Thursday, May 28, 2009
They may have been lucky to get to the final, but I don't think I've ever since a more perfect performance than Barcelona's last night. Manchester United have flattened all before them for the whole season, yet they were left bedraggled and humiliated. Amazing stuff.
Tuesday, May 26, 2009
Monday, May 25, 2009
What is to be done?
Well, there is one thing which can be done. It would revive British democracy and the Labour party in one go, as well as preventing the Conservatives from winning the next election. It would also be cheap and popular in the short run, and support social democracy in the long run. Most democracies have done it already, and Britain has too, but not for the derided Westminster parliament.
Let's end the suspense: I'm talking about Electoral Reform. To be precise, proportional representation (PR) - an electoral system which would allocate seats in parliament roughly proportionally to the votes each party wins.
This idea has come to me for two different reasons. The cynical reason is that Labour is almost certain to win less votes than the Conservatives in the next election, but still has a majority in parliament. This means that it could easily change the electoral system (the Liberal Democrats would certainly support it, since they would be the biggest beneficiaries), and the adoption of proportional representation would make it almost certain that the Conservatives would not have a majority after the next election.
Although this could appear as an opportunistic move, the kind of cynical manipulation which turns people off conventional politics, it has in its favour the fact that the distortions in the current system are surely part of the reason why politicians are so unpopular. After all, the current Labour government has a comfortable majority in the House of Commons, but received the votes of little more than a fifth of the British electorate (34% of the vote on a 60% turnout). So, 80% of voters did not support Labour in the last election - is there any wonder the government is unpopular? Whilst partisan gain is the obvious motivation for such a move, the crisis over MPs' expenses gives the government a public interest justification for it which would not be available in normal circumstances.
PR would mean that the government of the day - inevitably a coalition government - at least has some degree of support from half of the citizens who turn out to vote, and by giving voters the option of supporting the party they prefer, rather than the one of the two likely winners in their constituency, it may even encourage higher turnout.
The second reason for PR is more political: PR tends to promote a fairer distribution of income and wealth. Research by Torben Iversen of Harvard and David Soskice of Oxford shows that countries with PR tend to have more redistributive policies, promoting greater equality. They explain this pattern through a model of the median earner's behaviour, in which under PR she can choose a party that will redistribute from the rich to everyone else, whereas under First Past the Post she is more likely to vote for a party that will redistribute less, because she fears being 'soaked' by the poor. (LSE students can link to the article here).
So what has Gordon got to lose? He will lose the next election under current arrangements, and a majority Conservative government is likely to reverse many of the social democratic politics adopted by New Labour, from tax credits and Sure Start to higher spending on public healthcare and education. Under PR, Cameron will probably have to make a deal with the Liberal Democrats, which will moderate these policies (I hope). The downside is that Labour will never again enjoy the untrammeled power of the last decade and a bit, but neither will they ever suffer again the misery of 18 years of powerless opposition to Thatcher and Major.
What about the extremist parties? Put a threshold of 5% across the whole national territory, and use of form of PR (mixed member systems as in Scotland and Wales) to allow small parties with concentrated support to get elected. Germany has this system and has no extremist parties in parliament.
In the long run, Britain should be a fairer place under PR, and people might even start liking politics again (a long shot I admit). The time to do this is now, because if the Conservatives win the next election under First Past the Post, it's all over for a decade or two.
Saturday, May 23, 2009
N.F.: Well, I tell you what, I feel depressed after what I've heard tonight. We are now contemplating a massive expansion of the state to substitute for the private sector because that's the only thing Paul (Krugman) thinks will deliver growth. We're going to reregulate the markets, we're going to go back to those good old days. Where were you in the 1970s when all these wonderful regulations were in place? I don't remember that going too smoothly. But what else are we going to do? We're going to print money. Almost limitlessly we'll print money. That's going to be fine, too. And when we're done with that, we're going to raise taxes. What a fabulous package we have in store for us. You know, back in late 2007, I was asked what my big concern was, and I said, "My concern is that we're going to get the 1970s for fear of the 1930s." It's very easy to forget, in your iron indignation at the failure of the market, where the true mainsprings of economic growth lie. The lesson of economic history is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from the private sector, not from the state.
