The Sandworm Solution

by Henry on June 17, 2016

Brad DeLong:

Time to fly my Neoliberal Freak Flag again! I see this very differently than … Dani Rodrik … The problem is not that Europe has too little democracy. The problem is that it has the wrong kind. Issues of fiscal stance are technocratic issues of economic governance. … Harry Dexter White and John Maynard Keynes were good democrats. Neither would say that Europe’s economic problems now are the result of a deficiency of democracy. They would say that it is the fault of their IMF–that their IMF should have blown the whistle, declared a fundamental disequilibrium, and required one of:

  1. the shrinkage of the eurozone and the depreciation of the peso and the drachma back in 2010
  2. a wipeout of Greek and Spanish external debts, and a fiscal transfer program from the German government to Greece and Spain and to German banks if German authorities wished to avoid such a shrinking of the eurozone.

We did not have such an IMF back in 2010. But that we did not have such an IMF is not the result of a deficiency of democracy in Europe. Or so I think: I could be wrong here.

This is both later and much shorter than it ought to be, but I think that Brad DeLong is indeed wrong, in ways that suggest the limits to neo-liberal analysis.

The two options that he lists may indeed be the only good ones (and plausibly better than the current hot mess that serves as Eurozone governance). But they are obviously rather different to each other.

Specifically, they are different in ways that have marked distributional consequences. The first involves Greece and Spain being booted from the eurozone and paying the costs of adjustment, while Germany gets off scot free. The second involves Greece and Spain staying in the eurozone and Germany paying the costs of adjustment. Depending on your preference of poison, one might go for the one or the other. But the point is that, whichever you choose, it is not a technocratic choice. Instead, it’s a political one – you are choosing who will win and who will lose in a political game where the stakes are entire peoples’ lives and hopes of prosperity.

Put differently again, currency relationships between closely interdependent countries will always have a sharp political edge. This is, at least my reading of Harold James’ history of the processes that led up to economic and monetary union. The problem that European states faced before the euro was a quintessentially political one: who adjusts and has to bear the costs of adjustment? European states found themselves repeatedly having to adjust to American policies aimed at reshaping the international monetary system in ways that sheltered the US domestic economy. Other European economies found themselves repeatedly having to adjust to Germany’s policies and balance of payments surpluses. The project of European monetary union, emerged, in part as an effort to fix the anguished politics of European money. To quote my summary of James:

Through some species of technocratic alchemy, this was supposed to turn bitter arguments over how to run domestic economies and deal with international imbalances into expert-driven decisions on how best to target overall inflation.

Of course, as we know, the technocratic fudge didn’t work over the longer term. When crisis hit, the politics emerged again, and emerged redoubled. There isn’t any way to escape the fact that the choice between imposing pain on the southern countries or imposing pain on Germany is a starkly political choice rather than a technical one, as is the ‘choice’ of the currently existing eurozone in which neither is particularly happy.

Someone who is rightly entrusted with the authority to choose among such options is not a technocrat under any reasonable definition of the term. Instead, he or she is an enlightened autocrat – ideally a three thousand year old human-sandworm hybrid with untrammelled power, who is both wise and disinterested enough to find a solution that is to the collectivity’s long term benefit, and cruel enough to impose it, regardless of how it hurts specific people. Unfortunately, even if you buy the idea that this is politically legitimate (I don’t), the political economy of autocracy in real life is such that enlightened autocrats rarely, if ever, exist. People with untrammeled power rarely have the incentive to employ it in the collective interest. And hence, I think that Brad, although right to note that the problem stems from disagreements between different European democracies, is wrong to suggest that technocracy is the solution. It isn’t a solution, nor, plausibly, is it even technocracy.

{ 106 comments }

1

Sandwichman 06.17.16 at 7:21 pm

“…the technocratic fudge didn’t work over the longer term…” Our chief weapon is surprise, fear and surprise; two chief weapons, fear, surprise, and ruthless efficiency! Er, among our chief weapons are: fear, surprise, ruthless efficiency, and near fanatical devotion to the IMF!

2

Sandwichman 06.17.16 at 7:28 pm

I really should read James’s book. Sounds very much like a sequel to Fred Block’s “Origins of International Economic Disorder.”

3

Keith 06.17.16 at 7:48 pm

The lack of real democracy and transparency caused the crisis. It means both north and south are to blame, but neither wish to accept responsibility. France and Germany have the power so got off lightly. The burden on people in Greece has been shocking. This is a sorry disappointment of a fake Federation.

4

bruce wilder 06.17.16 at 8:08 pm

For those who don’t feel they grasp the technocratic basics, there’s no substitute for reading Wynne Godley’s Maastricht and All That in the London Review of Books, 1992.

You can reduce risk by managing a potentially volatile system, or not. That’s a political choice and “not” can be implemented by technocrats removing the alternative of public intervention and preaching, “There Is No Alternative” as Olivier Blanchard did at the IMF.

I know lots of people who can recite chapter and verse on how Greece brought it all on themselves and deserve it, good and hard, and isn’t it terrible how one bailout follows another? Looting, what looting?

5

Layman 06.17.16 at 8:11 pm

Whether or not there was a lack of democracy, it’s hard to see how the outcome would have been different – better! – with even more democracy. If every citizen of the EU had a vote on the solution for Greece, does anyone think ‘Germany and France pay’ would have been the result?

6

sarang 06.17.16 at 8:39 pm

I’m not entirely seeing how this is responsive to DeLong’s point. He is saying that technocratic analysis implies there are two possible good policies and the technocrat’s job is to make the democratic process adjudicate between these (and only these). It’s like saying that technocrats should make sure you’re Pareto optimal but politicians should choose between Pareto maxima.

Of course you might argue that certain Pareto improvements should be discarded because (e.g.) they exacerbate power disparities, but it doesn’t seem like you’re making that argument either.

7

JeffreyG 06.17.16 at 8:41 pm

When faced with the obvious failure of technocratic governance, it is typical for the neoliberal to insist that if only the right choices had been made, if only they had been as enlightened as we are now, then things would have been better. Confronted with the failures of their beloved set of elites and experts, they insist that the mistakes could have been easily avoided had a different set of experts been tasked with the problem (I say, Keynes and H.D. White would have done things differently!).

I don’t think there exists a set of outcomes which could convince the neoliberal set that technocracy itself is the root of the problem. How many more mea culpas do we want to really want to read from Brad DeLong and his ilk? Sure, watching someone like Greenspan squirm under questioning, or hearing the IMF own up to its terrible failures, is a satisfying sort of vindication. But it is about time to recognize that their expertise is akin to that of Bart Roberts, and start treating these individuals as such.

8

Stephen 06.17.16 at 9:00 pm

Wynne Godley’s article, as cited by Bruce, contains the extremely prescient statement:
“If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.”

Greece is only the extreme example of this. Look at Spain, or at Irish emigration (aided by a language more generally intelligible than Greek or Spanish). Basic problem: what democratic process inside Germany and related states would have produced a consensus for fiscal equalisation, aka taxing us to pay them? What democratic process from outside Germany, etc, could have imposed such a solution on Germany, etc?

And once you go for a non-democratic technocracy, in the long run you’d better have a large, really large number of very well-armed police and long-term prisons to support you. And if those fail you …

9

cassander 06.17.16 at 9:37 pm

@JefferyG

>I don’t think there exists a set of outcomes which could convince the neoliberal set that technocracy itself is the root of the problem. How many more mea culpas do we want to really want to read from Brad DeLong and his ilk? Sure, watching someone like Greenspan squirm under questioning, or hearing the IMF own up to its terrible failures, is a satisfying sort of vindication. But it is about time to recognize that their expertise is akin to that of Bart Roberts, and start treating these individuals as such.

Careful now, that’s getting dangerously close to suggesting that maybe we shouldn’t be trying to centrally plan the economy in the first place!

10

T 06.17.16 at 9:44 pm

@8 Stephen — Not in defense of technocrats, but most US economists opposed the Euro for exactly Goldley’s reason. They were opposed because they thought German politics would block the correct technocratic solution to European internal adjustment once monetary union occurred. They all knew that Germany wouldn’t inflate relative to the south and that deflation in the south would be a nightmare. They recognized that monetary union w/o fiscal union was a ticking bomb.

Now one may argue that the creation of the Euro was undemocratic in the first place.

11

Lupita 06.17.16 at 9:58 pm

a wipeout of Greek and Spanish external debts

That option would have been impossible. The IMF never recommended wiping out the debt of 3rd world nations and it wasn’t going to recommend so for the very first time for 1st world countries. DeLong seems to have forgotten that the West agreed among itself that the IMF would always be headed by a European and has fought the 3rd world in order to preserve this hegemonic prerogative. All the IMF can do is recommend the exact same policies it recommended for 3rd world countries. It is a matter of technocratic pride.

12

js. 06.17.16 at 11:43 pm

Reading the DeLong piece, it looks like for him the “right kind” of democracy is no kind of democracy. I’m really not sure what else would qualify.

13

Strategist 06.18.16 at 2:39 am

the depreciation of the peso and the drachma back in 2010
peseta?

14

J-D 06.18.16 at 5:32 am

T @11

‘Now one may argue that the creation of the Euro was undemocratic in the first place.’

That suggests this question: if there had been a popular vote on it in the first place, would there have been a majority in favour of the Euro (or rather, in which countries would there have been a majority in favour, and in which not)?

