Tuesday, November 30, 2010

Printing money is good for you

James Surowiecki in the New Yorker (thanks to Ken Shadlen).

What's wrong with printing your way out of a debt problem? At the moment neither the banks nor consumers can manage without this kind of help, and if fiscal stimulus is impossible, the only alternative is to sit on your hands and hope we can enjoy deflation Japanese-style (ie with social peace and low unemployment - good luck with that).

I'm wondering how the whole liquidationist line plays politically this time around. After all, people with capital clearly prefer sound money, but a big chunk of our economic elite is also heavily leveraged. How does this play out? Is QE the way to keep the financial game going whilst the unemployment price their way into work? After all, if Ben Bernanke is doing it it is probably not going to lead to hyperinflation.

Ci siamo anche noi!

Italians must have been wondering why bond markets took so long to worry about a large Eurozone country with a 100% + debt to GDP ratio, massive structural problems, and a Prime Minister accused of misdemeanors ranging from false accounting all the way through to child sex abuse.

Anyway, now here we are. Italian bond yields are starting to jump just like Spain's. So, at the moment we have Ireland, Greece, Portugal, Spain and Italy all in trouble, with just a hint of Belgium. Meanwhile Sweden (albeit outside the euro) had the highest economic growth on record last quarter. I wonder what the default risk countries might have in common?

Amongst other things, they all were running current account deficits, and all had high inequality in the mid-2000s. There are a bunch of possible explanations for this relationship (which is pretty strong, and not a quirk of the data or a historical accident), including one which relates equality and trade to strong unions, wage compression and high skill levels.

Anyway, whatever the explanation, it pretty much nails the idea - articulated by Arthur Okun and reproduced in any number of Economist editorials - that inequality is the price to be paid for economic efficiency.

Monday, November 29, 2010

That's not important right now

Farewell, Leslie Nielsen. The star of many Zucker brothers spoofs and comic genius (albeit after 30 years of struggle as a serious actor). He made a guest appearance on this blog as Gordon Brown. But that's not important right now.

The Guardian has a great retrospective with clips from his serious and then spoof career. In this I found out that his brother was deputy Prime Minister of Canada for a while. Maybe Nick Clegg will end up as a trivia question in the same way.

Ok, please disperse, nothing to see here.

Saturday, November 27, 2010

Liquidate me! (again)

Brad DeLong is also puzzling over this. Why, if we understand more about how the economy works than in 1931, and if investors have more to lose from a slump than in 1931, and more workers have the vote than in 1931, we are still heading the same way we headed back in... you get the idea.

Two basic components to the answer. 1. Economists (or at least some of them) may have figured out what a slump entails and how to deal with it, but the vast majority of citizens don't have a clue what's going on. There is an intellectual deficit extending to a wide range of opinion leaders, never mind of ordinary folks who have never heard of Keynes. So, when someone comes along and tells you that it is wrong to print money because it causes inflation, look at Zimbabwe, then you have no defences.

2. The second part of the story is that the victims of all this may have the vote, but they are not mobilized and do not know what to do with it. There is no anti-liquidationist political party (although maybe Ed Miliband is planning one, we'll see), there are weak trade unions, and, compared with the 30s, there are less victims of the slump. After all, we all still have mobile phones and something to eat.

In a world of relative material comfort (compared with 1931, and indeed most of the rest of the world now), with a rich elite willing to take a shot at rolling back the welfare state, and an ill-informed, disorganized citizenry, it's not so hard to understand why all this is happening.

The Unbearable Lightness of Keynesian Macroeconomics

is my poetic description of this post by Paul Krugman, which he more prosaically calls the 'Instability of Moderation'.

Krugman's argument is that the intellectual holes in Keynesian economics - the inconsistency of assumptions between micro and macro - has undermined the stability of the resulting policy paradigms. It's a great piece but my feeling is that most of the people engaged in trashing Keynesian economics have no idea what he's talking about. They are either simple-minded fanatics who've taken liberalism too literally, or people who've got lucky in the market and want to make sure they don't have to share their good fortune with anyone else.

In other words, it's politics, not theories of human behaviour. How do the rich manage to persuade the middle to overthrow the political economy that did so well for the non-rich majority? That's the question we have to answer, and in the end it's not really about whether we believe in inter-temporal optimization or not. 'Moderate' policy, as Krugman calls it, is about collective action - it requires labour unions, left parties, mass commitment to pooled risk and sharing. All of that is achievable but unstable, as three generations of post-Olsonian research reminds us.

Are you, or have you ever been, a socialist?

Apparently Ed Miliband, leader of the Labour party, has admitted his own dark secret: he is a socialist.

This is truly terrifying. If the experience of that other radical socialist, Obama, is anything to go by, the middle classes of this country need to start making plans to relocate. France is nice, I've heard - my friends Giles and Daphne have a place there.

