Economics/Finance

Late last year, along with Emma Dawson, John Hewson and Angela Jackson, I took part in a discussion for the ABC[1]’s Big Ideas program, hosted by Paul Barclay. It went to air recently. Here’s a link to the podcast[2]

Unfortunately, I don’t have the time/ patience to listen to audio. I also don’t like the sound of my voice on radio – this is true for many people I think. It would be great to have a program that took an audio file and generated text output. A very quick search mostly turned up paid transcription services. Does anyone have any experience with this.

fn1. Australian Broadcasting Corporation, our equivalent of the BBC

fn2. Is a recording of a radio program a podcast? Can anyone clarify this.

It’s been hard to miss the chaos that’s arisen from a bunch of Reddit users (on sub-reddit WallStreetBets) getting together to squeeze shortsellers on stocks including GameStop and AMC Theatres. Most of the attention has been confined to the stockmarket action, but I was struck by this piece in The Bulwark[1], making the point that the process has enabled AMC to issue high-priced shares, repay debt and thereby stave off impending bankruptcy.

I don’t have a view on whether AMC should go bankrupt or not, but this is the kind of decision about capital allocation that is driven, in large measure by stockmarkets. The efficient markets hypothesis says that stockmarkets do the best possible job of estimating the value of assets, and thereby guides the allocation of capital. In the absence of the WallStreetBets push, it appeared that the market judgement was that it would be better to steer capital away from AMC, and into some other activity. Now, it’s the opposite.

One possible response is that WallStreetBets is an episode of craziness that will soon pass. But once you strip away newsworthy bits like the role of Reddit and the scale of the price movement, this kind of squeeze (or conversely, short-selling raid) is available, and potentially profitable, to any group of traders who can mobilize the necessary few billion (using options, those billions can be magnified a fair way). That’s part of the reason why stock prices are far more volatile than would seem justified by the arrival of new information relative to future earnings.

If stock prices are more volatile than underlying value, the two must differ most of the time. That undermines the claim that financial markets do a better job of allocating investment capital than would, for example, a central planning board. Even if you don’t want to go that far, there’s no obvious reason why limiting stock trading to (say) once a week would impair the allocation of capital to an extent that would outweigh the savings from cutting the financial down to a small fraction of its present size.

fn1. A Never-Trump website, well worth a look.

I recently finished reading Quinn Slobodian’s excellent Globalists, which, for those who don’t know, is an intellectual history of neoliberalism focused on the “Geneva school”. As with all good history, the book did not contain quite what I expected it to. I expected to read of the European Union as a kind of realization of Hayek’s ideas from the 1930s aimed at putting economics (and private property) beyond democratic control, a reading that gives some support to “Lexity” narratives about the EU. But the picture that emerges from Slobodian’s story is much more complex than that. In fact, the Common Market emerges as a messy compromise between German neoliberals who did want a rules-based order putting economics beyond politics and French agricultural protectionism and neocolonialism. This results in a split within the neoliberal camp between those who see EU’s regional governance as a partial step towards the legal insulation of economics from the folly of economic nationalism and those who see the EU as economic nationalism writ large, with the latter camp putting their faith in international protections for markets, competition and capital embedded in the WTO.
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The United Nations Development Program’s flagship index of wellbeing and social progress, the Human Development Index, no longer captures what humans need, and needs to be replaced by a Green Human Development Index. That’s what I’ll argue in this post.

First, some context for those who do not know the Human Development Index (HDI). The HDI is the main index of the annual Human Development Reports, which, since 1990, have been published by the United Nations Development Program (UNDP). The reports analyse how countries are doing in terms of the wellbeing of their citizens, rather than the size of the economy. In 1990, the Pakistani economist Mahbub ul Haq had the visionary idea that in order to dethrone GDP per capita and economic growth as the yardstick for governmental policies, an alternative index was needed. He asked Amartya Sen to help him construct such an index. The rest is history. The HDI became a powerful alternative to GDP per capita. It consists of three dimensions and several indicators. The first dimension is human life itself, for which the indicators are child mortality and life expectancy. The second dimension is knowledge, captured by school enrollment rates and adult literacy rates. And the last dimension is the standard of living, for which the logarithmic function of GDP per capita is used.

It is easy to criticize the HDI for not capturing all dimensions of wellbeing, or for other shortcomings. For whatever those academic arguments are worth, there is no denying at how successful the HDI has been at accomplishing its two primary purposes: to dethrone GDP per capita and economic growth as the sole yardsticks for societal progress, and to stimulate policy makers to put human beings central in their institutional design and policy making. And by that yardstick, the HDI has been a great success. Each year, the release of the Human Development Reports captures the attention of media and policy makers worldwide. Many politicians and governments care about their ranking in comparison with other countries. And, most importantly, the political power of the HDI provides an incentive for countries to try to invest more in education and health, combatting child mortality and increasing life expectancy.

Yet, it is now time to abandon the HDI. Paradoxically, this is not despite, but because of its political success. The reason is that we have entered the Anthropocene – the geological epoch in which the human species is changing ecosystems and the geology of the Earth. The most well-known of those changes that humans have caused is climate change. And since these ecosystems and planetary boundaries in turn affect human flourishing, they must be central in any analyses of that human flourishing. [click to continue…]

That’s the self-explanatory title of my latest piece in The Conversation. It’s wonkish, but important. As I’ve explained here and here, an economy with zero real interest rates works very differently from the kind we are used to.

