As I mentioned last time I wrote about my adventures on Intrade, I’m sceptical of the claim, a special case of the (semi-strong version of the) Efficient Markets Hypothesis, that the odds in betting markets provide the best estimate of the probability of political outcomes. I managed to double my small stake betting on Newt Gingrich, and might have made more if I had not overestimated the efficiency with which the Republican electorate processes information. I sold on the news of his work for Fannie Mae, and thereby missed the peak of the market when he won South Carolina.

Having made my point and learned a bit about the practical operation of markets, I meant to cash out my winnings, but that turned out to be a complicated process, and I couldn’t resist another flutter. Rick Santorum was trading at 100-1, and while I didn’t think much of his chances, those are pretty good odds in a four-horse race, especially one with no particularly attractive candidates.

He’s now 17.9 per cent (nearly 4-1 in the old language, if I recall it correctly), so I’ve now made a pretty substantial gain. There’s a bit of a cognitive consistency problem here – I didn’t really mean to make money backing Santorum, so now I need some suggestions as to an appropriate use for the money, one which would offset any damage done by backing him when he was down where he belonged. Orientation can be US, Australian or global.

My critique of Tyler Cowen’s post arguing the unimportance of social mobility has started off, or maybe merged into, of those old-fashioned blog firestorms we used to have back in the day, now also reticulated through Twitter – a few links here, here and here. But rather than criticise Cowen further, I thought I would try to work through the bigger issues involved from a social democratic perspective[1].  In particular, as discussed in comments here, should social democrats favor policies to enhance social mobility, or does mobility between generations make inequality even worse, for example by justifying what appears as meritocracy?

It’s helpful to start with some facts, and the big one is that inequality of opportunity and inequality of incomes (or, more generally) outcomes are strongly positively correlated. The US and UK are notable as being highly unequal societies in both respects. More precisely, as would be expected on the basis of even momentary thinking about the ways in which parents try to help their children, highly unequal outcomes in one generation are negatively correlated with intergenerational mobility in the next. 

That brute fact kills off one of the central ideas put forward by lots of ‘Third Way’ advocates among former social democrats, namely that it’s fine to have the highly unequal outcomes produced by free-market liberalism if you can get a modest amount of extra growth in aggregate, since governments can use education and similar policies to ensure that everyone has a fair chance at the big prizes.  If a highly unequal society allows parents to give their children an unbeatable headstart, then the idea that we can offset greater inequality of outcomes by more efforts to promote equality of opportunity becomes problematic at best.

Matt Cavanagh in Against Equality of Opportunity takes the dilemma seriously and argues for the abandonment of equal opportunity on the basis that it is inconsistent with a market society.  That’s pretty much the actual position of most Third Way supporters[2] though not too many are willing to say so.

Moreover, the factual basis for the claim that free-market liberalism actually produces higher growth is weak, though the evidence isn’t as clear-cut as for the relationship between unequal outcomes and unequal opportunities.  The time-series evidence goes the other way – the strongest period of economic growth for the US and other (then) leading countries was during the post-1945 ‘Great Compression’.  The comparison is even sharper now that we’ve had a few years of highly unequal austerity.

So, the Third Way position appears unsustainable in every way. On the other hand, as long as you accept some role for markets, or even just for individual choice, different people will experience different outcomes in life. It seems obviously sensible, for example, to allow people a choice between working hard in paid employment, and buying goods and services in the market, or spending more time at home, providing directly for themselves and their families[3]. And, if people are allowed to take real risks, some will turn out relatively well and others relatively badly.

There is no reason, however, why freedom of choice, even within a generation, requires the grotesque inequalities produced by market liberalism. In fact, by punishing any choices that don’t produce a high income, market liberalism reduces the range of effective choices. Tyler Cowen makes this point, using the examples of the US and Europe, here (his point 4, though of course it’s not intended this way).

Once we have unequal outcomes in one generation, there will be a tendency to transmit them to the next. But if the distribution of income within a given generation is reasonably equal, there is lots of scope for government action to give everyone in the next generation access to the same broad set of choices and opportunities. 

The most obvious measures relate to wealth and education. Taxes on inheritance and capital gains can discourage the transfer of large accumulations of wealth from one generation to the next. As regards education, the crucial element is centralised funding, with a commitment to offset, rather than reinforce, inequalities in starting points. That is, schools in poor communities should get more resources rather than less, to offset both the poorer starting position of the students and the greater opportunities of schools in wealthy areas to secure support of various kinds for parents.

 How does this relate to concerns about meritocracy? The more that differences in outcomes reflect different choices from a given set of opportunities, rather than differential success in climbing a well-defined hierarchical ladder, the less this seems to me to be a concern. 

As always, I’m hoping for comments to point out (preferably in a non-snarky fashion) weaknesses in my argument and to help me clarify my thoughts. So, go to it.

fn1. I’m not going to attempt a definition of social democracy. But I’m thinking about a policy view that would take the best elements of the Keynesian/welfare state polities that was developed in the decades after 1945 and extend it to cover a much wider range of people and concerns than those of the developed-country male-earner households who were taken as the model participants in those polities.

fn2. The term is pretty much dead, along with the idea that the Third Way would transcend the divide between social democrats and free marketeers, rather than just split the difference as many times as the opinion polls appeared to require. But the political tendency it represents is very much alive, as shown by the general capitulation to the zombie economics of austerity.

fn3. This glosses over all sorts of problems, from involuntary unemployment to the distribution of work and consumption within households. But however these problems are resolved, the choice I’ve described will remain important.

The endless EU vs US debate rolls on, but now with an odd twist. Although the objective facts about economic inequality, immobility and so on are far worse in the US than the EU, the political situation seems more promising. (I’m not talking primarily about electoral politics but about the nature of public debate.)

In the EU, the right has succeeded in taking a crisis caused primarily by banks (including the central bank, and bank regulators) and blaming it on government profligacy, which is then being used to push through yet more of the neoliberal policies that caused the crisis. And, as we’ve just seen, formerly social democratic parties like New Labour in the UK, are pushing the same line.

By contrast the success of Occupy Wall Street have changed the US debate, in ways that I think will be hard to reverse. Once the Overton window shifted enough to allow inequality and social immobility to be mentioned, the weight of evidence has been overwhelming.

This post by Tyler Cowen is an indication of how far things have moved. Cowen feels the need, not merely to dispute some aspects of the data on inequality and social mobility in the US, but to make the case that a unequal society with a static social structure isn’t so bad after all.

