John Q

Most of the discussion I’ve seen of the financial crisis as it affects the eurozone seems to me both confused and confusing. A country outside the eurozone and without the “exorbitant privilege” of being able to sell lots of debt denominated in home currency has three options when it runs into debt trouble: default, depreciation and dependency.

Default is the straightforward solution, but it involves a big loss of face, and unpredictable long-term costs. Depreciation doesn’t directly improve the debt position, since debts are in foreign currency, but by making exports cheaper and imports dearer it helps a country to trade its way out of difficulty, without the need for a reduction in domestic prices and wages. Finally, there’s the option of dependency on an outside rescuer, normally the IMF. This has been the most common solution, but the IMF always demands a price (in terms of policy “reforms”) that makes a rescue only marginally more attractive than default.

A eurozone country doesn’t have the option of depreciation. In return, however, it has two dependency options, calling on either the IMF, or the European Financial Stability Fund. Since the EU would like to keep the IMF out, a distressed debtor can expect slightly better terms from the EFSF.

The default option isn’t affected, except in the same way as any kind of behavior viewed as discreditable affects membership of any club. A government that defaults on its debts might be thrown out of the eurozone, but then again it might be thrown out of the OECD, and the eurozone might expel a member that facilitated tax evasion.

The big question is whether the EFSF will work. That’s certainly challenging, but it still seems like a better bet for debtor countries than going it alone. And of course, there’s more commonality of interest than is often supposed because any bailout benefits the creditors, usually French and German banks

The big issue to be decided by the lame-duck Congress is whether to extend Bush’s tax cuts for the very rich[1]. This is a one-dimensional chess game, with the obvious zero-sum property that if the tax go through, the Republicans win and (at least in standard political terms) the Democrats lose by an equal amount.

There seems to be a near-universal consensus that
(i) The game is a forced win for the Dems (pass a bill extending the cuts for everyone but the rich and dare the Repugs to oppose it)
(ii) The Dems opening move will be to resign

This analysis certainly gives support to the idea of unobserved dimensions, presumably monetary

fn1. The option of not extending them for the well-off, and doing something serious about the deficit without too much impact on demand is way outside the Overton window.

Over the fold is the piece I wrote for the Fin which ran yesterday, on Remembrance Day. I wasn’t entirely satisfied with the last couple of paras, referring to the present and future, so I need to spell them out a bit more.

First, while I was, in 2002, a fairly enthusiastic supporter of the decision to go to war in Afghanistan, subsequent events and the evolution of my own thinking have led me to qualify that view, and to conclude, in particular, that Australia should withdraw its troops in the near future.

First, some general thoughts

* War is justified only in self-defence, and only to the extent that there is a reasonable expectation that going to war will yield a better outcome than not doing so
* Even when war is justified by self-defence, it should not be used as a pretext for securing benefits that go beyond restoration of the status quo ante bellum (bearing in mind that war changes things, so exact restoration is often not feasible).
* Political and public thinking is biased in favor of the belief that military force is an effective way to deal with political problems and a successful use of military force (even if justified) reinforces this bias. So it is important to create whatever institutional constraints are possible, such as requirements for Parliamentary approval of decisions to go to war
* Even when justified ex ante, war is unpredictable and likely to go badly. The idea that having started on a war that has turned out badly, we should “see it through” is a mistake

Coming to Afghanistan, I think the self-defence case was clear-cut. The US was attacked by terrorists trained in and led from Afghanistan, by a group supported by the Taliban government. It’s possible to make a hypothetical case that absent the incompetence and malice of the Bush Administration (backed by Blair and Howard in the decision to start a new war in Iraq) that there was a reasonable expectation of success. However, I observe with some discomfort that much the same case is put forward by many on the left who backed the Iraq war, where, however, the self-defence case was a transparent sham. In any case, we are past the point where continuing the war can be expected to produce benefits for either Afghanistan or the world. It would be better to withdraw and spend some of the money saved as a result (many times Afghanistan’s annual national income) on aid.

I concluded my post by saying “On this Remembrance Day, we should honour the sacrifice of all those who died by giving up, once and for all, the belief that war should be part of our national policy.” To be clear, I am not a pacifist and do not oppose fighting in self-defence. The idea that “war should be part of our national policy” means to me, that the use or threat of military force can and should be used to advance our perceived national interest. This idea, which forms the basis of military policy in most countries, appears to to both morally wrong and factually false.

