Economics/Finance

Thanks very much to Nick S for this news – Diageo plc is going to be dealing with its pension fund deficit by making a contribution of up to 2.5m barrels of whisky. Back in the dawn of CT[1], we addressed some of the financial aspects of this sort of thing …
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“The FT today”:http://www.ft.com/cms/s/0/39e9f212-82a1-11df-85ba-00144feabdc0.html (I wonder how long this will stay uncorrected).

Some thoughts on the nature of the European crisis, which I’m writing up for an opinion piece. Comments much appreciated

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I’m still thinking about policy responses to the latest phase of the crisis, though I suspect events are moving faster than I can think about them. Anyway, I thought I would try a little arithmetic on the question of whether, and how, the fiscal hole opened up by the crisis could be filled[1]. The first question is Who Should Pay? The finance sector, taken collectively, was both the biggest beneficiary of the neoliberal era and also bears most responsibility for the crisis. But at most it will be possible to recoup some of the money that has already been spent on bailouts for the banks, not to mention what will have to be spent in Europe in coming months [2].

The big class of beneficiaries of the neoliberal era have been those in the top quintile of the income distribution, a class that includes me and a fair chunk of CT’s contributors and readers. Since no-one much thinks of themselves as “rich”, I’ll use the term “well-off”. Particularly in English-speaking countries, this group has benefited both from an increase in the inequality of market income and from less progressive taxation.

So, can the well-off be made to pay for the crisis, and should they?

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Sometimes an _ad hominem_ attack just seems right. Such is the case with George Monbiot’s latest piece on Matt Ridley, the Dawkinsite pop-science author. I’ve been aware of Ridley in his journalistic capacity for years, but I had no idea that he also had a parallel career in banking. Monbiot on Ridley’s _The Rational Optimist_ :

bq. In the book, Ridley attacks the “parasitic bureaucracy”, which stifles free enterprise and excoriates governments for, among other sins, bailing out big corporations. If only the market is left to its own devices, he insists, and not stymied by regulations, the outcome will be wonderful for everybody. What Ridley glosses over is that before he wrote this book he had an opportunity to put his theories into practice. As chairman of Northern Rock, he was responsible, according to parliament’s Treasury select committee, for a “high-risk, reckless business strategy”. Northern Rock was able to pursue this strategy as a result of a “substantial failure of regulation” by the state. The wonderful outcome of this experiment was the first run on a British bank since 1878, and a £27bn government bail-out. But it’s not just Ridley who doesn’t mention the inconvenient disjunction between theory and practice: hardly anyone does. His book has now been reviewed dozens of times, and almost all the reviewers have either been unaware of his demonstration of what happens when his philosophy is applied or too polite to mention it.

Definitely worth a short post at CT, then, to make this connection more widely known.

I’m working on a longish piece on how to pay for the global financial crisis, and it seems like a good idea to deal with some side issues separately. One of the standard post-crisis responses of governments, i has been to increase the age at which people become eligible for public old age pensions. This change is likely to flow through to other policies, for example by shaping the presumptions around the tax treatment of private retirement income.

I want to step away from these financial questions and ask the question: does it make sense, in general, for people to retire at older ages than in the past? For those who want the “shorter” version, my answer, on balance, is “Yes, at least in Australia”.

Update The qualification “at least in Australia” is more important than I initially thought. In particular (and surprisingly to me), the US has not had anything like the increase in conditional life expectancy seen in Oz – a gain of about 2 years since 1980 for the US compared to 6 for Oz (US source here, Oz here). Also, the Australian old age pension is flat rate (subject to a means test) and essentially the same as the disability support pension, which is the main source of support for people who are too old to work in physically demanding jobs. Again, it seems worth pointing out that the best solution here is to make the jobs better, by reducing working hours and improving conditions.

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Have just finished writing two papers with hard deadlines – now in the throes of grading – so two quick points, which either sort-of-resonate-with or half-contradict each other in ways that I don’t have time to think or write about.

