Unpublishable thoughts

The Times - an unexpected friend for cyclists II

2012-02-03T00:03:00.000-08:00

In yesterday's post I briefly mused about The Times cycling campaign and wondered why the relatively small number of cycling deaths in London (around a tenth of the number of pedestrian deaths) suddenly became a source of public disquiet. Here's a couple more thoughts.

Mary Bowers is in a sense a typical cycling victim: a young woman hit by a truck which was turning left across her path. The majority of cycling deaths in London are caused by HGVs, and the majority of deaths are women. I can't help thinking that this may have helped capture the empathy of non-cyclists, who may be irritated by the stereotypical cyclist - a MOML (middle aged man in lycra), or a young man on a fixed-gear bike racing through red lights. Somehow, the latter categories are 'asking for it' through their deviant and 'threatening' behaviour, whilst a young woman on a bike is worthy of protection.

The irony is that more aggressive cycling seems to be safer. The dangers facing cyclists are often best resolved by ignoring red lights and stop signs and getting ahead of traffic, so we can be seen. Remaining trapped beside a turning lorry is the worst place you can possibly be. But being a passive, 'innocent', victim is socially more appealing. The public image of cycling has been shifted by these tragedies affecting young women, shifting the emphasis from the 'deviant' to the respectable.

As a middle-aged, middle class, white man, cycling is just about the only way in which I can experience what it is like to be on the social margins, a place where rights are ignored, violence is acceptable, and the law fails to protect. It's pretty educational, and not much fun. But the shift in focus represented by The Times' campaign may change that. There's nowhere more mainstream than The Times.

The Times - an unexpected friend for cyclists

2012-02-02T14:17:00.000-08:00

The Times has launched a big campaign for cycle safety, with front page treatment, centred around the serious injuries suffered by Mary Bowers, a Times journalist, on her way to work in November.

The Times is almost the last place I expected to find support for cycling, but they seem pretty serious about it. Cycling campaigns have so far been unsuccessful in reaching beyond the margins into the mainstream, but it seems that, at last, some kind of momentum is developing. The London mayoral elections this year will give even greater prominence to cycling.

As a social scientist, it's interesting to see how something can change from being an accepted pathology to becoming a political issue, requiring action and change. In part, it's about tragedy touching the people running a major newspaper directly. But clearly something was already moving, as cycle deaths had started to hit the newspapers before that. I can't help thinking that the disproportionate number of London cyclists who are young, well educated and linked to the media industry has something to do with it.

But it's also yet another demonstration of the role of social networks; blogs and twitter have served to mobilize the cycling community and reinforce a sense of grievance and a sense that change is possible. The feckless Boris Johnson and his inability to build on the success of the bike-hire scheme is another factor: it was a great publicity stunt to get people to call them 'Boris bikes', but it turned out not to be a free lunch. People expected roads that you could ride them on, and the cycling superhighways have been a dangerous fiasco.

So, we'll see what happens. 20mph limits in city streets would be a start, but what is really needed is a fundamental culture change, in which motorists give up their presumed right to dominate the roads. It's hard to see that happening without fundamental, and expensive, redesign of the urban space. I'm not sure if the Times really wants all that, but then again, I didn't expect this either.

Welfare is good for the economy

2012-02-01T06:09:00.000-08:00

Welfare is good for the economy.

Or at least, that is one logical interpretation of this chart, which measures income inequality before and after taxes and benefits in advanced countries (the chart is from an OECD report on inequality). The difference between the blue and grey bars for each country is a rough measure of how much the government intervenes to make household disposable income more equal than the 'market' allocation.

Two things stand out here.

First, all governments reduce inequality, but they vary a lot in terms of how much they intervene to change pre-tax allocations. Belgium has pre-tax inequality at a similar level to Canada, but post-tax inequality is much lower in Belgium. Pre-tax inequality in Italy is even higher than in the US, but post-tax it is much lower. So governments can do quite a lot to make society less unequal, at least in terms of income.

Second, on a rough measure of how these different countries have performed in the years since the current downturn began, high levels of redistribution seem to correlate with better outcomes. So, Sweden, Denmark and Finland, who have low deficits, trade surpluses and have recovered lost output more quickly, also happen to have a much greater difference between pre- and post-tax income inequality. In other words, they redistribute more. Even Germany, although it has intermediate levels of inequality, redistributes almost as much as the Nordics. The basket cases: the US, the UK and the GIIPS countries, are all at the low redistribution end of the scale, and have suffered bigger losses of output, and bigger fiscal deficits (and this is probably not endogenous, given the data come in part from the pre-crisis period).

So the best predictor of emerging quickly from the world's worst recession for 80 years is to have high taxes, high public spending, and substantial reallocation of market income from rich to poor.

Krugman and the UK Austerity Debacle

2012-01-30T09:34:00.000-08:00

Well, the British public seem to be strangely relaxed about our embrace of double-dip recession, but at least Paul Krugman (the Austerity Debacle. - NYTimes.com) is on the case.

Let's just recap: the Tory-Lib Dem government insisted two years ago that the only way to deal with our economic crisis was a sharp retrenchment in public spending, to bring down the deficit and create the kind of climate in which business would invest. (Labour, it must be admitted, also proposed cuts, although not quite so swingeing).

Some (notably Krugman, and on this side of the pond Martin Wolf and Samuel Brittan) objected that this was crazy - the global scarcity of safe assets meant that our debt could easily be refinanced and that deficits would be necessary to avoid a crunch in demand and a return to recession.

Who was right?

What's alarming about all this is that so many people who should know better embraced the theory that an economy suffering a brutal demand shock could return to growth whilst the private and public sectors both set about reducing their debts, at the same time as most of our key trading partners were going through the same experiment.

Of course, debt levels need to go down, but sustainably. The best analogy I can think of is of an obese patient who needs to lose weight. Any sensible doctor would recommend a steady reduction in calories over a long period of time to get the patient's weight back down to a healthy level, given that research shows that weight lost quickly is easily regained.

But what we've decided to do is to starve the patient to death.

Blogging the Italian crisis

2012-01-20T11:30:00.000-08:00

Not much action on these pages in the last few days, largely because I've been writing a piece on Monti and the Italian crisis. And you lucky readers get to see the draft first. Here goes:

Italy has long been seen as a weak link in the Euro. Back in the 1980s, when plans for monetary union first began to take shape, fears that Italy’s political instability and fiscal indiscipline might derail the project were a serious obstacle to progress. The stringent criteria laid down by the Maastricht Treaty for participation in the Euro were designed with Italy and its large public debt in mind, and the Growth and Stability Pact which unsuccessfully governed the Eurozone’s public finances through the 2000s was principally aimed at curbing deficit spending south of the Alps. The current scenario, in which Italy’s creditworthiness is doubted by the financial markets and its debt problems are beginning to seem unsustainable, is the nightmare European policymakers have long dreaded. With Italy in trouble, the once apocalyptic danger of a Greek default is now seen as no more than a little local difficulty.

