All 4 entries tagged Politics

Stupid After the Event

Writing about web page http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5663091.ece#cid=OTC-RSS&attr=1882523

We're all wise after the event.

The public would have like it better if more of us had been wise before the event. The bankers that are sorry now didn't see it coming. The politicians and regulators won't say they are sorry, but they didn't see it coming either. Who else should have seen it coming? Anatole Kaletsky (in The Times, Feb. 5, 2009) says that economists should join the others in the dock; they are "the forgotten guilty men." By economists, he adds,

I do not mean the talking heads (myself included) employed by the media and financial institutions to “explain”, usually after the event, why share prices or currencies have gone up or down. Nor do I mean the forecasters whose computers churn out scientific-looking numbers about what will happen to growth or inflation, but whose figures are revised so drastically whenever something “unexpected” happens - as it always does - that their forecasts are really nothing more than backward-looking descriptions of recent events.

What I mean by “economists” are the academic theorists who win Nobel prizes, or dream of winning them.

Why economists? The financial crisis, Kaletsky notes, was caused by practical men, not academic scribblers. But Keynes wrote, as Kaletsky reminds us:

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

This seems harsh to me. Not all economists were stupid before the event. I'm not well enough connected to have conducted a census, but Robert Shiller was writing about irrational exuberance in financial markets ten years ago. In 2002 my colleague Andrew Oswald predicted the great UK house price crash of 2003 to 2005. (If only he'd been right; we would all be hurting a lot less now.) In the same year other colleagues past and present – Marcus Miller, Lei Zhang, and Paul Weller – warned in the Economic Journal of the "Greenspan put," a "one-sided intervention policy on the part of the Federal Reserve which leads investors into the erroneous belief that they are insured against downside risk." Yes, some were wise before the event. They are people I can only bow to.

What about Kaletsky himself? Two years ago, on March 9, 2007, Kaletsky gave the Colliers CRE annual economist briefing. This is just some of what he said:

Kaletsky firmly believes that there is 'good news' supporting long-term trend growth in the global economy ... A 'mid-cycle slowdown', rather than a recession, is now overdue ... Kaletsky believes that we will experience a slowdown rather than an outright recession. This means we will not see a sharp rise in unemployment and bankruptcies ... The US housing market has undergone a strong slowdown ... Kaletsky is confident that we are much more likely to see a soft landing in the US housing market than a collapse ... Kaletsky firmly believes new home sales have reached a bottom in the US and is confident that 2007 will see signs of a pickup ... The UK will stand out against the tide of slowing growth in Europe ... the financial sector - led by London - will go from strength to strength ... Although a number of commentators have focused on the risks of a house price crash, Kaletsky believes these to be overstated.

In January 2008 I attended an AEA panel in New Orleans where Shiller, along with Paul Krugman and Nouriel Rubini, academic scribblers all, acurately predicted the coming huge bust in the U.S. housing market. A month later, on February 5, 2008, Kaletsky told Colliers CRE:

We are approaching the end of the credit crisis in terms of time, if not necessarily pricing, and that it will be resolved one way or another in the next month ... The US is experiencing its worst economic downturn since the 1990s, but Kaletsky believes the worst may be over, although the risk of recession remains.

Of course, Kaletsky said a lot more than I have quoted, and I have quoted very selectively. If you prefer to read the full texts of his briefings, they are both here. Let me add that, in his 2008 remarks, Kaletsky made one other very important point: 

in 2005, the International Monetary Fund (IMF) conducted a study of recessions around the world. Of the 74 recessions studied, only four were predicted in the preceding year. Furthermore, only one third of forecasters interviewed in a recession year actually spotted the recession in that same year.

So what? Here's what.

Nearly everyone has been wise after the event, not before. Don't get me wrong: being wise after the event is very important; let's not undervalue it. Being wise before the event is best, but being wise after the event is the next best thing. And being wise after the event definitely dominates being stupid after the event. This is a danger that I'll come to.

If we want to be wise after the event, it's time to rethink. What are the parts of economics that need rethinking? According to Kaletsky it is our concepts of

the “efficiency” of markets and the “rationality” of the investors, consumers and businesses who inhabit them.

I agree! We should rethink the way we use the rationality assumption. As an economic historian, I use it in all sorts of peculiar context. I have argued (here for example ) that the value of the axiom lies partly in helping us draw a line between what we do and do not understand. If we assume that individuals behave with full rationality, subject to constraints, and our models works in terms of simulation or prediction, then we can at least kid ourselves that we have understood that behaviour in the sense that we don't need anything more complicated to analyse it. If the model doesn't work, it tells us we failed to grasp something – some constraint on behaviour or some bound on rationality – that is missing from our model. In short, the rationality assumption helps us draw a line between what we understand and what we don't.