B.B.: As we look at the future, we also have to look at the mistakes policymakers made in the last ten years. It's not news that people are greedy. But we made conscious decisions not to put limits on that natural human impulse. What were the mistakes? In 1999, we allowed investment banks, banks, insurance companies to combine: we eliminated the Glass-Steagall Act, which prohibited commercial banks from operating as investment banks. Why was Glass-Steagall put into law? Because the last time we didn't limit greed we got into trouble, the Great Depression.
The second mistake was in 1999, the explicit decision by the Clinton administration and Congress not to regulate derivatives, in particular credit default swaps. In 2002 they were worth $1 trillion and today they're worth $33 trillion, and that decision not to regulate derivatives created the following sequence: you have mortgages; then a thousand mortgages are packaged and sold as a mortgage-backed security; a thousand mortgage-backed securities are packaged and sold as a collateral debt obligation [CDOs]; then a thousand collateral debt obligations are packaged and sold as a CDO squared; and insuring each one of those bundles are credit default swaps, which are a part of that $33 trillion. And our government deliberately decided not to regulate this chain of investments.
One result was that the 374 people in the London office of AIG who were responsible for AIG derivatives destroyed a company that had 116,000 employees in 120 countries. Why? Because there was no regulation at all.
The third decision was in 2004. The SEC allowed banks to go from 10 to 1 leverage to 30 to 1 leverage. And guess what? Once they were allowed to do it, they did it. So if we're going to look at the future, we might think of undoing those three mistakes.
Bradley doesn't end with 'I rest my case', but I'm not sure how you can answer that.
Tuesday, May 19, 2009
The scale of public anger has taken everyone aback. Aside from anything else, it more or less settles the next election, since Labour has taken the brunt of the hostility (despite the more entertaining stories of moat-cleaning, mole extermination and lightbulb-changing coming from the Conservatives).
As a few more sanguine observers have pointed out, the money involved is not an issue, especially in the light of the enormous sums looted by some bankers over the past few years. So why the fuss?
Here's my interpretation:
Most voters never believed in efficient, self-regulating markets, but a disturbingly large number of politicians apparently did. The voters were right on this one, and they're out to get the politicians who got it wrong.
What do I mean by that, and what has it got to do with MPs' expenses?
The pages of the FT have been dominated over the past few months by an argument about whether the financial meltdown is a failure of free markets - 'market failure', or a failure of government regulation - 'political failure'.
The stakes are high. If the crash was the result of the inherent instability of financial markets - a thesis with a distinguished pedigree, from Keynes, through Minsky, to Buiter, Krugman, Roubini today - then the answer most be to regulate the financial sector more, curbing activities like securitization, trade in insurance swaps, and over-leveraging which can cause systemic collapse. Even Alan Greenspan has begun to accept this, famously admitting the failure of the self-regulating market: 'those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief'. If we accept that self-interested rationality is not enough to stabilize the financial system, then political control is the only reasonable response. Greed isn't good: it has to be curbed, even suppressed, by government action.
If, on the other hand, we see the crash as the result of governments' incompetent regulation, then the bankers are off the hook. They were simply doing their job, and politicians and regulators failed to do theirs. The financial crisis is not a 'market failure', but a 'political failure'. As Leszek Balcerowicz argued in last week's FT: 'financial institutions and markets operate within the macroeconomic, regulatory and political framework created and maintained by public bodies, and it is empirically not difficult to point to the serious deficiencies of this framework that contributed to the present crisis'. For Balcerowicz (a Polish politician and central banker), excessively loose monetary policy and inappropriate rules were the main culprit. If government can't regulate effectively, asking it to regulate more is a recipe for disaster: 'individuals’ prosperity and dignity are best ensured under limited government'.
There is a sleight of hand in the 'political failure' argument: in the end it seems to recognize implicitly that markets need regulating, but that government just doesn't do it very well. But who else is supposed to regulate? And why don't efficient markets respond to loose monetary policy by protecting themselves from its predictable consequences? The 'political failure' thesis assumes the 'market failure' thesis, but just blames different people. By discrediting government intervention, they hope to resist greater regulation. No matter if it is a completely inconsistent argument - it's an argument that is out there, and still surprisingly influential.