The financial crisis has had a dramaticeffect on Italian politics. It provoked the resignation of Silvio Berlusconi asPrime Minister, sidelining the dominant figure in Italian politics over thepast two decades. Berlusconi had survived two election defeats, several trialsfor corruption and a sex scandal involving under-age prostitutes, but could notsurvive the Italian government bond yields hitting 7%. Equally dramatically,the same Italian parliament that had kept Berlusconi in office quickly lent itsoverwhelming support to a non-elected, non-partisan technocrat, Mario Monti, aformer European commissioner. Of course, Monti is hardly an ‘apolitical’figure, but his elevation to the Prime Minister’s office constitutes a starkrecognition by Italy’s elected politicians of their inability to address thecrisis effectively.

Monti’s first moves in office revolvedaround an emergency budget of tax rises and spending cuts designed to reducethe government deficit by €24 billion, and send a signal to the markets thatItaly was determined to honour its debts. In the short term, these measures hadlittle if any effect on market confidence: the spread between Italian andGerman 10 year debt, after dipping before 4% after Monti’s appointment, quicklyclimbed back to over 5%, a level generally considered to be unsustainable. Socan the Monti government do anything to resolve this crisis? The rest of thisarticle assesses the reasons for Italy’s economic decline, and the prospectsfor reform of its political and economic institutions. It argues that there isno quick fix for Italy’s problems, which are embedded in the structure of itspolitical economy, and that there is no coherent political coalition in favourof reform. As in the past, the most likely route to change is a furtherdelegation of power to the European Union.

TheItalian Economy in Crisis

Although Italy has been lumped togetherwith Greece, Spain, Portugal and Ireland in a group of troubled economies knownin sarcastic shorthand as the ‘PIIGS’, its economic problems are in fact ratherdistinctive. Whilst Greece, Ireland and Spain all enjoyed economic booms overthe past two decades, Italy’s growth rate since 1990 has been the lowest of anyadvanced economy, including deflation-prone Japan. Whilst the other strugglingeconomies in the Eurozone periphery have run up most of their private and/orpublic indebtedness in the decade since the Euro’s inception, Italy’s hugenational debt (around 120% of GDP, making it the third largest in the world)has been stable since the early 1990s. Unlike Greece, Ireland or Spain, Italy’sbudget deficit has been amongst the lowest in Europe since the 2008 financialcrisis. So why have the markets only now become so alarmed at Italy’s fiscalposition?

On one level, Italy’s fiscal problems are simplya function of the size of its economy. Whilst the Greek government has borroweda much higher share of its GDP than Italy, the Greek economy is very small(around 2% of the Eurozone economy), whilst Italy has the third largest GDP inthe Euro area. Italy is ‘too big to bail’ using conventional instruments, andfinancial markets are not convinced that Europe’s leaders have the politicalwill to ensure through other means that Italy will not default. With such alarge debt to service, credibility problems very quickly becomeself-fulfilling. In these circumstances, any doubts about the Italians’commitments to their creditors have rapidly become magnified.

Of course, there are plenty of reasons forinvestors to harbour such doubts. Italy’s other big problem is growth, or lackof it. If the Italian economy was barely expanding in the ‘good’ times of the1990s and early 2000s, how can it be expected to grow amidst the worst global crisissince the 1930s? Worse, the Italian economy suffers from glaring structuraldeficiencies. It has an inefficient bureaucracy, an impenetrable legal andregulatory system, endemic corruption and tax evasion, and parts of the countryin the hands of criminal gangs and locked in a cycle of stagnation and socialdecay. Italy’s system of worker representation and wage bargaining is less andless suited to meeting competitive pressures, whilst its welfare institutionsfail to promote social mobility and inclusion, focusing instead on maintaininga large and growing retired population. In short, the growth prospects appearbleak, and if Italy cannot grow, it will not be able to service its debt at thehigh interest rates currently prevailing.

The European Union leadership insists thatItaly can pull out of this crisis through austerity and reform. Borrowing needsto be reduced, and structural problems that are holding back the economy needto be tackled. This will involve government taking painful and unpopulardecisions, decisions which populist leaders such as Silvio Berlusconi haveproved stubbornly unwilling to countenance. Berlusconi’s replacement by Montiseeks to address this failure of political will. But the austerity and reformproject faces formidable economic and political obstacles. The next twosections discuss these in turn.

Goingfor Growth? Retrenchment and Reform

Italy’s economic problems are welldocumented and ostensibly well understood. Although Italy’s politicalinstitutions are widely considered to be corrupt, opaque and ineffective, theBank of Italy, the country’s central bank, is so well respected that its formerhead, Mario Draghi, was a shoe-in to succeed Jean-Claude Trichet at the helm ofthe European Central Bank. Italian universities produce well trained economistsin abundance, and leading academic economists such as Alberto Alesina of Yaleand Francesco Giavazzi of the University of Milan have been prominent advocatesof reforms to make the Italian economy more competitive. The consensus view isthat Italy’s excessive regulation and laborious legal procedures, alongside thegovernment’s wasteful spending, holds the economy back. Businesses face toomany pointless obstacles in going about their activities, and the tax burden istoo high and too uncertain.

There is no shortage of supporting evidencefor this view. In Italy, simple administrative procedures can take days, taxlaw is complex and inconsistently applied, and banal legal disputes can bebogged down in the courts for years. Labour law imposes significant rigiditiesin hiring and firing, and embeds wage bargaining at the sectoral level,increasing costs for many firms. Government spending in Italy is around 50% ofGDP, way above the average in the OECD, yet education, research and developmentand basic social services are underfunded. The deadweight costs of stateinefficiency are particularly severe in the South, as the interminable saga ofNaples’ refuse collection crisis attests.

This diagnosis fits neatly with the policyadvice coming from Brussels. The European Union’s ‘2020 agenda’ of economicreforms, inspired by measures adopted in Europe’s most successful economies,provides a blueprint of the kinds of changes that could resolve these problems:investment in skills and education, labour market changes to increaseemployment, and a focus on research and innovation. Similar advice is offeredby other international organizations, such as the OECD and the IMF: Italyshould shift its government spending to prioritize investment in human capital,cut waste, and liberalize markets. The Euro debt crisis has led to these callsbeing made with ever greater urgency.

Unfortunately, these measures are neithereasy to implement, nor are they guaranteed to make asubstantial difference to Italy’s growth rate. In fact, Italy has alreadyadopted a wide range of important structural reforms over the past 20 years,including a sequence of labour reforms facilitating temporary contracts andpart-time work, the privatization and consolidation of a large part of thebanking system and the part-privatization of a number of industrial companies,reforms of the revenue system and the pensions system, and numerous initiativesto reduce bureaucratic complexity. In spite of these changes, growth hasnonetheless ground to a halt over the same period. To say the least, thissuggests that structural reforms are not a magic wand.