Recent events are shifting that line, but in different ways for different people. First is a relatively narrow group, those (not all) financial economists that bought heavily into the efficient markets hypothesis and rational expectations; they have seen their frontier with the unexplained collapse inwards. Second are a much wider group, the macroeconomists that did not buy the efficient markets hypothesis, but nonetheless believed that in the event of market failure governments had the power, the monetary and fiscal instruments, the capacity for international coordination through G8, G20, IMF, and so forth, and the will to avert the worst consequences. We are watching events unfold, but I am much more pessimistic than I was.

The main problem for economics that I see is this. Most professional economists are clever people. Clever people have one weakness: they are clever in many ways. One of these is getting at the truth. Another is being contrarian. In fact, because they are clever, and often highly motivated, clever people tend to be good at denial. They can think up a thousand sophisticated arguments to defend manifestly absurd ideas. My rule of thumb is that everyone, including me, believes in at least one completely crazy idea; the trouble is, I don't know which one it is. So look out for a lot of clever economists who are going to be stupid after the event, because of some idea they are wedded to and will continue to defend while the world walks off in the other direction.

If I'm clever enough, I may well be among them.

The main problem for politics is different. It is that it is much more fun to play the blame game than to do something – something for which, in future, you may be blamed. As a result, politicians and journalists in our country (and no doubt elsewhere) are now sitting around throwing accusations at bankers, economists, journalists, and each other – particularly at bankers, which is fine in a way because monetary policy can currently do nothing more to make things better, so why not?

Except that it is a diversion from the one thing that can now make things better, the promised fiscal stimulus. We are losing 100,000 jobs a month – and unemployment is a lagging indicator. To make a difference, the fiscal stimulus was needed six months ago. It seems that we cannot even count on the automatic stabilizers that should limit recession. While local authorities lose revenue, for example, councils are cutting jobs and services that they can no longer afford but the community needs ever more desparately. The current lack of fiscal action on the part of our government is scandalous. Stupid after the event.

Mark Harrison : 12 Feb 2009 15:01 |  Tags: Keynes Politics Recession |  Comments (0) |  Close comments |  Report a problem

False Patriots

Writing about web page http://news.bbc.co.uk/1/hi/uk_politics/7866614.stm

So a lot of people would like to send them home – the foreign workers contracted to work in Britain. To judge from the tone, these people are not that interested in a level playing field. They want one that puts the foreign workers on a steep slope – preferably down to the sea.

How much better can that get?

As far as I can work out, there are about six million British citizens living abroad. In the countries where they live and work, they take up jobs, homes, schools, medical facilities, and even benefits – just like foreigners here. In those countries, jobs are going to be just as short as they are here. So, if we succeed in sending the foreigners home, our compatriots abroad are going to be equally vulnerable to the same pressure from the citizens of the countries where they live.

I wonder if these "patriots" are ready to see tens or hundeds of thousands of British citizens forced out of the countries where they have made their homes and sent back here to crowd the jobless queues and social security offices. That is the predictable consequence if they succeed.

We live in an interdependent world. How hard it is for us to weigh the benefits against the costs. All of us benefit, but at any one moment the benefits are imperceptible because they come in thousands or millions of tiny packages. Export industries appear and jobs are created by the invisible hand. Moreover, we do not benefit equally; some gain more than others. And some lose, but each job that is lost is clearly identifiable. At moments of difficulty, our common interest in free trade and movement can be all too easily drowned out by the vocal lobbies that want to block these things.

Take "Buy American." The current amendment to the U.S. fiscal stimulus package before Congress will protect the jobs of a few thousand American steel producers. A hundred million steel consumer in the U.S. will lose in higher prices. It's tragic, but unsurprising, that the U.S. steel lobby could win this one.

The same applies to "Buy British." If we all buy only British, that will cut our imports – but it will also cut our exports! How will foreigners have the means to continue to buy the goods and services we export if we buy nothing from them?

Worse, we will become poorer as a result. "Buy British" will make us buy more of the expensive goods that we are least good at making ourselves. It will protect the jobs that are of least value. At the same time, it will undermine the markets for the goods and services that we are best at, and so add most value.

Take Coventry, where I live. Once, Coventry was Britain's Detroit. It produced motor vehicles for a mass market and exported them across the world. No longer. But Coventry has not dropped out of the world market. Our city has a new export industry: higher education. Two universities, Warwick and Coventry, bring thousands of students from across the world to study here. They pay high fees and living costs worth many tens of millions of pounds to the local economy. The money they spend doesn't come out of thin air; it is financed by the pounds their countries earn by selling goods to us, cheaper than we can make them ourselves – Korean motor vehicles, for example.