Update Cowen offers a non-response response here. Apparently, disliking arguments for inherited inequality, such as his point 3 (because of habit formation, social mobility reduces welfare) is a “Turing test” for reflexive leftism.

Cowen makes seven arguments, ranging from weak to risible. He is an able economist, and no fool, so the weakness of the case he makes reflects the difficulty of making bricks without straw. I’ll reorder his arguments from weakest to strongest and respond to them in turn.

3. For a given level of income, if some are moving up others are moving down.  Do you take theories of wage rigidity seriously?  If so, you might favor less relative mobility, other things remaining equal.  More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects.

This is an ancient argument against income redistribution (Bentham had a version of it, IIRC) but it’s surprising to see it extended to the case of intergenerational mobility.  Apparently, expensive tastes, once acquired in childhood, can’t be dispensed with without great suffering.

5. How much of immobility is due to “inherited talent plus diminishing role for random circumstance”?  Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.?  What are you supposed to get when you combine genetics with meritocracy?  I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.

A lot of handwaving here. The supposed genetic role is assumed, not supported by any evidence to produce a suggestion that declining mobility arises because the US has now become more meritocratic, and therefore more efficient at promoting people of high ability. There’s plenty of evidence going the other way, notably including the fact that class matters much more than it used to in getting admission to high-status colleges..

4. Why do many European nations have higher mobility?  Putting ethnic and demographic issues aside, here is one mechanism.  Lots of smart Europeans decide to be not so ambitious, to enjoy their public goods, to work for the government, to avoid high marginal tax rates, to travel a lot, and so on.  That approach makes more sense in a lot of Europe than here.  Some of the children of those families have comparable smarts but higher ambition and so they rise quite a bit in income relative to their peers.  (The opposite may occur as well, with the children choosing more leisure.)  That is a less likely scenario for the United States, where smart people realize this is a country geared toward higher earners and so fewer smart parents play the “tend the garden” strategy.  Maybe the U.S. doesn’t have a “first best” set-up in this regard, but the comparison between U.S. and Europe is less sinister than it seems at first.  “High intergenerational mobility” is sometimes a synonym for “lots of parental underachievers.”

Another version of the same argument.  The only notable point is the observation that “smart people realize this is a country geared toward higher earners”.

6. I am more than willing to hear arguments than a less mobile society is a less stable society, or otherwise a society which makes worse political decisions.  But I haven’t seen serious arguments here.  By “serious arguments” I mean those which take endogeneity into account and go beyond noting that Denmark is a better polity than Brazil, and so on.

Granted, there doesn’t appear to be a lot of hard statistical evidence here (commenters, please prove me wrong on this). But there is a ton of US political rhetoric from the past (right up to the last six months or so) that would suggest great social and political benefits from living in a ‘land of opportunity’.

2. Measured mobility in the United States does not seem to be falling, or at least not falling much, as shown by Scott Winship.

This is a general class of argument I find unimpressive. Although statistical evidence is hard to find after a point, it seems pretty clear that at some point in the past income mobility was greater in the US than in Europe. And the evidence is clear that the reverse is true now. So, arguments of this kind amount to picking particular subperiods where you get negative results. There’s a further problem in that Winship’s summary of the data is unreliable. For example, this study  shows that “transmission of high-income status significantly increased” but Winship only reports the finding that “he transmission of low-income status remained stable”.

1. If the general standard of living is rising (and I am more than willing to admit problems in this area for the United States), mobility takes care of itself over time.  I find it more useful to focus on slow growth, if indeed that is the case.  Just look at income growth for non-wealthy families and that is more useful than all the mobility measures put together.

Maybe so, but as Cowen admits, the evidence is in, and median household income has been falling for a decade. Lower down the scale, the poverty rate is rising. Over the last 40 years, income growth for non-wealthy families has been much weaker than for wealthy families, and much slower than in the postwar decades. As Cowen must surely remember, when this fact was pointed out, defenders of the US system used to claim that it didn’t matter because the US system allowed lots of economic mobility. Some, like Paul Ryan are still pushing this claim.,

7. I would like all measurements in this area to take into account the pre-migration incomes of incoming entrants.  Denmark, which doesn’t let many people in, is a much less upwardly mobile society once you take this into account.  Sweden deserves more praise, and in general this factor will make the Anglo countries look much, much more supportive of mobility.

This is about the only argument worth taking seriously. But, in previous debates of this kind, it’s turned out that taking migrants into account doesn’t change much. The US would be a particularly complicated case because of the large number of undocumented migrants, many (most?) of whom return home at some point.

To sum up, Cowen’s post is an exercise in defending the indefensible, and its weaknesses reflect that. As Mitt Romney’s tax returns show, wealthy Americans have the rules rigged in their favor from day one. And that’s assuming they obey the rules. Unlike the poor, they can mostly cheat with impunity. In these circumstances, it’s unsurprising that US inequality is so deeply entrenched. The only surprise is the suddenness with which the facts have become common knowledge.

It remains to be seen how this will play out electorally, but there are at least some promising signs. Eight months ago, the situation in the US, seemed if anything even worse than in Europe. Obama seemed determined to capitulate to the Repubs, with the support of the entire centrist establishment, still committed to the idea of bipartisanship. Political discussion was dominated by the claims of the Tea Party, essentially identical to those of the European Austerians. The debt-ceiling debacle, the success of Occupy Wall Street and the recent Romney revelations have changed that. First, the fact that the Repubs are extreme reactionaries, uninterested in any kind of bipartisan compromise, has finally sunk in to all but the most obtuse centrists.[1] Second, the point that the rich play by different rules from the rest of us has been made glaringly obvious.[2]

Given the weakness of the economy, and the absence of any real action from the Administration between the initial stimulus and last year’s Jobs Plan, Obama’s re-election can’t be taken for granted. But it’s looking increasingly likely, and his SOTU speech will hopefully make commitments that will be hard to retract after November.

fn1. I don’t buy the 11-dimensional chess version of this story, but the slapdown of Obama’s painfully sincere attempts to reach across the aisle was exactly what was needed

fn2. It would be great if we could see a similar transformation regarding civil liberties, the permanent War on Terror and so on, but I’m not holding my breath. SOPA and the TSA can provoke outrage, but NDAA not so much, at least for the moment.

Not long ago, I read Daniel Ellsberg’s[1] autobiography, Secrets, and also watched the film, The Most Dangerous Man in America. A striking feature of the book was that Ellsberg’s biggest problem in leaking the Pentagon Papers was the logistical difficulty of making 20 or so copies of a 7000 page cache of documents. It took him and a couple of helpers several months, IIRC. 