If I'm understanding this right, Ed is trying to redefine the middle ground, as people in 'the middle of the income distribution', as he - almost tautologically - described it on the Today programme.

This radical idea - that the middle class consists of people on average incomes, rather than wealthy North London professionals, which is what most journalists seem to think it means - has common sense on its side. But more than this, it opens up British politics to the possibility of a redistributive coalition containing the median voter, thus paving the way for a new centre-left majority.

Social democracy has always been about bringing the middle class into the progressive camp, persuading them that collective provision and redistribution can benefit them as well as the poor. It's an ambitious project, but the current crisis and brutal reduction of state provision brings an opportunity for this kind of realignment.

Wednesday, November 24, 2010

The cuts aren't working? More cuts please

So Ireland is going to raise taxes and cut spending, again, in response to the bond markets' fears. But wait a second, wasn't Ireland everybody's favourite example of how to do the fiscal consolidation thing?

Even the markets have now cottoned on that fiscal retrenchment doesn't get them their money back. Yet Ireland still needs to show its willingness to bear pain, just so we know they're serious. It's like the ritual of some kind of weird cult.

This is starting to look like Argentina circa 2001. But without the exit option.

Tuesday, November 23, 2010

Who cares about income inequality?

Not Nick Clegg, apparently.

Achieving income inequality is the goal of 'old fashioned progressives'. 'New' progressives, on the other hand, 'focus on the power and freedom of citizens'. Which obviously has nothing to do with income inequality.

Clegg wants to redefine himself as a proponent of equality of opportunity rather than of income. This is a game try, but I'm not sure it's going to get him very far. The harsh fact is that equality of opportunity is impossible when you have high levels of income inequality. Opportunities accrue to the rich, and they accrue more sharply when the rich are more advantaged compared to the rest.

After all, look at the three party leaders: each in their own way the product of a highly privileged background, both economically and educationally. John Prescott, who pulled himself up by his bootstraps at Ruskin College, was vilified for his Northern accent and mangled grammar throughout his time in mainstream politics.

Of course, this British tradition of class warfare is not Nick Clegg's fault. But how can the huge advantages of the rich over the poor be reduced if we can't even contemplate maintaining a 50% tax rate for incomes over £150,000, a Labour policy dismissed by the LibDem leader as 'political posturing'?

What is Nick Clegg's fault is signing up to the tuition fees capitulation, which saves the state very little (not much more than has been raised by the much derided 50% tax rate) and will almost certainly terrify many young people from low income families into giving up on higher education. Quite how he sells the coalition as a vehicle for social mobility with that particularly calling card is a fascinating question.

Eichengreen on the Euro

... and while we're on Eichengreen, here's an interesting discussion of the Euro, and break-up scenarios, with the man himself.

Things are starting to look like autumn 2008 again, only this time it's the sovereigns that are collapsing. Can Germany be sovereign to the rest of the Eurozone? Fingers crossed.

Monday, November 22, 2010

Liquidate me now!

Barry Eichengreen developed a much-cited argument that democracy changed macroeconomics forever, because governments would no longer be able to enforce brutal adjustments on the population for the sake of monetary orthodoxy. A recent post by Brad DeLong evokes this democracy/policy relationship.

The classic Eichengreen view is starting to look a bit incomplete. The missing part of the argument must surely be that the population needs to have some understanding of what the implications of policy are. At the moment there is a populist backlash in the United States against fiscal stimulus and monetary expansion, on the grounds that it's not reducing unemployment fast enough and threatens higher inflation. But this populist backlash could lead to a policy that would be far worse for the populace.

So we need to revisit the argument about democracy and policy. It could be, of course, that the population is no longer mobilized around a 'working class' interest, so that the views that really count are those of comfortable centrist voters, who could well benefit from liquidationism (especially if there are retirees who own their own homes and have adequate pensions), or at least think they would. In which case Eichengreen's thesis works as long as there is working class mobilization, but if the poor are not organized, orthodoxy can be imposed.

Or it could be that Eichengreen's thesis presupposes that the population has a clue about what is going on. After all, if you have an inadequate understanding of what's happening in the world and current policy is not quickly producing miracles, you may well believe someone who comes along and says (the contemporary equivalent of) 'bring back the Gold Standard'.

Of course, the Tea Party is a funny kind of populism, with its close links to hugely wealthy interests. But this doesn't alter the argument if it is successful in winning popular support. The last couple of decades have shown us that democracy isn't enough to stop elitist interests getting their own way. Mass interests need organization and mobilization if they're to take part in the game.

Sunday, November 21, 2010

The seagulls and the sardines

I've been wondering for a while when some kind of radical reaction to the current crisis would emerge. Maybe this is it...

Friday, November 19, 2010

Relax! Mortgage rates are at record lows!

