At the Centre of the Gulag Archipelago, a Quiet Lagoon …

What sights and sensations does the word "lagoon" evoke? The poet Sheri Hoff thinks of:

A quiet lagoon...
Floating in the salty, blue water,
the sun shining on my face.

That's what it makes me think of, too.

If you like playing with words, there can be other associations. For Germans and Russians the first syllable of this beautiful word might evoke less pleasurable images. If the British invented the concentration camp (at the time of the Boer war), the Germans abbreviated the term to konzentrationslager and the Russians imported the word lager from German for their own forced labour camps. "Lag" was the Soviet-era abbreviation of anything to do with the institutions of forced labour. GULAG for example, was the chief administration of labour camps of the USSR interior ministry in Moscow; Siblag, Sevlag, among many others, were respectively the Siberian and Northern camp complexes.

But how could you get from the frostbitten outposts of the Soviet empire, encircled by barbed wire, to a lagoon? While some could only dream, others played with words.

On July 5, 1946, Lt. Col. Luferov, chief of the secretariat of GULAG (the chief administration of labour camps) of the USSR MVD (interior ministry) in Moscow, signed off a curt memorandum to his party comrade Major Silant'ev, chief of the control and inspection department (the document is in the Soviet archives collection of the Hoover Institution: GARF, f. R-9414, op. 1 dop., d. 144A, folio 91):

I inform you that the word "Laguna" is assigned to GULAG as its customary telegraphic address.

I request you to inform all departments and administrations of the USSR interior ministry chief administration of labour camps and also the peripheral units: ITL MVD [the labour camps themselves], UITLK MVD (the administration of labour camps and colonies), OITK MVD [the department of labour colonies], and PFL MVD [the verification and filtration camps for returning Soviet prisoners of war and labourers previously held in Germany].

This story shows that even the most heartless of Soviet bureaucrats could hear the poetry of word-play in his soul.

Mark Harrison : 14 May 2009 21:47 |  Tags: Forced-Labour History Russia |  Comments (3) |  Close comments |  Report a problem

Truth in Humour; No Humour in Truth

In The Gulag Archipelago, Alexander Solzhenitsyn recounted the Stalin-era joke of the labour camp guard who asked a newly arrived convict about the length of his sentence.

The man says 25 years, but proclaims he is innocent!

The guard retorts that he must have done something because the innocent are only given 10 years.

There can be a grain of truth in humour; that's what makes it funny. In this case, it's a matter of historical record that millions of people suffered unjust imprisonment or execution in Stalin's time. It isn't funny when the victim says it; the joke is when it is said by the perpetrator.

This next bit isn't a joke.

On January 31, 1938, the Politburo of the party Central Committee in Moscow considered the problem of foreign refugees. (The document is in the Soviet archives collection of the Hoover Institution: RGANI, f. 89, op. 73, d. 11, folio 53). The minutes of the meeting record:

It has been established that foreign intelligence services are casting their mass espionage and sabotage network of agents into the USSR, mainly under the guise of refugees and those apparently seeking a political safe haven, better economic conditions in consequence of unemployment, deserters from military units and border security, and returning migrants and emigrants.

The Central Committee of the All-Union Communist Party (Bolsheviks) resolves:

1. To propose to the USSR NKVD [interior ministry in charge of state security] to arrest immediately and subject to meticulous interrogation all refugees detained at the border, regardless of their motives for entering the territory of the USSR.
2. All refugees for whom it is established directly or indirectly that they entered the territory of the USSR with espionage, sabotage, or other anti-Soviet intentions -- to hand them over to the court of the Military Tribunal, with mandatory application of [death by] shooting. 
3. Cases of all refugees for whom it is established that they entered the territory of the USSR without ill intentions -- to hand them over for consideration by the USSR NKVD Special Asssembly, with application of the penalty of 10 years' imprisonment ... [emphasis added]

So: Guilty, death. Innocent, ten years. It didn't make me laugh.

Mark Harrison : 02 May 2009 01:32 |  Tags: Forced-Labour History Russia Stalin |  Comments (4) |  Close comments |  Report a problem

Saintly Inquisitors

Writing about web page http://www.nytimes.com/2009/04/18/world/middleeast/18zubaydah.html

On April 18, the New York Times reported:

Abu Zubaydah had provided much valuable information under less severe treatment, and the harsher handling produced no breakthroughs, according to one former intelligence official with direct knowledge of the case. Instead, watching his torment caused great distress to his captors, the official said.

By implication, the CIA operatives who first did this were good people who implemented a bad policy reluctantly and against their own better judgement.

That's something I can credit. I don't have a problem with believing it.

But there must be more. I explained why, in a short article I wrote more than seven years ago, back in November 2001 when the policy of torture was still a twinkle in Dick Cheney's eye. I wrote:

The practice of torture also attracts those who find it enjoyable and use it as an instrument of self-gratification rather than investigation.

How else could you explain the fact that, as the New York Times reported on April 19:

The C.I.A. officers used waterboarding at least 83 times in August 2002 against Abu Zubaydah, according to a 2005 Justice Department legal memorandum ... The 2005 memo also says that the C.I.A. used waterboarding 183 times in March 2003 against Khalid Shaikh Mohammed, the self-described planner of the Sept. 11, 2001, terrorist attacks.

It defies belief that the same inquisitors continued to experience the same distress throughout these 83 episodes, let alone the 183 times (six times on an average day!) that they or others waterboarded Khalid Shaikh Mohamed in the month of March 2003. Either they changed their feelings, or they changed places with others. The CIA officers that initially found the practice of torture "distressing" must either have overcome their scruples and learned to find satisfaction in it, or they would inevitably have given up their place to others that enjoyed it without forcing themselves.