15

Robespierre 06.18.16 at 6:30 am

It doesn’t matter if the orthodoxy that technocracts cling to is correct in one particular instance. The issue is precisely having to answer to the people at large for the result of your policies.

Economic dictator Paul Krugman would probably have managed our current depression better – his hindsight is certainly 20/20 – but unless he or his replacement don’t have to answer for their results, how are they supposed to correct their blunders or even work for the public in the first place? Economists of all people should understand incentives.

Both the nature of EU governance and the wave of great coalitions between traditional parties are accountability-avoiding efforts.

16

bruce wilder 06.18.16 at 7:11 am

Indeed, the economists are girded all about, not least by the general uselessness of their own doctrines, which are designed as much to prevent the hoi polloi from understanding their own situation as to legitimise whatever misery may obtain (there is no alternative).

17

Robespierre 06.18.16 at 7:16 am

Yes, doctors (or generals, or ship captains) are a common rethorical device for elitists, from Plato’s times onwards. The greek colonels often used the metaphor for themselves, for instance.

But not even these people have zero accountability, and it’s not a good idea to give doctors patients to experiment on, no questions asked.

I’m fine with selecting qualified people for office (if so much of economics weren’t apologetics it would be even better, but still), and I’m fine with people in government governing, whithin strict limits.

Trying to do so without ever having to answer (ie without the public having the chance to kick you out) is adking a bit too much.

18

derrida derider 06.18.16 at 7:26 am

Layman nails it. Yes, choosing between pain for the Germans or the Greeks is a political choice. But it doesn’t mean that political choices of a democracy will always always be economically optimal, in the sense of maximising human utility. That is in fact precisely why minority rights are an important part of democracy – pure majoritarianism will not always have a happy outcome .

The relevance here is that (1) above was always going to involve far, far more individual pain than (2) . Indeed, arguably Germany would now be growing much faster if it had taken on more debt. The problem with the troika was that it was WRONG, not that it was technocratic. Of course arguably it was wrong precisely for political reasons – the welfare of some people (creditors, basically) was given much more weight than the welfare of others.

19

Stephen 06.18.16 at 7:31 am

J-D@15: there could not have been an EU-wide referendum on creating the Euro because the German constitution prohibits referenda, I think because Hitler used them.

(Well-known Austrian joke: Hitler liked Wagner, so for two generations no more Wagner. Hitler liked classical architecture, so no more classical architecture. Thank God Hitler didn’t like wiener schnitzel.)

But if I may hazard a guess, I think the results would have been ironic. Probably referenda in the countries which in the end have suffered badly from the Euro, Greece and Spain and others, would have been in favour since people would have believed it would make them richer; and a referendum in Germany, which has benefited greatly, would have been in favour of keeping the Deutschmark. I may be wrong, and we’ll never know.

20

Sean Matthews 06.18.16 at 9:55 am

I think you are being unfair to Brad here, because I think it is perfectly clear that he thinks the two options are different. I understand his point to be that there are two possibilities that make technocratic sense, and after that, it is the job of politicians to choose between those. I don’t think it is unreasonable to say that it is a good idea to identify the alternative actions for which a good case can be made that they will actually work, and then to decide on political grounds which one you actually want, and I don’t think Brad has said more than this.

21

J-D 06.18.16 at 11:21 am

Stephen @21

I’m aware of the German constitutional prohibition on referenda, but that doesn’t prevent speculation about hypotheticals, as you’ve just demonstrated yourself. I know the speculation can’t be subject to definitive test; it just seemed to me that the question arose naturally from the discussion.

22

Sean Matthews 06.18.16 at 12:25 pm

Ze K

“What if politics demands something completely different, proscribed by the technocrats”

If politics demands something that all informed and rational analysis says is not to a good idea, then feel free – that is politics, and after all; in fact it describes the apparent situation in the UK at the moment. And who am I to criticise Michael Grove and his ‘Britain has had enough of experts’ schtick on the grounds that it will likely significantly harm people (in fact in large part the people who seem to be planning to vote for it).

Homeopathy too.

You’re also an enthusiast for homeopathic medicine, I assume.

23

jake the antisoshul soshulist 06.18.16 at 2:20 pm

Reminds me of a discussion from my youth. I had just heard the famous quote attributed to Churchill, “democracy is the worst form of government, except for all the others”. When I mentioned the quote to my father, his response was the best form of governemnt would be a perfect dictatorship, the problem being finding a “perfect” dictator. My thought was that the best form would be a perfect anarchy, but then everyone would have to be perfect.

24

JimV 06.18.16 at 2:49 pm

“The two options that he lists may indeed be the only good ones (and plausibly better than the current hot mess that serves as Eurozone governance). But they are obviously rather different to each other.”

You say that as though it’s a bad thing. Of course when there are two possible options to accomplish some objective they are different. If they were not different, there would be only one option. You lost me there. (Not a great loss.)

The choice may be hard, or in fact impossible given the mean and variance of human abilities, or in other words, democracy is not guaranteed to make the best choices. That doesn’t make the options wrong.

Mathematics offers the pie-slicing algorithm to insure fair divisions of gains and losses. I leave that to the student, as a possible starting point for a better system of making choices.

25

T 06.18.16 at 3:17 pm

Stephen @21

Good point. There was certainly support in Italy for the Euro based on the idea that having a single currency run by the Germans would prevent Italian monetary authorizes (and politicians pressuring or controlling the monetary authorities) from inflating the lira as they had so often done. Nonetheless, US technocrats did accurately predict the current European situation and opposed the Euro.

26

Sebastian_h 06.18.16 at 4:01 pm

“I’m not entirely seeing how this is responsive to DeLong’s point. He is saying that technocratic analysis implies there are two possible good policies and the technocrat’s job is to make the democratic process adjudicate between these (and only these). It’s like saying that technocrats should make sure you’re Pareto optimal but politicians should choose between Pareto maxima.”

Ok, sooooo that means that we have a huge technocratic failure in Europe because at no time did they try to force or even strongly help politicians choose between those two options.

27

mere mortal 06.18.16 at 5:09 pm

“The first involves Greece and Spain being booted from the eurozone and paying the costs of adjustment, while Germany gets off scot free. The second involves Greece and Spain staying in the eurozone and Germany paying the costs of adjustment.”

I believe that you have this badly wrong. The distribution of benefits and costs are not as you say, or at least not as simple as you say.

The first option involves Greece and Spain given the option to endure the costs alone, but through depreciation, with the benefit of responding to future crisis the same way, without incredibly painful downward wage and service shocks.

The second involves Germany having the option to continue benefiting from their advantaged position in the currency union, and avoiding the rise of unstable right-wing governments in the middle of Europe.

It doesn’t matter whether Germany prefers all the benefits and none of the costs, because they simply can’t have the full roster of no costs of adjustment, continued currency union, and a stable, tranquil continent.

That is the role of technocrats, to help self-governing people realize what their actual choices are, not the ones promised by ignorant, craven, or dishonest politicians and their selfish, ignorant constituencies.

28

bruce wilder 06.18.16 at 5:20 pm

I have had a chance to read and consider more of the linked material and now I think this part of the OP is critically muddled:

The two options that he lists may indeed be the only good ones (and plausibly better than the current hot mess that serves as Eurozone governance). But they are obviously rather different to each other.

Specifically, they are different in ways that have marked distributional consequences. The first involves Greece and Spain being booted from the eurozone and paying the costs of adjustment, while Germany gets off scot free. The second involves Greece and Spain staying in the eurozone and Germany paying the costs of adjustment. Depending on your preference of poison, one might go for the one or the other. But the point is that, whichever you choose, it is not a technocratic choice. Instead, it’s a political one – you are choosing who will win and who will lose in a political game where the stakes are entire peoples’ lives and hopes of prosperity.

Economically, the two options are actually quite similar, and, depending upon on how one interprets the sketch, they both involve Germany bearing some of “the costs of adjustment”.

If we were to try to be good economists, we would be careful to distinguish “costs” from transfers. Costs are strictly speaking the opportunity cost of using resources for real production of real goods. Transfers are simply the shuffling about of paper claims on output. A transfer might be an expense or income in an accounting sense, but it is not necessarily a cost in the strict economic sense of an opportunity cost impinging on real output for consumption. Schemes of transfer have costs to the extent that they do that impinging: taxes, for example, are transfers and they have costs to the extent that the burden of taxation reduces or distorts in a bad way the efficiency of decisions about production and output. The point of good technocracy is to make transfers accomplish as much of the necessary adjustment as possible, so as to minimize costs.

The political problem is that transfers of wealth and income are often more live to powerful players than costs. To put it bluntly, the powerful may wish to trade off efficiency for inequity in their own favor.

A cost of adjustment would be the deadweight loss from idling resources as a means to force changes in prices and wages. These costs a good technocrat would want to avoid.

The two policy options that Professor DeLong sketches are presumably to be preferred technocratically, because they involve smaller costs. They don’t try to bring about adjustment using widespread unemployment as a means.

Either one would have effectively wiped out some large part of the bad debt accumulated, either by inflation or fiat.

The abrogation of promises is a transfer, not a cost in itself. Presumably, there are costs to abrogating promises, but those costs are indirect, showing up in the effect on the efficient allocation of resources and the level of economic activity; they are not in proportion to the nominal losses.