The dilemma facing Italian policymakers isheightened by the inauspicious global economic environment in which furtherreforms will have to be implemented. Much of the pressure for reform hasfocused on the labour market, and in particular the much debated Article 18 ofthe labour code, which restricts the circumstances in which workers in mediumand large firms (over 15 workers) can be fired. But reforming Article 18 wouldinevitably exacerbate the deep pessimism of Italian households, who havealready responded to the fear and uncertainty over the future by reducing theirspending significantly, pulling the economy down with them. In a climate ofretrenchment, restrictions on employment protection would compound the effectsthe crisis on consumer confidence, already at a 16-year low.

Similar points can be made about governmentspending. European policy-makers have pressed for pension reform as a way ofreducing budgetary pressures, since pensions are a greater share of governmentspending in Italy than in most other European countries (around 15% of GDP).However reductions in pension entitlements again reduce consumer confidence andincrease households’ propensity to save rather than spend their decliningincome. The problem is all the more severe because a relatively generouspensions system has acted indirectly as a broad social policy buffer in Italy,given the high degree of inter-family solidarity and the importance of pensionincome as a supplement to the resources of younger generations.

To be sure, there are a number of areaswhere reform and retrenchment are unambiguously necessary and desirable. The wasteful and often corrupt use of publicmoney in public infrastructure investment – such as for example the continuingfinancing of the unrealistic project for a bridge over the Straits of Messina,despite no actual construction work being planned – needs to be addressed. Aserious attempt to address the labyrinthine nature of the legal andadministrative systems would almost certainly produce extensive public sector productivitygains. The distortions in the tax system act as a disincentive to innovationand subsidize weaker sectors of the economy, as well as penalizing honesty. Anda number of markets for services – the law, pharmacy, taxis and hauliers, forexample – could be opened up to competitive pressures to improve efficiency. Butif these reforms were so obviously favourable to growth, one has to wonder whythey have not been implemented already. To understand why such apparently dysfunctionalinstitutions have survived for so long, we need to examine the politics ofItaly’s economic choices.

‘Eppursi muove’: From Growth to Stagnation

Thirty years ago, the economist MancurOlson wrote an influential book, The Riseand Decline of Nations, which sought to explain why some democracies hadenjoyed faster growth than others in the post-war period. Olson’s thesis wasthat long periods of peace and stability allowed vested interests to tightentheir grip on policy-making, protecting their own positions at the expense ofthe economy as a whole. He argued that Italy, along with the other countriesdefeated in World War II, was growing faster than the UK and the US in the1970s precisely because its elites had been replaced in the aftermath of itsdefeat.

Three decades later, Olson’s theory seemsto fit the Italian case rather well. Since the 1980s, Italy’s economy has grownlittle, but the power and influence of vested interests seems stronger thanever. And although the currentpressure for reform for the most part targets unionized production workers,pensioners and other beneficiaries of public spending, these groups are notnecessarily the key obstacles to economic dynamism. Indeed there is a strongcase for arguing that Italy’s fiscal problems are in large part the result of afailure to confront the immense privileges enjoyed by the country’s small andmedium-sized businesses and self-employed professionals and tradespeople. Theseprivileges are in turn the consequence of a deliberate strategy followed overdecades by the ruling parties in order to consolidate their electoral support.

The origins of this strategy can be foundin the aftermath of the war, when Italy was deeply politically divided. Largeareas of central Italy in particular were under the control of anti-Fascistpartisans who had fought against the Nazi occupation alongside the Allies, andmostly sympathized with the Italian Communist Party (PCI). As the newbattlelines of the Cold War emerged, the Allies threw their weight behind theItalian Christian Democratic party (DC) determined to avert the risk of aCommunist takeover at the heart of the Mediterranean. The DC was successful in winning the first democraticelections held in 1948, but the PCI was the dominant opposition party, andCommunist support grew over the post-war period, peaking at 34% of the vote inthe early 1980s. The effective American veto on Communist access to governmentpower meant that the DC was ‘condemned to govern’, and the Christian Democratsused their decades-long presence at the heart of the state to lock in theirdominant position.

Ironically, part of the ChristianDemocratic strategy involved adopting the same kind of statist economicpolicies usually associated with Communism, taking large areas of industrialproduction under direct or indirect government control. The DC and itsgoverning partners also expanded state employment on a huge scale, rewardingtheir supporters with secure state jobs, pensions and other forms of state aid.As the left grew in strength, further spending commitments – particularly onpensions and welfare - were offered to buy industrial peace. By the 1970s theresulting pressures on government spending were outstripping the Italianeconomy’s ability to deliver growth in tax revenue, and the borrowing spreethat led to today’s debt problems began in earnest. By 1992, Italy’s deficithad hit double figures and the government was plunged into financial disarray.The debt burden Italy faces now is essentially the unresolved inheritance ofthe chaotic public finances of the late 1970s and 1980s.

Of course, public borrowing is a functionof both spending and revenue, and the fiscal crisis was also a consequence ofan inadequate tax policy. As part of its electoral strategy the DC hadencouraged the emergence of an extensive small business and self-employedsector of farmers, shop-keepers, artisans and tradespeople of various kinds.These groups were (and still are) often protected by strict regulations whichprevented market entry for outsiders, the classic example being the tightcontrol on the number of taxi licenses, providing taxi drivers with incomesecurity and the guarantees of future livelihoods for their children (these valuablelicenses can be inherited or sold). Crucially, lax andoften corrupt tax inspection regimes relieved these sectors of a large part ofits fiscal burden. Small business owners and self-employed workerssystematically under-reported their incomes, sometimes on a colossal scale; therecent raid on the luxury ski resort Cortina d’Ampezzo, in which tax officialschecked the tax returns of the owners of luxury vehicles, revealed that many ofthem were declaring gross incomes of under €30,000 per year. At the same time,the tax and social security burden on employees of larger firms grewdisproportionately, reducing the real value of salaries and hinderingemployment growth.

The postwar Italian economy, then, wasbuilt on a complex web of political exchanges which reached across thepolitical spectrum and over-committed the state. What is perhaps surprising ishow long it took for this system to run into the buffers, given the rewards forcorruption and unproductive rent-seeking that it generated. One academic studyof the Italian economy was entitled Ilcalabrone Italia, which we can loosely translate as ‘the Italianbumble-bee’, because it was not clear how the economy could keep moving underthe weight of politicized government interference. But the financial crisis ofthe early 1990s, and the subsequent move toward European monetary integration,forced dramatic changes.

Savedby Europe, but for how long?: Berlusconi and the Euro

1992 was a momentous year for Europe, withthe completion of the single market and the ratification of the Treaty ofMaastricht, which committed member states to creating a single currency. But itwas also a turning point in recent Italian history, as the Christian Democraticcoalition, which had governed Italy in various forms since 1948, fell apart. Apoor election result was followed by a spectacular wave of corruption scandals involvingthe DC and its coalition partners. Within weeks, most members of the Italianparliament were formally under investigation for corruption, and the governingparties effectively ceased to function. At the same time the Italian governmentwas on the verge of debt default, whilst the Italian currency, the lira, wasfacing devaluation. A government with cross-party support under Giuliano Amatoset about addressing the government finances whilst preparations were made fornew elections, to be held under a new electoral system based on‘first-past-the-post’ principles of voting used in most of the English-speakingworld.

