight away to deal with the deficit. So far, so conventional. But they go a little further: they even argue that cutting the deficit may be better for recovery than not cutting it, on the grounds that investors may get spooked by the deficit and the high interest rates would lead to cuts in investment.
This might be true, of course, but who is to say that the benefits of reducing the deficit - which at this stage, while we are still enjoying very low long-term interest rates, is totally theoretical - will outweigh the very obvious risks that a fiscal tightening will push demand down and increase unemployment, spooking consumers. Sure, it would be better for the private sector to invest to create jobs, but jobs doing what? Export markets are just as depressed as the home market, so where is the demand?
Sachs and Osbourne just don't know the answer to this question. And in the absence of an answer, hurrying to tighten belts when deficits are still easy to finance is not a great idea. There are risks in running deficits, and risks in cutting them. Osbourne may be about to find out the hard way that there is no free lunch on this one.

Wednesday, March 10, 2010

Yes, minister

... Italian style.

Tell us something we don't know

OK, but it's nice to have the data to show it for sure. Italy and the UK, as well as having the highest inequality in Western Europe, have the lowest social mobility, according to the OECD.
Doubtless in Britain this will be interpreted as a mark of the failure of New Labour's tentative social democracy, rather than as damning evidence of how the hyper-marketization of British social life creates and institutionalizes inequality.  This is important, because the Conservative (or Conservative-led) government which is most likely to emerge out of the elections will try to tell us that Labour policies like Sure Start, tax credits and higher spending on schools did nothing for the poor.

Sunday, March 7, 2010

British economists take an interest...

Fun public debate about deficit reduction between Tim Besley and Alan Manning at LSE last Thursday. Tim Besley: smart suit, clean-cut image. Alan Manning: loud shirt, lots of curly grey hair. Guess who is in more of a hurry to cut the deficit?

Obviously I'm instinctively with the 'don't worry crowd', for entirely ideological reasons, I have to confess. Besley has models, serious models on which to base his analysis. The striking thing though, is that the models seem to me - on a superficial viewing - pretty indeterminate, due to the difficulties in pinning down a key variable: market confidence. If markets are confident that governments will not default (either formally, or informally through high inflation), then deficits can be sustained for a long time. Put another way, governments have to have credible commitments.

But credible commitment seems more and more like an equation filler to me. How are we to independently observe the credibility of a commitment? Argentina's dollar peg collapsed despite low inflation, low deficits and low debt-GDP ratio. Because: markets don't find Argentina credible. So, will markets trust Britain not to default? Well, maybe they will, maybe they won't. My guess is the outcome will not depend on observable political or economic phenomena in any predictable way. After all, financial markets have shown that they have little grip on financial risk. Why should they have any better a grasp of political risk? Some market participants will make instinctive bets, others will follow, and that will be that.

In other words, my feeling is that the response could be pretty random, and therefore hard to theorize about. Now, this may not seem to be much help, but realizing the limits of predictability is still useful. And under high uncertainty, we start to grab hold of familiar and reassuring templates and memes, as Blyth and others tell us. I do it, and I think market participants do it too. So, my guess is that a Conservative government will get away with rather more than a Labour one will, because traders will perceive them as more sympathetic to bond-holders than the unemployed. But this will probably have little to do with real policy choices or commitments.

Why do I bother?

OK, I know supporting Hull City is not supposed to be fun, but still. I'm beginning to wonder whether it would be more enjoyable to be in a league where we can compete.

On the bright side, Cairney scored a great goal and Bullard didn't get injured.

On the less bright side:
Everton 5 Hull City 1.

Monday, March 1, 2010

More rubbish from the Guardian

Yes, I'm becoming really disenamoured of what was once my favourite paper. Another pointless and ill-informed piece of comment gets front-page treatment here:

Pre-election politics could cause second wave of inflation, warns BDO

Who are BDO? An accountancy firm. The kind of people telling us that mortgage-backed securities were triple-A investments until yesterday. Why do we listen to this facile garbage? Where is the serious analysis? Not in the Guardian, that's for sure.

Fred Pearce roundly debunked

... in this nice post from RealClimate.

If Gavin Schmidt is right, I was way too charitable to Fred Pearce in my posts here and letter to the Guardian.

Our favourite cuddly lefty climate denialist paper also announces today that 'Climate scientist at centre of email row to face questions from MPs' - Phil Jones will appear before a parliamentary committee along with his Vice-Chancellor Edward Acton, and Nigel Lawson among others. 

Now why is Nigel Lawson, the architect of Britain's last unsustainable housing boom, in the late 1980s (a boom ended when Britain left the ERM, another screw-up advocated by Lawson) testifying to parliament about climate change? Beats me. I think he would be better off sticking to the one subject on which he has real expertise - dieting.