Controlling the creation of both public and private debt on the front end — thru banking regulation, for example — and resolving bad debts on the back end — through deposit guarantees and bankruptcy — require public institutions and rules. These have been notably lacking or perverse in the Eurozone.

I think Professor DeLong is wrong insofar as he is not taking notice that neither of his options were available, and this was by design. Actual, operative neoliberal theory mandates that the adjustment should be accomplished by destructive reform of institutions protecting labor and labor income.

29

Alex B 06.18.16 at 5:44 pm

Sarang @7: “It’s like saying that technocrats should make sure you’re Pareto optimal but politicians should choose between Pareto maxima.”

Which is a really bad idea. Choosing between Pareto Maxima is a zero sum game. Zero sum games are precisely where politics produces really ugly results, because loss aversion causes every faction to demonize the others, and naked power wins out.

It’s easy to look effective if you solve the easy part of the problem and land the difficult parts on someone else.

30

Kaleberg 06.18.16 at 11:59 pm

I think Mark Twain said something about history not repeating itself, but tending to rhyme.

– The euro is basically the gold standard, except the gold standard was more flexible in that one could mine for gold, but one cannot mine for euros.

– The Pareto argument is basically The Divine Right of Kings, as it is mainly used to argue against taking anything from the powerful to benefit the many.

– The IMF is the Roman Catholic Church which provided a test of purity and loyalty to determine those who would be saved and those who would be lost.

31

Asteele 06.19.16 at 1:33 am

I’m pretty sure even if we got away with all democracy the technocrats wouldn’t have anymore power to do things not in the interests of the wealthy.

32

Peter T 06.19.16 at 6:06 am

I’m in general agreement with bw, but these words:

“to the extent that the burden of taxation reduces or distorts in a bad way the efficiency of decisions about production and output”

suggested that he – along with Brad deLong – thinks there is some non-political way to maximise “efficiency”. This is, of course, the economic technocrats raison d’etre. But there is no such way. There is no possible definition of efficiency that makes it measurable outside some particular socio-political context (and probably none inside one either). There are better and worse outcomes, along multiple dimensions, that all have to be taken into account as far as possible.

The economists’ ideal – the “efficiency’ of all production and consumption organised through free exchange among individuals is unrealisable as a general practice, unmeasurable in application and often disastrous when embodied in policy. That politicians should take expert advice presupposes that the experts know what they are talking about. In this case, they don’t.

33

Howard Frant 06.19.16 at 6:09 am

Really, you could’ve saved yourselves a lot of effort by paying more attention to sarang @7 (and Sean Matthews @25). Of course DeLong knows that there are dramatically different distributional consequences. That’s why he saying that this decision should be made democratically and not by technocrats. But the technocrats, he thinks, should have said, “These are the choices.” The problem, he says, is that the IMF in the pre-Lagarde era was not capable of doing that.

So no, this is not an “apologia” for the failures of the technocrats. What he’s talking about is how responsibilities should be (or should have been) distributed between technocrats and politicians. To me, that seems a lot more useful and interesting than more verbiage about how technocratseconomists/neoliberals are villains raping the helpless virgin Democracy. But obviously a lot of you disagree.

34

ccc 06.19.16 at 8:45 am

“The two options that he lists … are obviously rather different to each other.”

They are the same in one aspect, and in that aspect they are also both neoliberal: they include no substantial consequences for the economists/technocrats responsible for what happened.

Dean Baker is spot on:

“If we expect to hold people accountable then they have to face consequences for doing their job badly. In particular, if they mess up really badly then they should be fired. There is a whole economics literature on the importance of being able to fire workers as a way of ensuring work discipline. Unfortunately this never seems to apply to the people at the top. And this is seen most clearly in the cases of those responsible for economic policy in the European Union.”

“Not only were Trichet and his colleagues not fired, there was not even any talk of it. No one even seriously proposed some sort of cut to Trichet’s pay or some other penalty for f**king up just about as much as is possible for a central bank president. This is unaccountable government.”

“This gets back to the famous dirty toilet problem. If the custodian doesn’t clean the toilet properly, he gets fired. Everyone understands that. But if the central bank president sinks the economy, costing millions of people their jobs and their homes, well, who could have known? Yes, there is a really big problem of accountable government in the EU, and here.”
http://cepr.net/blogs/beat-the-press/paul-krugman-brexit-and-unaccountable-government

The only problem with Baker’s argument is that it does not go far enough.

Operate building machinery incompetently so that a few people die? Jailtime!

Operate echonomic machinery incompetently so that havoc erupts which down the line cause the DEATH (one vector: http://bmjopen.bmj.com/content/5/3/e007295.full ) of many more people than the number killed by building machinery. “Mistakes were made”, carry on.

35

Howard Frant 06.19.16 at 9:43 am

ccc@37

“They are the same in one aspect, and in that aspect they are also both neoliberal: they include no substantial consequences for the economists/technocrats responsible for what happened.”

The more people on this blog decry neoliberalism, the less idea I have what they are talking about. Now we have a completely new definition, or so I conclude from the colon. Well, no matter, we’re against those economists/technocrats, right?

There’s a simple reason why people are more often fired for nor cleaning the toilet than for screwing up the economy: it’s a lot easier to figure out whose fault it is. In the US, Presidents quite commonly lose their jobs for poor economic performance, although that’s rarely the fault of the President. How much should we blame Bernanke for not noticing the bubble in real time versus crediting him for staving off a second Great Depression? Beats me.

Another problem with firing the Chair of the Fed is that once confirmed he can’t be fired. Do we really need to review why more political control is not always better– why Federal judges are appointed for life, for example?

36

Peter T 06.19.16 at 11:05 am

Howard

I’ll give you what I see as the major thrust of neo-liberalism. It’s the attempt, in the realisation that the economic aspects of classical liberalism are neither widely desired or natural, to enact that program by force. That is, to have the state force a “free market” on as much of life as possible.

Since many economists have persuaded themselves that markets are the most desirable and natural form of human economic interaction, they often buy into this program in the belief that they are only forcing people to be free.

The premises preclude responsibility, since they preclude failure. To his credit, deLong seems to be working himself away from this coil. But he has yet to reach the point where he might see the technocrats as not merely wrong in their advice, or the politicians as foolish, but both as operating from false premises.

37

Rich Puchalsky 06.19.16 at 11:28 am

Here’s what I wrote the last time Howard Frant did his “The more people on this blog decry neoliberalism, the less idea I have what they are talking about” thing.

38

JBL 06.19.16 at 3:25 pm

Alex B @33: “Choosing between Pareto Maxima is a zero sum game.” No, certainly not.

39

William Berry 06.19.16 at 3:42 pm

“No, certainly not.”

You might want to re-think that.

Choosing among “maxima” of any kind is always at least a zero-sum game. More likely, it will be a negative sum game.

Perhaps you were thinking of Pareto optim[ums].

40

JBL 06.19.16 at 5:24 pm

William Berry, there are many implausibilities in your comment, but the clearest is that it makes “Pareto maximum” have nothing to do with the Pareto partial ordering on outcomes, of which a Pareto optimum is a maximum point.

41

William Berry 06.19.16 at 5:57 pm

Wow! If I managed “many implausibilities” in one idea– that is quite an accomplishment, no?

Whatever, dude.

42

Cranky Observer 06.19.16 at 6:10 pm

= = = I’ll give you what I see as the major thrust of neo-liberalism. It’s the attempt, in the realisation that the economic aspects of classical liberalism are neither widely desired or natural, to enact that program by force. That is, to have the state force a “free market” on as much of life as possible. = = =

A good example of this phenomenon can be seen in the electricity market in the US/Canada [in all areas that are both coordinating via NERC and either under the market jurisdiction of FERC (1) or using the FERC’s market principles to manage its economics whether required to do so or not (2)]: the idea in the ‘reform’ acts of 1992 and 2005 that using Chicago School economic theory to redesign hundred-year-old electricity provision systems into a series of auction “markets” would usher in a nirvana of abundence, lower cost, and higher profits without jeopardizing stability or future supply.

The results have been pretty disastrous for end consumers with higher prices and reduced stability, and not always that great for the private entities attempting to play in the market (Enron, Dynegy, Duke Power). The FERC’s response has been to order more and more auction-style “markets” to be implemented for every component of the electric system under their jurisdiction (and FERC now claims the authority to order markets in components explicitly not part of their jurisdiction if said component has the potential to affect the FERC markets – which everything down to your toaster does). I believe we’re now up to 35 auction markets for those regions such as MISO under full FERC jurisdiction., Those markets aren’t working, supply and service are getting worse, customers are paying more and firms aren’t making much profit, so FERC’s response is… to order that more Chicago-style auction markets be implemented. Because freshwater economics can never fail, it can only be failed.

fn1: not all electricity provisions regions in the US are under FERC market jurisdiction, but those that are include a large percentage of the population

fn2: several of the Canadian provinces and a small region of northwest Mexico

43

UserGoogol 06.19.16 at 6:12 pm

Kaleberg @ 34: No, that’s not what Pareto optimums are at all. Something is Pareto optimal if it is at a situation where it is impossible to improve the fortunes of some without making others worse off. Whether we should make some people worse off in order to get to a Pareto optimum is a completely separate question.