The ‘DC system’ had come to an end, andpolitical commentators dramatically announced the end of the ‘First Republic’. TheDC was formally dissolved at a congress in 1993, its leaders too concerned withtheir legal defences to think about getting re-elected. The second largestgoverning party, the Socialists, were if anything worse hit, with theirpowerful leader Bettino Craxi taking refuge from prosecutors in his holidayhome in Tunisia, where he remained, free from extradition, until his death in2000. With the collapse of the governing parties, the only organized politicalforce remaining was the Communist party, which in 1991 had formally abandonedits Marxist doctrine and reformed as the Democratic Party of the Left (PDS).Into this vacuum stepped Silvio Berlusconi, media tycoon, owner of Italy’s thirdlargest commercial TV channels, and close friend of Craxi.

Using his media power, money and a nationalnetwork of advertising salesmen Berlusconi performed a miraculous feat: in justa few months he built a political movement, ForzaItalia (Go, Italy!) that became Italy’s largest party in the 1994elections, and elevated its leader to the Prime Minister’s office. Ostensiblysupportive of the popular investigating judges who had unveiled the corruptpractices of the DC, Berlusconi was in fact fighting for his own survival. Notonly was his business empire burdened with huge debts and his key poltiicalally, Craxi, on the run, but his own financial affairs had also begun toattract the attention of the Milanese magistrates. Getting elected was a highrisk strategy to avoid the election of an unsympathetic left-wing government,and move beyond the reach of the courts. Thus began a political career that hasdominated Italian politics for the past 17 years.

Berlusconi’s first experience of governmentended abruptly with a formal notification of judicial investigation beinghanded to him as he hosted a G7 summit in Naples. Forza Italia went into opposition, and in what now appears as arehearsal for the current governing arrangements, the technocrats took charge. LambertoDini, a former Bank of Italy executive, formed a caretaker government whichpassed a major pensions reform seen as a sinequa non of participation in EMU. After Dini, further elections were held,and a centre-left government was elected under Romano Prodi, with former Bankof Italy Governor Carlo Azeglio Ciampi as Treasury Minister. The Prodigovernment adopted a number of economic reforms and took stringent budgetarymeasures, including a so-called ‘Eurotax’, which reduced Italy’s borrowingsenough to allow participation in the first wave of monetary union in 1999. Thetechnocrats had turned the public finances around, set Italy’s debt burden on adownward path, and begun the process of dismantling the Christian Democrats’political machine.

However, such rigour was not to voters’tastes, and by 2001, Berlusconi had returned to power in an election landslide,promising ‘less taxes for everyone’. This time, Berlusconi governed for a fullfive year term, with a solid parliamentary majority. But this opportunity topush through unpopular reforms was missed: apart from a labour reform, theso-called ‘Biagi law’, which extended temporary contracts, few regulatorychanges were made, and Berlusconi showed more interest in judicial reformswhich would hinder the prosecutors investigating his business affairs. Despite thehistorically cheap borrowing costs resulting from Euro membership, the steadyimprovements in the public finances slowed to a halt. After losing the 2006elections, Berlusconi won power again two years later, on the back ofdeficit-busting promises such as the abolition of the ICI, Italy’s localproperty tax, and a state rescue of the bankrupt national airline Alitalia. Thedeficit once again began to climb, as the bursting of the sub-prime bubble inthe United States degenerated into a global crisis.

Berlusconi’s political demise can be seenas the inevitable consequence of Italy’s failure to adapt to the dramaticchanges in the world economy since the early 1990s. The removal of the corruptChristian Democratic elite and the adoption of profound economic reformsallowed Italy to take its place in the Eurozone, but once this challenge hadbeen met Berlusconi skilfully persuaded Italian voters that the time for painwas over. Whilst promising a ‘new Italian miracle’ in the economy, in practiceBerlusconi’s governments made few reforms, and failed to exploit the virtuouscircle of falling deficits and interest rates to attack the government debtburden. At the critical European summit in November 2011 held to address thedramatic collapse in market confidence, Berlusconi insisted against all theevidence that Italy’s economy was so healthy that it was hard to book arestaurant table. His resignation suggests that Italy is no longer a country indenial. But can it address its problems and remain in the Euro?

WhatIs To Be Done? Rigour, Reform and the Populist Trap

Mario Monti’s arrival has been greeted as abreath of fresh air by other European governments, which had becomeincreasingly frustrated at Berlusconi’s inability to deal with the crisis. AnItalian public weary of scandal and economic decline has also extended a waryline of credit to the new technocratic administration. But the main difficultyMonti faces is that his reform programme will create winners and losers, and only the latter are generally wellorganized. To invoke Olson once again, economic reforms will tend to imposeconcentrated and immediate costs on well defined producer interests, whilst thebenefits will mostly be diffuse, and enjoyed by the broad mass of Italianconsumers over a longer period of time. In other words, the costs arepolitically far more visible than the benefits, making reforms politically hardto sell.

Of course, the same argument could havemade about the reforms Italy adopted in order to get into the Euro, and yetthese obstacles were overcome, largely because Italians were fearful of theconsequences of remaining outside. The so-called ‘vincolo esterno’ (externalconstraint) was a crucial component of this first wave of reforms, as Italiansaccepted a period of fiscal tightening and wage restraint to meet therequirements of the Maastricht Treaty. This time around, the threat is no longerof failing to meet the cut, but of being thrown out of the club. Will thisprove a sufficient incentive to overcome vested interests opposed to reform?

Exit from the Euro would certainly be anextreme option, fraught with risk for the broad mass of Italian voters, many ofwhom hold financial assets which would be devalued as a result. This grimscenario will concentrate voter minds. However, remaining inside is no easyoption, since the conditions for any bailout will surely involve both a longperiod of austerity, and the Italian government losing a large part of itsfiscal sovereignty. Whilst the prospect of Euro entry in the 1990s could bepresented in optimistic terms, continued Euro membership in 2012 simply evokes,at best, more of the same. Greece’s nightmarish descent into fiscal chaos andeconomic depression since its debt problems began is not a good precedent, andmakes it harder to win political support for measures which may in the shortterm make things worse rather than better.

Monti’s appointment as Prime Ministerrepresents a gamble that Italians will place their trust in a technocraticsolution to their acute economic problems. Monti is certainly an impressivefigure, with his background as an academic and subsequent a Europeancommissioner, a man who speaks several languages is at ease in internationalsummits. His political legitimacy therefore rests in part on his expertise, andin part on his lack of political baggage. Monti can claim to be about thepartisan fray and free of debts to vested interests; in his administrationreforms are presented as the rational, technical solution to practicalproblems. This means that the reforms must produce results if the technocraticroute is going to enjoy the kind of political authority necessary to bringabout sweeping changes in the Italian way of life.

