Thursday, March 31, 2011

No need to panic

It's been a while since I blogged about banks and the financial crisis. I guess I ran out of things to say. However, the crisis is still very much with us, as Ireland's further bank bailout today confirms.

The Eurozone is stuck in a very deep hole. On the one hand, some member countries are being asked to perform feats of deflation which are possible only in undemocratic countries, or in the Baltics (don't ask me why the Baltics have this masochistic tendency). On the other, the ECB is bound by statute and culture to raise interest rates at its next meeting because.... I don't know, I guess some lady saw it in the tea leaves. Or maybe the framers of EMU couldn't imagine a world in which 2.6% inflation is not a catastrophe. Anyway, this will provoke more banking losses and more bailouts.

The way this all unfolds is beautifully outlined by Edward Harrison in a blog post here. And if you enjoyed his account as much as I did, read his take on this at the end of last year. He presents three possible outcomes: sovereign defaults in the pseudo-PIGS, monetization of the debt (presumably also involving ritual suicide of the board of the ECB), or the dissolution of the Eurozone (Argentina all over again, but with awkward questions about how you leave the Euro without everybody moving their money to Germany overnight).

Harrison suggests monetization as the most efficient way of distributing losses. But how do you persuade Angela Merkel to sign up to a solution that will finish her political career with immediate effect?

The impact of the budget on public opinion

Labour's poll lead is back up to 10 points, after a brief blip last week.

Must be Ed getting married.

Wednesday, March 30, 2011

Public austerity, private profligacy

... is George Osborne's recipe for economic recovery.

Links from Krugman and Naked Capitalism lead us to a great little piece in False Economy by Duncan Weldon. This points out that the counterparty to the Con-Lib government's deficit reduction programme is a substantial increase in private indebtedness. The Office for Budget Responsibility admits as much, with the following chart (courtesy of Krugman):


Wow. The increase in private debt swamps the reduction in public debt (£245 billion to £43 billion). And the Chancellor then has the nerve to talk about 'rebalancing the economy'....

This is surprising and shocking, except when you stop to think about it. If the state contracts, then the obvious alternative source of demand is households. Households are suffering an unprecedented income squeeze, and so the savings rate will go down. Unless we enjoy an export boom (exporting what? To whom?) then there is no other way it can go.

So we suffered a massive economic shock because of our private indebtedness, the government bailed households out for a while, and then decided to stop in order to allow private indebtedness to rise even further. The squeezed middle is about to get squeezed even harder than we thought, and we'll probably get another major financial collapse before too long.

(More on this here).

Tuesday, March 29, 2011

Public sector pensions

... are getting cheaper.

Yes, that's right. The cost of public sector pensions is going to peak in .... (drumroll) ... 2011. Yes, this year. After this year it falls steadily into the future, on whatever forecast you choose. So why are we being told that we need to cut public sector pensions because of the huge liability they place on future taxpayers?

There are two obvious answers to this. First, there are powerful people who don't like the public sector or their pensions, and want to destroy them. Second, people who may not care too much either way don't understand pensions, or forecasts about their costs, so it's easy to kid them. But the truth is that we are being told porkies about public sector pensions. What's going to happen is this (courtesy of Yorkshire Ranter):


Black Blockheads

Nice article on the 'anarchist' fringe of the demo last Saturday.

Monday, March 28, 2011

I'm so pleased...

...that I didn't vote Lib Dem.

Now St Vince of Cable confirms that the coalition government will try and reverse the 50% tax rate on high incomes as soon as they can. All the while confirming that the government's austerian spending cuts must be stuck to.

Why on earth? What exactly is the problem with a 50% tax rate for people in the top 0.1% of the income distribution? Does it bring the tax take down, a la Laffer? No. Doesn't it offend natural justice? Hardly. I just can't figure this one out.

Vince then suggests it would be replaced by a 'mansion tax'. Some chance. Any attempt to levy high taxes on expensive properties will founder the moment the Daily Mail finds an old lady on the state pension in a million pound house. There are undoubtedly many of these in London and the South-East. Taxes on property would be a good idea, but will very obviously never happen. The 50% tax rate is already here, as long as it raises money it should be kept.