44

ccc 06.19.16 at 6:13 pm

Howard Frant @39

The replies by Peter T and Rich Puchalsky are worth reading.

Also I didn’t give a definition. But I do think an account of neoliberalism would be incomplete if it didn’t give prominent place to the role of technocratic economists.

“it’s a lot easier to figure out whose fault it is”

How do you know that when there hasn’t been even been any serious attempt at technocratic accountability for the eurocrisis? One possibility is to experiment with strict liability versions of responsibility. If you accept the job as president of the European Central Bank and things go catastrophically wrong then there should be real consequences for you personally, period.

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bruce wilder 06.19.16 at 7:22 pm

Peter T: BW – along with Brad deLong – thinks there is some non-political way to maximise “efficiency”.

That seems a little ungenerous to me, but, yes, like Brad, and his chosen interlocutor, Dani Rodrik, this problem in political economy seems to me to be like one of institutions properly ordered and ordering a system of distributed decision-making.

The OP makes fun of DeLong for allegedly positing the IMF as an all-wise Philosopher King cum Leviathan, interpreting DeLong’s imaginary IMF as an enlightened autocrat. (Think Catherine the Great as a giant Worm.) Although I am also unfriendly to DeLong’s neoliberalism (and I thought I basically called DeLong out as a liar), I read DeLong more sympathetically than the OP does.

I think a lot of people see the IMF’s role in world affairs outside Europe as that of an economic hitman, but the economists inside the IMF, particular on the economics research side (which, unlike the policy side, rarely gets its hands dirty beyond dutifully predicting growth thru pain), see themselves more benignly. The myth they tell themselves, which I read DeLong as echoing here, is that the political struggle over dividing up the pie becomes so dysfunctional that it threatens the ability to make and bake the pie, the IMF steps in and cuts thru the stalemate and makes at least one group of kleptocrats take their losses like men, so that the country-in-crisis can get on with the business of business and economic growth as part of the world (neoliberal) system.

The economic hitman story probably has at least as much truth in it, but, though it is a self-serving myth, it is not without some merit as an idealized description of what the IMF ought to be about. DeLong is not saying, per the OP, that the IMF should rule in all things forever, but that it should resolve particular stalemates — stalemates that arise from random shocks to the (economic) system and create crises in the normal functioning of the (economic) system — and it should resolve those stalemates like Solomon called to judgment, by cutting the baby in half. And, DeLong offers two alternative cuts — length-wise and cross-wise — as illustrations of his ideal model for resolution.

The OP seems to think DeLong’s alternatives hand the baby whole to one Mother of the Crisis or the other (Germany or Greece; Germany or Spain, as the case may be). Germany pays or Greece pays the unanalyzed “costs of adjustment”. I think that’s wrong: either way, Germany and Greece are made to split the difference, each bearing some of the cost of resolving the bad debt. And, I think the unstated implication is that much of the bad debt, by either method, would be resolved in part by either writing it off or inflating it away.

I attack the unanalyzed “costs of adjustment” as muddled thinking, because I think, in addition to not recognizing that both of DeLong’s alternatives split the baby, they also miss his implication that the policy actually followed grew the baby significantly. DeLong is, as I read him, taking for granted that his readers share his assessment that the policy actually followed has multiplied the costs of adjustment and prolonged the crisis.

If the costs of adjustment can be increased, and increased by a multiple, by technocratic incompetence or malfeasance, we ought to notice in our political philosophy, no?

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Rich Puchalsky 06.19.16 at 8:04 pm

With all due respect to BW, Delong’s OP does say “The problem is not that Europe has too little democracy. The problem is that it has the wrong kind.” And then it continues with saying that these are technocratic issues and that the electorate should not be — or perhaps, only can — voting on them as a morality play. If the electorate is pretty much only voting on them as a morality play, and they shouldn’t, it’s hard to see how this is supposed to be a decision left in any way to democracy. Even if you say that technocrats should have presented two options for splitting the costs, how is the electorate supposed to choose between them?

“mere mortal” above writes this a little more straightforwardly: “That is the role of technocrats, to help self-governing people realize what their actual choices are, not the ones promised by ignorant, craven, or dishonest politicians and their selfish, ignorant constituencies.” Selfish, ignorant constituencies are otherwise known as the electorate.

I personally think — in the Eternal Return of my blog comments — that people should give up on democracy. Give up on long-distance coordination problems, embrace anarchy, make decisions in small groups by consensus and leave the large-scale decisions to be made by culture. There is no honest way to square the circle of “we have an immensely complicated society with hugely important communal decisions that people can’t understand” and “we’re going to let people vote on these decisions in some meaningful way”. Large-scale representative democracy is what we have now, and rather than continuing to say that we want some kind of ideal form of it or some better leader, maybe we should just say that this is what it predictably leads to.

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Howard Frant 06.19.16 at 9:47 pm

Rich Puchalsky @41: The problem last time was that people were trying to insist that the word “neoliberal” that Charles Peters invented was somehow the same as the word that Europeans had been using. It wasn’t. Peters probably was unaware of the European use; he was talking about “improved progressivism”, while the Europeans were talking about “revived free-marketism” or something like that. Peters was using the word “liberal” in its American sense, while the Europeans were not.

People then went on to say that H. Clinton was a neoliberal, which is somewhat true in the Peters sense, but ridiculous in the European sense. This led to total confusion, with trying to figure out what Clinton’s position was on the IMF, how Clinton was like Thatcher, etc. To add to the confusion, you had Sanders supporters in Nevada shouting “Neolib bitch” at Barbara Boxer, while Sanders was trumpeting his support for a carbon tax, which is pure neoliberalism in the Peters sense of using markets to achieve progressive goals.

So here we’re all on the European page, which is an improvement. But there still seems to be some confusion. Peter T @40 adds a new item to the mix, the idea that neoliberalism has to be imposed by force. If that’s how we’re using the word, OK, but then we should leave out poor Hayek, who certainly would’ve been against that.

As for DeLong, people are reading a huge amount into him, and perhaps not understanding the context. When he talks about a “morality play,” he means specifically the Northern European countries acting as though the fiscal problems of the Southern European countries are a result of their free-spending ways and general laziness, which DeLong does not believe.

As I read DeLong, he is saying that the IMF, instead of just acting as hitman, should have forced the politicians to decide between two alternatives. How people get from this to him favoring rule by the technocratic elites is a mystery to me.

As for holding technocrats accountable, fine. But first everybody has to agree that they screwed up. People on this blog think so. So does DeLong. But do the Germans?

Cranky Observer @46: DeLong is as against freshwater economics as anyone. He’s a saltwater guy.

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bruce wilder 06.19.16 at 9:51 pm

RP: Delong’s OP does say “The problem is not that Europe has too little democracy. The problem is that it has the wrong kind.” And then it continues with saying that these are technocratic issues and that the electorate should not be — or perhaps, only can [be] — voting on them as a morality play. If the electorate is pretty much only voting on them as a morality play, and they shouldn’t, it’s hard to see how this is supposed to be a decision left in any way to democracy.

I accept on a meta-level the political problem is the proper institutional ordering and coordination of decision-making in a system of large-scale decentralized decision-making. I don’t think DeLong was imagining that the European Central Bank in Frankfurt should decide what you eat for breakfast, though some in Britain may suspect that some baby sandworm in Brussels has that ambition.

Money is a great instrument for enabling a system of distributed decision-making and initiative, but the governance and administration of the institutions of money entail a number of predictable hazards. It is helpful to have actual experts in charge, and not sociopathic demagogues. The checks and balances on the experts is an age-old political problem.

I am actually fine with parliaments voting on morality plays, as long as it is the right morality play, with some reliable functional connection to ethical leadership and prudence in the management of the common weal. If we could hold economic experts responsible and accountable for performance, as another commenter suggested, that would be a good thing.

My objection to neoliberalism is rooted in how it entraps our experts and ourselves in the sticky goo of neoclassical economics, its discourse and language, and prevents us from discriminating usefully among economic experts or economic doctrines or moral narratives, etc.

I am with Peter T:

The economists’ ideal – the “efficiency’ of all production and consumption organised through free exchange among individuals is unrealisable as a general practice, unmeasurable in application and often disastrous when embodied in policy. That politicians should take expert advice presupposes that the experts know what they are talking about. In this case, they don’t.

and

. . . many economists have persuaded themselves that markets are the most desirable and natural form of human economic interaction, they often buy into this program in the belief that they are only forcing people to be free.

The premises preclude responsibility, since they preclude failure.

Unfortunately, Peter T’s summary is only a caricature (as befits a blog comment), and any economist I know would brush it off without feeling the sting of its entailed critique. Economists think they understand “all that” and will wave their hands at transaction costs and frictions and various esoteric incantations. (“Optimal currency area” would be magic words absolving the economics profession from complicity in the Euro, at least in their own demented minds.)

Neoliberalism is not a single, unitary doctrine or ideology. As is the discourse of neoclassical economics from which it springs, it is more of a bounded dialectic, a conversation between opposite poles of a single axis, in which silence plays as important a role as scorn and stylized resentment, and in which the axis itself (the myth of a market economy) can never be effectively criticized let alone abandoned.

Brad’s neoliberal move is classic: to legitimize and to distract. Whither the actual policymakers’ stated intent, to demolish the social welfare state? Nowhere. He has a counterfactual plucked from thin air with which to rally the unsuspecting leftish.