First: ungovernability. Or, rather, “ungovernability.” Chris got a lot of flak in comments for suggesting that centrists and center-right people in the media were going to come out with suggestions that a bit of dictatorship might not be a bad idea. As he pointed out, there used to be a lot of people on the right and center-right who made these arguments – and not just about countries in the developing world. Crouch and Pizzorno’s _The Resurgence of Class Conflict in Western Europe_ is particularly good on this, as I recall. That said, unlike Chris, I don’t have strong expectations that this set of rhetorical tropes is going to emerge in the very near future (although it may in the medium term). The old crop of center-right dictator-fanciers were fans of dictatorships not because they were opposed to democracy _tout court_, but because they were opposed to certain parts of the economy being subject to political control. This is not so much of an issue these days. From a certain point of view, the European Central Bank is a more-than-acceptable functional substitute for General Augusto Pinochet. Indeed, being less publicly embarrassing, it is arguably superior. One of these days soon, by the way, I’m going to write my post on the editorial policy of the _Economist_ during the Irish Famine – it wasn’t one of its finer moments.
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I’m rushing to prepare to go into a lockup to write reports on Australia’s government budget, brought down tomorrow, so this post is a bit scatty, but it might raise some points for discussion regarding the European debt crisis.

* First, a general observation. In a typical bailout, the biggest beneficiaries are not debtors, but creditors. So creditors ought to be “bailed-in” and made to bear some part of the cost

* The Greek case is misleading, in implying that government profligacy is the primary cause of the crisis. In most cases, the problem is the same as in earlier rounds of the crisis, most obviously in Iceland – bad loans by private banks which their national governments feel impelled to rescue, but can’t afford to

* The idea that the euro precludes devaluation as a way out is a relatively minor part of the story. Given that debts are denominated in euros, devaluation to improve the trade balance would be only marginally effective. The real effect of the eurozone so far, has been to raise the stakes regarding default.

* Resolving the crisis requires a couple of measures at the European level
– monetary expansion by the ECB
– co-ordinated action to strengthen government revenue, both by an acceleration of the attack on tax evasion and by discouragement of tax competition within the eurozone

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Just about every article in this morning’s _Financial Times_ seems to include a paragraph or two about how governments need to “deliver” debt reduction, to satisfy the markets, investor expectations etc. They then typically note that said investors are anxious about whether democratic politicians can “deliver” the austerity measures that the markets “require”. So here’s the question: how long before the _Economist_, the Murdoch press and similar give up on democracy on the grounds of its incapacity to “deliver” firm government? We’ve been here before, of course, in the 1970s, when the _Economist_ and the _Times_ backed the Pinochet coup in Chile. Of the PIIGS, only Ireland has escaped dictatorship in living memory and some of the southern European countries still contain contain authoritarian rumps (with special strength in the armed forces and law enforcement). My guess is that we’ll be reading op-eds pretty soon that raise the spectre of “ungovernability” and espouse “temporary” authoritarian solutions. Maybe such columns are already being written? Feel free to provide examples in comments.

Greg Mankiw suggests that “he has identified the Anti-Mankiw Movement”:http://gregmankiw.blogspot.com/2010/04/anti-mankiw-movement.html. Apparently, it consists of a graduate student who doesn’t like his textbook very much. On the same expansive definition of social movement, I would like to formally announce that I am re-constituting myself as the Pro-Mankiw Movement. Our (or, rather, my) slogan: Let Mankiw Unleash His Inner Mankiw. In particular, “building on previous suggestions”:https://crookedtimber.org/2008/03/04/principles-and-practices-of-economics/ I would like to advocate in the strongest possible terms that Mankiw rewrite his popular textbook so that the relevant sections cover the intriguing case of N. Gregory Mankiw’s domination of the Harvard introductory economics textbooks market.

Since N. Gregory Mankiw returned to Harvard to teach the College’s introductory economics class, 2,278 students have filled his weekly lectures, many picking up the former Bush advisor’s best-selling textbook, “Principle of Economics” along the way. So, what has professor of economics Mankiw done with those profits? “I don’t talk about personal finances,” Mankiw said, adding that he has never considered giving the proceeds to charity. … Retailing for $175 on Amazon.com … Mankiw asserts that “Principles of Economics” has been the bible of Harvard economics concentrators since before he took over “Economics 10.”