Now of course, such a task is easy, as demonstrated by Ellsberg’s successor (allegedly Bradley Manning) who supplied vast quantities of classified documents to Wikileaks. On the other hand, if Ellsberg had been 20 or so years earlier, he wouldn’t even have been able to make a single copy. [2]

Our blackout yesterday as a protest against SOPA and PIPA reflects a simple fact about the Internet – it is, in essence a way of making and distributing vast numbers of copies of documents of all kinds.

That’s true not only in the obvious sense that users can obtain copies of articles, music, video and so on from websites all around the planet, but in the way that they are transmitted through large numbers of intermediaries, cached by service providers, backed up on local computer systems ans so on. 

The implications, for someone who wants to control copying, are stark. Since the technology makes it incredibly easy to copy, it’s essentially impossible to prevent it. The only way to stop copying is through the imposition of draconian penalties after the fact. Moreover, since the technology of the Internet depends on copying at every stage, almost any scheme designed to criminalise copying must cripple the operations of the Internet in one way or another.

Until now, we’ve seen an arms race, in which ever stronger legal rights have been accorded to the owners of “Intellectual Property”, while technological advances have made those rights less and less effective. The dispute over SOPA and PIPA seems to mark a change in that dynamic. The IP lobby proceeded in the traditional way, drawing up a law that met their objectives, in the expectation that, at most, they might have to negotiate away a few points to deal with the concerns of Internet users.

But faced with Wikipedia, Google and others saying the bills would destroy the Internet, the IP lobby was helpless. By the time they took out the most obnoxious provisions, such as the DNS filter,  the bills were already political poison. 

No doubt they will try again. But the dynamic has now changed. They’ll have to come up with measures that can’t be plausibly claimed to damage the Internet, cripple computers and so on. And given their past performances, they aren’t going to have a lot of credences if their claims are disputed by the likes of Wikipedia.

So, the likelihood is that they won’t be very effective. They may be able to put some obstacles in the way of large-scale copying of pirated commercial material like music and videos, but they’ll have a lot of trouble enforcing the claims of strong IP, that everything is subject to copyright and that the owner has near-absolute control over how it is used. [3]

That’s all to the good, I think. At least among mainstream/orthodox economist[4] there is near-universal consensus that existing intellectual property protections are too strong and that there are substantial potential gains from weakening both the duration and the scope of such protections. A Marxist analysis reaches the same conclusion, with reasoning fairly similar to what I’ve written above.

Anyway, SOPA and PIPA appear to be dead for now, and hopefully forever

fn1. Readers who have even a passing familiarity with decision theory will recognise Ellsberg as the inventor of the Ellsberg problem, which demolished the idea that decisionmakers have well-defined subjective probabilities over events. As I’ll explain in the post, however, Ellsberg also played an important historical role in the United States.

fn2. The development of photocopiers is said to have been one of the factors contributing to the failure of the Soviet Union – adopting the technology made samizdat publication easy, while trying to restrict it killed productivity growth

fn3. A helpful hint. Don’t mention rootkits

fn4. The orthodox view is that copyright is a compromise between the ex ante need to encourage content creation and the ex post benefits of free access to information.   Libertarians/Austrians are split between the extremes – either creators have absolute rights, or they have none. I looked quickly for an institutionalist view, but couldn’t find one.

Back in 2009, I made a bet with Bryan Caplan that the average unemployment rate in the EU-15 over the following 10 years would be no more than 1.5 percentage points above that in the US. Before talking about the bet itself, I’d like to note that while we disagree about a lot of things, Bryan and I both take a strong stand against war, with a limited exception for self-defence. As Bryan says here, that takes a lot of sting out of the possibility of a losing bet for either of us – agreement on war and peace is more important than disagreement about labor markets in my view. 

Now, on to the bet.

First the numbers. Until now, I’ve been consistently ahead. EU-15 and US unemployment rates were very close during 2009 and 2010. A gap has opened up in the last few months and is now about 1.5 per cent. Given the dismal prospects for the EU economy in the coming year, and the likelihood of some kind of recovery in the US, I expect to be losing ground on the bet this year, and probably for a couple of years after that.

Having said that, the original premises of the debate have pretty much ceased to apply. I was expecting a longish recession followed by a gradual recovery in both the US and EU. Macro policy has been worse than I expected in both cases, but dramatically more so in the eurozone, where the ECB seems determined to turn a recession into a depression. It’s this, rather than differences in labor market performance that’s driving the present divergence in unemployment rates.

Looking specifically at the US labor market, it’s hard to see any signs of the flexibility benefits that might be expected to offset the negative effects of a combination of employment at will, an almost non-existent union movement and minimum wages that are substantially lower, in real terms, than they were 30 years ago.  While unemployment has fallen from its peaks, there is no sign of a recovery in the more relevant measure of labor market performance, the employment-population ratio.

Arthur Brisbane, Public Opinion editor for the NY Times, has copped a well deserved shellacking for a column in which he asked whether reporters should act as ‘truth vigilantes’ in relation to statements made by public figures.

Having observed the silliness of asking whether newspapers should (aspire to) tell the truth, the obvious question is: How should they telll it. Here are a some suggestions

1. Its unreasonable to expect reporters to take the burden from scratch in refuting zombie lies. Newspapers, including the NYT, should include a set of factual conclusions, regularly updated, in their style manuals. The most relevant current example is that of global warming. As with the current account deficit (routinely glossed as ‘the broadest measure of the balance of payments’) the NYT should formulate a standard set of words, such as “a conclusion endorsed by every major scientific organization in the world’) to be used whenever the views of Repubs on the issue are mentioned. Similarly, any reference to claims about ‘Climategate’ should include the words ‘a conspiracy theory refuted by a number of inquiries in the US and UK’. Rinse and repeat wrt evolution, the Ryan budget plan etc

2. If the approach suggested above, it will rapidly become apparent that Republicans lie all of the time about everything, whereas Democrats only lie some of the time about some things. A serious paper of record would acknowledge this, noting the partial exceptions like Jon Huntsman. That is, if the NYT were reallly serious about truth, it would gloss every statement by a Repub as (X, a member of the Republican Party claimed Y. Extensive studies by the NYT have shown that most statements by members of the Republican party are false. In this case …)

3. This is a sad state of affairs, just as its sad that Americans won’t have a chance to vote for a serious  Presidential candidate who opposes indefinite detention of innocent people. But that is the situation and organizations like the NYT have limited choices – they can either publish lies or be ‘truth vigilantes’.