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bruce wilder 06.19.16 at 10:28 pm

DeLong is as against freshwater economics as anyone. He’s a saltwater guy.

What you seem to be missing is that both sides of that dialectic contribute to neoliberalism. Defining the choice as fresh water v salt water is neoliberalism. It is not that neoliberalism = fresh water economics. neoliberalism = defining fresh water v salt water as the legitimate mainstream debate, while marginalizing any other view by scorn or neglect.

Neoliberalism isn’t believing exactly whatever doctrines Brad Delong believes. It is believing that the legitimate and worthwhile conversation to be having is between Delong and Mankiw or Thoma and Tyler Cowen.

In a broader context, neoliberalism isn’t the conservative ideology or policy program associated with the Reagan Administration or the Thatcher governments, it is the dialectic that followed from the third way politics of Clinton and Blair, responding to Reagan and Thatcher.

Key ideas have streamed down from differing points of origin to contribute in confluence to the neoliberal torrent. Hayek’s idea of the market economy as a system of distributed information-processing relying on price, conceived as a polemical refutation of socialist planning, flowed downstream from the 1940s to the 21st century. That doesn’t mean that Charles Peters or the Washington Consensus are not also contributing sources. Their coming together in a global lockout of critical thought is what we should notice.

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bruce wilder 06.19.16 at 10:35 pm

Howard Frant @ 52: As for holding technocrats accountable, fine. But first everybody has to agree that they screwed up. People on this blog think so. So does DeLong. But do the Germans?

Everybody thinks they screwed up. But, point taken nevertheless: we don’t agree on the nature of the screwup or the performance shortfall.

Even the Greeks, suffering at they have, do not seem agreed on who to blame for what.

Also, the seemingly endless series of bailouts for Greece have involved a lot of parliamentary voting. I am not sure what anyone has been allowed to decide by that method, but the voting has gone on.

What’s the alternative? There is no alternative. That’s neoliberalism, Howard.

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Rich Puchalsky 06.19.16 at 10:43 pm

“People then went on to say that H. Clinton was a neoliberal, which is somewhat true in the Peters sense, but ridiculous in the European sense.”

No it isn’t. Remember all of her bits about single-payer health care being unworkable? The replacement of single-payer — the goal that everyone on the left was working towards — with the ACA, and then defining the ACA as the only available alternative, is exactly how neoliberalism plays out in the U.S.

Peters’ sense *is* what yore calling the European sense. (You could just as well call it the South American sense.) Neoliberalism sells itself as improved progressivism and always has done.

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bruce wilder 06.19.16 at 11:08 pm

This article from the Guardian, featuring recollections by Greg Palast of Robert Mundell, seems apropos. Coming from Greg Palast, it is polemical and most decidedly not a neoliberal perspective, but what he says about Mundell’s personal politics is dead-on.

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Rich Puchalsky 06.19.16 at 11:26 pm

BW talks about both sides of the dialectic contributing to neoliberalism: I like to use a slightly different phrasing and say that neoliberalism is the ideology of the global managerial class. As such, it encompasses Eurocrats — some of whom are, in theory, social democrats — “respectable” right-wingers, literal managers / CEOs, higher-ranking people in important NGOs, U.S. liberal politicians, and even upper-level Chinese Communist Party members. All of these people cooperate to make the current international order work, and the cozy system within which they in theory argue with each other but in practice have the same interests is neoliberalism.

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Howard Frant 06.20.16 at 12:03 am

Rich Puchalsky@56

“Peters’ sense *is* what yore calling the European sense. (You could just as well call it the South American sense.) Neoliberalism sells itself as improved progressivism and always has done.”

I don’t really think so. Surely Thatcher was a neoliberal, in the European, or non-American, or metric-system, sense. Was she selling herself as a progressive? Was Reagan? The fact is that the word “liberal” means something different in in British English than in American English. Hayek called himself a liberal; I doubt Paul Ryan would call him that.

As for Clinton, it’s just possible that she was recalling, not only how she got hammered by the insurance companies on her version, but how even the ACA only just squeaked through, with the Republicans screaming about a “government takeover of health care.” Now you’re going to go in and tell people that you are, in fact, proposing a government takeover of insurance, when actually a lot of people are pretty satisfied with their insurance. She thought that was unachievable. She said, “That’s not going to happen,” and the left ran around with its hair on fire talking about how Clinton had vowed to prevent single-payer.

Yes, the left has been working towards the goal of single-payer. For a long, long, long time, without success. Forty years ago, Ted Kennedy tried to work out a compromise with Nixon on health care. Kennedy wanted single-payer, Nixon offered something closer to the ACA. Kennedy turned it down, and regretted it for the rest of his life. That experience had some influence on the ACA. By the way, people are happy to heap abuse on Clinton for supporting the ACA, but are strangely silent on Obama.

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Roger Gathman 06.20.16 at 12:59 am

There are plenty more options. How abt a euro wide public bank able to make low interest loans to househols and small businesses? How about a euro wide decision to shrink the financial sector of the economy? In fact , thats the whole point of democracy – to contest the myopia and unconscious class interests of the technocrats.

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Howard Frant 06.20.16 at 1:52 am

Bruce Wilder @54

My comment on freshwater economics was purely in response to a comment by Cranky Commenter, and had no larger significance.

We agree, I think, that we need experts in the picture somewhere. That implies that there will be some conversations going on that we don’t understand and can’t really evaluate. People on the left are fine with this when the experts are climate scientists, but when they’re economists they stiffen up and start talking about elites and democracy.

One problem, of course, is that there’s a lot less unanimity among economists than climate scientists. But I don’t see much basis for the claim that economics rules out a lot of the discussion. I read DeLong infrequently, but I was reading Krugman through the whole euro crisis. He was as concerned as any non-economist about the suffering that that the EU was inflicting on Greece; and he was more able than non-economists to see through the morality play that had taken hold in Northern Europe about those no-good southerners.

And in general, all this talk about technocrats running everything has the effect of letting politicians off the hook. My impression is that the decision to go to the euro was a political decision which some but not all technocrats warned against. In general it’s a reflex of politicians to blame bureaucrats when things go wrong, but usually the politicians are more to blame.

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bruce wilder 06.20.16 at 2:21 am

Rich Puchalsky @ 58

Yes, I’ve noticed neoliberalism being used as a label for the emerging world political and economic system, which seems to destroy and absorb, like the Borg.

I tend to identify it as an ideology of the chattering classes and the often mindless rhetoric of politicians, the punditocrisy and the PR propagandists and I also connect it with the unexamined and unchallenged rhetoric of Econ 101 and the market economy. In colleges and business schools, people are trained in the language of Econ 101 as part of preparing to staff the bureaucratic apparatus from top to bottom. Talk about a monoculture!

As with any religion, I tend to think there are probably a lot of people, who neither understand nor believe, even if they mouth the words. They aren’t necessarily rebels, even in their hearts. It is just conformity to convention to recite the words.

The extent to which practical people use neoliberalism and/or neoclassical economics as a guide to the architecture of organization or policy — with what actual aim as opposed to the aim purported — is something that’s harder to sort out in all its ramifications. Where does rank incompetence leave off and bad faith begin?

I’ve sat thru speeches where millionaires congratulate themselves on their interest in public education while touting the charter school initiatives by which they stand to skim many hundreds of thousands of dollars in loot. I’ve looked at a few of the literally hundreds of papers where economists pretend to estimate the costs of responding effectively to the threat of climate change with projective analysis of economic growth to the end of the century — not only are they preposterous and wildly irrelevant in their abstractness, but their neoliberal rhetorical frameworks adopt idiotic conventions that make good policy cost economic growth. I’ve shuddered thru that Frontline documentary on what a fool L Paul Bremer was.

Of course, you can think that ideas are just a wagging tail, following the appetite and its business end around: just a rationalization for the imperatives of a changing social and economic structure. Globalization and managerialism become their own raisons d’être and economists really do serve as a civic priesthood.

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Rich Puchalsky 06.20.16 at 2:44 am

“One problem, of course, is that there’s a lot less unanimity among economists than climate scientists.”

At least I had one laugh today. If only we could get the same unanimity among lawyers as we have with physicists. Strangely those lawyers always seem to be saying different things. It’s as if they aren’t scientists at all!

BW: “Where does rank incompetence leave off and bad faith begin?”

Re-read Cranky’s comment #46 and shudder. The electricity grid is either #1 or #2 in critical infrastructure that absolutely must work. (Not sure whether drinking water is #1 or #2). It’s being market-ized, and for whom? For “elites”? As Cranky writes, I can’t even see that elites are making a lot on it. Enron did before Enron went bust. But if you’re a real billionaire interested in buying up public assets, wouldn’t you want them to sort of make a guaranteed profit? The only people doing well out of the system are the managerial class, who get to make money managing the process and them run away when the scam goes bust, not the “capitalist” wealth-owning class as such.

So why do regulators keep insisting on more auctions? I think they’re true believers. “More auctions” is simple and unfalsifiable, since any problems might in theory be solved by more auctions. Wouldn’t it be great to have a simple, unfalsifiable theory that meant that you were never wrong?

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Peter T 06.20.16 at 3:08 am

Frant @ 52

“the idea that neoliberalism has to be imposed by force. If that’s how we’re using the word, OK, but then we should leave out poor Hayek, who certainly would’ve been against that.”