The outcome, I concluded back in 2001, is that:

The process of torture is corrupting ... It gives rise to vested interests in its continuation that do not wish to be held accountable for their actions. These interests are helped by secrecy. Torture takes place in secret. Most people find the subject distasteful and do not wish to know about it, and this further strengthens the wall of secrecy. The result is a part of the state that exercises a cruel and tyrannical power over society, one that grows inevitably with the extension of torture and has the power to resist subsequent attempts to curb it.

It is something of a miracle that today, this cruelest form of corruption has not only been curbed but is being brought to light.

Mark Harrison : 21 Apr 2009 06:01 |  Tags: Politics Torture |  Comments (0) |  Close comments |  Report a problem

The Other Enemy

Writing about web page http://blogs.ft.com/maverecon/2009/04/the-green-shoots-are-weeds-growing-through-the-rubble-in-the-ruins-of-the-global-economy/

Looking back on the G20, there seems little to say that has not been said better by Willem Buiter in his recent blog. I'm going to address a related question: Are our leaders now doing too much, or too little?

Here are some people who think president Obama and prime minister Brown are doing too much: The British (Conservative) and United States (Republican) oppositions, and the governments of France, Germany, Ireland, and the Czech Republic. In varying terms, they fear the same enemy. Fiscal action to combat the Great Recession will cause very large increases in the public debt. In the medium term there will have to be a heavy settling of fiscal accounts. One risk is that governments that have started to enjoy their wider powers will try to pass the burden onto others through inflation or default. Even if they deny themselves this pleasure, they will have to enact tax increases that risk causing large market distortions. Persistent damage to market institutions could ensue, justifying further expansion of the role of government. This is what people mean when they refer to creeping collectivism or socialism.

As I have said before (but Buiter says it better), there is genuine reason here for concern. But those of our leaders that have lined up in the "too much" camp are facing the wrong way. In doing as much as Obama and Brown have been prepared to do, we risk creating one enemy. But the other enemy is the one we will cede power to by doing too little. And this enemy is the more dangerous of the two.

By doing too little, we will give up the political middle ground to populists and pressure groups of left, right, and middle England: protectionists, advocates of self-sufficiency and economic isolation, nationalists, xenophobes, and proponents of extra-parliamentary politics and direct action. I do not meant that such people are all the same; they are not. But whether they fight side by side or against each other, they are capable of destroying confidence in representative democracy. This would give away far more power to arbitrary government than a little gentle Keynesianism.

No one can be 100% sure, but I don't believe our leaders have done too much. They may have done too little. By doing too little, we risk a future governed by those that want to weaken the market economy permanently, or even destroy it, not fix it.

To try to do nothing in the face of the Great Recession is not even desirable. The unnecessary ruin of hundreds of thousands of businesses and households, and the consignment of a similar number of young people to unemployment, would be a great social crime. Bad as it will be to burden our children with a larger public debt in the future, it would be worse to burden them with a Great Depression in the present. The current wave of layoffs and bankruptcies is already under way, and nothing can now stop that, but we can and should do all we can to mitigate its extent and duration.

To try to do nothing will eventually fail, because our society will not tolerate complete inaction on the part of its leaders. Remedial intervention in the economy is inevitable. This means that, in the next few years, there will inevitably be more public spending, debt, and regulation. Just as most medications have harmful side effects, remedial intervention that is guided by the best intentions and the best judgements will have harmful spillovers and unintended consequences.

I would like to see remedial intervention carried out by politicians who do not relish it, but understand it as a necessary but temporary expedient, to be reversed in the medium term. I would apply this even to banking regulation: clearly, the regulatory framework must change, but it should not leave a permanently greater role for political action.

Maybe that's too much to ask. But it is what our future demands.

The alternative is to give up the keys of the city to the other enemy: to allow the remedial instruments to fall into the hands of state-building entrepreneurs who will use them enthusiastically to accumulate power, build persistent economic and political monopolies, and gradually acquire the means and motives to suppress criticism and opposition.

Mark Harrison : 14 Apr 2009 05:51 |  Tags: G20 Globalization Politics Recession |  Comments (2) |  Close comments |  Report a problem

War and the Great Recession: Some Thoughts

A while back, an American journalist wrote to me:

We ... are trying to determine how big of a war we would need to have in order to drive the US out of this recession.  It is common belief that WWII was a major factor in invigorating US economy which had been decimated during the Great Depression.  I was wondering if it would be possible to make a projected estimate for our current situation using that era as a model. 

This question got me thinking and I put quite a lot of effort into some answers, which they did not use. So, I thought I would update them and share them here.

Basically, the question sees the problem back to front and upside down. The problem we should be thinking about today is not how to start a war that can help pull us out of recession. The real problem is that, if we don't pull ourselves and others out of recession fairly rapidly by peaceful means, we will face growing risks of war -- and that could end in a catastrophe for everyone.

So, it is a trick question. Sometimes, however, it is interesting to take trick questions at face value and work out what is wrong with them by seeing where they lead. This is what I did.

• Is the situation of the U.S. economy today comparable with the Great Depression?

At the moment, the situation of the U.S. economy over the next year or two looks bad compared with the recent past, but it is still way better than it was in the 1930s. Economists often work in terms of what is called the "output gap," the proportion of potential output that is unrealized because there is not enough demand in the economy. The Congressional Budget Office currently expects the output gap over the next two years to average almost 7 percent.

There are various ways of calculating the output gap of the U.S. economy before World War II, and it varied a lot from year to year, but any reasonable estimate would be far above 7 percent. At the bottom of the depression, in 1932, the gap was probably around one third. At the end of the first recovery, in 1937, around one fifth of potential output was still not being realized, and in 1938 and 1939 the output gap widened again. It had got back to relatively normal levels by 1941.