A little late to the game, the NY Times has quite a good piece by Jason DeParle on the well-established finding that the US is not only the most unequal of developed societies but is also at the bottom of the scale for social mobility.

I’ve been arguing since the Triassic era of blogging that this isn’t a coincidence – a society with highly unequal outcomes can’t sustain equality of opportunity, but until this year (in fact, until the emergence of the Occupy movement) I didn’t see any evidence that the facts were sinking in, even among the majority liberals. Now it’s as if a dam has broken. Some thoughts, cautionary and otherwise over the fold.

* As I mentioned a while back, the research evidence of low social mobility in the US has been around for at least a decade, but seemed to have no impact on the policy debate. That’s changed, but I doubt that Americans who don’t follow the debate closely have had their beliefs on the subject challenged. In this context, I’m not sure if the NYT piece will have much effect. It was very briefly on the front page of the website earlier today (Oz time) but is now almost impossible to find unless you know what to search for.

* It’s striking how limited, and ineffectual, the pushback from the right has been. There’s been a huge effort to deny the glaringly obvious increase in inequality of income and wealth. By contrast, social mobiity is hard to measure and it’s never difficult to find examples of people who’ve done very well despite deprived backgrounds (Obama, for example). Yet even  the National Review has accepted the evidence on this point (OTOH, DeParle quotes a lame rejoinder from Heritage and some predictable spin from Reihan Salam).

* The most significant move on the right is Rick Santorum’s adoption of this theme. It’s not hard to work out the political logic of concern about the emergence of a society where your prospects depend mainly on who your father was. But it raises some interesting possibilities. For example, how long before Santorum, or an attackPAC working for him, runs an ad with this “money shot” photo?

Corey Robin’s new book The Reactionary Mind has attracted plenty of attention both favorable and otherwise. I don’t want to offer a full-scale review, but to respond to the central thesis. As I read Robin, his central claim is that the current situation in which people who call themselves “conservative” are in fact radical reactionaries is not an aberration, but the norm, and that this has been the case ever since the first self-conscioulsy conservative thinker, Edmund Burke.

I’d put this more broadly – conservatism (and, it’s opposites, progressivism radicalism) are, in essence ideas about process, but the most people active in politics are more concerned about pursuing particular goals than about the way they get there.

To illustrate the point consider the standard claim about conservatism put forward by Michael Oakeshott in 1956  (also cited by Robin)

“To be conservative, then, is to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant, the sufficient to the superabundant, the convenient to the perfect, present laughter to utopian bliss.”

Now consider how someone who actually held these views in the Britain of 1956 ought to have regarded trade unions. Of all British institutions, they were surely amongst the most familiar and factual, embodying the preference for actual present benefits over utopian projects. Yet that was not, as far as I can tell Oakeshott’s position at all (though his refusal of an honour from the Thatcher government may suggest some reconsideration later in life).

Robin’s thesis is that claims like Oakeshott’s about conservatism (and also, those of Hayek about classical liberalism) are nothing more than a mask for attempts to resist, and where possible, roll back the claims of the working class against their rulers.

I think this is broadly correct. Although there are people with the conservative disposition described above (and also, people who are attracted by radicalism as such), there is no inherent correlation between conservatism as a disposition and support for the political views commonly associated with conservatism. 

There is an accidental association reflecting the fact that, taking the last two or three centuries as a whole, the ruling class has mostly been losing ground. First, the aristocracy was forced to share power with the bourgeoisie, and, then for most of the 20th century, the working class gained ground against the power of capital. Under such circumstances, people of conservative disposition will generally be found in opposition to the progressive demands being put forward by workers and their supporters.

The crucial test comes in periods such as the Bourbon restoration, or the neoliberal resurgence of the last thirty years or so, when the direction of change is reversed. Genuine conservatives in these circumstances seek to preserve those advances that have been embedded in the way society works (such as the New Deal in the US).  Conservative politics on the other hand, is dominated by reactionaries seeking to restore (an idealised version) of the status quo ante, and gains the support of those with a radical disposition (Newt Gingrich is an ideal example).  It’s certainly possible to find examples of the first kind (the “Wets” who resisted Thatcher for example) but they are clearly in the minority.

Long ago, I planned a book based on Raymond Williams Keywords, and blogged entries on topics including conservative, progressive and reform, which made some of these points. Corey Robin has done a much better job, and his book is well worth reading.

Thanks to everyone who has made comments on the drafts of the new chapter of Zombie Economics, on Expansionary Austerity, for the forthcoming paperback edition.  I’m now editing in response, and adding a section on Further Reading. I’d welcome any suggestions for this chapter, as well as any useful references that weren’t in the hardback edition.

This is the final draft section of the new chapter of my Zombie Economics book, on Expansionary Austerity. 

As before comments are welcome. That includes everything from typos and suggestions for better phrasing to substantive critiques of the argument.  If I can get organized, I will try to post the edited version of the entire chapter and invite another round of comments.

As an aside, I just got an email link to the Journal of Economic Literature (behind a login screen), which contains Stephen Williamson’s review of my book, including his claims that both the Efficient Markets Hypothesis and DSGE macro are devoid of any implications. I bet that if I had submitted an article to any publication of the American Economic Association making such claims, it would have been shot down in flames by the referees. But, now it’s been published – anyone keen on a radical critique of mainstream economics can now cite the JEL to the effect that the whole enterprise (at least as applied to finance and macroeconomics) is irrelevant to reality.

Expansionary Austerity – After the Zombies

failure of expansionary austerity is already evident. Predictions that, once the state got out of the way, the private sector would come roaring back, have proved laughably false. After more than a year of austerity in the US and Europe, there is no sign of any recovery. Rather, the risk of another crash looms larger than ever. 

Expansionary austerity is not simply a zombie economic idea. It forms the basis of a political strategy of class war, undertaken by the financial and political elite (the “1 per cent”) to hold on to the wealth and power they accumulated during the decades of market liberalism, and to shift the costs of their own failure on to the rest of the population. An effective response must similarly combine an economic analysis with a policy program and a political movement to mobilise resistance to the push for austerity.

In economic terms, the primary need is to relearn the basic lessons of Keynesian economics. Government intervention can help to stabilise aggregate demand and, when monetary policy is ineffectual because of a liquidity trap, expansionary fiscal policy is the optimal choice.