But most voters, I think, don't buy it for a minute. Citizens in western democracies expect politicians to prevent financial meltdowns from happening, just as we expect them to protect us from floods, earthquakes, swine flu and traffic jams. Despite the prevailing 'small government' orthodoxy, people still have very high expectations of the political class. We're too busy to develop econometric models to help with planning our household finances. The government should guide us, and protect us from disaster. Why pay half your income in taxes otherwise?
So our MPs have failed us. They encouraged us to buy houses at inflated prices with close to 100% loan to value mortgages. If we were lucky enough to catch the boom, they encouraged us to draw down equity for conservatories, new cars, and foreign holidays (even, fatally, further property speculation). None of them (except Vince Cable) told us to be careful, that house prices always go up and down. None of them told the bankers to be careful, that excessive leveraging on the basis of volatile mark to market values could bring the whole system crashing down. None of them realized that there is no point in a 'golden rule' of fiscal stability that can be blown apart if we don't keep our eye on what the financial sector is doing.
And worse, while they were failing to protect us, they were riding the property boom, with our money.
In normal times, people would be angry at politicians on the make. These are not normal times. Our financial system has collapsed, and we are having to pay to put it back together again. Fred Goodwin bankrupted RBS and claimed a fat pension, but - doh - he's a banker! Politicians, on the other hand ...
Politicians are paid precisely to stop the Fred Goodwins from destroying our livelihoods. That's supposed to be their job. And unlike Fred Goodwin, we can punish them with our votes if they mess up.
Monday, May 11, 2009
None, if you're David Willetts.
He simply hired someone to change 25 lightbulbs on his constituency home, and claimed the 100 pounds back from MPs' expenses. (I'm only the 50000th to crack this joke today).
Is this really something to get exercised about? In times of recession, politicians - who are paid out of public funds - are an easy target. There have indeed been abuses of the system for claiming expenses on second homes (allowable for MPs representing constituencies outside London, and who need a pied-a-terre in their constituency and in the capital), and that obviously annoys voters who are up against the worst recession since the 1980s, or maybe the 1930s.
But does it matter? The sheer amount of money involved is... well, nothing. If David Willetts had put up his lightbulbs himself, it would have saved the average taxpayer a microscopic fraction of a penny (provided of course he didn't topple off the ladder, requiring expensive medical care through the NHS). MPs need to be paid, because if not only rich people or part-timers would be able to represent us. What they are paid - in standard salary - is not an awful lot more than a middle-ranking academic: the princely sum of 64,000 pounds sterling a year. They get perks, sure, but a large part of that is in the line of duty, so to speak. There is probably a case for them not cashing in the capital gains on their second homes, but what if these homes lost value?
What we should really be worried about is corruption - MPs taking free lightbulb fitting or other benefits from private companies in exchange for policy favours. What if an MP got free lightbulbs for life from Lightbulbs Inc. in exchange for pushing through legislation obliging us all to change our lightbulbs for some new specification? Now, that would be a problem. It would be a problem because policy would be subordinated to the private material interest of the MP, subverting the representative process. Politics often involves decisions which may be defensible in terms of the public interest, but will also enrich someone (like massive government spending on a vaccine for a flu pandemic which may not happen). Politicians can be bribed, lobbied and persuaded to adopt some policies rather than others. If MPs are well enough paid for their job, there is probably more chance that they will choose the right policies, rather than the ones which will give them a material payoff from interested parties.
So corruption is something to worry about. But expenses, well, it's not really a story, except in that it shows how clueless MPs are in managing public perceptions of what they do. Now, multimillion pound bonuses for bankers whose trillion pound losses are being covered by us and future taxpayers... THAT is a story. Maybe a story that the Daily Telegraph - the newspaper of record for the stockbroker belt and prime mover behind the MPs' expenses 'scandal' - would rather we all quickly forgot about.
Wednesday, May 6, 2009
Why, for pity's sake, privatize the Royal Mail? It is a public service which by its nature cannot make a profit in a competitive market. Its traditional role is bind the country together by delivering post at a fixed price to everyone, wherever they live. Increasingly its main role is to provide banking services to the many British citizens who are too old to deal with the complexities of modern banking, or too poor for our risk-averse banks (OK, I'm joking) to make a profit out of.