"Buy British" means killing Coventry's new exports. It means rolling the clock back from the new to the old -- giving up on what we do with greatest success, and going back to what we once could do but then failed in.

Folly that cloaks itself in patriotism is still folly.

We need all the major countries to cooperate to keep trade and [policy coordination going. On that note, Jeff Frieden has written something that everyone should read. Frieden's point is the importance of political leadership: our governments must create social consent at home and political agreement abroad keep open the channels of international trade and movement. He says:

At the domestic level, governments need to work out an equitable and politically sustainable allocation of austerity across the population.

This means ensuring that those sectors of society hit hardest by the crisis are not also the ones asked to bear the stiffest sacrifices. ... Governments that ignore the social and distributional implications of the crisis are likely to find themselves either driven toward extreme and counter-productive policies, or swept away.

At the international level, governments need to work just as consciously to coordinate not just words, but actions.

This will not happen of its own accord ...

Mark Harrison : 03 Feb 2009 20:19 |  Tags: Coventry Globalization Politics Recession Universities |  Comments (0) |  Close comments |  Report a problem

The Fiscal Stimulus: Catch 22

Writing about web page http://krugman.blogs.nytimes.com/page/2/

Paul Krugman has made the following point: for the United States, one dollar added to the federal debt by new public spending will save three dollars' worth of jobs. This is despite the fact that the Keynesian multiplier for the United States is only about 1.5. Why? Because every job saved will generate tax revenues that should offset some of the implied increase in the federal deficit.

There's a couple of assumptions in that. One is that interest rates won't change much, which makes sense because right now they are on the floor and likely to remain there. Another is that, oddly enough for a guy that won the Nobel prize for contributions for trade theory, Krugman doesn't mention foreign trade. That makes sense because the United States ratio of trade to GDP is only 10% (exports) to 15% (imports).

The same idea should work for Britain. But it is much less favourable, because we are more heavily taxed and also have a much more open economy. Unless I misled several generations of first-year students, the Keynesian multiplier for an economy with direct and indirect taxes and foreign trade is 1/(1 - c(1 - t₁) + t₂ + m) where c is the marginal propensity to consume (say 0.6 in the short run), t₁ is the direct tax rate (say 0.25), t₂ is the indirect tax rate (say 0.15 since Darling's VAT reduction), and m is the import propensity (say 0.25). That gives us a Keynesian multiplier of 1/0.95 which for present purposes is about 1.

Let's assume that interest rates stay low, and the exchange rate stays where it is. Then, every extra pound of public spending generates about one pound of effective demand for goods and services. But then, each extra pound spent will bring back 40p to the Treasury in direct and indirect tax revenues, raising the national debt by only 60p. That makes 60p of new indebtedness the price we will pay to create one additional pound of GDP.

Think about jobs. In the UK economy each person employed generates about £50k of GDP. We are currently losing around 100,000 jobs a month from the economy; to be conservative let's put that at a round million jobs over the next year. To save those million jobs should take a fiscal stimulus of £50 billion a year, starting now, but it will add only £30 billion to our national debt, because if those jobs can be saved there will be a clawback to the Treasury of £20 billion in tax revenues.

There are some catches.

Catch 1. The government is proposing a stimulus of £20 billion over the next two years. Oh – and it hasn't even started yet. Jobs are being lost now. A fiscal stimulus doesn't work instantaneously. Fixated on blaming the banking sector for what is about to happen (in addition to what has happened already), the government is still trying to revive lending rather than to revive spending directly. 

Catch 2. Britain, unlike America, can't ignore the rest of the world. The reason exports don't figure in the Keynesian multiplier is that they're outside our economic system: if our export markets are falling off the same shelf as us, that will have an adverse multiplier effect that works against the multiplier effect of our own public spending.

It is critically important for small open economies like the UK to have a fiscal stimulus that is coordinated internationally. We all make up each others' export markets! If every country would stimulate demand at the same time, and in the same proportion, the trade balance effects would be neutral, but the collective stimulus would be far more powerful. Every country would see a double bonus, the first coming from its own public spending, and the second coming from the public spending of its trading partners, reflected in exports.

Catch 22. The European Union was constituted on the assumption that the problem of deficient demand had been solved. Coordination was needed only for monetary policy (so we have a European Central Bank) and to ensure fiscal restraint (so the Eurozone is supposedly governed by the deflationary rules of the Growth and Stability Pact). There's no mechanism to coordinate a European fiscal stimulus!