This lesson has been reinforced in both positive and negative ways since the beginning of the crisis. Fiscal stimulus was successful, most clearly in countries like Australia and China, where governments had advance warning of an externally-generated shock.  But even in the US and Europe, notably including Germany, fiscal policy softened the impact of the crisis.

That lesson, sadly, was not learned. Instead, we are receiving a much harsher lesson that goes the other way. Just as expansionary fiscal policy works to stimulate economic activity, contractionary fiscal policy (that is, austerity) works to depress it.  

Experience has discredited the zombie idea of expansionary austerity, but the lessons of the slump go much further. According to the claims of classical economics (new old) and of Real Business Cycle theory, a long slump like the one that has been going on since 2008 should not happen, except as a result of a failure in labor markets. Although there have been some (fairly desperate) attempts to find such a failure [such as Casey Mulligan’s theory, discussed in Chapter 3, that it was all caused by fear of Obama] none of them can explain a simultaneous slump in the US, Europe and the UK, countries with radically different labor market institutions.

In policy terms, the required response is reasonably clear. Instead of fiscal austerity, what is needed is a return to expansionary fiscal policy to promote economic growth. Only then can the vicious cycle of debt and deflation be broken.

Both for political and economic reasons, it is important to emphasise both sides of the Keynesian policy prescription: stimulatory budget deficits in recessions, matched by stabilising budget surpluses under normal, and especially boom, conditions.  This means that expansionary fiscal measures should be temporary, and accompanied by longer term policies to improve fiscal sustainability.

If the EU agreement signed in December 2011 were interpreted in the light of a sound Keynesian analysis, it would in fact be consistent with this approach. The agreement calls on EU governments to limit the ‘structural’ deficit to 0.5 per cent of GDP. The term ‘structural’ is not well-defined, but is generally taken to refer to the component of the budget that is determined by long-term revenue and expenditure policies rather than by short term macroeconomic fluctuations. If this interpretation is taken to allow for short run fiscal stimulus during recessions, then the structural budget should indeed be required to be in, or near balance.

An expansionary fiscal policy is essential to stimulate demand, but monetary policy must also be remodelled in the light of the crisis. The minimal requirement is a more expansionary policy in which a temporary increase in inflation would be accepted as part of the price of cleaning up the massive debts inherited from the crisis.

But  deepter changes are needed. The monetary policy regime of the past two decades, in which central banks were entirely independent of government, and the maintenance of low inflation was the sole (or, at least, pre-eminent) goal of monetary policy, has been a catastrophic failure. 

The failed system of inflation targeting should be replaced, in the first instance, by a target that takes explicit account of the need to maintain economic activity at a level consistent with full employment. The most popular candidate here is the proposal to target, instead, the level of nominal gross domestic product (GDP).

The idea would be to combine a target rate of inflation (say 2-3 per cent) with an estimate of the long-term rate of real economic growth required to maintain full employment (again 2-3 per cent is a plausible estimate). The aim would then be to keep the value of GDP, expressed in current dollars, on a growth path consistent with these targets (that is, at an average annual rate somewhere between 4 and 6 per cent).

This change would have several effects. First, it would restore the balance that used to prevail in monetary policy before the 1990s, when central banks were explicitly required to pursue full employment as well as price stability.  At a minimum, this would force central banks to admit that their current policies are failing, a key requirement for any progress.
Second, because the target would apply to the level of nominal GDP, its adoption would require central banks to catch up the ground lost over the last few years of depressed growth and generally low inflation. That would permit a temporary increase in inflation, which is necessary if growth is to be restarted against a crushing burden of debt.

Last but not least, a nominal GDP target would create room for fiscal policy as well as monetary policy. What is needed now is the abandonment of counterproductive austerity policies and their replacement with a combination of short-term fiscal stimulus and long-run measures aimed at a sustainable budget balance. 

The abandonment of inflation targeting would, of course, be an admission of failure. But central banks have failed, disastrously, and admitting this would be the first step towards a sustainable recovery. A system of nominal GDP targeting would maintain or enhance the transparency associated with a system based on stated targets, while restoring the balance missing from a monetary policy based solely on the goal of price stability.

An effective system of nominal GDP targeting central banks co-operate with pro-growth fiscal policy, instead of seeking to counteract it in the name of inflation targets. This in turn would entail a change in the nature of central bank independence. As in the Keynesian era, central banks would still be independent in the sense that they would not be subject to day-to-day political control of their policy decisions. That is, they would have the same kind of independence as other regulatory bodies put in place to manage aspects of economic policy where direct political control is unhelpful. On the other hand, they would no longer be empowered to act as if they were an economic Supreme Court, not merely independent of, but superior to, governments.

Alternative policy programs are all very well, but they are useless in the absence of a  political movement capable of resisting the push for austerity, and of demanding a progressive alternative. Until recently, there has been little sign of such a movement. But 2011 has been a year a political ferment throughout the world. The ‘Arab Spring’ arose in a very different context from that of the developed market economies, but the revolts were driven in large measure by the fact that people were no longer willing to accept a system where the benefits of economic progress were creamed off by a tiny elite, leaving the population as a whole to struggle.

The example of the Arab Spring has been inspirational. Resistance to austerity has emerged, first in Europe and then, more surprisingly, in the US, where the ‘Occupy Wall Street’ movement has upended many political preconceptions. 

So far, these movements have been notable more for their effects in raising consciousness than for concrete political achievements. But there are promising signs. In the US, the Obama Administration has finally been pushed into taking some positive steps, though it remains to be seen how much of this is mere electoral positioning.  Similarly, European social democrats, now in opposition in nearly all countries, are shifting away from their previously uncritical acceptance of market liberalism. The “European Growth and Jobs Pact” tabled by the Socialists and Democrats (the social-democratic grouping in the European Parliament) represents a step in the direction of resistance to austerity, though still a small one.

Meanwhile, even as the parties of the political right push ever harder for pro-rich austerity policies, their incoherence is becoming more evident.  Given the state of the US economy, and the failure of the Obama Administration to do much about it, the Republicans ought to be guaranteed of a sweeping victory in the 2012 elections. In reality, the process of nominating an alternative candidate has descended into farce, and the Congressional Republicans have plumbed unheard of depths of (un)popularity. In large measure, this reflects the total separation between ideology and reality now required of Republicans

Meanwhile, in Europe, the dominant rightwing power bloc, consisting of the conservative German and French governments, the European Central Bank and the European Commission, is trying ever more desperate expedients in its attempt to maintain the market liberal order. The imposition of “technocratic” governments in Greece (headed by a former member of the ECB Board) and Italy (headed by a former chairman of the European Commission) represents a substantial abridgement of democracy.  It is not clear how this will end, but very hard to see it ending well, at least in the absence of a radical change in policy.