So the good news is that, on present forecasts, the fiscal stimulus that is required to fix the U.S. economy is much less than was called for in the 1930s. What everyone should worry about, though, is that if things play out badly in the world as a whole there is plenty of scope for present forecasts to prove optimistic.

• What size of war would be required to provide an equivalent fiscal stimulus?

U.S. GDP is currently around $15 trillion a year, and so an output gap of 7 percent means about $1 trillion a year of lost production. Since, in the U.S. economy, an extra dollar of public spending should give rise to about an extra $1.50 of total (public plus private) spending, a stimulus of around $700 billion a year would be needed to stimulate $1 trillion a year of extra output.

As far as I am aware from press reports and so on, the total U.S. budgetary appropriation for the global war on terror (Afghanistan, Iraq, and the protection of U.S. embassies abroad) has reached around $1 trillion in total, spread over the entire period from 9/11 to the present. I am not certain what the annual cost is currently, and I believe that not all of it is explicitly funded (i.e., the GWOT has been partly funded by the Defense Department taking resources from elsewhere.) For the sake of argument, suppose the net budgetary cost of the GWOT has recently been of the order of $200 to 250 billion a year. To provide a stimulus of $700 billion a year, therefore, the required war would have to be the equivalent of three additional global wars on terror, waged on the scale of the recent past.

How does that compare with the fiscal stimulus package that went through Congress recently? The package is $700 billion spread over two years, and much of it is tax cuts rather than public spending, which will have a lesser impact because tax cuts can be saved rather than spent privately. It is one half or one third of the stimulus that would halt the slide, so it runs the risk of being too little, too late.

One reason for the modest size of the package is that President Obama is restrained by conservative opponents of big government in Congress. I suppose someone could argue that a war might help to overcome such constraints. I think that would be a bad argument. It amounts to saying that we should whip up nationalism in order to stigmatize the people we disagree with as unpatriotic and crush them. That is not unheard of, but it does not appeal to me.

• How good for the U.S. economy would it be to have another war?

History should make us very skeptical. Here are five reasons. First, it is true only in small part that World War II pulled the U.S. out of the depression. In fact, 1940 was the first year after 1919 when U.S. military spending rose above 2 percent of the national income. The fiscal stimulus from New Deal spending was also modest. The main driver of the U.S. recovery up to 1940 was private investment. If World War II had not broken out, this natural recovery process would have continued.

Second, it is true that the wartime period saw a huge further increase in the total output of the U.S. economy. In the three years from 1941 to 1944 the GDP rose by about two thirds. The main element in this was Federal outlays on national defense that brought about a vast increase in the mass production of standardized machinery and equipment for combat and transportation. Because of mobilization and wartime controls, patriotic national feeling, and mass production and the associated efficiency gains, the U.S. economy could temporarily produce far above peacetime norms -- effectively, there was a negative output gap. But the extra output did not make anyone better off; it was mainly in the form of ships, planes, and guns that achieved victory, not higher living standards.

After the war, most of the extra output disappeared and the economy fell back, not towards depression, just towards normal peacetime operation. So the wartime "production miracle" did not bring about lasting gains. The U.S. economy was much more prosperous after 1945 than before 1941, but this was not because of the war. It was because of the return to normal working combined with underlying productivity advances that had continued through the Great Depression, but were temporarily overwhelmed by the lack of demand.

Third, it is true that millions of U.S. citizens had a good war, economically speaking. Many people would previously have expected to live out their lives in poverty in the South and Mid-West. They moved to the industrialized, urbanized North and found new lives there. Many young men gained new skills and experiences by joining the military and fighting or supporting the war effort overseas. You might ask whether there were cheaper ways of achieving the same goals without having to fight a war. I don't mean that American involvement in that particular war was wrong; it was clearly in America's own national interest. But if you want to achieve a more mobile, equal society, and war is not forced upon you, there are cheaper ways.

Fourth, it needs to be said out loud that war is costly to society in terms of death and disability. I looked up what Michael Edelstein has to say in his chapter on “War and the American Economy in the Twentieth Century,” in The Cambridge Economic History of the United States, vol. 3 (published in 2000), on pages 342 and 349. He measures the budgetary cost of war as the cost of defense above normal peacetime operations, and the social cost is the capitalized value of lost earnings of the killed and injured. Everything is in constant 1982 prices. Edelstein’s estimates are: WW1, budgetary cost $378 billion and social cost $25 billion, WW2 $2,460 billion and $202 billion, Korea $206 billion and $27 billion, and Vietnam $313 billion and $46 billion.

You can see a couple of things. One is that, on this measure, the social costs were relatively small. Why? Mainly because the United States could fight all these wars at a distance against much less well equipped enemies. In World War II, U.S. battle deaths in Europe and the Pacific were around 350,000. In contrast, Red Army battle deaths on the Eastern Front were around 8.7 million.

Another thing is that, on the same figures, the ratio of social to budgetary costs rose continually from war to war. As a share of the combined total, the human costs were around 6% in WW1 rising to 12% for Vietnam. Why? I think, mainly because there was rising productivity, so human life got relatively more expensive. In their book on the costs of the Iraq and Afghanistan conflicts, Joseph E. Stiglitz and Linda J. Bilmes come up with various figures but their “realistic moderate” scenario (The Three Trillion Dollar War, published in 2007, page 112) suggests about 12% for social costs as a share of the total of budgetary plus social costs combined. (Stiglitz and Bilmes include items of veterans’ welfare costs that Edelstein I think does not, but these appear on both the budgetary and social sides of the balance.)

What does this mean? Well, if you want $700 billion a year of fiscal stimulus through going to war, you’d better factor in that, for every year at war, the U.S. economy will also lose a future income stream with a capitalized value of $100 billion, because of troops killed and injured. That does not seem like a good idea.