Yes, it's truly amazing, but after all the Conservatives' desperate efforts to look as though they understand that some people are having a hard time of it - no quaffing champagne at the party conference, Camo's wife wearing Marks and Spencer dresses - some idiot still manages to put his foot in it.

This time it's Lord Young, who recklessly suggested that in the middle of the worst recession since 1931, in fact some people have 'never had it so good'. This, because if you still have a job and have a variable rate mortgage, your disposable income has gone up. This of course is true. In hard times, some people are better off. In theory I'm one of them. Never mind that the pile of bricks which secures my mortgage is worth rather less than I paid for it - I am indeed paying less for my mortgage than I was before the world financial system collapsed. Silver linings, eh?

Of course Lord Young is getting on a bit - in fact I wasn't even sure to be begin with that it was the same Lord Young Mrs Thatcher famously praised for 'bringing her solutions when others only brought her problems'. With rusty political reflexes he may have just made a misguided remark without realizing the likely consequences.

Or, alternatively, he may be a multimillionaire who, in a conversation with a Daily Telegraph journalist in a restaurant frequented by other millionaires, talked frankly about the world he inhabits. This is a world in which a recession means that your seven figure mortgage suddenly gets way cheaper. What's not to like?

This may sound like 'old-fashioned class envy', but I'm convinced that a government full of very rich men is not well placed to understand the society they are trying to govern. I predict disaster.

Sunday, November 14, 2010

Hope springs eternal

Most new governments in Britain have a 'honeymoon' period in which people extend them a line of political credit as a reward for winning an election.

Doesn't seem to be happening this time. Today's YouGov poll makes interesting reading.

Labour 41%, Conservatives 39%, Lib Dems 10%

Let's remember that the election gave us:

Labour 29% Conservatives 36% Lib Dems 23%

The Lib Dems are being crucified here, not unreasonably given that their flagship policy has been not only reversed, but turned into the one thing that nobody could have imagined in their wildest dreams that the Lib Dems would have supporetd. Can they survive?

It's hard to see how they recover from this. Abolishing tuition fees was not just their policy, it was just about their only policy. Tripling tuition fees is the last thing any Lib Dem voter could have expected to happen with the Lib Dems in government for the first time in the best part of a century. The deficit is no excuse, by the way: since the government has to put up the money for the requisite student loans, there will be no government saving in the short to medium term. All that is happening is that government funding is being removed and students will have to make up the difference. And given that the £9000 cap the government will impose still leaves universities barely adequately funded, it is surely only a matter of time before fees in the UK approach US levels.

I don't agree with Nick.

Never waste a good crisis pt 2

Tories do it better. The collapse of free-wheeling financialized capitalism gave the left the opportunity and the means to reshape our political economy: the most powerful business elites - the hyper-rich investment bankers - were insolvent and begging for government help, which could have been extended by the simple expedient of taking ownership (which in extreme cases, such as RBS, is what the UK government did).

But TARP and quantitative easing, the main tools of government intervention used so far in western countries, essentially consist of printing money (or taking it from taxpayers) and giving it to bankrupt financial institutions so that they can rebuild their balance sheets. Unsurprisingly, the banks are making use of this facility to make money, most of which they redistribute back to themselves. Governments feebly exhort them to lend money to businesses and consumers. They sit on their hands, knowing there is no ultimate sanction.

Along comes the resurgent right, with the following message: free-wheeling financialized capitalism has failed, because it was held back by the welfare state. So, to solve the problem we dismantle the welfare state, not only by cutting subsidies to the poor, but by undermining the very core of western welfare capitalism: public provision of education, health and pensions to all but the hyper-rich.

Even though the Conservatives failed to win the election, winning the support of only 23% of the total electorate,  thanks to the Lib Dems they are being allowed to take on the welfare state in a way Margaret Thatcher could have only dreamt about. Cuts to unemployment benefit, housing benefit, education at all levels, reorganization of the NHS, removal of elected local councils from the management of local schools, the list goes on. No mandate for any of this: none of the more radical measures were presented to the electorate before the vote, and much of it directly contradicts what the Liberal Democrats actively campaigned on. A government of 18 millionaires removing benefits from the workless in the middle of a recession. Can this really be allowed to stand?

If this country has any life left in it, the coalition should last no longer than a couple of years. If it lasts a parliament, I'm outta here.

Friday, November 5, 2010

Stop press: Politician lies to get elected

This is the extraordinary finding of the UK's 'election court' - which I'd never heard of - which has ejected Phil Woolas from parliament for, basically, demagogically slurring his opponent. While not quite from the manual of ethical politics, what Woolas did doesn't actually seem too far removed from the everyday nastiness of competitive electoral politics. Since it is not credible that Woolas is the only politician in 99 years to have unjustly cast aspersions on his opponent's character, this suggests a new electoral activism from our judges.

I'm now looking forward to the High Court invalidating the elections of the entire parliamentary delegation of the Liberal Democrats for lying about abolishing tuition fees.