The struggle against the politics of austerity will be a long one, and often dispiriting.  As the experience of the 1920s and 1930s showed, the forces pushing for austerity are powerful. Nonetheless, they were defeated in the end, by the New Deal in the US, the Attlee Labour government in the UK, and the success of social democratic movements and policies in Europe.

This time around, we are fighting the idea in a zombie form, already multiply discredited by experience.  Keynes’ critique of ‘Treasury view’ has been developed into a coherent alternative to classical economics. While far from being the last word, Keynesian economics has repeatedly demonstrated its capacity to explain a crisis that, according to the views of market liberals, should never have happened at all, and, if it did, should have been followed by a rapid recovery.

The revolts of the past year have shown how the power of ideas, when pushed forward by an active protest movement can be amplified by the power of modern communications technology. There is every reason to hope that the inevitable downfall of the zombie economics of austerity will come sooner rather than later.

Now that Obama has signalled that he will sign the National Defense Authorization Act, US citizens have no legal rights that can’t be over-ridden by miltary or presidential fiat. Anyone accused of being a terrorist linked to Al Qaeda can be arrested, shipped overseas and held indefinitely without trial, or alternatively tried by military commissions.[1] And, if arrest isn’t feasible or convenient then (at least outside the US), they can be hunted down and assassinated, with or without warning.

On the face of it, that makes the US a scary place to live. But, as a matter of everyday reality, most Americans aren’t scared at all.[2] Should they be? 

There is a problem of cognitive dissonance here. The powers claimed by the Bush and Obama Administrations have only been used against US citizens on a handful of occasions and always against people who were, at least, supporters of Islamist terror groups. As far as everyday experience is concerned, the ratification of those powers by Congress makes no difference.

Is this situation stable, or is the US on a slippery slope? If the law remains unchanged, expansion of its scope is virtually inevitable. The Republicans have long demanded the end of ordinary criminal trials for those accused of involvement in Islamist terrorism and, sooner or later, they will be in a position to enforce that demand. As with Guantanamo Bay, that’s a step that will prove virtually impossible to reverse.

As Glenn Greenwald has pointed out, the system as applied so far has a multi-tiered approach to a guaranteed outcome. If the evidence against a suspect is adequate and legally admissible suspects, can be tried and convicted in civilian courts. If it’s dubious but enough to pass muster in a military tribunal they can be tried and convicted there. If there’s no admissible evidence at all, they can can be held without trial. Whichever route is chosen, suspects, once arrested, need never be released.

The next steps would probably involve:

* removing (or reading down to insignificance) the requirement for a link to the 2001 attacks, and using the detention power for broader groups that might be classed as terrorist. It’s easy to imagine the right using this against leftwing protest groups. On the other hand, once the new laws are fully accepted, it’s worth observing that there are quite a few actual terrorists on the political right, and plenty more people who might be accused of giving them material . A particularly alarming possibility, since it would massively expand the potential target group is the application of the law to alleged ‘narcoterrorists’, some of whom are supposedly linked to Hezbollar.

* abandoning any pretense of adhering to rules of evidence, and allowing convictions based on hearsay, entrapment and so on. Existing practice has already gone a fair way in this direction

After that, the road is open to the unfettered use of these powers. Even if the numbers actually detained were relatively modest (in the thousands, say) the threat would be available in all sorts of contexts, going well beyond law enforcement. 

The process would presumably move more slowly if the Dems retained power. On the other hand, the longer the laws remain on the books with bipartisan support, the harder it will be to challenge their inevitable use.

Is there any prospect of a reversal of this trend? Based on past experience, this won’t happen simply because of principled objections, so any reaction will only come when these powers are actually abused. And given the abuses to which the US public (and even more the US elite) are already inured, it would take something quite extreme – either mass detention of people who are clearly innocent or the use of the law against members of the elite, leading the rest to take alarm.

Perhaps I’m being overdramatic here. There have, after all, only been a handful of cases where these powers have been asserted, and I don’t detect a lot of enthusiasm for a police state among ordinary Americans. So, anyone who would like to cheer up my festivities is welcome to show me I’m wrong about this.

fn1. I’m aware that the part of the legislation making detention mandatory includes anexemption for US citizens, and that the part relating to Al Qaeda linked terrorism purports merely to endorse the status quo, which is left undefined. But the fact that Congress rejected amendments that would have explicitly excluded US citizens, and that the Bush Administration succeeded in holding US citizens in military custody for years make it quite unlikely that the courts would intervene to free alleged terrorists from military detention claimed as necessary by the President.

fn2. As a  now-departed visiting non-citizen  the change of rules makes no difference to me – the US has long claimed an absolute right to seize or kill anyone, other than a US citizen, anywhere in the world, and US courts have repeatedly denied redress to those claiming wrongful detention and torture following seizure in the US or elsewhere.  That didn’t stop me coming to the US, nor has the loss of any marginal protection I might gain from being in the US deterred me from going home. And, while in the US, I haven’t worried about what I said or who I talked to, despite the absence of any legal protections. So, I have just the same cognitive dissonance as everyone else.

Expansionary Austerity – Reanimation

The idea of expansionary austerity first emerged in the early 1990s, in the context of the formation of the eurozone. The creation of a monetary union between countries with no capacity to undertake a co-ordinated fiscal policy was seen as requiring convergence on a more conservative fiscal stance than had been possible during the chaos of the 1970s and 1980s. The agreements made at Maastricht in 1992 , and later formalised at the Growth and Stability pact required countries wishing to join the eurozone to hold deficits below 3 per cent of GDP and public debt below 60 per cent Check

With unemployment still high in many European countries, there was some reluctance to implement the austerity measures required by the Maastricht criteria. So, there was a lot of interest in analyses claiming to show that austerity could, in fact, be expansionary.  A series of such analyses were produced by Albert Alesina and a series of co-authors, most notably Silvia Ardagna.

Some of these papers provided econometric analyses, which tried to show that reducing government expenditure and budget deficits would lead to stronger economic growth. Statistical analysis is rarely as convincing as a good story, however, and the most influential work in this literature was a series of stories about individual countries, entitled ‘Tales of Fiscal Adjustment’ by Alesina and Ardagna.

Although this work had only a modest impact at the time it appeared, it but it become part of the thinking of many anti-Keynesians, particularly in Europe So, when European governments found themselves struggling with apparently unsustainable levels of public debt in the aftermath of the global financial crisis, advocates of austerity measures could argue that the policies they proposed would accelerate economic recovery.