Fifth, a war today would bring huge costs in further disruption of the international economy. In 1941 international trade was a small fraction of its pre-1913 volume, so there was little to lose. The world today is much more interdependent than it was in the 1930s. Stiglitz has pointed up the billions of dollars lost to the U.S. economy because the war in Iraq triggered higher oil prices. You need to factor that in too.

Maybe I should finish this bit by quoting Edelstein again (on page 349):

It is absurd to think that the methods and perspectives of economic history come anywhere near to comprehending the meaning of human losses from war. We are far better served by the speeches and letters of Lincoln or the poetry of Sassoon, Brooke, Owen, Graves, and Seager.

OK, but where does this leave us?

I have two conclusions. One is that the only good reason to have a war would be to defeat an enemy. If our leaders want to make our economy work better in everyone's interests, and if they have legitimate instruments to achieve this, and if such improvements would also be an accidental by-product of a war, then that is not an argument for a war. It is an argument for adopting peaceful ways to achieve these things that carry democratic consent and do not also involve the irreversible losses and persistent collateral damage that a war would bring.

My other conclusion is that the original question ("how big of a war we would need to have in order to drive the US out of this recession?") confuses the problem for the solution. It's true that the Great Depression ended in the most terrible war the world has seen. But it did not end because of the war; the depression would have come to an end anyway. In fact, the war curtailed the natural recovery process.

But why did the war come about? World War II happened for a number of reasons, but one of them was the great powers' failure to avert the Great Depression in the first place, and rapidly to mitigate it once it came along. Many of the ingredients for violent conflict were there, but until the Great Depression they lacked a spark. Before 1929, was Germany evolving gradually towards a normal parliamentary democracy? Yes. Would Hitler have come to power without 30% unemployment in Germany in 1932? Probably not.

Eurasia today, from the Baltic to the China Sea, has many of the ingredients for violent nationalism. Scattered around that vast landmass, there is more than enough petrol and a good supply of oil-soaked rags. Meeting in London today, the G20 has the power to coordinate an effective international response to the global economic calamity that threatens us. If they fail, it is not just an economic calamity that we should fear; the world's leaders are playing with matches.

Mark Harrison : 02 Apr 2009 13:08 |  Tags: G20 Globalization Politics Recession War |  Comments (5) |  Close comments |  Report a problem

Naomi Klein, Milton Friedman and Me

Writing about web page http://www.warwick.ac.uk/go/markharrison/comment/shockdoctrine.pdf

On February 24, 2009, by Naomi Klein was awarded the first Warwick International Prize for Writing, for her book The Shock Doctrine. On behalf of the panel of judges, the novelist China Miéville described The Shock Doctrine as "a brilliant, provocative, outstandingly written investigation into some of the great outrages of our time."

That got my attention. Here's why. On August 26, 2008, Kurt Jacobsen reported in The Guardian about opposition to plans to set up a Milton Friedman Institute at the University of Chicago. The report included some claims that I thought were wrong. So, I replied. Here's my letter, published on August 28:

Your feature on Chicago's proposal to establish a Milton Friedman Institute of economic research (Milton Friedman gives Chicago a headache, August 26) is misinformed in some important respects.

You state: "In postwar America, Friedman's market fundamentalism was regarded as lunatic-fringe stuff." This was never the case. I learned economics in Cambridge in the late 1960s. My professors followed Keynes and Marx, but they rightly made Friedman's work part of my undergraduate syllabus. Friedman's scholarship, not his opinions, made him one of the most influential economists of the 20th century.

You state that Friedman "worked for General Pinochet". While Friedman visited Chile, he did not work for the dictator. His advice was that Chile should turn back from state control of economic life; in the long run, he argued, free markets and political freedoms go hand in hand.

Finally, you give the impression that the mission of the proposed Friedman Institute is tendentious: "The design and evaluation of economic policy requires analyses that respect the incentives of individuals and the essential role of markets in allocating goods and services ... design of public policy without regard to market alternatives has adverse social consequences." While such a statement may be infinitely qualified, few economists today would dispute the principle.

I didn't expect to get away scot-free. On August 30, The Guardian published a letter from David Waddilove of Teignmouth, Devon:

Mark Harrison (Letters, August 28) is disingenuous about the relationship of Milton Friedman to Pinochet's Chile. Neither does he mention the havoc, bloodshed and mass starvation wrought on the people and economies of, among others, Uruguay, Argentina, Russia and Iraq by the Chicago School's symbiotic relationship with sundry dictators and their personal financial gain from those relationships. Nor, of course, does he mention the benefits to US corporate power wrought by the destruction of the public sector in each country the Chicago School meddles with. It is sad to see Warwick University, once the harbinger of some radical thought, now accommodating such "free" market orthodoxies without reference to their real-life testing grounds. Naomi Klein's The Shock Doctrine should be required reading for anyone interested in what actually happened.

I didn't think of replying, but I didn't like the tone. It seemed to be all guilt by association: Chicago-Pinochet. Chicago-Harrison. Harrison-Pinochet. Harrison-Warwick. Warwick-Pinochet. It looked like I must have blood on my hands. If that was the spirit of The Shock Doctrine, I wasn't sure I wanted to read it. Still, it stuck in my mind.

Months went passed. Then, the prize went to ... Naomi Klein for The Shock Doctrine. Not just any prize, but the first biennial Warwick Prize for Writing, a major literary award endowed by a great university, one that I love and have worked and lived for over thirty years.

Maybe I had missed something.

I got hold of the book and read it. It had a big, important message that I wrestled with. I asked my colleagues what they thought about it. It turned out none of them had read it. I think that is a mistake: the book has already had a significant influence on how people see economics and economists, David Waddilove of Teignmouth being one.