Sunday, March 27, 2011

Look at me!

Depressingly, a big turnout for the TUC rally yesterday has been undermined by the handful of self-obsessed morons who decided to smash a couple of windows. Of course, the march was overwhelmingly peaceful, but we all know what the headline is going to be in the right-wing press. And there is no real excuse, because this is not revolutionary action, but instead basically attention-seeking: protest becomes a kind of X-Factor, so-called 'anarchists' who have never read any political theory simply joining in the miserable cult of celebrity the country is sinking into.

Thursday, March 24, 2011

We're all in this together

The government has decided that the near-bankruptcy of the British state is no reason not to offer a 'multi-billion pound tax cut' to the people who clog up our roads the most. Of all the things that could be done to relieve the squeeze on disposable income, it's hard to imagine anything more stupid than this. After all, this encourages people to do something which we should trying to discourage. It is also regressive, since people who use their cars the most tend not to be poor. Why not increase tax credits instead? Or reinstate 80% child care relief for low earners?

I suppose nobody will be that surprised that the 'greening' of the Conservatives under David Cameron turned out to be a PR stunt. But I wonder how long the Lib Dems can go on pretending they agree with all this.

Tuesday, March 22, 2011

Catholics against capitalists

Just looking at some historical material for some work on market constraining regulations, I've found a great quote from the French Catholic publication L'Esprit in the early 20th century (courtesy of Donald Sassoon and Richard Kuisel): capitalism was described as 'usury erected into general laws'.

What a great description! It also explains nicely why countries with a strong Catholic tradition tend to more regulated markets. Weber, of course, wouldn't agree.

Monday, March 21, 2011

Make the Environment Pay

It's interesting that the leaks about this week's budget suggest that Osborne is planning to offer a few small treats to voters which will be environmentally damaging: freezing duty on fuel, and dropping a rise in passenger duty for air travel. Nice to know how far Cameron's greening of the Tory Party will get.

Instead, environmentally friendly policies actually offer a real chance of spurring growth in a fiscally beneficial fashion, as Robert Skidelsky and Felix Martin argue in today's FT. The idea is to create a green investment bank, which would leverage government borrowing to invest in the kinds of activities a more balanced economy needs (green building projects for example), as well as stimulating demand in the short run.

Any chance of this happening? Obviously not. Despite the apparent malleability of British politics, with its frequent and total alternations in government and the unfettered powers given to parliamentary majorities, British politics is as bogged down and static as the US, with its well known restraints on executive power. The right to drive your car anywhere you want, enjoy rents from land ownership, make money at the risk of economic stability through 'free' capital markets are sacred. The need to improve our infrastructure and make the country a greener and more pleasant place to live is dismissed as radical, unaffordable or impossible.

I blame the voting system.

Tuesday, March 15, 2011

Risk and reward

Well, forget the reward bit.

The disaster in Japan, coming on top of the financial disaster of a couple of years back, says something about the way we manage risk. In the case of finance, economic models and political influence led us to adopt a model of regulation that opened up the possibility for catastrophe (and in case you think no-one realized, and that we were dealing with unknown unknowns, see this piece by Susan Strange written over 10 years ago -  link courtesy of Mlada Bukovansky).

In the case of nuclear energy, a number of experts have been confidently pushing the industry on the grounds that it is safe and clean. And if we know what the risks of environmental shocks are, and can factor in redundancy to compensate for human error, that may be true. But the Japanese scenario suggests our risk assessments contain a dose of wishful thinking. After all, Japan has a history of major earthquakes and tsunamis. If they can't design a nuclear plant to withstand predictable threats, then that's not a great sign that others will do any better.

Risk management could do with a more conservative approach (a la Pascal). We need to err on the side of avoiding the unthinkable, rather than risking the unthinkable just to get the desirable. To take the example of climate change: if we're wrong about man-made global warming, the worse that can happen is that we save energy and use less polluting ways of life for nothing. If the skeptics are wrong, Japan in March 2011 will look like a training exercise.