This claim led to a re-examination of the econometric work undertaken by the advocates of expansionary austerity. Some of the most important work was done by the IMF and by one of Alesina’s former co-authors, Roberto Perotti.  The conclusions reinforced the common-sense Keynesian view that contractionary fiscal policy (that is, austerity) is contractionary in macroeconomic terms.

The IMF critiques convinced most professional economists, at least those open to empirical evidence. But what about the success stories told by Alesina and Ardagna. Such stories can’t be refuted by statistical analysis. Rather it’s necessary to examine the historical accuracy of the account that is offered. I decided to look at the story told by Alesina and Ardagna about my own country Australia. I expected to find points of disagreement, but I was surprised to find much more. The section on Australia is full of glaring factual errors, even though Alesina had spent time there as a guest of the central bank.

To mention just a few of the most glaring errors

* Alesina and Ardagna attribute the policy of austerity to a leftwing government elected in 1985. In fact, the government was elected in early 1983 at the depths of a severe recession. It implemented an expansionary policy. The recovery was well under way when the government took measures, beginning in 1984 to wind back the budget deficit

* Alesina and Ardagna assert that the main budget savings came from  “cuts in transfer programmes .. mainly concentrated on unemployment insurance.” Spending on unemployment benefits fell, but not because of cuts. The unemployment rate was falling and expenditure fell as a result. This is the standard Keynesian “automatic stabilisers” at work

* Most strikingly of all the write ‘Australia is a clear case of an‘expansionary fiscal contraction’. GDP grew faster during and in the aftermath of the adjustment, both in absolute terms and relative to the G7 countries. A private investment boom was associated with profits and easier access to credit following the financial deregulation process that took place in 1985–6.”

This is like the story of the man who jumps off a tall building and says, as he passes the 25th floor “All good so far”. Writing in 1998, Alesina and Ardagna must surely have been aware that, almost immediately after their story ends, Australia entered the worst recession in its postwar history. 

Australia’s recession was triggered by contractionary monetary policy, but its severity was largely due to the collapse of the investment boom, which was dominated by speculative investment projects undertaken by so-called ‘entrepreneurs’ who took advantage of financial deregulation to build conglomerate empires that failed in the crisis, almost taking down the banking system with them.  The Australian experience of the 1980s was a preview of what would happen in the US and Europe in the 2000s.

To sum up, the tale told by Alesina and Ardagna bears zero relation to the actual history of Australia in the 1980s. The most revealing point about their account is their eagerness to shift the burden of adjustment to a crisis onto its most vulnerable victims – the unemployed. The 1990s literature on expansionary austerity was a warning of what was to come after the global financial crisis.

The crisis and its aftermath

For a brief period after the eruption of the crisis in 2008, it seemed that everyone was a Keynesian.  With interest rates already at or near zero in most countries, the fear of disaster led governments of all political persuasions to engage in large-scale fiscal stimulus

The only exceptions to this trend were countries such as Iceland and Ireland where the financial crisis had resulted in the rapid collapse of an over-expanded financial sector.  Decisions to guarantee the debts of failing institutions, while perhaps inevitable, were disastrous for the fiscal position of the governments concerned. Public debt  increased massively and suddenly, leaving governments with with no room to stimulate the real economy through higher public expenditure and lower taxes.

Unsurprisingly, the combination of financial collapse and enforced fiscal austerity produced severe recessions, made more dramatic by the fact that the countries most affected were precisely those which had enjoyed unprecedented prosperity as a result of the financial sector boom. Conversely, Australia, where the domestic banking system remained stable, and a large-scale fiscal stimulus was introduced before the effects of the global crisis were felt, avoided recession altogether.

The experience of the crisis was entirely in line with the Keynesian analysis. Nonetheless, with the immediate danger of global economic collapse in the past, there was a substantial push to restore the status quo ante, in which fiscal policy played a marginal role. The key players here were central banks, for whom the era of inflation targeting had meant an immense increase in power and prestige. Despite having presided over the near-collapse of the financial system they were supposed to manage, and despite continuing double-digit inflation, central banks were keen to treat the crisis as a temporary aberration, with no lessons for the future.

Emblematic of this view is the widely-publicised statement of outgoing ECB President Jean-Claude Trichet at a press conference in September 2011 

^⁠1I will say the following: first, we were called to deliver price stability! We were called on by all the democracies of Europe to deliver price stability and, in particular, of course by the 17 democracies that asked us to issue the currency in their 17 countries. We have delivered price stability over the first 12-13 years of the euro! Impeccably! Impeccably!  I would like very much to hear some congratulations for this institution, which has delivered price stability in Germany over almost 13 years at approximately 1.55% – as the yearly average of inflation – we will recalculate the figure to the second decimal. This figure is better than any ever obtained in this country over a period of 13 years in the past 50 years. So, my first remark is this: we have a mandate and we deliver on our mandate! And we deliver in a way that is not only numerically convincing, but which is better than anything achieved in the past.

http://www.ecb.int/press/pressconf/2011/html/is110908.en.html

Bad as the return to inflation targeting was, it did not imply a resurrection of the austerity policies that had failed so disastrously in the Great Depression. Although proposals for further discretionary stimulus met with increasing resistance, governments initially maintained a neutral or expansionary policy

All of that changed in early 2010 with the emergence of the Greek sovereign debt crisis. In … the major ratings agencies downgraded Greek government debt, beginning a downward spiral so steep that default became virtually inevitable. As of October 2011, the market prices of Greek bonds and credit default swaps implied a default probability close to 100 per cent, with likely losses of 60 per cent.

For many years, Greek governments had used a wide range of expedients to increase borrowing while appearing to remain within, or close enough to, the limits on debt and deficits set by the ‘Stability and Growth’ Pact under which the eurozone was established. A notable , and well-publicized, instance was a bogus currency swap set up with the assistance of Goldman Sachs.

http://www.spiegel.de/international/europe/0,1518,676634,00.html

The real story however, involved the big French and German banks. Under the Basel II system of financial regulation, they had been freed from prescriptive controls on the assets they were required to hold. Instead, they were required to maintain a low-risk portfolio, where risk was assessed by credit ratings agencies.  

This system encouraged banks  to hold AAA-rated assets, since these were considered as virtually riskless. Unfortunately, low risk usually means low return and banks were hungry for profits. So, there was a massive potential gain to anyone who could find a way of making risk invisible, producing a AAA-rated asset with the high return that risky borrowers were willing to pay.It was for this reason that European banks piled into the subprime derivatives created on a massive scale in the US, often raising the money to do so on the US wholesale market. 