So it's up to the G8 and the G20. Let's think about that.

Generations of students of international economic history have learned that a major part of the Great Depression was the failure of international coordination. Our ability to coordinate a response to the greatest economic challenge since the Great Depression is being tested now. Until recently, we thought we knew how to avoid bank runs. Then we had the first major run in 150 years. We also thought we knew how to avoid a major recession. I was about to write: "Watch this space." Depressingly, I'm not sure you need to.

Mark Harrison : 22 Jan 2009 11:23 |  Tags: Globalization Keynes Politics Recession |  Comments (0) |  Close comments |  Report a problem

My President is Black

Writing about web page http://www.forbes.com/opinions/2008/11/20/obama-shelby-steele-oped-cx_pr_1121robinson.html

On a trip to Washington and Philadelphia, it seems like everywhere there are Obama T-shirts on sale. Sometimes it's Obama on the front, sometimes with his smiling family, and often they are all wrapped up in the Stars and Stripes. Captions: "My Commander in Chief." And "My President is Black." I liked that one so much, I tried to get it for my wife, but they didn't have her size. I wondered why I wasn't trying to get one for myself, but they so much more didn't have my size, and anyway I thought the sequins wouldn't suit me.

Out on the street some black kids had set up a stall and were noisily telling a small audience not to fall for the Obama illusion. I looked at a placard and saw something about the lost tribes of Israel. I didn't read too closely because it seemed like a bad place to linger. A colleague wondered if they knew Al-Qaeda was trying to put the same message across. There must be hope -- Christians and Muslims coming together before Christmas!

Later, I read "An interview with Shelby Steele." Steele, like Obama, has a mixed racial heritage, but he resents Obama's victory. He rejects the proposition that Obama was a post-racial candidate. (It's a fact: I Googled "Obama" and "post-racial" and got 528,000 hits in 0.19 seconds.) Steele says white folks voted for Obama to prove they were not racist, and black folks voted for him to prove they were not inferior to whites. So, he says, Obama got elected because he is black.

I agree Obama is not "post-racial," whatever that means. The polls show clearly that black voters favoured him more than white voters. Still, Obama got a lot of white votes. The TV pictures showed clearly that a huge number of people around the world, black and white, are inspired that "My President is Black" -- even if for many Obama is not, strictly, their president. In fact, I am one of them. I think it's inspiring that Americans have elected Obama. But to claim that Obama was elected because he is black seems to me to have a firm grip on a seriously wrong end of the stick.

Let's think:

• Would the voters have put in anyone who was black? I don't think so.
• If Jesse Jackson had been the Democratic candidate, would he have won? Surely not.
• Politics aside, did Obama have to demonstrate a lot more competence and leadership than McCain to win? Probably. 

So, Obama was not elected just because he is black. Being black was not enough. Most likely, being as good as the white guy was not enough either. That's the down side: Obama had to be twice as good as the white guy to win. But there's an upside, too: being black did not stop him winning! So, my conclusion is: there's a double bonus in this. Good for Obama, and good for America!

All Obama has to do now is govern America and lead the free world for four years without messing up in a context of financial and environmental meltdowns, a military quagmire in the Middle East, America's global unpopularity, and an undefeated terrorist threat ... And, if he can do that, he can be reelected and get to do it again!

One more reason to be hopeful of America: The cab driver from my hotel to the Union station in Washington DC was talking on his cellphone in a language I could not begin to recognise. When he finished, I asked where he came from. "Afghanistan, seven years ago," he said. I asked how he liked it here. "You know," he said, "I feel at home. This is my country now."

I told the driver he was lucky not to have sought refuge in England; seven years on, he would be living miserably in the British equivalent of a refugee camp in Peshawar, and complete strangers would call him a Paki. That set him off in another direction, saying that Peshawar belonged to Afghanistan until the conniving British gave it to Pakistan. Later, I looked this up on http://en.wikipedia.org/wiki/Peshawar and the story does seem a little complicated, but it notes that "to this day many Afghans claim large swathes of Pakistani territory, including the bustling frontier cities of Peshawar and Quetta, rightfully belong to Afghanistan."

My driver said he was reading The Kite Runner, so in his honour and in honour of America I bought it at the next bookstore to read myself. At my conference in Philadelphia I told this story to an old friend. He told me he'd refused to read The Kite Runner, although his wife had read it, because the small midwestern college town where they live had adopted it under the slogan "One Town -- One Book!" Isn't that called totalitarianism? I asked. He smiled uneasily and changed the subject.

Mark Harrison : 23 Nov 2008 05:27 |  Tags: Cab-Drivers Obama Politics |  Comments (0) |  Close comments |  Report a problem