All entries for July 2010

You Have Been Warned

Writing about web page http://www.agentura.ru/timeline/2010/profilactika/

A draft law before the Russian Parliament gives new powers to the FSB (Federal Security Service), the successor to the KGB. It allows the FSB to issue binding warnings to citizens suspected of creating conditions, through negligence, passivity, or incitement, in which crimes might be committed or facilitated. A warning that is ignored can be followed by an unspecified penalty, even though the actions that led to the warning may not be offenses in themselves.

This provision of the draft law restores the legal basis of a function once widely exercised by the KGB. This function was known in Russian as profilaktika, which translates directly as "prophylaxis" or "prevention."

Across the Soviet Union in the late 1960s and early 1970s, for example, the KGB subjected around 15,000 people a year to profilaktika, more than half of them for displaying some sort of overt political unreliability, or having connections with foreigners leading to suspicion of disloyalty (see Rudol'ph Pikhoia, Sovetskii Soiuz: istoriia vlasti, 1945–1991: Moscow 1998, pp. 365-366.) In proportion to the population, this would be about one in 10,000 adult Soviet citizens in each year.

What did profilaktika mean? Evidence of many, many individual cases can be found, for example, in the Lithuania KGB collection of the archive at the Hoover Institution, where I'm working now. How did they work? You could imagine it like this. Out of the blue, you get a call to come into your local KGB office. You really don't know what it's about, but you're on your best behaviour. Sitting behind his desk is a KGB colonel. He asks you what you think of the Soviet Union. Wonderful! You declare. Good, he says.

But in that case, he goes on: How come you told this anti-Soviet joke to your colleagues in the office on Thursday? And on Friday in the bar you repeated the news you heard the day before on Radio Liberty? And on Saturday you were heard cursing your Soviet-made automobile and wishing you had a BMW?

At first you bluster and deny everything. Inside, however, your world is collapsing. You're realizing just how much trouble you're in; your job and your home depend on the state and both are on the line. But that is only the start. Worse, it's dawning on you that your colleagues, your friends, maybe even your family members have been telling tales about you to the KGB. You're on your own.

You crumble. You start to make excuses: You were tired and under stress, you've always been a bit of an ignorant big mouth, you've been promoted above your competence and this has put you under pressure. You didn't realize how wrong it was. But you do now. Yes, you do, you do.

You promise you will never, ever do such things again. And you really mean it because, short of being physically beaten or locked in a cell, nothing is worse than the state of mind that this profilaktika has put you in. You've been exposed, hurt, humiliated, compromised, and isolated from society: From now on you will trust nobody, not even yourself. In fact, the only honest person in the room is the man in front of you.

The colonel listens as you stammer out your explanations. He is calm and nods a lot. He accepts what you say. When you've done, he closes the file. Go away, he says, and change your ways. We'll keep the information but, as long as you do the right thing from now on, we'll never have to look at it again. As you leave, you thank him for putting you back on the right track.

After you've gone, he makes a note to keep a special watch on you for a few months or a year, just to be sure that you meant it.

Profilaktika was applied to all sorts of cases, from loose morals and rowdy behaviour to indiscreet or unauthorized contacts with foreigners, petty smuggling or currency violations, and to adolescents who, in a place like Lithuania, might get caught up in the romance of anti-Soviet fly-posting or dreams of emigration. In such cases profilaktika was applied to the parents as well as the children.

More than half of all the cases of profilaktika were carried out in the privacy of the KGB offices, but there was also another version of the drama. This was enacted in public meetings. In this case the psychological beating was administered by your own colleagues, your student peers, or the pillars of your neighbourhood community.

For a police state, profilaktika was relatively humane. For hundreds of thousands of people it took the place of arrest and imprisonment, which would have been their fate in Stalin's time. It was also very effective in causing people to change their behaviour. In eight years, according to Pikhoia, out of more than 120,000 people subjected to such treatment, only 150 were subsequently taken to court for an actual offense. That's one eighth of one percent, a recidivism rate that western penal systems can only dream about.

A durable police state cannot be built out of bricks alone. There are building blocks like the security police and civilian police, border controls, the control of public assets, the distribution of taxes and resource rents, and media monopolies. In addition, binding agents are needed to assemble the blocks and glue them in place by controlling and coordinating the everyday behaviour of citizens at work, at home, and in the streets. Profilaktika was part of the mortar that held the bricks of the KGB state in position. Looks like it will do so again.

Mark Harrison : 28 Jul 2010 05:19 |  Tags: History Politics Russia |  Comments (0) |  Close comments |  Report a problem

The Return of Animal Spirits?

A student asked me recently if the economists' consensus is that deficit reduction should be delayed until private demand has picked up -- which might not be any time soon. My first response was to point out that, while this might easily be the impression gained by reading the pages of The Guardian, a number of distinguished economists take the view that global demand would benefit from a more rapid fiscal adjustment. My Hoover colleague John Taylor has listed some of them here.