Within Europe, the creation of the euro provided another way of adding risk while staying within the Basel II guidelines.  Bonds issued by eurozone countries with high public debt, such as Greece and Italy, carried a small but significant risk premium. On the other hand, for regulatory purposes, such debt was effectively treated as risk-free.

The role of the banks, and of the Basel II system was not immediately apparent (even now, the idea that European investments in subprime assets reflected ‘dumb bankers in Dusselsorp’ has a fair bit of currency. Instead, attention was focused almost entirely on the profligacy of Greek governments, … in the civil service and rampant tax evasion.

The real problems came when this analysis was extended to the rest of the heavily indebted periphery – commonly referred to in such accounts as the PIGS (Portugal, Italy, Greece and Spain) group, sometimes with Ireland thrown in as a second ‘I’. This was unfair and inaccurate, particularly as regards Spain and Ireland, which had been running budget surpluses in the years leading up to the crisis. Even Italy was reducing its ratio of debt to GDP, and adopting measures aimed at a gradual return to fiscal sustainability.

The fiscal crisis in these countries was driven by the need to bail out the financial sector, and by the collapse in revenues that resulted from the bursting of financial bubbles. In Ireland, for example, under pressure from the ECB, the government agreed to guarantee all the debts of the major banks, pledging  as collateral $20 billion euros from the National Pension Reserve Fund (the equivalent of the Social Security Trust Fund  in the US). Most of this money, and tens of billions more from other sources, appears to have been lost.

The injustice of making hospital workers, policy and old age pensioners pay for the crisis, while the bankers who caused it are receiving even bigger bonuses than before, is glaringly obvious. So, just as with trickle down economics, it was necessary to claim that everyone would be better off in the long run.

It was here that the zombie idea of expansionary austerity emerged from the grave. Alesina and Ardagna, citing their dubious work from the 1990s, argued … They attracted the support of central bankers, ratings agencies and financial markets, all of whom wanted to disclaim responsibility for the crisis they had created and get back to a system where they ruled the roost, and profited handsomely as a result.

The shift to austerity was politically convenient for market liberals. Despite the fact that it was their own policies of financial deregulation that had produced the crisis, they used the pretext of austerity to push these policies even further. The Conservative government of David Cameron in the UK [formally a coalition with the Liberal Democrats led by Nick Clegg, but Clegg has proved utterly ineffectual in all respects].

Although the term ‘expansionary austerity’ was not much used in the US, the swing to austerity policies began even earlier than in the US and Europe. After introducing a substantial, but still inadequate fiscal stimulus early in 2009, the Obama Administration withdrew from the economic policy debate, preferring to focus on health policy and wait for the economy to recover.

Meanwhile the Republican party, and particularly the Tea Party faction that emerged in 2009, embraced the idea, though not the terminology, of expansionary austerity and in particular the claim that reducing government spending is the way to prosperity. In the absence of any effective pushback from the Obama Administration, the Tea Party was successful in discrediting Keynesian economic ideas.^⁠2 

Following Republican victories in the 2010 Congressional elections, the Administration accepted the case for austerity and sought a ‘grand bargain’ with the Republicans. It was only after the Republicans brought the US to the brink of default on its debt in mid-2011 that Obama returned to the economic debate with his proposed American Jobs Act. While rhetorically effective, Obama’s proposals were, predictably, rejected by the Republicans in Congress.

At the state and local government level, austerity policies were in force from the beginning of the crisis. Since they are subject to balanced-budget requirements, state and local governments were forced to respond to declining tax revenues with cuts in expenditure. Initially, they received some support from the stimulus package but, as this source of funding ran out, they were forced to make cuts across the board, including scaling back vital services such as police, schools and social welfare.

The theory of expansionary austerity has faced the test of experience, and failed. Wherever austerity policies have been applied, recovery from the crisis has been halted. At the end of 2012, the unemployment rate was above 8 per cent in the US, the UK and the eurozone. In the UK, where the switch from stimulus to austerity began with the election of the Conservative-Liberal Democratic coalition government in 2010, unemployment rose rapidly to its highest rate in 17 years. In Europe, the risk of a new recession, or worse, remains severe at the time of writing (December 2011).

Although the US economy shows some superficial signs of recovery, the underlying reality is arguably even worse than in Europe. Although unemployment rates have fallen somewhat, this mainly reflects the fact that millions of workers have given up the search for work altogether. The most important measure of labor market performance, the employment-population ratio (that is, the proportion of the adult population who have jobs) fell sharply at the beginning of the crisis and has never recovered (Graphs to come here).

 The reanimation of expansionary austerity represents zombie economics at its worst. Having failed utterly to deliver the promised benefits, the financial and political elite, raised to power by market liberalism has pushed ahead with even greater intensity. In the wake of a crisis caused entirely by financial markets and the central banks and regulators that were supposed to control them, the burden of fixing the problem has been placed on ordinary workers, public services, the old, and the sick.

With their main theoretical claims, such as the Efficient Markets Hypothesis and Real Business Cycle in ruins, the advocates of market liberalism have fallen back on long-exploded claims, backed by shoddy research. Yet, in the absence of a coherent alternative, their policy program is being implemented, with disastrous results.

¹ The question referred to German concerns about the limited ‘quantitative easing’ undertaken by the ECB. It is striking that, three years into the deepest recession since the 1930s, Trichet is most concerned to defend himself against charges that he is not hawkish enough!

² It’s worth observing that, although the Tea Party now claims to have been motivated by anger at the bailout of the banks, which took place under the Bush Administration, it did not begin to organize until after the inauguaration of Barack Obama. The precipitating event was a widely publicised rant by a Chicago commodities trader, Rick Santelli. Mr Santelli whose job would have disappeared if the financial system had not been bailed out was not, of course, complaining about the trillions of dollars spent to rescue Wall Street and its offshoots in Chicago and elsewhere. Rather, he was objecting to the much more modest help given to families who had taken out mortgages they could no longer afford to buy houses that had collapsed in value.

My plans for a full-length movie extravaganza based on my hit book Zombie Economics have gone nowhere. But, now, thanks to the wonders of Xtranormal, reader Paula D’Itallo has produced her own movie version, Zombie Mourning: Exploring the Lives of Dead Economic Theory. Watch and enjoy, as zombie financial theorists explore the risks and opportunities created by an apocalyptic zombie bubble.