Finally, I collected a fair bit of flak not long ago for writing that the outbreak of the Great War was the critical disaster in the history of the 20th century. I don’t step back from that, but I don’t really want to re-argue the case here, so I’m not going to respond to disputes about it.

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Watching a TV report on the Merapi volcano eruption, I was struck by a feeling of deja vu. Warned that the volcano was likely to erupt, Indonesian authorities have organised the evacuation of over 200 000 people into temporary shelters – the report I saw showed people at a large football stadium, well cared for but crowded and anxious to go home. I couldn’t find that report, but here’s another on volunteer teachers helping to keep kids entertained. Indonesia is a poor country that has had more than its share of disaster (natural and otherwise), and there have been plenty of problems, but overall this was an impressive effort.

For those who would like to help, here’s the Indonesian Red Cross site.

Faced with a sharp rise in unemployment since 2008, the Con-Lib government in Britain has diagnosed an epidemic of laziness, and announced measures to push the “work-shy” back into jobs. In particular, they’ve announced that those deemed not to be looking hard enough for work will be forced to undertake unpaid part-time work for community organizations.

Stripped of the punitive rhetoric, this is a cut down job-creation scheme, partly paid for by the unpaid labor of the participants. It’s hard enough to make job creation work well as a counter to unemployment, without adding in this kind of thing.

Australia has been there and done that. Following the discovery in the late 1990s that it played well with focus groups, John Howard (conservative PM) introduced a program explicitly called Work for the Dole and targeted initially at the young unemployed. It was a political success, but didn’t have any evident effects on unemployment. This evaluation of Work for the Dole and other programs suggests that it performed much less well than the explicit job creation and wage subsidy programs it replaced. Strikingly, given that the UK government is supposed to be on an austerity drive, the cost in the late 1990s was $2000-3000 per participant (around 1000 stg), on top of the benefit payment for which they were working.

But at least Howard’s moves came quite a few years into an expansion when it could credibly be claimed that there were jobs available for people willing to look hard enough. For a government that is busy creating unemployment to start attacking the “work-shy” requires a truly impressive level of hypocrisy.

After finishing Zombie Economics, and confident that it would soar to the top of the best-seller lists, I had the idea of a franchise-style list of sequels – Vampire Econ (on the financial sector), Cyborg Econ (the market and the mixed economy) and so on. Now, though, I’m thinking I could spend a lifetime on the zombie ideas that dominate the political right.

One of the most tenacious has been the DDT myth, that the writings of Rachel Carson led to a global ban on the use of DDT[1], bringing to an end a program that was on the verge of eradicating malaria[2], and causing the death of millions[3]. I thought that Tim Lambert and I had finally administered the coup de grace with this piece in Prospect a while back, after which some of the leading promoters of the myth (such as Roger Bate and his Africa Fighting Malaria group) appeared to have given up and moved on to other projects.

But zombies are hard to kill, especially for such reliable sources of misinformation as Britain’s Channel Four. C4 has just run a documentary by Stewart Brand, entitled What the Green Movement Got Wrong in which the DDT myth was repeated in its full glory. Amusingly, Brand made the plea ‘I want to see an environment movement that can admit when it’s wrong’. When challenged by George Monbiot on his glaring errors of fact, Brand exhibited the familiar pattern of weasel words and blame-shifting, followed by silence.

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The US Federal Reserve has announced its long-awaited renewal of quantitative easing (cutely labelled QE2). It’s $600 billion of new money to buy US Treasury notes with an average duration of five years, along with recycling of some money from the mortgage bailouts, also into T-note purchases. That sounds like a lot, but the reaction from Brad DeLong (endorsed by Paul Krugman) has been a big yawn. With the five-year bond rate at just over 1 per cent, the amount the private sector would demand to hold these bonds (that is, the annual interest payment) is about $7 billion, which is rounding error in the context of the current crisis.

I had been thinking that the Fed might take the much riskier (and politically trickier) step of buying corporate bonds. That would seem more likely to promote investment, but would obviously involve a good deal of winner-picking, with the associated potential for (real or perceived) corruption.

But what is really needed here is fiscal stimulus focused on job creation, combined with a long-term plan for fiscal consolidation (that is, higher taxes and/or lower expenditure). Instead, what the US appears likely to get is a permanent tax cut for the rich, partly offset by lots of job-destroying nickel-and-dime cuts in current expenditure. Many of these cuts will prove to be counterproductive or unsustainable in the long run.