News to the Chileans

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bruce wilder 06.20.16 at 3:23 am

a simple, unfalsifiable theory

It is a false theory, a Big Lie. It only became “unfalsifiable” within its own framework, when economists wrecked their methodology. No idea in economics is ever wrong; every idea gets loaded onto one big overloaded smorgasbord and served rotting or fresh to a profession that has lost its sense of smell.

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JW Mason 06.20.16 at 4:34 am

It’s good to know what we’re up against. Thanks for posting this.

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Howard Frant 06.20.16 at 4:54 am

God, this is depressing. The clearly intelligent people commenting here seem unable to do more than conceive the world as divided up into elites (which never, never include themselves, whatever Glenn Beck may say) and the people. Economics is hard, so let’s just finesse it by saying it’s all phony and designed by the rich to serve their own interests. Europe is a mess, because that’s how the elites wanted it.

Meanwhile, the fact that people in different countries have different interests– say, that Germans might have different interests than Greeks– gets elided. So does the fact that some members of the elite were vociferously opposed to what the European central bankers did. And they were opposed not just on moral grounds but on grounds of economic theory. It isn’t “neoliberalism” that created the mess in Europe; it’s conscious decisions made by duly elected politicians. They were guided by their experts, but they could’ve chosen to be guided by other experts.

Roger Gathman @60

“How about a euro wide decision to shrink the financial sector of the economy?” OK, how about it? Do you think it’s neoliberalism that’s preventing such a decision from taking place? It may be the power of the rich, it may be conflicting interests of different countries, it may be that it’s bad idea. I doubt that it’s because everyone’s in the grip of an ideology they can’t escape from. “How abt a euro wide public bank able to make low interest loans to househols and small businesses” OK– how much will it cost? Who will pay for it? How effective will it be– are there a lot of businesses that would hire if they could get low-interest loans? Most importantly, what is the political support for it, among both voters and politicians? Ideas are easy.

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Howard Frant 06.20.16 at 5:11 am

Peter T @ 64

I was unaware of that piece of Hayek’s history; I thought he had died long before. Certainly doesn’t reflect well on him. It seems clearly inconsistent with, say, “The Road to Serfdom” (which is actually all I’ve read of his, aside from one very good paper). To be clear, I’m not a disciple of his. But I think the left is too quick to write him off. He was explicitly against “laissez-faire” and I think would’ve favored cap and trade for greenhouse gases, an increase in the minimum wage, and Obamacare.

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Howard Frant 06.20.16 at 5:44 am

ccc @48

Clearly here ought to be some accountability for Eurocrats. I don’t see why there shouldn’t be something akin to the notion of ministerial responsibility that we so sadly lack in the US. The problem remains, can we all agree on when something is a mess? And trying to apply that to the US: (1) If Bernanke had quit over the crash, things might have been much worse, because he happened to be a specialist in situations like that and apparently did the right things to keep it from from turning to a second Great Depression. (2) I ask myself if I honestly believe that Bernanke would’ve done a better job if he known that his job was hanging in the balance, and I don’t. At that level he can easily get a job that pays a lot more; he’s much more concerned about his reputation. The only argument for him resigning is that it sort of preserves the principle that the guilty ought to be punished, at which point he starts to look like a scapegoat for the banks.

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bob mcmanus 06.20.16 at 7:28 am

67.1 and 67.2: Cue Lupita

The clearly intelligent people commenting here seem unable to do more than conceive the world as divided up into elites (which never, never include themselves

Now that is how neoliberalism works, and why it is not an ontology, ideology and hegemony by and of elites, any more than capitalism is only by and for the capitalists.

The commenters here, the subjects and suckers and agents of communicative capitalism, each and all have smarter saner more ethical analyses and solutions than those other guys, iow, view themselves as technocratic elites searching for the Habermasian colloquium that will set things right, or at least confirm and approve their self-identifications. And the Trumpsters, Sanderistas and Brexiters all believe they are trying their best, with a six-pack or bong to help them through the hard thinking to do.

Is it time yet for my spontaneous irrationalism?

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bruce wilder 06.20.16 at 8:47 am

Is it time yet for my spontaneous irrationalism?

Time for a beer. Nice and frosty.

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faustusnotes 06.20.16 at 10:55 am

Oh dear Howard Frant at 68 is glorious. Yes Howard one of the key architects of your theory, who you think supports “laissez faire” was in favour of forcing “laissez faire” on people by military force. I guess you also didn’t know that he refused to move back to America unless he was guaranteed his social security?

Now, you were saying something about this false distinction of “elites” and “the people”. Would you like to revisit that?

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Rich Puchalsky 06.20.16 at 11:49 am

Howard Frant @68: “I was unaware of that piece of Hayek’s history […] He was explicitly against “laissez-faire” and I think would’ve favored cap and trade for greenhouse gases, an increase in the minimum wage, and Obamacare.”

Neoliberalism never sells itself as improved progressivism, though.

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JBL 06.20.16 at 1:51 pm

William Berry, yes, you’re right, “several” really should have been 2. (The other is that your definition, whatever it is, supports both zero- and negative-sum but not positive-sum outcomes.)

Separately, I am not a well-calibrated comment writer: I aim for “terse,” but often unintentionally end up at “rude.” This is a personal failing that I should work harder to amend. My apologies.

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roger gathmann 06.20.16 at 3:57 pm

67 – you are right, ideas are easy. They are also powerful. If the idea comes across that there are only two macro-alternatives, that idea is easy and false. As you demonstrated, you can actually ask questions about other ideas. The ones that came off the top of my head at the moment, for instance.
I definitely think that a strong claim can be made that a, if neo-liberalism names an actual historical event, b., it is integral to neo-liberalism that the financial sector increase dramatically.After all, that is what the privatization of areas that were, in the post-war social democratic epoch (1945 – 1975, about) , considered the province of the state, such as providing a base for retirement and health care. The de-regulatory legislation of the late 70s definitely sent massive amounts of money into the financial sector – just look at how “investment” was encouraged by IRAs, 401ks, and the dramatic change in private pensions. Look at the way Milton Friedman’s paper advocating the deregulation of currency trading, which was paid for by the president of the Chicago Mercantile Exchange, led to changes in the law that vastly expanded this aspect of the financial markets from 1972 onward. The increase in the size and influence of the financial sector is easy to track, and it tracks exactly with the change in the regulatory structure that, if anything, is what neoliberalism means. Here’s a paper conveniently tracking the growth of the financial sector as a percentage of the US GDP from the 50s to 2006. http://www.people.hbs.edu/dscharfstein/Growth_of_Finance_JEP.pdf

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roger gathmann 06.20.16 at 4:22 pm

ps – I’m of course writing about the American experience, but that – and Britain, which experienced a similar though less deep regulatory change – were the models for the EU regulatory changes in the 90s and 00s, culminating in the massive attack on unions and state insurance systems that went on after the crash of 2008. Interestingly, Germany, which was the least effected country in the aftermath of the crash, has the least “developed” financial sector of the major economies of the EU – for instance, the total capitalisation of its stock market is only 39 percent of its GDP – in contrast with France 74 percent, Spain, 89 percent, UK, 128 percent, and US, 102 percent (2009).

The original technocratic argument, in the seventies, for deregulation and the de facto expansion of the financial sector was that growth and productivity had slowed to the point that the economy should be galvanized. Galvanized it was, and we now have – low growth and productivity. But in contrast with the 7os, corporations are rolling in wealth and plutocrats have succeeded in taking the lion’s share of what growth there is. And the technocracy, or the economists, have no desire to revisit the history of what they have wrought.

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notsneaky 06.20.16 at 7:58 pm

I think this is essentially right thought it misses one key piece – the Eurozone was formed and its institutions designed back in a world where inflation was still a primary concern and a good chunk of the reason why countries such as Italy or Greece wanted in is precisely to get some of the credibility of the German Bundesbank and lower inflation. But now we’re no longer in a high inflation world, or even a modest inflation world so the structure that was put in place just isn’t meant for today’s problems.

Also, you can’t 1) be a utilitarian, 2) follow rule based monetary policy and 3) minimize the possibility that someone will wish to leave the currency area at the same time. At least not unless you’ve got a robust system of side fiscal transfers.

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bruce wilder 06.20.16 at 9:19 pm

I love the way inflation, in notsneaky’s narrative, is something that just floats in from outer space.

and, “credibility” — yeah, we’d better get some of that. Put it on the list, next to eggs and milk.

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William Meyer 06.20.16 at 9:46 pm

At 63.

Actually, I have followed power markets for 30 years, and in fact restructured power markets have created very significant investment opportunities for wealthy investors. Private equity firms and hedge funds have made significant amounts of money from buying, operating and selling generation and transmission assets, and private equity firms provide most of the capital for non-utility power developers, including virtually all of the big wind- and solar-farm developers. Investment banks have also controlled significant amount of generation assets and virtually own the power trading markets. Of course, the power busines is an odd beast in that its changes — the source of its big profit opportunities — have largely been driven by regulatory and legislative anxieties, such as the apparently unstable price of energy in the 1970s, and by a desire to engage with global warming in the 1990s and the 2000s.

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notsneaky 06.20.16 at 11:16 pm

Bruce, is there something incorrect in what I said? Or perhaps I wasn’t clear about something and you need me to explain it in a different way?