After some reflection, I wrote down what I think about the book in a paper called Credibility Crunch: A Comment on The Shock Doctrine. This is how it begins:

If you think that free markets haven’t worked that well recently, it is perhaps not surprising. If you think that free markets are spread only when business executives, politicians, soldiers, technocrats, and economists join to overwhelm popular resistance by force and violence, then you may have read it first in Naomi Klein’s The Shock Doctrine.

It concludes:

For the [Warwick Prize] panel, China Miéville described The Shock Doctrine as "a brilliant, provocative, outstandingly written investigation into some of the great outrages of our time." The Shock Doctrine merits this praise, but it does not merit belief.

If you are still interested, I hope you'll look at my paper and see the reasoning that fills the gap between my opening and my conclusion.

Mark Harrison : 25 Mar 2009 09:12 |  Tags: Globalization Naomi-Klein Politics Using-Data |  Comments (9) |  Close comments |  Report a problem

G20: Gordon Brown's Got It … Anyone Else?

Writing about web page http://www.guardian.co.uk/politics/2009/mar/13/g20-obama-brown

On March 4, the Prime Minister told the United States Congress:

... never before have the benefits of cooperation been so far-reaching.

On jobs, you the American people through your stimulus proposals could create or save at least 3 million jobs. We in Britain are acting with similar determination. How much nearer an end to this downturn would we be if the whole of the world resolved to do the same?

... Just think how each of our actions, if combined, could mean a whole, much greater than the sum of the parts ... the impact multiplied because everybody does it - rising demand in all our countries creating jobs in each of our countries - and trade once again the engine of prosperity, the wealth of nations restored.

I guess the President was listening. But did he really get it? My point is this. Brown was not just indulging in the easy rhetoric of let's-all-pull-together and unity-makes-us-strong. What he said is literally, word-for-word true. But you have to get the economics to really get it.

Why? A fiscal stimulus by one country acting alone creates a spillover benefit (economists call this an "externality") for other countries. There is an increase in our national debt, which is a cost to us, but part of the benefit, the global increase in demand, is received beyond our borders through our demand for imports. Because it is costly to us, and others reap part of the benefit of what we do, the incentive is for us to do less than we should.

This barrier to action can be overcome by everyone agreeing to help themselves and each other at the same time. We can pull each other out of the hole. Through international coordination, each country can reap the benefit at a lower cost measured by the increase in the national debt.

Without coordination, in contrast, each country gains privately from protectionism, which internalizes the benefit of a national stimulus package at the expense of other countries; hence, beggar-thy-neighbour. The resulting losses from despecialization will be long-term and the damage to the international economy will take decades to undo. Sounds familiar? Yes, it happened before. That, with a few twists, is the story of the 1930s.

When I heard Gordon Brown's speech I thought to myself: "Yes! He's got it!" Did Barack Obama get it? I hoped he did. According to this morning's papers, maybe not. Maybe Obama thought Gordon's words were just special-relationship type rhetoric. Or maybe he figured: the United States economy is so big that the Americans can go it alone more easily than any other country. A  huge loss for the world, but only a small loss for America. (Hmm. I hope that's not what he figured. I'd prefer to think he just didn't get it.)

Much harder for us to understand is the cowardice of France's Nicolas Sarkozy and Germany's Angela Merkel. France and Germany are not giant economies that can go it alone. Yet this morning's papers report Merkel, following joint discussion, sending "a common signal" to the G20 summit that France and Germany will stand aside from any further fiscal coordination (unless you call it coordination when everybody does nothing at once). Merkel said:

The issue is not spending even more but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated.

I see ... We're sliding towards disaster, but the right thing to do is not avert it, just hold a seminar about not doing it again. If we're still there at the end of it, that is.

The denial that is currently at the heart of Europe extends to the fate of Europe's East. I know Merkel and Sarkozy don't want this, but almost certainly we will have to bail out others as well as ourselves. There will be no choice over this; it's just another thing that Merkel and Sarkozy don't get yet.

One thing we will be able to choose: Eastwards, how far will the European bail-out extend? Can the EU risk letting longstanding members like Greece (and Ireland in the West) go to the wall? Surely not. New arrivals like Poland, Hungary, the Czech Republic, the Baltic? Hmm. And beyond EU borders, there lie Ukraine and Turkey. Somewhere, either within or beyond current EU borders, a line will be drawn. Inside the line, we will prop up what we can. The countries beyond it will go to the wall.

Don't underestimate the importance of that line. The countries that lie beyond it will be greatly impoverished compared with their position a year ago. They will have been impoverished by Europe's indifference, our lack of coordination, our failure to lead.

The Great Depression was followed by a recovery, it's true. But by the end of the Great Depression every poor country in Europe was ruled by a dictator.

Mark Harrison : 13 Mar 2009 11:19 |  Tags: G20 Globalization Obama Politics Recession |  Comments (0) |  Close comments |  Report a problem

What Does Coventry Do Best?

Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/

Last week, the Economic and Social Research Council awarded a £3.6m contract to the University of Warwick for a centre on Competitive Advantage in the Global Economy.

This seems a good moment to ask, where is Coventry's competitive advantage? What do we do best today? At a time of recession, when many are losing what little sense of security and prosperity they had, what is our city's future?

I arrived in Coventry in 1974. At that time, Coventry was England's motor city -- its Detroit. A friend told me half the city's population belonged to two trade unions, the transport and general workers and the engineers. I don't know if that was true, exactly, but it certainly felt like it.

Between then and now, Coventry has not had it easy. In a way that is nothing new; Coventry's industrial history has seen continual change, from ribbons and watches to bicycles, munitions, machine tools, motor cars, and synthetic fibres. But in the 1980s deindustrialization hit our city hard. The great vehicle building and tool making factories melted away. Employment and wages sagged. Then, other jobs sprang up. Coventry recovered.