Having written a series of hit pieces on people who perform the traditional journalistic function of revealing facts that those in power would like to keep secret, NYT “reporter” John Burns copped a hit in return from Glenn Greenwald, and then got some hostile emails. Water off a duck’s back, you might expect, except that

his email inbox has been full of denunciations from readers and a number of academics at top-tier schools such as Harvard, Yale, and MIT. Some, he said, used “language that I don’t think they would use at their own dinner table.”

So there you have it. “Reporters” who are happy to act as propagandists and stenographers for the Pentagon, can still be shocked by coarse language from academics at top-tier schools. Sad to say, uq.edu.au doesn’t pack quite the same punch, but it’s nice to know that academic prestige is still of some use. CT readers with appropriately prestigious affilations should take note.

One reason I’m thinking a fair bit about the long term future is that immediate prospects look grim, particularly in the US.

According to this piece from the NY Times on Obama’s post-election plan

After two years of operating at loggerheads with Republicans, Mr. Obama and his aides are planning a post-election agenda for a very different political climate. They see potential for bipartisan cooperation on reducing the deficit, passing stalled free-trade pacts and revamping the education bill known as No Child Left Behind — work that Arne Duncan, Mr. Obama’s education secretary, says could go a long way toward repairing “the current state of anger and animosity.”

Translation: Mr Obama and his aides plan a series of pre-emptive capitulations, after which the Republicans will demand the repeal of the healthcare act (or maybe abolition of Social Security). When/if that is refused, the Repugs will shut down the government, and this time they will hold their nerve until Obama folds.

BTW, the only thing I knew about Arne Duncan before this was that he was a fair country (ie Australian NBL) basketball player. But reading his bio (corporate-style charter school booster, fan of incentives based on standardised tests etc) along with the fact that he’s in close with Obama is indicative of why things have gone so badly in this administration.

Angela Merkel’s recent denunciation of German multiculturalism marks another step in the tightening of ties between the market-liberal right and ethnic-national tribalism, evident in other European countries and in the US (most obviously with the rise of the Tea Party). In part at least, this is a result of weakness. The positive appeal of market liberalism has declined a fair bit since the triumphalist decades of the 1980s and 1990s, and the global financial crisis exposed the failure of its theoretical basis. But there are obvious problems for social democrats in responding to this development. I’ve been thinking about this for a while, and have come to the view that it’s better to put up some half-thought ideas for discussion (and maybe debunking) than to wait for a perfect formulation.

The left needs to offer a transformational vision of a better society if it is to motivate the kind of enthusiasm needed to overcome a rightwing politics of tribalism and (often misperceived) self-interest. The 19th/20th century vision of socialism and class solidarity provides a model and a starting point, but that model is no longer adequate, and the political movements it gave rise to are in disarray. We need, a world view that extends the solidarity of social democracy to the whole of humanity [1].

The institutions of social democracy have been developed primarily at the level of the nation-state and the popular appeal of social democracy rests on notions of solidarity which arise most naturally in a relatively homogeneous society. Most of the last few decades have been spent defending the social democratic welfare state against attacks which were largely justified by claims about the need to respond to (market liberal) globalisation. That defence has been surprisingly successful, even when market liberalism seemed to have won conclusive intellectual and political victories. It’s natural to continue that defensive stance in response to the current push for “austerity”, and to organise that defence at a national level, while seeking to refurbish and to some extent rationalise the national welfare state.

That defensive struggle is necessary, but I don’t think social democracy can endure indefinitely in this defensive/managerialist mode. As I said a while ago we need to mobilise a positive alternative to the fear, anger and tribalism on offer from the right. That means setting out goals that are far more ambitious than the incremental changes debated in day-to-day electoral politics. The goals that seem to me to offer the most hope – a world free of nuclear weapons and extreme poverty, an end to the acceptance of war as an instrument of national policy, action to stabilise the global climate – all involve going beyond national governments and concepts of national interest. And, so I believe, does any plausible program to renew and extend social democracy.