Above and beyond the merits of the case, the last thing New Labour needs at the moment is to start privatizing more public services. I think we have already got the picture that New Labour is not anxious to nationalize the whole economy, and that state control of the banks was a decision taken under duress. What Labour needs to prove right now is that it has an answer to people's fears about their economic future. Privatizing the post office is the weirdest way of doing that I can think of.
The 'public-private partnership' strategy made sense in the 1990s, when people still remembered the 1970s and Labour's famous 83% marginal tax rate on top earners. It makes no sense now, because for most people Labour ceased to be a socialist party long ago. Gordon Brown is fighting old battles. His moment of glory - the swift and intelligent reaction to last autumn's financial meltdown - has passed, and gives him his place in history. For a moment I thought that would be the making of his premiership. But it's increasingly clear he's not going to win the next election, so he should give someone else the chance to make the running right now.
For what it's worth, I think it should be someone who has been exposed to Marxism from an early age.
Sunday, May 3, 2009
The essence of the 'irrelevance' claim is that Obama hasn't hired any political scientists to important jobs, whilst economists - despite their embarrassing failure to predict the (economic) end of the world - still have marketable expertise.
There are any number of explanations for this lack of prestige as a profession, but one - proferred by the late lamented Brian Barry - is that politicians tend to see themselves as the real experts on politics, rather than as the raw material political scientists study. I have a feeling he was right - whilst Obama will doubtless take economic policy decisions on the basis of extensive briefings by professional economists, he probably feels confident that he knows politics better than most poli sci professors. And having just landed the biggest job in politics, who can blame him?
I'm not sure policy advice is really such a measure of relevance in the end. We have a few workable theories that are of some use in designing some policies and institutions, but for the most part we - like the economists, but with a bit of humility - are constantly chasing the curve, trying to make sense of things that have just happened.
Is this because we are useless, or because life is unpredictable? Probably both. As a neo-Talebite, I go for the latter. People may behave in predictable ways a lot of the time, but every now and again do the unexpected, like vote for Obama, for example. Or start believing en masse that a piece of brick on a piece of earth will grow in value even when nothing else does. And those unpredictable events, though perhaps exceptional, end up changing the world in such big ways that they cannot be dismissed as outliers.
So Obama can probably do without us, but when something happens that he wasn't expecting, we'll be sitting there ready to explain it afterwards.
Friday, May 1, 2009
I've no idea, of course. Almost as distressing as the collapse of the free market model of free-wheeling finance is the failure of the Left in the West to say anything very much about it. The Labour party in the UK timidly pushes up income tax - from 40% to 50% for the top 1% of earners - but is otherwise mainly concerned with piecing back together the financial system so it can carry on as before. Obama is certainly a departure in the US, but his main radical goals are not particularly revolutionary: universal healthcare, achieved everywhere else in the West half a century ago, and a tax system which will remain less redistributive than it was under Ronald Reagan. The left in continental Europe halfheartedly adopts liberalizing reforms, whilst clinging on to the 'conquests' of protected 'insider' workers and pensioners.
There is only one clear beneficiary of this confusion: the racist extreme right (and the utopic extreme left, in the case of France). The Left's pathetic response to the collapse of a model of capitalism it had ended up accepting is a serious problem. People feel cheated and exposed, and seek protection. Protection can be progressive and egalitarian - the post-war Keynesian welfare states - but it can also be reactionary, regressive and violent.
Karl Polanyi's masterpiece 'The Great Transformation' interprets the rise of Nazism and Fascism as a response to the threats free markets posed to the livelihoods of the masses. Only after the catastrophe of war did Western governments discover a way of providing protection without foreign aggression or the scapegoating of ethnic minorities. 'Embedded liberalism' (as John Ruggie defined it) involved liberal trade between nations under stable exchange rates and capital controls, with welfare provision inside the nation state to insure workers against social risks. This model was a triumph, delivering growing living standards and social equality for the best part of half a century. But the moment it ran into trouble the assault began, and the various components of embedded liberalism have been steadily dismantled over the past couple of decades.
We need to put embedded liberalism back again, adapted to new circumstances (a bigger world market and a disintegrating environment top of the list). And who else will do it, if not the democratic Left?