Economics/Finance

In the controversy over who should replace Ben Bernanke as Chairman of the US Fed, a fair bit is being made of the fact that Larry Summers is (to put it politely) a jerk. Without denying this, I’d like point out that, when it really mattered, Summers was thoroughly outjerked by the genuine article, Rahm Emanuel.

The occasion was the decision on a stimulus package needed immediately after Obama’s inauguration. Emanuel’s brilliant strategy was to go for as small a stimulus as possible, declare victory on the economic front, then turn to the main game of cutting a deal with the Republicans on health care reform. We all know how that turned out, [^1] and anyone who recalled the Great Depression could easily have foreseen it. I can recall how stunned I was that Obama failed to take the obvious opportunity to nail Bush and the Repubs for the crisis, and switch to a single-minded focus on economic recovery.

The Keynesian analysis done inside the White House by Christina Romer and outside by Paul Krugman showed that what was needed was a stimulus of at least $1.7 trillion. Based on his subsequent commentary, it’s clear the Summers understood and agreed with this. If he had lived up to his reputation, Summers would have pushed this through the White House by demonstrating, beyond any doubt, that Emanuel was the kind of fool he is famed for not suffering gladly. Instead, he first made Romer reduce the estimate to $1.2 trillion, then dropped it from his brief without telling her, giving Obama a range from $600 billion to $800 billion.

Summers is great at saying the unsayable when it comes to things like shipping toxic waste to poor countries or making baseless speculations about genetics and gender. But when it really mattered, he couldn’t come up to scratch.

Note: Out of laziness, I omitted the link to the piece by Noam Scheiber, on which I relied. I’ve added it now.

[^1]: Fans of 11-dimensional chess might want to make the case that Obama deliberately threw the 2010 election to the Tea Party, foreseeing that the resulting hubris would drive the Repubs mad, and therefore lead to their ultimate destruction. But I can’t impute such subtlety to Emanuel.

[Monsters University](http://monstersuniversity.com/edu/), the prequel to [Monsters, Inc](http://disney.go.com/monstersinc/index.html), opened this weekend. I brought the kids to see it. As a faculty member at what is generally thought of as America’s most [monstrous university](http://duke.edu), I was naturally interested in seeing how higher education worked in Monstropolis. What sort of pedagogical techniques are in vogue there? Is the flipped classroom all the rage? What’s the structure of the curriculum? These are natural questions to ask of a children’s movie about imaginary creatures. Do I have to say there will be spoilers? Of course there will be spoilers. (But really, if you are the sort of person who would be genuinely upset by having someone reveal a few plot points in *Monsters University*, I am not sure I have any sympathy for you at all.) As it turned out, while my initial reactions focused on aspects of everyday campus life at MU, my considered reaction is that, as an institution, Monsters University is doomed.

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Remember when Robert Nozick wrote in Anarchy State and Utopia that income taxation is akin to forced labour? Well it turns out that that is far far worse than that. Taxing the 1 per cent would be like the state forcibly ripping out their spare internal organs! At least that’s what Gregory Mankiw thinks. His paper, forthcoming in the Journal of Economic Perspectives also includes a thinly-disguised rehash of the Wilt Chamberlain parable, but no proper acknowledgement to Nozick (suprising that the referees or editors at JEP didn’t make this point).

“All successful revolutions are the kicking in of a rotten door.” – J. K. Galbraith

Kickstarter is glorious insofar as it is a well-earned kick to a rotten door.

That’s why a lot of people are griped about Zach Braff funding his Garden City sequel this way.

The idea – and it’s a great one – is that Kickstarter allows filmmakers who otherwise would have NO access to Hollywood and NO access to serious investors to scrounge up enough money to make their movies. Zach Braff has contacts. Zach Braff has a name. Zach Braff has a track record. Zach Braff has residuals. He can get in a room with money people. He is represented by a major talent agency. But the poor schmoe in Mobile, Alabama or Walla Walla, Washington has none of those advantages.

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“Paul Krugman”:http://krugman.blogs.nytimes.com/2013/04/26/grasping-at-straw-men/ on the “latest Reinhart-Rogoff self-defense”:http://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.html?hp&_r=0

bq. OK, Reinhart and Rogoff have said their piece. I’d say that they’re still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates – but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the “eek! 90 percent!” rhetoric that was used to justify sharp austerity right now.

Maybe worth noting that this is a variant of John Holbo’s “Two-Step of Terrific Triviality”:https://crookedtimber.org/2007/04/11/when-i-hear-the-word-culture-aw-hell-with-it/

bq. To put it another way, Goldberg is making a standard rhetorical move which has no accepted name, but which really needs one. I call it ‘the two-step of terrific triviality’. Say something that is ambiguous between something so strong it is absurd and so weak that it would be absurd even to mention it. When attacked, hop from foot to foot as necessary, keeping a serious expression on your face. With luck, you will be able to generate the mistaken impression that you haven’t been knocked flat, by rights. As a result, the thing that you said which was absurdly strong will appear to have some obscure grain of truth in it. Even though you have provided no reason to think so.