The technocratic route also implies anexplicit rejection of the normal rules of democratic politics. The failure ofthe existing democratic institutions to prevent the crisis has legitimized,like in the 1990s, a non-partisan route to reform. But the experience of the1990s shows that electorates can only take so much of this kind of medicine.Once technocrats such as Dini and Prodi had secured Euro entry, Berlusconi’spopulist rhetoric restored normal service. In the likely scenario that Monti’sreforms fail to quickly reverse economic stagnation, populist appeals from leftand right will gain traction. Umberto Bossi’s Northern League, ostensiblycommitted to separating Italy’s prosperous north from the rest of the country, supportedBerlusconi for a decade, but has refuse to back Monti and is preparing toexploit popular anger at the crisis. On the left, the fastest growing politicalforce is led by a comedian, Beppe Grillo, whose tirades against the politicalclass have been so popular that he has formed his own political party. Grillohas no real policies, but his message that Italians have been let down by theircorrupt leaders has attracted a sizeable following.

Rejection of mainstream politicians hasbecome a widespread sentiment, especially amongst the young, who areincreasingly reluctant to join or vote for traditional political parties. Withno end in sight to the economic downturn, and Europe’s leadership lookingincreasingly beleaguered, a message of continued austerity and reform will notgo down well at the next parliamentary elections, due in 2013. Italy’s economicproblems have fundamentally political causes. There is no coherent electoralcoalition to support any of the measures considered necessary to resolve thecrisis, and the weakness of Italy’s political parties makes it hard to imaginesuch a coalition being forged by the persuasive rhetoric of political leaders.

As a result, the most likely source ofreform is, as in the 1990s, the delegation of policy decisions to the Europeaninstitutions. The policy currently emerging appears to be a combination ofmonetary loosening in Frankfurt, combined with much stricter budgetary rulesfor the member states. By giving up the lira, Italy bound itself to a strictmonetary policy, and now it may have to give up its fiscal autonomy in order tomaintain Euro membership. Italians harbour few illusions about the integrityand effectiveness of their political leaders, and have been mostly quite sanguineabout the loss of national sovereignty inherent in the European project. Italy mayreluctantly accept being ‘saved by Europe’ once again. But if the crisiscontinues, the patience of the long-suffering Italian voter will come undersevere strain. If Italy turns back to populism, there will be dramaticconsequences for the governance of the European economy.

Santorum's Calvinism

2012-01-12T14:17:00.000-08:00

This (Santorum To Mother Of Cancer Survivor: Sick To Blame For Pre-Existing Conditions, Should Be Charged More) is pretty amazing coming from a man hoping to be elected president. I wonder how many Americans with pre-existing conditions would be happy to accept individual moral responsibility for their ailments?

Apart from the apparently suicidal electoral politics here, it speaks eloquently of the difficulties of the market-based approach to health. Santorum freely admits that the insurance market has to charge higher risk patients more if it is to work properly, and that means that a cancer survivor will pay more, even if the cancer struck them as a child. At least he's up front about that unattractive conclusion.

This is doubly interesting as an expression of the brutal individualism of Puritan religious thought analyzed by Weber in The Protestant Ethic. Weber highlights the purely individual nature of salvation, and cites the exhortations of Puritan literature to shun the help of others, and embrace an ascetic programme of moral self-control (for example in Bunyan's The Pilgrim's Progress). In Calvinist thought, God has chosen the saved and the damned, and that choice cannot be altered by man. Santorum's acceptance of the harsh consequences for someone of suffering a serious illness seems to reflect this view of the world.

As it happens, Santorum is a Catholic, but the Weberian account fits his words neatly.

UK hasn't got a gang problem

2012-01-06T08:02:00.000-08:00

From the Evening Standard: US supercop dismisses our gang problem as 'laughable'. Looks like the American brought int to act as our 'gang czar' hasn't learnt the first rule of crime politics in Britain - you have to pretend that poor people are very dangerous and must be brought to heel.

Tax evasion on ice

2012-01-05T00:04:00.001-08:00

Looks like the Italian revenue services are taking tax evasion a bit more seriously (did they read this?). Repubblica.it reports that the Venetian tax inspection office "raided" Cortina d'Ampezzo, an emblematic ski resort for the wealthy, and ran a series of inspections of bars and restaurants, with the result that their declared takings since New Year's Day have increased by several hundred per cent compared with the same period last year. A parallel investigation of over 200 luxury automobiles revealed that dozens of them were owned by people whose tax returns reported gross incomes of less than €30,000 per year.

Similar raids have happened before, and they are never sustained over time. Let's see if things change under Monti. If they do, we can be sure that Berlusconi's Pdl party will be ready to bring the government down: the only reactions from the Pdl to the Cortina operation were critical of the 'police state' tactics deployed.

Happy new year

2012-01-02T01:19:00.000-08:00

Oh, and by the way, Happy New Year.

Make them pay

2012-01-02T01:12:00.000-08:00

Reflecting on the notion of collective moral hazard, I have been thinking about ways of disaggregating the responsibility for the budget crises facing most advanced democracies. Of course, I don't buy the austerity argument, and I am totally unconvinced that deficit reduction serves any useful purpose in the current climate. But if sacrifices have to be made, how are we supposed to allocate the pain?

In the Italian case, there is a pretty clear line of responsibility. In periods of centre-left rule (1995-2001, 2006-7), the deficit went down, whilst in periods of centre-right rule (up to 1995, and then from 2001 to the present, save the short-lived Prodi II government) deficits have remained stable or increased. The picture is made clear enough here:

So, we can attribute a chunk of the responsibility to the Berlusconi-led centre-right coalition for Italy's failure to reduce its debt substantially over the past two decades (an argument I made here in a piece for Foreign Affairs). We can make a case that citizens who voted for these administrations should therefore be first in line to pay the costs of their mistakes, particularly in view of the fact that the failure to reduce the deficit was also motivated by the need to distribute favours to this very electorate.

In fact, what seems to have happened is that centre-right voters got most of the benefit of deficit spending (in the form of distributive spending and tax concessions, including a light touch for tax evasion) whilst centre-left voters got little direct benefit from the briefer periods of centre-left government, in which the focus was on repairing the damage caused by their opponents (as is indeed the case for the Monti government, so far robustly supported by the centre-left).

So as a matter of social justice, centre-right voters should pay more to get the deficit down. They tend to be wealthier, are more likely to have evaded tax, and are more likely to have received material benefit from the deficit-inducing policies of their governments. But more than all of this, they are directly responsible for the policies followed, in much the same way that drivers of gas-guzzling cars should pay more of the cost for addressing global warming.