Nucleare? No grazie

I wonder if the recent experience of another highly seismic and politically corrupt nation with nuclear energy will have any impact on Italian policymakers?
Here is Claudio Scajola - who resigned from the government over a bribery allegation last year - making the case for nuclear energy in Italy.
Anyway, we can rest assured that Berlusconi will have prepared the most stringent measures to avert any incidents:

Sunday, March 13, 2011

Labour ahead

A second 11-point Labour lead in the polls. It's remarkable how quickly people have got rid of any lingering embarrassment about supporting Labour. Doesn't mean anything much about the likely result of coming elections, but at least the brand doesn't need detoxifying as much as some people thought.

Let keep some sense of perspective here!

The human toll here looks to be much worse than the economic toll and we can be grateful for that

(link from Brad DeLong)

Friday, March 11, 2011

why the left loses

Or, more accurately, why the left doesn't win all the time, as Meltzer and Richard would predict (see various previous posts if you're unfamiliar with this literature).

Just to recall the problem is, why don't the lower (L) and middle (M) income groups, who together form an unbeatable coalition to milk the rich (H), manage to coordinate? Or at least, often fail to do so.

Couple of insights on this. First, as Mark Blyth reminded me the other day, redistribution and the welfare state actually are not about milking the rich. On the whole, welfare capitalism is - and increasingly so - about lower and middle income groups agreeing to share income (through wage compression) and pool risk (through insurance such as unemployment coverage and pensions) amongst themselves. Sweden never had a particularly progressive tax system, and taxed capital gains lightly. So, the L+M vs M+ H dilemma presented by Iversen and Soskice misses the point.

Second, if Blyth is right and the question is all about L and M, then driving a wedge between these groups is far easier, since they have divergent interests if we exclude the possibility of milking the rich. So arguments about welfare spending benefiting L at the expense of M becoming all the more compelling.

The next step in completing the M+H coalition is the role of ideology in convincing M. Arguing that public spending is largely directed at the poor may be inaccurate, but most people aren't well enough informed to know how budgets break down. So propaganda can make a difference.

Here the debate about epistemic closure becomes interesting - even if M has a big interest in increasing government spending, the reluctance of some voters to willingly face the basic facts about redistribution subverts the process of social mobilization.

This probably makes very little sense except to me, but I'll post it anyway.

Big government and the left

Just a thought coming out of the presentation David Miliband made at LSE the other day, and the op-ed by Krugman in the NYT this morning.

Miliband's talk made some neat points about the difficulties the left has in reassembling its traditional coalition, although without making any clear suggestions about how to address them (perhaps not surprisingly, given the problems any concrete suggestions might cause for his brother). Listening to him, it occurred to me that one of the problems the left has is that it traditionally stands for state intervention and redistribution, but that there is less and less scope to do this in inventive and popular ways, because an ever greater share of GDP is eaten up by more or less non-discretionary public spending: spending on healthcare and pensions particularly (which it is technically and politically impossible to prune down).

This is a particular problem for the left because the right will never cut these programmes seriously, but does want to cut everything else. So they can spin a largely fictional story about cutting government spending and therefore taxes, appealing to voters of working age, whilst reassuring core voters that the two big programmes for the elderly will be protected. The Republicans in the US are pretty adept at doing this, and the Democrats are confused about how to react.

In short, the left doesn't have the tools to do anything very innovative and progressive, because the fixed costs of running any western government are creeping ever closer to the effective limits of public acceptance of government intervention. Conservatives keep the elderly happy and starve everything else, and the left can only deliver marginal gains through interventionism (often in the area of childcare and family friendly policy - see research by Kimberly Morgan).

The only obvious way out of this is to grow productivity and, preferably, the working age population. But these are both very long-term projects, and not the kind of thing that brings immediate electoral dividents. The Scandinavians have pulled this off, but this doesn't seem to have stemmed the decline of the social democratic electorate.