The need for global action on issues like nuclear disarmament and climate change is obvious enough. The argument about social democracy is less obvious. In a world where national borders no longer act as an effective barrier to migration, it is harder to justify social welfare systems in terms of solidarity with people like ourselves (since the population is more diverse) or in terms of mutual insurance or past contributions, at least as regards recent arrivals. Particularly where migrant groups are concentrated at the bottom of the income distribution and are therefore net beneficiaries from the welfare state, including health and education systems as well as social insurance. Less obviously perhaps, internationally mobile workers are unlikely to be happy about paying taxes for welfare systems from which they may not benefit. Within the framework of national social welfare systems, the alternatives are to cut back the system for everyone, to discriminate against recent arrivals, or to tighten restrictions on migration.

The alternative is to extend the welfare state beyond national boundaries. This has already happened in a very modest (and often grudging) way with various agreements between national governments, and somewhat more systematically under EU rules which require national governments to treat all EU citizens equally with respect to some social services.

As between very rich and very poor countries, the benefits of this all go one way. People from poor countries gain from access to social services in rich countries, but not vice versa. But we can turn this argument around to say that the achievements of social democracy in the developed world can’t be secure as long as so much of the world is in extreme poverty. As Jeffrey Sachs has argued (and I’ve argued further), ending extreme poverty is entirely feasible, given an effort comparable to that the developed world has put into fighting pointless wars.

The ultimate goal ought to be one in which, everyone, no matter where they happen to be born has access to the basic requirements for a decent life. That doesn’t entail a world government (at least in the sense in which we typically understand the word “government” today) but it does entail a break with ideas based on nation-states as the ultimate focus of sovereignty. One relatively minor, but important step towards this would come with a “contract and converge” approach to CO2 emissions, which would ultimately imply equal entitlements to emissions per person in all countries [2].

All of this seems utopian in (at least) two senses. First, it seems very hard to sell politically. In part this reflects the long-standing distinction between a maximalist statement of long-term goals and a ‘fighting platform’ for a particular election. Part of my argument is that it’s the lack of long-term vision beyond the preservation of past gains that is sapping enthusiasm for social democracy.

But even after making the obvious adjustments to electoral reality, it’s far from obvious how to fashion a platform based on these ideas that is going to attract majority support in the short term. The power of nationalism and tribalism is strong, and the counter-appeal of global idealism goes only so far. On the other hand, it seems as if there is enough support for greens and leftish social democrats to form the basis of a significant minority that would support such ideas. Given a reaction against rightwing austerity politics, this group could form part of a majority coalition with mainstream social democrats.

More importantly, tribalism and monoculturalist nationalism belong to the past (as do essentialist versions of multiculturalism, in which people are defined by birth into some particular culture). The possibility of sustaining, in any country[3] a majority group (or even a dominant minority) that can be defined homogeneously in terms of race, religion, sexual politics and world-view (all at once) is slipping away fast. Part of the rage of the Tea Party is the fact that its adherents at once recognise this and are unwilling to concede the existence of an America that is not overwhelmingly white, Christian and traditionalist in terms of sexual mores and broader social attitudes. So, the more that social democracy and acceptance of social diversity are seen as two sides of the same coin, the better the long term prospects for social democrats.

The deeper question is whether such a program is feasible at all. Traditional views of international politics take the nation-state as an immutable atomic constituent of the system that can’t be wished out of existence by idealistic political movements. But the reality is that the sovereignty of nation-states has been eroded in all sorts of ways over the years since 1945. That’s most obvious in Europe, but all countries are bound up in a web of international arrangements that are increasingly hard to break out of. Big and powerful states like the US, Russia and China still act intermittently on the assumption that the rules don’t apply to them, but such displays (US and Russian military adventures, China’s attempted blackmail over rare earths) typically have high costs and few benefits. The real question is whether (as was assumed unquestioningly in the years leading up the global financial crisis) such constraints work inevitably in the interests of financialised market liberalism or whether they can be turned in more socially productive directions. I don’t know the answer, but I do think that the attempt to do this represents the best hope for a social democratic future.

Obviously, a lot of what I’ve written above is only partly thought through, and at least some of it is doubtless wrong. However, I’m not really interested in dealing with snarky nitpicking and general derailment, so I will exercise a fair bit of discretion in deleting comments I regard as unhelpful. Over at my blog I’ve opened up a “sandpit” thread where I will direct snark and lengthy off-topic monologues and back-and-forth disputes between commenters.