What has taken the place of manufacturing? Coventry has a new competitive advantage. It sells to an international market. In the current downturn this market is proving resilient so far: in fact, while global demand for everything else is falling off the shelf, the market in which Coventry is now competing is rising against the trend.

Leading this trend are new corporate giants that have grown up stealthily among us. They are local firms, with their roots are firmly bedded in our region, but they already export a large fraction of what they make.

What are they? The new giants are our city's two universities, Coventry University and the University of Warwick. (For those reading this column at a distance, the University of Warwick is nowhere near the town of Warwick; it is on the edge of Coventry, half in the city and half in the fields of Warwickshire. Coventry University is right in our city centre.) The two universities are not only among our city's biggest employers. Their combined corporate revenues come to around £500 million a year, or nearly £1,700 for every one of Coventry's 300,000 residents. 

The universities are part of a bigger picture. Around them, and not only because of them, a new economy has sprung up; according to the West Midlands Regional Observatory, knowledge-based activities now employ half of Coventry's working population.

Coventry once had a competitive advantage in engineering things. Now, what Coventry does best is the engineering of ideas. At one time, half of Coventry bashed metal; forty years on, half of us bash keyboards. Science and technology parks have sprung up where engines and car bodies were once assembled in giant hangars. The toilets are a lot cleaner, even if the language is just as filthy.

Like the motor factories they have replaced, our universities are big exporters. Instead of selling metal fabricates, they sell and certify knowledge and understanding. One difference is that the customer comes here to collect. Every year more than 10,000 students arrive from continental Europe and beyond to study in our city. The typical international student is likely to pay around £6,000 in annual fees and spend another £6,000 in annual living costs. That would make their total contribution to the economy of Coventry and its South Warwickshire hinterland, and to our national export revenues, £120 million a year and rising. 

The demand for higher education has an important feature that makes it different from the demand for motor vehicles -- it moves against the business cycle. When the economy booms and there are many vacancies, young people entering the market are tempted straight into employment. When the vacancies evaporate, they enroll for courses in order to improve their chances when things pick up. Right now, both our universities are experiencing a small boom in admissions, particularly to courses in management and economics. (Unfortunately, they are also suffering from the slump in everything else from the arts and entertainment to the conference trade.)

How can Coventry make the most of its future? Good management of our universities is important, but it is not the only thing that matters. The poor management of the British motor industry has been criticized, but would better management have saved Coventry's industrial past? It seems unlikely. At best, the decline might have been postponed by a few years.

More important is to understand how our future will remain bound up with the global economy. The international recruitment of academics and students is vital to the competitiveness and prosperity of Coventry's knowledge sector. That's obvious. Less obvious may be what follows.

If we are to maximize our new competitive advantage, and so focus on what we now do best, we have to let others do the same. One country can't do everything best. Today, we are best at science and education. If we are to put our resources into that, then let others exploit their competitive advantage in making the textiles and machinery we used to make and now buy from elsewhere.

Sometimes people feel bad about buying cheap clothes from abroad. There's a "Buy British" lobby that works to make us feel guilty when we do this. We should resist it; it is bad logic. Buying British would mean chopping out the roots of Coventry's knowledge economy just when we need it most.

Think about this: if students from Austria, Bangladesh, China, Dominica, Ecuador, and the rest of the A to Z of nations are to come to Coventry to be educated, their families or governments must have the pounds to pay for them. They can have these pounds, only because we are willing to buy the goods that they make cheaper than we can. When we buy their stuff, we enable them to buy ours. It's a virtuous circle: by trading, everyone can do what they are best at. When everyone is free to exploit their competitive advantage, everyone gains! There are not many such virtuous circles in this world, so we should make the most of them when we find them.

Whatever we do, times are going to be hard. It looks like our political class is going to let us down; obsessed with blaming the bankers and each other, they are failing to do elementary things at home (enacting a fiscal stimulus) and abroad (coordinating fiscal action) that would rapidly improve our situation. To turn our face away from the world, from our competitive advantage, would just make our future harder still.

For the time being, Coventry's future lies in the global knowledge economy. It is what we do best. It is another chapter in our history, one that is still being written.

Mark Harrison : 02 Mar 2009 13:51 |  Tags: Coventry Recession Universities |  Comments (5) |  Close comments |  Report a problem

New Romantics

Writing about web page http://www.guardian.co.uk/commentisfree/2009/feb/20/economics-emotions-human-values

There is a strong case for thinking about how emotion and mood affect economic decisions.

Does my own mood affect my decisions? I discussed this with my wife, and she agreed I'm a model of level headed rationality. But she knows lots of people for whom that wouldn't be true. She's not saying who (but I bet they're not economists).

If mood can affect decisions, does it affect the decisions that really matter? Not all decisions are important. But isn't it at least possible that powerful emotions like joy, fear, sadness, or enthusiasm interfere with our ability to calculate an optimum? Suppose that emotions frame our vision of the future; suppose they are capable of boosting our willingness to provide for the future or winding it down; suppose they make us more or less willing to shoulder risks. In that case, important economic decisions will indeed swing with our moods.

Again the net effect, averaged across millions people, might not add up to much. If one person's mood cancels out another's, the total effect should be zero. But if the moods of millions swing together, in a concerted way, billiions of pounds could swing with them into -- or out of --  particular markets.

And it is intuitively plausible, to say the least, that the mood of millions of people is taking a hit at the moment, as homes and jobs are lost and the fear of loss infects our nation.

As Jon Elster pointed out some years ago in The Journal of Economic Literature (1998), economists have given much closer attention to cognitive limits on rationality than to emotional limits.