I also considered how to explain the wide range of disagreement to my student. Model uncertainty is part of the story, reflected in divergent views about the value of the government spending multiplier. According to President Obama's advisers, a government consumption stimulus of 1% of GDP will add 1.55% to U.S. GDP over 16 quarters, i.e. every $1 of federal spending should create another 55 cents of private consumption and investment. A recent IMF paper, in contrast, estimates that the effect goes nearly to zero over the same period, i.e. the same $1 of federal spending eventually reduces private consumption and investment by an equal amount.

Just as importantly, I wondered whether, in addition to differences between models, there is also inconsistency within models -- specifically, within the Keynesian model as some are applying it currently.

Think of Keynesian economics as incorporating two key insights. One is the problem of effective demand, and the spending multiplier that augments the effect of any income shock on aggregate demand. The other is the problem of unpriced uncertainty and the human reaction to this problem, which Keynes called "animal spirits." It seems to me that Keynesians are sometimes unjustifiably selective in applying these two insights.

To simplify, the Keynesian narrative of the crisis should have both main elements. On the way down they work like this. Borrowers and lenders failed to price the uncertainty in asset markets. Animal spirits soared, then collapsed as reality struck home. When animal spirits collapsed, they took down effective demand and there was a sharp multiplier contraction. It's a coherent and interesting diagnosis. Now we have the problem of getting back up. What should the Keynesian narrative of the recovery look like? Here the prescription of leading Keynesians (I'm thinking of Paul Krugman, Brad deLong, and my Warwick colleague Robert Skidelsky) becomes curiously one sided; there's the multiplier -- and just the multiplier. Animal spirits aren't in the picture, so private demand is destined to be flat. In this view, the only thing that can get us back up off the floor is discretionary government spending. That's why, they argue, deficit reduction right now is crazy.

On top of that are the politicians and the journalists. There is a lot of Keynesian-inspired "never again" publicism around at the present time. This might be stretching it a bit, but the spirit of it is pretty much: Animal spirits got us into this mess -- never again! Animal spirits are bad -- let's kill them off, once and for all! We need rules that will put a stop to irrational behaviour! Let's appoint sensible people to take charge and just not let that happen any more!

This is absolutely not the spirit of Keynes. Keynes did not say that animal spirits are a bad thing or that we should get rid of them. He said that animal spirits are a source of instability, and they are hard to manipulate; but they are also the driver of capitalist enteprise and we cannot get away from them or do without them. Here I'm going to quote a few sentences from Keynes's General Theory of 1935 (which is on line here). First, Keynes suggests that enterprise relies on animal spirits as much as business calculation:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come.

When animal spirits falter, so does enterprise:

Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.

Without animal spirits there is no progress:

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.

Policy makers must legitimately reckon with the effects of politics and policy on animal spirits:

This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.

It's Keynes's last point that so-called Keynesians should pay more attention to. Reckoning with animal spirits does not mean that we are now somehow ruled by "the markets," as Robert Skidelsky suggested recently. It does mean giving thought to how policy can encourage animal spirits to revive -- and how policy mistakes can do further damage.

At the core of today's policy dilemma is this question: How does the government's budgetary policy influence animal spirits? It's a difficult question because it cuts both ways. Deficit spending by the government is good for animal spirits, other things being equal, because it floods the economy with demand and floats us all upwards. But other things are not equal. The deficit adds to the debt. Public debt must be financed, and a growing debt implies a rising tax burden that, looking to the future, must depress animal spirits.

So, there are two effects: deficits are a positive, but debt is a negative, and you cannot have the deficit without adding to the debt. Of the two effects, which today is the greater? It's hard to be sure, because animal spirits are as incalculable as the uncertainty to which they respond. In fact, we don't really know. On top of that, when policy outcomes are uncertain, and we fail to make a clear choice, we have policy uncertainty. As Robert Higgs has shown looking at the Great Depression, policy uncertainty is more bad news for animal spirits.

In short, there exists a Keynesian argument for decisive fiscal retrenchment now -- and it is more coherent and truer to Keynes than the positions adopted by some latter-day Keynesians. Deficit reduction is likely to take away from demand now via the spending multiplier (which may however be small, or become small or even go to zero over a few years). At the same time deficit should add to demand to the extent that it slows the accumulation of debt and encourages business confidence in the future, and also because a clear choice in favour of enterprise also builds confidence.

Contemplating deficit reduction, can we be sure of the results? No. Past behaviour gives us only rough averages as a guide; for example, Reinhart and Rogoff suggest that the median long term growth penalty for pushing debt above 90% of GDP is 1% a year. There's a lot of variation around that figure, which reduces the predictability of the outcome. So, is there an element of gamble in debt reduction now? Absolutely. But is there a safe or low-risk alternative? No.

The jobs and welfare of hundreds of millions of people are at stake in the fiscal policy game being played out now in the capitals of the West. But it's not a game we can refuse to play.

Mark Harrison : 26 Jul 2010 19:36 |  Tags: Economics Keynes Politics Recession |  Comments (0) |  Close comments |  Report a problem