Of course, a policy like this is difficult to apply, since voting in Italy, as in all democracies, is by secret ballot. Arguments have been made for changing this, to encourage voters to exercise moral responsibility for their choices (eg here). I propose a further refinement: tax liabilities should be adjusted according to the degree of voter responsibility for good and bad fiscal outcomes: so a 100% Berlusconi voting record could imply a 100% increase in the differential tax burden for deficit reduction, whilst a 100% Prodi/centre-left record could imply a 50% discount.

This is merely an extension of the notions of liability which already apply to other activities with the potential for negative externalities. And it is also consistent with the notion of encouraging a stricter correspondence of duties and rights in democratic societies, as advocated by Maurizio Viroli here. It won't solve Italy's problems, because the people I would target already evade much of their tax liability - just getting them to comply with the law would be a start. But the fact that the burden of deficit reduction in most countries is falling on those who did least to create the problem in the first place offends any notion of social justice I can think of.

The game's up

2011-12-28T05:57:00.000-08:00

John Quiggin at Crooked Timber declares a neat little victory over Stephen Williamson, who had trashed his Zombie Economic books on his blog, and later for the Journal of Economic Literature. Quiggin points out that one of Williamson's rhetorical tools - the claim that some of the theories Quiggin critiques are actually tautological - implies that those theories are entirely pointless, and scientifically worthless.

While this was just a petty aside in a blog post, it could be safely ignored. But now the same points have been made in the august JEL, a house journal of the American Economic Association, they acquire a cachet which means they can't be so easily dismissed as Aunt Sallies.

I'm pleased to see this problem get a bit more attention because I've always been frustrated at how economists and rational choice theorists in general play bait-and-switch with the rationality assumption. Obviously if anything can be rational, then rational choice cannot make substantive predictions. But at the same time, the claims that are usually made in the name of rationality are far tougher - ie that people are self-interested, rational and capable of complex calculations about their material interests. The tautological rationality assumption is only wheeled out when the latter claims run into trouble (which they generally do when we try to explain non-trivial problems).

So, as Quiggin says, whenever we want to make this kind of point, we can just cite Williamson 2011 in the JEL.

As a footnote, I love Williamson's introductory paragraph, which states that 'in economics, the 2008-9 financial crisis has resulted in renewed appreciation of advances made in information economics, the theory of financial intermediation and monetary economics'. Which is like saying that collapse of the Berlin Wall brought renewed appreciation of advances in our understanding of Soviet communism through the 1980s, or that 9/11 alerted us to our most cutting-edge findings in the study of international terrorism.

Middlesbrough 1-0 Hull City

2011-12-27T14:57:00.001-08:00

Almost, but not quite.

REPORT: Middlesbrough 1-0 City « Amber Nectar

That's me up the road

2011-12-24T01:40:00.001-08:00

This blog is now closed for Christmas.

Gis' a job!

2011-12-22T14:46:00.000-08:00

Nice one. Via Brad DeLong, Jim Henley explains the otherwise inexplicable: the Lib Dems remaining in this Conservative government.

It all makes sense if you start to think about what Nick Clegg plans to do when his political career is over (circa 2015) - get a well paid job in the corporate sector. And how do you get offered a well paid job in the corporate sector? Well, not by reforming the banks, penal tax rates on bonuses, and help for the poor, that's for sure.

This raises a broader question: How much is the general shift towards pro-rich policy over the past decades explained by the failure to generate a political elite that actually responds in any serious way to popular demands? This angle certainly sounds more plausible than the alternative - that somehow median voters became convinced of the need to line the pockets of the 1%.

Martin Wolf on inequality

2011-12-22T14:22:00.000-08:00

Martin Wolf takes on inequality in today's FT. He points out that a lot of the increase in inequality in the UK is down to an increase in the dispersion of male earnings, and that

some – perhaps a great deal – of the ultra-high incomes at the top are almost certainly the fruit of rent extraction facilitated by a breakdown in the control exercised by principals – outside investors – over their agents – corporate executives and financiers. Huge rewards then are both unjust and inefficient.

This is the key point - any pretence that inequality might be the price to be paid for economic dynamism cannot survive the events of the past three years. Hopefully this realization can spread beyond the pages of the FT fast.

Print and be damned

2011-12-22T13:45:00.001-08:00

It looks that the ECB is finally, by a circuitous route, doing what needs to be done. It remains to be seen whether it will do enough, but the combination of nearly half a trillion euros - in one day - in cheap loans to banks, with the acceptance of troubled sovereign debt as collateral, is a step in the right direction. The direction, that is, of acting as a lender of last resort, despite German protestations.

This is a smart move by Mario Draghi, who talked tough on bail-outs, then effectively ate his words, but did so in such a way as to leave most German voters unsure as to what has really happened.

Anyway, this is just a start. The austerity medicine will still depress Southern European economies, and monetizing slices of their debt just as we approach the abyss is not exactly going to resolve the problem.

Is there such a thing as moral hazard for nations?

2011-12-21T09:42:00.000-08:00

Just in case you needed any more reasons to oppose austerity, here's another, outlined in this neat and evocative Guardian piece ('Europeans migrate south as continent drifts deeper into crisis): emigration.

Yes, in a development that has probably never occurred to Europe's blinkered political leaders but is blindingly obvious to anyone residing in the real world, young, ambitious and dynamic European citizens are escaping from the misery of austerity and seeking a new life elsewhere, often outside the EU. It is hardly worth pointing out the obvious implication - that austerity is even less likely to work if the most productive sections of society are bailing out and leaving the pain behind.

This is neat in all sorts of ways, but what I find intriguing about it is the stark distinction it draws between the collective responsibility of debtor nations and the individual responsibilities of their citizens. So Greece must suffer for its mistakes, otherwise moral hazard will encourage it to behave badly in the future; but of course there is nothing stopping individual Greeks leaving the sinking ship and evading the punishment.

This reminds me of a neat piece of prose on the crisis by John Lanchester, who has made more sense out of this mess than many economists. In a piece published in the London Review of Books last summer, he noted the following:

From the worm’s-eye perspective which most of us inhabit, the general feeling about this new turn in the economic crisis is one of bewilderment. I’ve encountered this in Iceland and in Ireland and in the UK: a sense of alienation and incomprehension and done-unto-ness. People feel they have very little economic or political agency, very little control over their own lives; during the boom times, nobody told them this was an unsustainable bubble until it was already too late.

In consequence, people don't feel that the crisis was in any real sense caused by them:

The austerity is supposed to be a consequence of us all having had it a little bit too easy (this is an attitude which is only very gently implied in public, but it’s there, and in private it is sometimes spelled out). But the thing is, most of us don’t feel we did have it particularly easy. When you combine that with the fact that we have so little real agency in our economic lives, we tend to feel we don’t deserve much of the blame.

It's difficult to argue with this. But irrespective of whatever moral responsibility an individual Greek may bear, there is no law whatsoever against him or her leaving the country and starting afresh, washing their hands of the whole mess.