Ever since I wrote Work for All with Australian MP John Langmore back in 1994, I’ve been pushing the idea that a path to full employment requires an expansion of publicly provided services. For about the same length of time, Bill Mitchell (also an Australian economostO has been putting forward similar (but not identical) proposals. At some point in this process, Bill became one of the advocates of what’s called Modern Monetary Theory, which makes the point that taxes don’t (directly) “fund” public expenditure. Rather, they ensure that the total demand for goods and services (for consumption and investment) don’t exceed the productive capacity of the economy, thereby generating inflation.

This reframing raises the question: does a Job Guarantee require higher taxation? The answer, using MMT reasoning, is “Almost certainly, yes”.

This Paul Krugman column helped crystallize the weirdness of the ongoing economists versus epidemiologists spat, perhaps more accurately described as the ‘some economists, especially those with libertarian politics, versus epidemiologists spat.’ Different theories, in turn below the fold.
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I’ve been working for some time on a review of the first full-length text based on Modern Monetary Policy, Macroeconomics by William Mitchell, Randall Wray and Martin Watts. A near-final draft is over the fold

An addendum to my earlier post, to explain more directly why I am skeptical of the argument that public choice is a useful lens to understand the politics of the public during coronavirus. Shorter version: if the “public” is indeed some kind of equilibrium, then the underlying game is unlikely to be the kind of game that public choice scholars like to model. [click to continue…]

Tyler Cowen quotes approvingly from a Robin Hanson post (the URL suggests that the original title of Tyler’s post was “On Reopening, Robin Hanson is Exactly Correct).

While the public tends to defer to elites and experts, and even now still defers a lot, this deference is gradually weakening. We are starting to open, and will continue to open, as long as opening is the main well-supported alternative to the closed status quo, which we can all see isn’t working as fast as expected, and plausibly not fast enough to be a net gain. Hearing elites debate a dozen other alternatives, each supported by different theories and groups, will not be enough to resist that pressure to open.

Winning at politics requires more than just prestige, good ideas, and passion. It also requires compromise, to produce sufficient unity. At this game, elites are now failing, while the public is not.

… More broadly, this is an example of why we need public choice/political economy in our models of this situation. It is all about the plan you can pull off in the real world of politics, not the best plan you can design. A lot of what I am seeing is a model of “all those bad Fox News viewers out there,” and I do agree those viewers tend to have incorrect views on the biomedical side.

This all begs an obvious question: who exactly is the “public” that they are talking about? [click to continue…]

Last year I published a book chapter arguing that the first step way to get to a Universal Basic Income in Australia was to expand the existing benefit system, increasing payments and removing conditionality (relevant extract over the fold).

This is often called a Guaranteed Minimum Income (GMI). I counterposed the GMI approach to the alternative of making a small payment to everyone in the community, and then trying to increase it over time. I suggested three initial steps

Assuming a ‘basic first’ approach is preferred, how might it be implemented? Three initial measures might be considered:

(i) increase unemployment benefits, at least to the poverty line;

(ii) replace the job search test for unemployment benefits with a ‘participation’ test;

(iii) fully integrate the tax and welfare systems

We are already on the way to taking these steps. Having floated the idea of a separate benefit for people who lose their jobs due to the virus crisis, the Australian government has quickly abandoned it in favour of an increase in existing benefits. This is supposed to be temporary, and, in theory, at least, there has been no change in compliance efforts like work testing. But ‘temporary’ will turn out to be a long time, and compliance efforts are going to be impossible until things return to normal.

I have a [new piece up at the LRB blog on the UK’s post-Brexit immigration plans](https://www.lrb.co.uk/blog/2020/february/who-will-pick-the-turnips). I argue that at the core of the plans is an intention to treat EU migrants and others as a vulnerable and exploitable workforce and that the logic of denying a long-term working visa route to the low paid leads to three possibilities: either the businesses that rely upon them will go bust, technology will substitute for labour, or the UK will have to start denying education to young Britons so that they become willing to be the underpaid workforce that picks turnips and cleans the elderly in social care.

… what replaces it will be even worse. That’s the (slightly premature) headline for my recent article in The Conversation.

The headline will become operative in December, if as expected, the Trump Administration maintains its refusal to nominate new judges to the WTO appellate panel. That will render the WTO unable to take on new cases, and bring about an effective return to the General Agreement on Trade and Tariffs (GATT) which preceded the WTO.

An interesting sidelight is that Brexit No-Dealers have been keen on the merits of trading “on WTO terms”, but those terms will probably be unenforceable by the time No Deal happens (if it does).

Looking for a different story in the business pages of The Guardian, I happened across a headline stating The men who plundered Europe’: bankers on trial for defrauding €447m. That attracted my attention, but the standfirst, in smaller print, was even more startling

Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal worth €60bn that exposes City’s pursuit of profit

I think of myself as someone who pays attention to the news, but I had missed this entirely. Google reveals essentially no coverage in the main English language media. There’s a short but helpful Wikipedia article and that’s about it. The scandal has been described as the ‘crime of the century’, but it’s just one of many multi-billion dollar/euro heists, with the GFC towering above them all.

It remains to be seen how the trial will turn out, but it’s already clear that, as usual, the banks have got away with it. The bank most closely involved in the scam, HypoVereinsBank in German has set aside €200 million euros to cover its potential liability. That’s less than 1 per cent of the tax avoided or evaded (the lawyers will be fighting out which, for some time, but the effect on ordinary citizens is the same).

The crucial point here isn’t the failure of the law to punish wrongdoing.

What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.

The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains. The rational route to achieve this would start with the kinds of reforms being proposed by Elizabeth Warren. But we may be stuck with a messier path, in which courts tire of giving slaps on the wrist to recidivist banks and start shutting them down.