Which brings us to the critics of orthodox economics. There are so many at the moment ... it seems invidious to pick and choose. But choose we must, so we'll pick from my daily newspaper which, despite the fact that it is written mainly by and for lunatics, remains The Guardian. On February 16, 2009, Larry Elliott wrote:

There have been many economists down the years who have expressed scepticism about reducing their discipline to a mechanistic subject. Malthus told Ricardo to be wary of becoming too attached to abstract hypotheses; Schumpeter talked of creative destruction; Hayek saw the market as a voyage of discovery; Keynes stressed the importance of "animal spirits."

And:

Mervyn King says Britain is in a deep recession ... Interestingly, the governor cited Keynes at the Bank's inflation report press conference, noting that animal spirits were currently depressed. With confidence so weak, it is hard to envisage an early or a robust recovery.

Two days later, Sam Whimster (Professor of Sociology at London Metropolitan), commented: 

We should also consider the place of emotions in economic life. The share price of UK banks fluctuates wildly as traders attempt to calculate their capital value from future estimated losses and profits. Keynes, in 1933 in his lectures on his General Theory, said that current yields of firms exercise an "irrational" influence on estimating future worth.

In the boom years that have ended so abruptly, Whimster continues:

Infectious greed and optimism was the mindset of economists, bankers, politicians and regulators - leading to behaviour that no regulatory mechanism could have controlled. But the extent of the greed and adventurism, and the flouting of standard banking precautions which had been stress-tested by decades of history, raises the question of what determines which emotions come to the fore.

The question of whether economists should take emotions into account is a good one. But where are the answers? Not as easily to hand as one might hope. Let me mention some issues that everyone should think about at this point.

To begin with, emotions are just one more variable. There is a lot going on in the world economy that we understand all too imperfectly. But it doesn't help our understanding to say, after the event: Oh -- people have been behaving irrationally, it must be because of their emotions. Change the context a little and you'll see how fainthearted and pathetic this is. Imagine me telling my wife: You've been behaving irrationally, it must be because of your emotions. (I can't imagine saying it, but you can try.) She'd kill me, and rightly so. The reason is not just that it's insufferably patronising, but that it also devalues emotions into something irrational, flighty, whimsical, and beyond understanding.

In different words, adding another variable, the variable of emotions, to a model does not add to its predictive power unless the added variable is itself predictable. Are emotions predictably variable?  It is entirely possible that aggregate moods are predictable -- in fact, I made a prediction above when I suggested that "that the mood of millions is taking a hit at the moment, as homes and jobs are lost and the fear of loss infects our nation." If so, perhaps we should be working towards a model of emotions. But be aware that it may not be worthwhile. If the aggregate mood just goes up and down with the rate of unemployment, for example, then modelling emotions may add complexity without increasing the predictive power that is already taken there in conventional models.

A deeper question is whether emotions truly vary in ways that are beyond our individual control. Consider hatred. Two sorts of people can kill without hating. Some are trained and paid to do so to defend us against our enemies, and these are our soldiers. The rest are few in number and we call them psychopaths. The majority of people kill only those whom they hate. So, hate first, then kill. But here there is a problem: the idea that killing, or any kind of premeditated violence, is the deterministic result of uncontrollable feelings, flies in the face of our traditions of personal moral and legal responsiblity. In fact, it is possible that we must first allow ourselves to hate those whom we have a prior intention to kill. Decide to kill, then hate, then kill. If so, emotions as such do not decide what we do; we decide what to do, and then select the emotions that validate our decisions. This is a difficulty that must be resolved before we can understand whether emotions add anything to economics.

Clearly, we must learn more about the psychological laws underlying emotions. I am open minded as to whether we will ultimately need more complex economic models. Whatever we decide, I am in favour of economic models -- maybe not more complex ones, but just better ones.

If so, I am going to disappoint Elliott, in whose view:

The mechanistic approach to economics has failed.

"Mechanistic" is a prejudicial term in this context, however. Economic models are just thought experiments. They are mechanical in the sense that they are formal (as opposed to purely literary and intuitive) and logical (as opposed to internally inconsistent). They still seem like useful things to me. For argument, I will quote briefly from the best essay written on this subject in the last 30 years: Paul Krugman's "Two Cheers for Formalism," published in The Economic Journal (1998); I also strongly urge you to read the original in full:

First, much of the criticism of formalism in economics is an attack on a straw man: the reality of what good economists do is a lot less formalistic than the popular image. Bad economists, of course, do bad economics; but one should not confuse a complaint about quality with a complaint about methodology. Second, when outsiders criticize formalism in economics, their real complaint is often not about method but about content - in particular, they dislike "formalistic" arguments not because they are formalistic, but because they refute their pet doctrines. Finally, as a practical matter formalism is crucial to progress in economic thought - even when it turns out that the ideas initially developed with the help of formal analysis can in the end, with some work, be expressed in plain English. Moreover, this is especially true precisely in the sorts of areas that economists are often accused of neglecting, such as those that involve imperfect competition, incomplete rationality, and so on.

I'm not sure where I should leave Whimster, who starts his comment by asking to bring in emotions and ends up bringing in values; the problem, he concludes, has been that:

Anglo-Saxon attitudes have been dominated by what Weber would have called the values of adventurer capitalism, and the economist and sociologist Werner Sombart would have called the lust for wealth ... Aesthetics, harmony with nature, the ethics and politics of community - these need to be reasserted as values independent of and superior to market values, which as the Romantics pointed out should be merely means to other ends. It is time for what Nietzsche termed the revaluation of values.

Don't you love the wedge that's driven between "market values" and higher things? We're losing a hundred thousand jobs a month, but it's okay because we should refocus on "aesthetics, harmony with nature, the ethics and politics of community."