Now this couldn’t possibly be an example of a public spirited regulator wisely choosing the best possible product on the market, and imposing it on his regulatees for their own good. As the N. Gregory Mankiws of this world know, such benign autocrats only exist in the imaginations of fevered left-wingers. So it _must_ be a story of monopolistic rent-seeking and regulatory collusion. And what could be more fitting than that these monopolistic abuses be documented in the very textbook that is their instrument!

I’ve suggested before that if I were N. Gregory Mankiw:

I’d claim that I was teaching my students a valuable practical lesson in economics, by illustrating how regulatory power (the power to assign mandatory textbooks for a required credit class, and to smother secondary markets by frequently printing and requiring new editions) can lead to rent-seeking and the creation of effective monopolies. Indeed, I would use graphs and basic math in both book and classroom to illustrate this, so that students would be left in no doubt whatsoever about what was happening. This would really bring the arguments of public choice home to them in a forceful and direct way, teaching them a lesson that they would remember for a very long time.

But this, in retrospect, seems far too lily-livered approach for the true Mankiw. Why not instead use the class as an experimental setting to see how far the price for the book can be jacked up before profits begin to decline? That would give Harvard econ 10 students a practical grounding in economic theory that they could genuinely claim as unique.

The deadline for the manuscript of Zombie Economics (last complete draft here) is only a few weeks away, and the zombies are popping up faster than I can knock them down. I’m adding a section on reanimated zombies to each chapter. Over the fold is the social mobility defense of trickle down economics, as animated by Thomas Sowell. There’s still time for me to benefit from your comments.

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Brad DeLong:

DragonDictate for iPhone had better learn not to write “Martian” when I say “Marshallian”. Just saying.

It’s not often you see a case where the jokes literally write themselves.

Cambridge has just published a new book, Measuring Justice: Primary Goods and Capabilities (UK), which Ingrid and I edited (the idea of doing it was entirely Ingrid’s, I should say, and a brilliant idea it turned out to be). Its a fairly tightly focused collection, for which we invited two kinds of contribution. It opens with a shortened version of Pogge’s essay “Can the Capabilities Approach be Justified?” which many of the contributors refer back to, and the first part continues with a series of chapters considering the relative merits of Rawls’s social primary goods approach and the capabilities approach to the metric of justice; for this we invited contributors whom we believed would defend one or another of these metrics while giving careful criticisms of the rival, plus Dick Arneson whom we believed (rightly) could be relied on to help make progress despite not being associated with either view. For the second part we invited contributors who would think about some specific issue of justice (in health, education, gender, the family, disability) and consider the relative merits of the approaches with respect to that specific issue. We wrote a short analytical introduction which locates the debate in a broader context, and which, we hope, helps guide the reader through the book (the CUP page has a pdf of it, so you can judge for yourselves); the book concludes with a nice, partly autobiographical, essay by Sen engaging with the chapters in the first part of the book. The contributors so far unmentioned are Erin Kelly, Elizabeth Anderson, Norman Daniel, Lorella Terzi, Colin MacLeod, and Elaine Unterhalter. This is the second volume I’ve co-edited for Cambridge, and both times they have come up with much better titles than the editors would have done, good-looking but demure covers, and, most importantly, a reasonable price.

There’s been a lot of discussion of the problems of Greek sovereign debt, its implications for the euro and so on. But I haven’t seen much discussion, from a standard national policy perspective, of what the Greek government should do in dealing with the simultaneous problems of an economic downturn and unsustainable debt (feel free to point me to good discussions).

The course of action being demanded by the bondholders and their advocates, as well as by the EU governments that are likely to bear the costs of a bailout is that of drastic retrenchment on the lines the IMF would normally advocate in cases of this kind. But that is obviously not a desirable policy response when considered in macroeconomic terms. I’m not well informed on the details of Greece’s budget problems, so I’m mostly going to make generic suggestions that are applicable to a case like this.
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