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SamChevre 06.21.16 at 12:43 am

Roger Gathman @ 75

The de-regulatory legislation of the late 70s definitely sent massive amounts of money into the financial sector – just look at how “investment” was encouraged by… the dramatic change in private pensions.

Describing ERISA as “de-regulatory” is exactly backward. The change for private pensions (after the disaster for pensioners of the Studebaker bankruptcy) was that they were much MORE regulated, and had to be funded out of an asset base, not assumed to be paid out of future earnings.

This change definitely led to more financial-market investment, but it was in no way de-regulatory.

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John 06.21.16 at 1:44 am

Just because there are political issues doesn’t mean that there aren’t also technocratic failures. Take for instance the 2010 ECB rate hike. While it wasn’t the largest magnitude of error ever it shows how transparent this whole “politics” explanation is. That was a technocratic error pure and simple. All parties in europe would have been better if Europe had it’s incompetent “technocrats” replaced by real technocrats like Ben Bernanke or Janet Yellen.

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Howard Frant 06.21.16 at 2:34 am

Rich Puchalsky @73

“Neoliberalism never sells itself as improved progressivism, though.”

Right, and yet for the life of me I couldn’t convince people that what Charlie Peters wrote had nothing to do with what they were talking about; they (you?) were in love with the idea that because they had the same name they must somehow be connected. Even though clearly improved progressivism was clearly what Peters was aiming for.

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Rich Puchalsky 06.21.16 at 2:55 am

I was being sarcastic, obvs. You cited Hayek as supporting cap and trade and Obamacare, items in the so-called “improved progressivism” neoliberalism that is supposedly so different from the “revived free-markets” neoliberalism (not to mention the “temporary dictatorship” neoliberalism).

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derrida derider 06.21.16 at 4:00 am

“What if politics demands something completely different, proscribed by the technocrats?” – ZeK@23

Why, then you get the creation of the Euro. For all those sceptical of economics this is actually a story of scientific triumph – the technocrats predicted the Euro would fail in pretty much the way that it did. The politicians ignored such unwelcome advice, as is their privilege, but eventually reality caught up with them. Facts are stubborn things.

The only surprise was that it took so long – but arguably that was only because German politicians didn’t hesitate to ignore the Growth and Stability Pact in the early 2000s when reflation was needed. They seem to have lost wisdom between then and now.

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john c. halasz 06.21.16 at 4:28 am

William Meyer @ 68:

Yep. There was a excellent David Kay Johnston article on a company selling electricity transmission derivatives, which had actually lost money in only 1 month over 7-8 years. They had hired top quality mathematical/engineering talent to analyze the grid and identify recurrent bottle-necks. The theory is that such “free market’ derivatives should invite a corrective market response. But if so, why was the company so persistently profitable? And wouldn’t such top quality talent be better used in correcting the grid problems rather than seeking to mint profits from them?

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faustusnotes 06.21.16 at 5:25 am

Didn’t Hayek spend his career ranting against social security (while receiving it)? Why would he support a medicaid expansion?

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Howard Frant 06.21.16 at 12:17 pm

Rich Puchalsky @84

“I was being sarcastic, obvs. You cited Hayek as supporting cap and trade and Obamacare, items in the so-called “improved progressivism” neoliberalism that is supposedly so different from the “revived free-markets” neoliberalism (not to mention the “temporary dictatorship” neoliberalism).”

Once again I chase the elusive butterfly of neoliberalism. Does something automatically become neoliberal, and therefore bad, because Hayek would have supported it? So cap-and-trade (or, I could have added, a carbon tax) is neoliberal? Bernie Sanders is now a neoliberal? Neoliberalism favors giving health insurance to millions of uninsured people? Hayek also said he saw nothing wrong with a guaranteed annual income. Is that now part of neoliberalism? I have to say, it’s starting to look rather benign.

I summarized Peters as wanting to use markets to achieve progressive ends (though no doubt there are other bits I’m leaving out). Turns out ends matter. The Republican party has always claimed to be pro-market, when in fact it is pro-business. They never hesitate to throw competition under the bus. So I think viewing the problem as being marketization of everything misses a lot.

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Rich Puchalsky 06.21.16 at 12:37 pm

“So cap-and-trade (or, I could have added, a carbon tax) is neoliberal?”

There are at least four uses of neoliberalism, all related. This should not be a surprise because nearly all political words work in this way.
1. neoliberalism as economic ideology:, the “Economics 101” framework that says that everything is better off privatized and left to the market;
2. neoliberalism as global system: the set of institutions through which the world currently works and the class of people who control them;
3. neoliberalism as characteristic solutions: cap and trade, carbon tax, ACA, electricity auctions, trade agreements;
4. neoliberalism as bounds of political possibility: the dialectic between Reagan/Clinton or Thatcher/Blair, “there is no alternative”, Hayek justifying support of temporary dictatorship.

Was unsure where “neoliberalism as cover for wealthy country interests” goes in there, since it shows up in all of them. Maybe I should have added a 5.

But the point is this case is that neoliberalism, as “the bounds of possibility” and as the only functioning world system we have, controls the form of solutions that people suggest even if they aren’t neoliberals. Why do people suggest cap-and-trade? Because they want something to be done and it seems as if that might get something done, since those solutions appear to be respectable if for no other reason. They’re wrong that these solutions would work, since neoliberalism has characteristic failure modes around its solutions, but that’s why.

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Cranky Observer 06.21.16 at 12:54 pm

“I summarized Peters as wanting to use markets to achieve progressive ends (though no doubt there are other bits I’m leaving out)”

Assumes facts not in evidence. Peters wanted to terminate much of the New Deal and use the Democratic Party to implement what he considered the best parts of the Republican & libertarian agendas. No evidence that this was in service of progressive ends other than smokescreen/lip service.

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Layman 06.21.16 at 12:57 pm

Howard Frant: “So cap-and-trade (or, I could have added, a carbon tax) is neoliberal?”

Of course it is. The obvious solution – the solution which is used to constrain the behavior of people – is regulation. We don’t offer everyone a crime allowance, and then encourage people to trade their allowances so as to fit their individual criminal needs, as the means to reduce crime. We pass laws against crime. This solution, which worked in the past, is apparently unavailable now because neoliberalism and the beautiful freedom of Markets!

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Faustusnotes 06.21.16 at 12:58 pm

Howard, Hayek was clearly opposed to giving health insurance to millions of people. He wrote repeated screeds about it. Why do you insist he believed something he repeatedly disavowed? And why are you arguing a case using the theories of someone you know nothing about?

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Rich Puchalsky 06.21.16 at 4:31 pm

Here is a slightly longer-form piece on the problems with cap-and-trade / carbon taxes.

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Howard Frant 06.21.16 at 4:42 pm

Faustusnotes@94

I am, indeed, not a Hayek expert. I know that he was bitterly opposed to the NHS. (I believe his father was a doctor.) Possibly that was because he was just “opposed to giving health insurance to millions of people” in principle, but I guessed he would not have been opposed to the ACA in principle, just as he was not opposed to a guaranteed annual income. Rich’s response to that was essentially to say well, then, the ACA must be neoliberal. You can see why I sometimes feel that I am chasing a mirage.

Layman @93

My goodness, I thought this argument had been settled a long time ago. Yes, you can, of course, do the obvious thing and use “command-and-control” regulation. When the GHW Bush Admistration proposed using cap-and-trade for acid rain, a lot of environmentalists reacted as you did, talked about a “license to kill” etc. The reason they stopped is that it worked, and was much cheaper than command-and-control would have been. We could certainly regulate carbon that way now. The reason no one is proposing it is not, as you think, freedom, but cost. Using markets is much cheaper than c&c. It’s a parody of right-wing beliefs about the left to say, no, we want to do it the much more expensive way so we can maintain control.

Rich Puchalsky @91

#1: I doubt there’s any Econ 101 text (even, say, Greg Mankiw’s) that says everything is better off privatized and left to the market. Every Econ 101 text, I’m pretty sure, spends a fair amount of time talking about economic justifications for government action. Sure, there’s a vulgar pseudo-economics in Republican circles that grunts “Private, good! Public, bad!”, but I don’t think that deserves a fancy title like “neo-liberalism.”

No, I could be wrong, but I think people want cap-and-trade (or a carbon tax– has Sanders been sucked in too?) because if they’re going to be proposing an expensive change in the way we use energy, they’d like it to be as cheap as possible. If by beyond “the bounds of political possibility” you mean, say, a huge increase in mass transit, I think what’s stopping that is not neoliberalism but the Overton Window.

And can I just say a few words in defense of Bill Clinton? Here they are:

Nixon
Nixon
Carter*
Reagan
Reagan
Bush

*Democrat

Here are the facts: Before Clinton five of the last six Presidential elections had gone to the Republicans, and the sixth went to the most conservative candidate among the Democrats. Two of the five were historic and humiliating Electoral College landslides. The point is not just that the Democrats wanted to get back to power. The point is that by any reasonable standard, the voters had decisively rejected what the Democrats were offering. Clinton tried something slightly different (as did Blair). One result is that we now have RBG and Breyer on the Supreme Court instead of a 6-2 conservative majority.