Finally, a few links to things I’ve found useful (not necessarily because I agreed), from John Keane and Policy Network.

fn1. This certainly isn’t a new claim – Ulrich Beck has been arguing for a similar, cosmopolitan and social democratic, position for some time. But it certainly needs a lot of working out and discussion, and blogging provides me with an avenue to try out ideas like this.

fn2. Although I don’t believe the process is as conscious as this, the ferocious rightwing resistance to the reality of climate change ultimately reflects an intuition that some global action of this kind is the only possible response.

fn3. The big potential exceptions are China and perhaps Japan, although it seems obvious that maintaining current restrictions on immigration will be very costly for Japan.

The bailout of the US financial sector through the Troubled Assets Recovery Program (TARP) looks to have been fairly successful on its own terms – the banks have become profitable again and the final estimated loss to the government is relatively small. That doesn’t change the fact that the government took on huge risks for negative returns, without any reason to expect that the future behavior of the banks will change.

But all of that was based on assumptions of an orderly resolution of the mortgage crisis. Those assumptions now look very dubious, as the legal consequences of the practices of the financial sector during the bubble, ranging from sloppiness to outright fraud, manifest themselves.
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Chris’ post on the Browne reforms[1] in UK Higher Education has prompted me to write a post I’d half-planned a while ago, after seeing this familiar (to Australian eyes) claim.

Too many universities simply state a desire to “achieve excellence in teaching and research” and appear unable to carve out a market niche, Professor Beer said.

The idea that a pseudo-market system (centralised control but with sharper price incentives) will generate diversity is one of many illusions that were exposed during the Australian reform era of the 1990s. Faced with pressure to find a market niche and select a “flagship” program, 37 Australian universities (out of 37) decided that business education and a multitude of specifically labelled vocational degrees were the right niche and that an MBA would be a good flagship. This is scarcely surprising: given the incentives, business degrees were the obvious profit centre.

However, similar choices didn’t produce a homogenous outcome. Rather, the historical hierarchy (century-old sandstones at the top, former teachers colleges at the bottom) which had been somewhat muted when funding flowed a little more freely, re-emerged stronger than ever. At the top, there was enough surplus to maintain, more or less, the full range of disciplines as well as the long-established professional schools (law, pharmacy and so on). The further down the scale you went the less of the arts, humanities and sciences survived. This apparently came as a surprise to the Australian equivalents of Professor Beer (which would be a great name for an Oz Prof, BTW).

Even more bizarre was the shock expressed by some market advocates when they discovered that, with a customer base consisting of 18-year olds who understood their own preferences, and parents who mostly knew very little), the market produced very little demand for anything that was hard and didn’t purport to offer training for a well-paid job. Some of them seriously appeared to think that the market would kill off critical theory in favor of good old-fashioned classical education. In fact, provided the pill was sugar-coated with film studies and pop culture, critical theory didn’t do too badly, at least relative to old-style humanities.

Australia has a long history of importing policies that have already failed in the UK. It’s a source of mild schadenfreude to see the trade going in the opposite direction for once.

fn1. As always, I use “reform” to mean “change in structure” with no implication of approval or disapproval. Given the history of C20, most reforms consist, in large measure, of undoing some previous reform.

A few days ago, Germany made the final payment on the reparations imposed in the Treaty of Versailles, bringing to an end the formal consequences of the Great War that began in 1914 and continued, in one form or another, throughout the 20th century.[1] Many of the new states that emerged from the war (the USSR, Yugoslavia, Czechoslovakia) have now disappeared, though the consequences of the breakup of the Ottoman Empire and the secret Sykes-Picot Agreement are very much still with us. I don’t really have the basis for a post on this, but I thought this event deserved some kind of acknowledgement anyway.

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I’m paying close attention to Amazon rankings just now[1], and it’s striking that both the #1 and #2 spots in “Economics-Theory” are held by FA Hayek’s Road to Serfdom. Whatever your view of Hayek’s work in general, this is truly bizarre, and indicative of the kind of disconnection from reality going on on the political right. On the natural interpretation, shared by everyone in mainstream economics from Samuelson to Stigler, this book, which argued that the policies advocated by the British Labour Party in 1944 would lead to a totalitarian dictatorship, was a piece of misprediction comparable to Glassman and Hassett’s Dow 36000. So what is going on in the minds of the buyers? Are they crazy? Do they actually think that Hayek was proven right after all? Is there a defensible interpretation of Hayek that makes sense?

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