A kind of citizen's default. So much for moral hazard.

It's all covered by Road Tax

2011-12-18T00:58:00.000-08:00

Stat of the week from the blog Man's Greatest Mistake: the total cost of all motor vehicle accidents in the UK for a year is: (drum roll) £18 billion. That's about 1% of GDP, or, put another way, about 15% of the government deficit.

So not a trivial amount of money.

I've been thinking for a while that actually, reducing car use is one of the best ways of increasing living standards. After all, many families on middle to low incomes have one or sometimes two cars, and the associated costs are enormous. Providing people with alternatives, through more public transport investment and traffic calming to make cycling more attractive, would basically make people richer. And that's before we start to consider the environmental benefits.

It's a no-brainer, but of course a very radical change to get people used to. But on the other hand we're going to have to do it one day, so why not start now when we have a bunch of other good reasons to do it, like avoiding a second great depression?

Joseph Stiglitz explains the depressions

2011-12-16T06:55:00.000-08:00

Fascinating piece in Vanity Fair by Stiglitz. He argues that the implosion of financial sector was a symptom of broader structural dysfunctions in the economy, involving the transformation from an industrial to service-based economy. He develops the argument but comparing with the 1930s, where the collapse of the financial system was in large part an effect of the difficult structural change from an agriculture-based to an industrial economy.

This is important stuff. It carries two broad implications. First, fixing finance alone won't solve the problem. It is an essential pre-requisite of exiting the crisis, but there also needs to be a fundamental shift towards a services-based economy, achieved through state intervention to retrain workers and make the investments needed to hasten the transformation. The private sector won't do it alone, and currently policy, by depressing demand, simply locks us into a downward spiral.

How to increase your debts by saving more

2011-12-14T11:35:00.000-08:00

When it comes to understanding the crisis, it's still hard to beat Krugman. By explaining IS-LM to a popular audience (including me) he's doing a great service, and I read today's blog post after seeing this chart (courtesy of Richard Koo), which shows that the UK government deficit is paralleled by a big increase in private saving.

According to IS-LM deficit reduction, unless it is counteracted by a dramatic increase in private borrowing (in a credit crunch?) will simply shrink GDP, because this is the way that desired savings get to match desired investment.

So if we really save hard enough, our incomes will shrink enough to make our savings as small as the paltry levels of investment we're currently suffering.

Look at the IS-LM graph long enough and a smaller deficit looks less appealing.

Britain's loss, Europe's gain?

2011-12-10T04:49:00.000-08:00

Fascinating piece in The Economist about the Euro summit and Cameron's 'walk out'. The interesting thing is that the article discusses the whole issue from the point of view of the kind of pro-free market Anglo-focused angle typical of the Economist.

It finds, with impeccable logic, that Cameron, and the British right, have been roundly defeated. After all, what does a 'walk out' mean? Either that we stay in the single market but with no real influence on how it's regulated, or we leave the single market and see investors take a detour around us as they seek access to a market of over 400 million people. Even the City, which Cameron purports to defend, could well ditch us and head to Frankfurt (after all, the City is basically an offshore arena for American banks, and stopped representing indigenous capital sometime in the 1960s).

Doesn't look good. Unless of course you want to take Britain back to the 1950s, which is precisely what most Conservatives really aspire to.

One step from disaster

2011-12-10T01:19:00.001-08:00

A pretty good assessment of yesterday's summit outcome from Tim Duy's Fed Watch (via Mark Thoma).

In the end, this mess is entirely a political one. Not that economists aren't in large part to blame, but the key point is that some economists have figured out what the answer is, but too many politicians find it convenient to stick to the line that made some kind of sense until 3 years ago, but makes no sense at all now.

So what we need is a theory of economic policy lunacy.

Weber's revenge

2011-12-08T03:35:00.000-08:00

Markets have faith in Protestants (% of Protestants in population, by logged 5 year CDS price today).

The Rsq without Greece is .45, meaning that Protestantism predicts almost half the variation in the log of CDS prices.

Quite why Protestantism is related to the perception of fiscal responsibility is one for another post.

Ever closer union

2011-12-06T10:44:00.001-08:00

The Guardian reports that Radical eurozone shakeup could see Brussels get austerity powers.

Is this really what 'ever closer union' was supposed to mean...?

When will Germany start living beyond its means?

2011-12-05T15:18:00.000-08:00

In most of my posts on the southern Europe debt crisis I've focused on the contractionary nature of fiscal retrenchment, and the 'paradox of thrift' it engenders - that by retrenching, Southern Europe risks shrinking its GDP, thus cancelling out any putative gains from austerity.

Paul Krugman, in response to Ezra Klein, reminds us that there is another big obstacle to this strategy: that Southern Europe cannot recover without unwinding its trade deficit, and its trade deficit is the counterparty to the German trade surplus.

In other words, are the Germans willing to run a trade deficit to make this happen? Because if they are not, it's not going to work. And nothing I've heard out of Berlin recently sounds like coming close to recognizing this.

Elementary, Signor Monti

2011-12-05T08:53:00.001-08:00

Fascinating stuff - yields on Italian debt dropped sharply today (FT Alphaville » Signor Monti, sensazionale). Monti's €27 billion of contractionary budget cuts and tax rises really did the trick...

The fact that Spain's yields did much the same suggests a momentum behind the Euro crisis management strategy of Merkel and Sarkozy. It also suggests that should this week's summit fail, we could pretty quickly be back to where we started last week.

All of this goes to show that policy's real effects seem to matter less than their effects on expectations, and that countries like Italy and Spain are only at risk of default if markets think they are at risk of default. There is nothing remotely rational about our current financial arrangements.

'via Blog this'

Munchau is depressed

2011-12-05T03:35:00.000-08:00

Reading Wolfgang Munchau is not a lot of fun at the moment. His doom-laden pronouncements are all the more depressing for the fact that he is almost certainly right to predict that France and Germany look set to fudge it yet again.

In any case, at least the scenario is becoming clearer. The ECB will probably act if given the political backing, as Draghi suggested the other day. But Merkel only seems to want ECB action if the Southern Europeans commit to open-ended austerity. This is politically implausible, as well as being almost certainly economically counter-productive.

So here we are. If we were a game theorist, I could probably write a nice paper about this. It's basically a Prisoner's Dilemma game, but I fear it's an unbalanced one, because I'm not sure the Germans even understand what the cooperative outcome would be. So they dig in their heels.

Let's just hope they blink, because they're going to be dragged down by this as much as anyone else. What price those years of 'sacrifice' for competitiveness if they end up with a Swiss exchange rate and an insolvent banking system?

George Osborne's U-turn

2011-12-04T15:21:00.000-08:00

George Osborne has turned Keynesian:

"We need to put to work the many billions of pounds that British people save in British pension funds, and get those savings invested in British projects. You could call it British savings for British jobs," he said in the autumn statement, adding that the government was exploring guarantees and ways of letting city mayors borrow against future tax receipts in an echo of the vast municipally funded works that built Britain's water, sewerage and road network in the Victorian era, as well as hospitals and schools"

Exactly how is that different to the deficit spending that the government refuses to contemplate?