Thursday, March 10, 2011

My name is Jonathan and I am a cyclist

Yes, the time had to come when I came out as a cyclist on this blog. The reason is the entertaining online kerfuffle resulting from John Cassidy's rabid and incoherent rant against a couple of Manhatten bike lanes in the New Yorker. Hilarious though Cassidy's article is, the putdowns here, here and here (and in the comments to JC's article) are even funnier. When the arguments against promoting bikes fall to such a pitiful level, it makes me fondly imagine that people cannot possibly resist cycle-friendly cities for much longer.

Then I bike to work in London and remember that there may not be an infinite amount of space for new roads, but there is something close to an infinite supply of morons with driving licences.

Not bad, Ed

Labour are 11 points ahead in the latest opinion poll. Not bad for a party whose leader is coming under a fair amount of oblique criticism.

Fred Goodwin, **nker (allegedly)

I have reason to believe that Fred Goodwin is a **nker, but I'm not allowed to reveal exactly how much of a **nker he is due to legal constraints.

Sorry.

Wednesday, March 9, 2011

Downsize this

Nice article in the Independent (which you can now buy in concise tabloid form - i) about the Cameron approach to the public sector. Christina Patterson shows how the government's discourse on how to slim down the public sector and promote the Big Society is the latest expression of the 'cult of the amateur' - the UK's insistence that high-skill jobs in the public sector are wasteful by definition, and that anyone could do a job like teaching or running a hospital budget.

Apart from the obvious lack of understanding of how the state works, which is worrying in people who have to run the state, there is another implication here that is worth noting: that the whole Big Society idea seems to assume that amateurs can do anything the state does. This flies in the face of everything we know about modern economies - that success comes from investment, skills and coordination. David Starkey in the classroom on Jamie Oliver's latest reality show personifies this nicely (ironically, given that Starkey does actually teach for a living).

There is something to be learnt from this. The right has been banging on for years about the public sector as a drain on resources, and New Labour responded by introducing a series of 'reforms', some of which may have improved efficiency, some of which clearly didn't, and some of which were counter-productive. But perhaps the best way to respond is to make the public sector better by increasing the skills and professionalism of its employees. Sure, this costs money, but in the end people want the product (good healthcare, good schools etc), not something made by the private or public sector. Of course, if people have no way of comparing private and public, it is hard to make the case that the public sector is as good as it could be. But by downsizing the state and leaving key functions - at best - in the hands of amateurs, the Conservatives could be about to make that case for us.

Saturday, March 5, 2011

Tha' can't beat Barnsley...

...as my Grandma used to say.

The Lib Dems might have listened to my Gran. They just finished 6th - yes, 6th - in the Barnsley by-election. 
They finished behind Labour, who grew their vote to 60% despite the by-election the result of the sitting Labour MP's imprisonment.
They finished behind UKIP (12%), who are starting to get some serious support for their basic recipe of vague xenophobia and wishful thinking.
They finished behind the Conservatives, whose 8% is what you might expect in a former mining town.
They finished behind the BNP, whose candidate Enis Dalton, despite looking vaguely foreign, got 6%.
They finished behind a local Independent, Tony Devoy. No, I've never heard of him either.
They also finished behind Colonel Ghaffadi.
But, to look on the bright side, they did manage to beat the English Democrats, the Loony Party, and another Independent candidate.
How did that 'new politics' work out for ya?

PS. I never blog about my employer, or anything (however vaguely) connected with the Middle East. Just saying.

Friday, March 4, 2011

No time to blog....

At a conference, no time to blog. Apologies. Fortunately there's not much going on at the moment.

Tuesday, March 1, 2011

Strange and unusual punishment

Two of our favourite footballers have escaped the death penalty this week.

First, Wayne Rooney was spared electrocution, referee Mark Clattenburg deciding instead that a free-kick in the centre-circle was adequate punishment for elbowing Wigan's James McCarthy.

In an unrelated incident, Ashley Cole was fined two weeks wages for shooting a student, rather than being killed, an option his manager Carlo 'Porkbelly' Ancelotti apparently considered but decided against.

The two heroes meet tonight in the Premiership, chastened by the experience of coming so close to summary execution.