The Boston Review symposium I pointed to last year on James Heckman’s “Promoting Social Mobility” is now out in book form as Giving Kids a Fair Chance. Its all still on the web, at least right now, but the book is cute and inexpensive. I’m curious what other people’s experience is, but I find that when I assign a book in class it gets read by more students, and more carefully, than if I assign something from the web; so I am planning to use it alongside Unequal Childhoods with my freshman class in the fall.

Over at the National Interest, I have a piece arguing that Bitcoin is a more perfect example of a bubble, and therefore a more perfect refutation of the Efficient Markets Hypothesis, than anything seen previously. Key quote

It beats the classic historical example, produced during the 18th century South Sea Bubble of “a company for carrying out an undertaking of great advantage, but nobody to know what it is.” After all, the promoter of this enterprise might, in principle, have had a genuine secret plan. Bitcoin also outmatches Ponzi schemes, which rely on the claim that the issuer is undertaking some kind of financial arbitrage (the original Ponzi scheme was supposed to involve postal orders). The closest parallel is the fictitious dotcom company imagined in Garry Trudeau’s Doonesbury, whose only product was its own stock.

You can see this point made in somewhat more detail here.

[My reflections on Britain since the Seventies](https://crookedtimber.org/2013/04/10/britain-since-the-seventies-impressionistic-thoughts/) the other day partly depended on a narrative about social mobility that has become part of the political culture, repeated by the likes of Tony Blair and Gordon Brown and recycled by journalists and commentators. In brief: it is the conventional wisdom. That story is basically that Britain enjoyed a lot of social mobility between the Second World War and the 1970s, but that this has closed down since. It is an orthodoxy that can, and has, been put in the service of both left and right. The left can claim that neoliberalism results in a less fluid society than the postwar welfare state did; the right can go on about how the left, by abolishing the grammar schools, have locked the talented poor out of the elite. And New Labour, with its mantra of education, education, education, argued that more spending on schools and wider access to higher education could unfreeze the barriers to mobility. (Senior university administrators, hungry for funds, have also been keen to promote the notion that higher education is a social solvent.)
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The 1970s have been in my mind over the past few days, not only for the obvious reason, but also because I visited the Glam exhibition at Tate Liverpool last weekend. Not only were the seventies the final decade of an electrical-chemical epoch that stretched back to the late nineteenth-century, they were also the time when the sexual and political experimentation of the 1960s and a sense of being part of a cosmopolitan world order became something for the masses, for the working class, and when the old social order started to dissolve. In the experience of many people, the sixties happened in the seventies, as it were.

But my main thoughts, concerning Britain at any rate, have been about social division, and about some oddly paradoxical features of British life before Thatcher. There’s a very real sense in which postwar British society was very sharply divided. On the one hand, it was possible to be born in an NHS hospital, to grow up on a council estate, to attend a state school, to work in a nationalised industry and, eventually (people hoped), to retire on a decent state pension, living entirely within a socialised system co-managed by the state and a powerful Labour movement. On the other, there were people who shared the experience of the NHS but with whom the commonality stopped there: they were privately educated, lived in an owner-occupied house and worked in the private sector. These were two alternate moral universes governed by their own sets of assumptions and inhabited by people with quite different outlooks. Both were powerful disciplinary orders. The working class society had one set of assumptions – welfarist, communitarian, but strongly gendered and somewhat intolerant of sexual “deviance”; middle-class society had another, expressed at public (that is, private) schools through institutions like compulsory Anglican chapel. Inside the private-sector world, at least, there was a powerful sense of resentment towards Labour, expressed in slogans about “managers right to manage” and so on that later found expression in some of the sadism of the Thatcher era towards the working-class communities that were being destroyed. Present too, at least in the more paranoid ramblings of those who contemplated coups against Labour, was the idea that that the parallel socialised order represented a kind of incipient Soviet alternative-in-waiting that might one day swallow them up.
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There’s already plenty of commentary, here and elsewhere on Margaret Thatcher. Rather than add to it, I’d like to compare the situation when she assumed the leadership of the Conservative Party with the one we face now. As Corey points out in his post

In the early 1970s, Tory MP Edward Heath was facing high unemployment and massive trade union unrest. Despite having come into office on a vague promise to contest some elements of the postwar Keynesian consensus, he was forced to reverse course. Instead of austerity, he pumped money into the economy via increases in pensions and benefits and tax cuts. That shift in policy came to be called the “U-Turn.”