Markets that work well have allowed millions of people to live and work as they choose, enjoy the freedoms of the press and media, travel the world, and address the world from their own homes. Markets that work well have another virtue, as Hayek understood so clearly: they allow one person's end to be another person's means, without anyone having to rule on or even consider the difference. Millions of people aspire to what well-functioning markets can offer: opportunity, mobility, prosperity, stability, insurance, the backdrop to the everyday joys of friendship, love, sex, children, and families -- or not, if you don't want them. I don't know what's higher than that.

That's why, when markets don't work well, it's so important to fix them.

Mark Harrison : 23 Feb 2009 22:56 |  Tags: Keynes Politics Recession |  Comments (0) |  Close comments |  Report a problem

Automatic Destabilizers

Writing about web page http://www.coventry.gov.uk/ccm/content/chief-executives-directorate/corporate-policy/communications-team/news-releases-2009/coventry-residents-set-for-44p-a-week-rise-in-council-tax.en

The day after Leeds City Council announced the loss of 650 local authority jobs because of "lower government grants and the economic downturn," it's Coventry's turn. According to a news release on Coventry City Council's website, our city faces a "budget gap" of £13.5 million. More than £9 million of savings have been identified. These include, in addition to "efficiency reviews of services," "a £469,000 reduction in publicity and advertising budgets, 3% cuts in grants to voluntary organisations and £530,000 through increasing charges in some social care services." It is expected that 190 posts could disappear. Councillor Kevin Foster, Deputy Leader of Coventry City Council, is quoted:

The Council, like all councils, is facing a number of challenges over the coming year. Clearly the recession is having a major impact on our finances ...

Oddly enough, this is not what is supposed to happen in a recession.

As I wrote here, faced with the current collapse of aggregate demand, "the government faces a bitter choice. It can stabilize its budget, or it can stabilize the economy, but it cannot do both." The recession is plunging the budgets of central and local government alike into deficit. Stabilizing the budget means cutting government spending and jobs as revenue falls. Stabilizing the economy, in contrast, means maintaining spending and jobs, borrowing to cover the widening budget gap. In the interests of us all, including the interests of tomorrow, the government should choose the latter course.

In theory, some stabilization of the economy should happen automatically. In our economy, taxation is progressive; this means that, when personal incomes fall, the government's tax take should fall more than proportion. As a result, personal incomes should fall by less than the country's national income, and this should to maintain spending and employment. Part of what the government spends is also progressive: as jobs and family incomes fall away, the government should automatically replace part of what is lost by meeting entitlements to unemployment benefits and other income support. These "automatic stabilizers" don't make things better. They just make things a little less bad than they would be otherwise.

Think about that word, "otherwise." It means: in the absence of the automatic stabilizers. If, say, the government always spent every penny it received, but never more, the government would continually add to the natural volatility in the economy. Every time there was a boom, the government would experience a rise in its revenues and, by rushing out to spend them, heighten the boom. Every time there was a slump, the government would respond to its lost revenues by spending less and so deepening the recession. It doesn't just sound like a bad idea: it is an absolutely terrible idea.

Yet this idea is currently being put into effect by local authorities up and down the country. As property values and business and personal incomes fall, city councils are losing revenue from council taxes and charges. At the same time, for exactly the same reason, local claims on services and benefits are growing. But our cash strapped cities not only cannot meet these rising demands; they must cut back provision.

Rather than mitigating the jobs crisis, they are adding to it and deepening it.

This is the result of a policy failure on the part of central government -- a failure of scandalous proportions. While Westminster plays the blame game -- who should be punished for the failures of our banking system? -- the real economy is sliding down into depression. The solution is well known: a strong fiscal stimulus. But, while Westminster talks, what our country is actually experiencing is the exact opposite: a powerful fiscal brake that is spread by the collapse of local government finance and adds to the burden on us all.

The failure is scandalous because the solution could be put into effect overnight. The Treasury must promise now to stabilize local government funding at its pre-recession level. Local authorities should be enabled to plan for the future without adding to the pool of the unemployed. When the economy recovers, the additional subsidy from the centre can be gradually withdrawn.

I can see two obstacles to this simple course of action.

First problem: Purists may object that our cities are subsidy junkies already; if the subsidy from central government is temporarily increased, it may be politically difficult to withdraw it later when conditions improve. I acknowledge this danger. It is an example of what, on January 20, Bank of England governor Mervyn King described as

the paradox of policy at present – almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term. Spending now supports the economy, but in the long run we need to save more and borrow less. Public borrowing sustains spending, but in the long run needs to fall. Banks are encouraged to run down their capital to enable them to absorb losses while continuing to lend, but in the long run they will need more capital. Interest rates have fallen to unprecedented levels, but in the long run will need to rise to more normal levels.

In the same way local government in the UK must be allowed to spend its way through this crisis, yet in the long term become fiscally more self-reliant. But there are ways to achieve this; for example, local authorities could take out loans from the Treasury with repayment contingent on local incomes or employment rates returning to their pre-crisis levels. But the time for complicated solutions may be already past; this is, after all, a crisis.

Second problem: The Westminster government may positively not want to do this. Whitehall is full of spending ministers. If there is to be a stimulus package, they will want to monopolize it and claim the credit for it. Scattering central funding across many local authorities, many (like Coventry) managed by parties that are in opposition in Westminster, may not look like the best way for Labour to prepare for the next general election. I suspect this is the most important obstacle to the action that our country needs. If so, it makes the failure to act even more scandalous.

Let me repeat: allowing local authorities to keep up their spending during the current recession is not a solution to the crisis. It is just a way to neutralize a mechanism for destabilization, one that is currently making the crisis worse than it needs to be.

Mark Harrison : 17 Feb 2009 11:02 |  Tags: Coventry Keynes Politics Recession |  Comments (0) |  Close comments |  Report a problem