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Rich Puchalsky 06.21.16 at 4:48 pm

Howard Frant: “When the GHW Bush Admistration proposed using cap-and-trade for acid rain, a lot of environmentalists reacted as you did, talked about a “license to kill” etc. The reason they stopped is that it worked, and was much cheaper than command-and-control would have been.”

This zombie factoid again. No, the cap-and-trade program for acid rain did not work. There was command-and-control Clean Air Act regulation happening at the same time, and that regulation (and the prospect of known future costs due to that regulation) forced the changes that actually occurred. If you look at the actual prices of acid rain pollution allowances, they were never sufficient to force adoption of the actual changes that happened, because they always costed far less than the changes costed. The one time that they did approach a price peak where might have started to force change, they were promptly challenged in court and did not have the political support necessary for their defense.

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roger gathmann 06.21.16 at 5:24 pm

sam chevre. The ERISA legislation was passed at the liberal highwater mark – 1974.

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Howard Frant 06.21.16 at 7:10 pm

Rich Puchalsky @97

Just a zombie factoid? Not even a zombie fact?

Ok, fine. I’ll pass on spending a week studying up on this. Let’s say you’re right. What is the point? That direct regulation of carbon emissions would be as cheap as cap-and-trade? That seems doubtful to me, given the difference in ages of generating plants. So people went to all that trouble, including putting up with Republicans calling it “cap and tax”, just because they were in the grip of neoliberal ideology?

And even if that were true, so what? How are ordinary people made worse off by the fact that we’re using cap and trade rather than command-and-control?

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Rich Puchalsky 06.21.16 at 8:00 pm

HF: “How are ordinary people made worse off by the fact that we’re using cap and trade rather than command-and-control?”

Ordinary people are made worse off because cap and trade does not work. When the traded allowances get expensive enough to actually force changes in behavior, there is a predictable political backlash, and cap and trade programs do not produce a political constituency that allows them to survive this backlash. So these programs go away as soon as they start to work. Just because no economist is apparently capable of understanding this does not make it false.

Conrad and control, on the other hand, forces changes in infrastructure that are predictable and long-term, and if a backlash comes later, the new infrastructure is already a sunk cost.

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Faustusnotes 06.21.16 at 10:19 pm

Howard, obamacare includes a Medicaid expansion that gives free health insurance to millions. Probably 20 million. Hayek opposed this on economic principle. To say he would have supported it requires ignorance of both it and his work.

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SamChevre 06.22.16 at 12:02 am

roger gathman @ 98

If you are counting ERISA as regulatory (rather than neo-liberal), I’m completely unable to figure out what the deregulatory move that pushed retirement into the financial markets was.

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Howard Frant 06.22.16 at 3:49 pm

“Howard, obamacare includes a Medicaid expansion that gives free health insurance to millions. Probably 20 million. Hayek opposed this on economic principle. To say he would have supported it requires ignorance of both it and his work.”

How kind of you to say so, but I think you mean “either it or his work.” As I said above, I’ve read only “The Road to Serfdom” and a paper, “The Use of Knowledge in Society.” From the former:

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to supersede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatability in principle between the state’s providing greater security in this way and the preservation of individual freedom.”

Maybe he changed his mind later, but this is the book that the right is always citing, I think because they misunderstand the title.

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Howard Frant 06.22.16 at 4:23 pm

Sorry– since I don’t know how to edit comments,I’m going to re-post the quotation in @103 with emphasis added. This is Hayek, The Road to Serfdom:

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to super-cede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatability in principle between the state’s providing greater security in this way and the preservation of individual freedom.

I am not a huge fan of Hayek; I just dislike seeing people reduced to caricature.

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Howard Frant 06.22.16 at 4:24 pm

Sorry– since I don’t know how to edit comments,I’m going to re-post the quotation in @103 with emphasis added. This is Hayek, The Road to Serfdom:

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to super-cede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatability in principle between the state’s providing greater security in this way and the preservation of individual freedom.

I am not a huge fan of Hayek; I just dislike seeing people reduced to caricature.

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Layman 06.23.16 at 11:43 am

Howard Frant: “That direct regulation of carbon emissions would be as cheap as cap-and-trade? That seems doubtful to me, given the difference in ages of generating plants.”

Doesn’t this rather give the game away? For cap-and-trade to be ‘cheaper’ (for polluters, presumably?), must it not achieve less aggressive results, so that cap-and-trade is simply a weaker regulatory regime? Else, how ‘cheaper’?

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Howard Frant 06.23.16 at 9:53 pm

Layman@106

“Doesn’t this rather give the game away? For cap-and-trade to be ‘cheaper’ (for polluters, presumably?), must it not achieve less aggressive results, so that cap-and-trade is simply a weaker regulatory regime? Else, how ‘cheaper’?”

No, you’ve come to the heart of what we might call the Layman’s misunderstanding of economics. Not everything that’s better for one party is worse for the other– the whole point is to find things that are better for both parties. There are cheaper and more expensive ways to control a given amount of pollution. And some part of increased costs to the polluter– in the long run, most of them– end up being paid by the consumer as higher prices. So it’s in everyone’s interests to find cheaper ways of doing it.

The basic idea with cap-and-trade is that some polluters can control pollution more cheaply than others– maybe because of the technology they’re using, maybe because they’ve thought of a clever way to do it, maybe for other reasons. It’s in everyone’s interest for the pollution control to be done as cheaply as possible for any given level of control. Cap-and-trade is a mechanism for making sure that a given amount of pollution is controlled by the people who can do it the most cheaply. The original polluters aren’t let off the hook; they have to pay money.

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Howard Frant 06.23.16 at 11:21 pm

Rich Puchalsky @95

Thanks. I think I can kind of see what you’re saying, e.g., economic theory says that if energy prices were right, we wouldn’t need mileage tandards in car, or lightbulb standards. But to do that you’d need prices so high that you’d get a lot of pushback. So it’s a lot easier just to have a rule.

But I don’t see that so much with electricity. If you have a carbon tax, coal gets more expensive relative to natural gas. I think when elec. executives are planning investments in new generating capacity, they’re definitely taking that into account. So we get less CO2 in the air.The price of elec. increases, but less, because generating costs are only a fraction of total costs.But it’s probably enough to get some small reduction in electricity use. And gas is now disadvantaged relative to renewables., so …

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Layman 06.23.16 at 11:47 pm

“Cap-and-trade is a mechanism for making sure that a given amount of pollution is controlled by the people who can do it the most cheaply. The original polluters aren’t let off the hook; they have to pay money.”

Yes, I understand this quite well, thanks! The question is, how are overall goals established? I imagine that targets are set in a context mindful of the need of the worst offenders to continue to operate, by buying credits from lesser offenders or those more able to improve. Set targets which are too stringent, and the effect on the worst is no different than regulating them out of business. Since the point of cap-and-trade is to avoid that, the targets will be weaker than they would otherwise. It is an accommodation of offenders, not a regulation of them.

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Brett Dunbar 06.24.16 at 12:13 am

The same considerations apply. You might set direct regulation such that the targets are achievable. The idea with cap-and-trade is that you decide what overall level is acceptable and realistically achievable and than issue that quantity of permits. Some plants might close due to having unaffordable permit costs. This might lead to some older plants closing, which is also true with direct regulation. The political considerations are the same.

The idea is to get the reduction in the most cost-effective method and to take account of consumer preference. So if for example the public are prepared to pay more for airline tickets rather than forgo travel then additional reductions have to occur elsewhere. It is a rather more democratic approach than having reductions determined by a bureaucratic process.

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Rich Puchalsky 06.24.16 at 1:08 am

HF: “But I don’t see that so much with electricity.”

Electricity generation is a nightmare of incentive incompatibility.

1. Large power plants can not go out of business. If they do, society crashes, and no one overbuilds to the point where they can just lose one. So they pretty much end up have a guaranteed profit margin one way or the other. Because of this, costs are generally passed along to the consumer.

2. They are typically 30-year investments. What is important to a 30-year investment is not the spot price of coal. What *is* important is factors like: does the company building one own a coal mine?

3. Because of this, executives are *not* taking prices into account. They are taking other factors into account. The people responding to prices are consumers. I will assume that you can imagine what happens, politically, when consumers suddenly see that their electricity bill is going to double next month because the cost of tradable allowances just shot up. Or even that carbon taxes are being passed on to them. The baseline grid has to be paid for: they must pay no matter what the executives choose.

4. Consumer demand is relatively inelastic.

5. No one seriously constructs a large power plant without lots of planning with government. The command-and-c0ntrol is effectively already there, only it’s not admitted, so the opportunities for lobbying, crony capitalism, etc. are rife.

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Howard Frant 06.24.16 at 1:25 am

Layman@109

I was in the middle of writing, but I’ll let Brett do the work. For “cost-effective” in his comment, substitute the word “inexpensive.” For “more democratic” substitute the words ” less hierarchical” or “less authoritarian.”

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Brett Dunbar 06.24.16 at 1:50 am

Electricity generators mostly contract for their fuel on somewhat long term contracts. Which avoids volatility in supply costs, while they sell both variable rate and fixed rate contracts. Normally the variable have been cheaper, oddly fixes are cheaper at the moment.

The UK has a free market in electricity supply. The wires are a regulated monopoly while retail and generation are free market. It turns out a big chunk of consumers are totally price insensitive, they have never switched despite switching being easy and if you have never switched switching to anyone will save a lot of money. The default tariffs are worse than any of the market tariffs.

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