Crucially, Heath was defeated mainly as a result of strikes by the coal miners union.[1]

From the viewpoint of conservatives, the postwar Keynesian/social democratic consensus had failed, producing chronic stagflation, but the system could not be changed because of the entrenched power of the trade unions, and particularly the National Union of Miners. In addition, the established structures of the state such as the civil service and the BBC were saturated with social democratic thinking.[2]

Thatcher reversed all of these conditions, smashing the miners union and greatly weakening the movement in general, and promoting and implementing market liberal ideology as a response to the (actual and perceived) failures of social democracy. Her policies accelerated the decline of the manufacturing sector, and its replacement by an economy reliant mainly on the financial sector, exploiting the international role of the City of London.

Our current situation seems to me to be a mirror image of 1975. Once again the dominant ideology has led to economic crisis, but attempts to break away from it (such as the initial swing to Keynesian stimulus) have been rolled back in favour of even more vigorous pursuit of the policies that created the crisis. The financial sector now plays the role of the miners’ union (as seen in Thatcherite mythology) as the unelected and unaccountable power that prevents any positive change.

Is our own version of Thatcher waiting somewhere in the wings to take on the banks and mount an ideological counter-offensive against market liberalism? If so, it’s not obvious to me, but then, there wasn’t much in Thatcher’s pre-1975 career that would have led anyone to predict the character of her Prime Ministership.

fn1. I was too far from the scene to be able to assess the rights and wrongs of these strikes or the failed strike of the early 1980. It’s obvious that the final outcome was disastrous both for coal miners and for British workers in general, but not that there was a better alternative on offer at the time.

fn2. The popular series, Yes Minister, was essentially a full-length elaboration of this belief, informed by public choice theory

In the recent TLS I have an essay on Benn Steil’s new book on Bretton Woods. Unlike some notices, mine is critical. You can read mine here. If you’re interested in the theory, put forward in Steil’s book, that Harry Dexter White caused US intervention in World War II, read below the fold. If you’re more interested in the late Baroness Thatcher, please carry on down to the other posts for today.

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My review of Mark Blyth’s forthcoming book, _Austerity: A Dangerous Idea_ can be “found here”:http://www.washingtonmonthly.com/magazine/march_april_2013/on_political_books/slaves_of_defunct_economists043306.php. After I wrote the review, Dani Rodrik “published a piece”:http://www.project-syndicate.org/commentary/ideas-over-interests arguing that economists needed to pay less attention to interests, and more to ideas:

bq. Interests are not fixed or predetermined. They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas. … So, where do those ideas come from? Policymakers, like all of us, are slaves to fashion. Their perspectives on what is feasible and desirable are shaped by the zeitgeist, the “ideas in the air.” This means that economists and other thought leaders can exert much influence – for good or ill. John Maynard Keynes once famously said that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.” He probably didn’t put it nearly strongly enough. The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists who are (for the most part) very much alive. … Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned.

Blyth thinks very similarly about how ideas dominate interests, and how we need to take account of this studying the economy. As I summarize his take (building not only on the austerity book, but his previous work too):

Blyth cares about bad ideas because they have profound consequences. We do not live in the tidy, ordered universe depicted by economists’ models. Instead, our world is crazy and chaotic. We try to control this world through imposing our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work for a while. For a couple of decades, it looked as though markets really were efficient, in the way that economists claimed they were. As long as everyone believed in the underlying idea of underlying markets, and believed that everyone else believed in this idea too, they could sustain the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating another short-lived island of stability.

This means that ideas are fundamentally important. The world does not come with an instruction sheet, but ideas can make it seem as if it does. They tell you which things to care about, and which to ignore; which policies to implement, and which to ridicule. This was true before the economic crisis. Everyone from the center left to the center right believed that weakly regulated markets worked as advertised, right up to the moment when they didn’t. It is equally true in the aftermath, as boosters of neoliberalism have moved with remarkable alacrity from one set of bad ideas to another.

In yesterday’s elections in Italy, ‘voters defied a failing policy and a clapped-out political establishment‘, resulting in an indecisive outcome. Here is more evidence in the Eurozone of what the late Peter Mair called the conflict between ‘responsible’ and ‘responsive’ politics. The centre-left ‘responsible’ party of Pier Luigi Bersani won most votes, just about. But the über-‘responsible’ Mario Monti, the technocratic prime minister and Bersani’s most likely coalition partner, gained only half the support he had hoped for. Quelle surprise, one may be forgiven for thinking, since the mix of ‘austerity’-driven tax increases with no real structural reform, and with none of the stimulus that would enable reform to work, has proven highly unpopular with voters.

Once again, it seems to me, we see that it really is a mistake to leave the politics out of politics. I have some thoughts about why this is a bad idea in a recent talk (audio and slides here).

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