The Monti treatment

2011-12-04T07:21:00.001-08:00

Contractionary measures for contractionary times (Monti outlines tough measures for Italy). €27 billion taken out of a stressed economy, which is also suffering financial uncertainty on a colossal scale.

Can any of this work? Yes, but only as an offer to the Gods of austerity, giving them the political offer to authorize a monetary bailout through the ECB.

Peculiar how entirely irrational policies can become rational, if they are designed to encourage irrational leaders to do rational things.

Feldstein on Italy

2011-11-30T03:28:00.001-08:00

Martin Feldstein weighs in on the Euro crisis (Italy can save itself and the euro), and makes some interesting points.

First, as Feldstein notes, Italy has a huge stock of debt, but it's flow situation is not that bad - it has been running a large primary surplus for years, unlike Greece. It could reduce its deficit and enhance market confidence with realistic adjustments to taxation and spending. This is an important point, since the measures asked of Greece are truly impossible to successfully implement.

Feldstein also makes another good point - that with public spending running at half of GDP, there must be savings that Italy can make somewhere. This is clearly true: Italy has a public sector that wastes resources on a truly awesome scale. However, it is also true that any major cuts will be contractionary in the current climate, and could reduce what little growth Italy has in store.

And that brings us to another point. As Feldstein shows, that required fiscal adjustment, with measures taken to increase growth, could quickly rebalance the situation. But if the reforms needed were so easy to achieve, maybe they would have been implemented already, given Italy's poor economic performance over the past two decades. Clearly, the time for such reforms was in the more buoyant climate of the late 1990s and early 2000s - now they will probably have contractionary effects.

That all said, there is a lot of low-hanging fruit when it comes to possible reforms. More women could be encouraged in the labour force very easily (see the weird but interesting proposal by Alesina and Inchino to reduce employment taxes for women), competition could be usefully introduced into some closed markets (the 'professions', local transport, retail). A bonfire of pointless regulations could save a lot of time and energy for businesses and citizens and allow resources to be deployed more productively.

The trouble is, there is at present no political constituency for these measures. The majority position in Italy is economic and cultural conservatism, with occasional bursts of intolerance towards groups such as immigrants that are key to the country's future. Berlusconismo has to be defeated before anything good can happen.

The Euro elite

2011-11-28T02:14:00.000-08:00

Reuters reports that Germany is planning 'elite' bonds with 5 nations. So this is still all about saving Germany's skin? The only reason to be hopeful about a development like this would be if it was a preliminary step to a bailout of the periphery. But that bailout needs ECB intervention, and I can't see how a 'hard' Eurobond makes any difference to that.

The German burden

2011-11-26T11:01:00.001-08:00

Paul Krugman once again puts the boot in (Mysterious Europe). What occurs to me reading this post is that ultimately all that the Germans would be required to do to resolve the problem is allow the ECB to backstop Southern European debt, and in the meantime spend some (preferably all) of their surplus on Southern European products.

So, we are inviting the Germans to spend some nice holidays in Greece and Spain, preferably eating lots of good local food, and buy a bunch of Gucci handbags and the odd Ferrari.

Is that really so much of a sacrifice?

'via Blog this'

Understanding the Euromess

2011-11-24T09:14:00.000-08:00

Great lecture from Barry Eichengreen - Europe's Never Ending Crisis (link courtesy of Mark Thoma). All you need to understand the basics of what is going on in Europe.

Chart of the week

2011-11-23T04:25:00.001-08:00

Here's great chart courtesy of Nick Andrews. It shows the bond yields for Eurozone countries from the early 1990s to the present:

Yet further proof of the efficient markets hypothesis, if you ask me.

Reform, reform, reform!

2011-11-23T04:10:00.000-08:00

The technocratic turn in the Euro crisis has brought us yet more talk of 'reform'. German central bankers grimly warn that there can be no quick fixes and that debtor countries must 'reform' in order to save the euro. But what do they mean by reform?

There is a deep irony in all of this. Germany spent close to two decades being lectured by the Anglo-Saxons about 'reform' - the German social market economy, based on social partnership, long-term investment, strong social protection and a heavily regulated service sector, were singled out by neoliberals as the reason for Germany's weak economic performance after reunification. And Germany did reform - the Hartz measures moved the German social model in a more liberal direction, permitting the creation of more low skilled and low paid jobs and reducing welfare entitlements, at least for some workers. And lo and behold, Germany quickly shed its reputation as the sick man of Europe and is once again calling the shots in Europe.

How much of this is down to 'reform', rather than Germany's rather conservative consumer culture, is a difficult question to answer. However, one simple point that can be made is that Germany is not the only country in Europe that has 'reformed'. Italy and Spain have both had waves of labour market reform and important institutional changes in financial markets. The obvious implication is that reform is not necessarily a solution to anything, and that we need to be a bit more specific about what reform means.

One good example of this is that the dominant orthodoxy of the last couple of decades has been the deregulated capital markets were good for both stability and growth. Ahem. Germany actually resisted reform in this area (the famous Mannesman takeover by Vodafone led to a more restrictive law), much to the disgust of Anglo-Saxon observers. Meanwhile Spain embraced contemporary financial practice much more enthusiastically, resulting in an unsustainable housing boom which has left the country deeply exposed in the current crisis.

The Euro crisis is bad for everyone, but the pain does not seem to correspond in any consistent way with the extent of reform in the various European countries. It is not easy to see how more of this ill-defined reform is going to solve the problem.

The myth of technocracy

2011-11-22T06:31:00.000-08:00

Paul Krugman has written a great Op-ed (Cruel Euro Romantics) which, as usual, nails it.

The arrival of technocrats at the helm of two of Europe's most stressed governments has been largely welcomed by people who should know better. And indeed, no genuine democrat can really regret the demise of Silvio Berlusconi. But what exactly can technocracy offer us in the middle of this terrible crisis?

Well, they don't have a magic wand, for sure. Times remain tough, and Italy's bond spreads have merely stabilized at the unsustainable levels they reached under Berlusconi. But, as Krugman argues, the problem with technocracy goes further - that in fact, these technocrats are the ones who got us in this mess in the first place, with their fantasy world of a diverse Eurozone gliding seamlessly towards convergence under monetary union. Why on earth should anyone have expected this to happen?

So these technocrats are really 'romantics' - rather than robotically applying the findings of the best economists, they chose instead to invent for themselves an imaginary world in which the Euro would succeed where other monetary experiments had failed. Krugman, of course, argues that the failure of technocracy is their choice to use the wrong kind of economics, and that the right kind - his kind - would allow us to solve the problem, or least avoid catastrophe. I'm inclined to agree. But there is something else here that Krugman misses.

The other problem with technocracy, is that it does not engage the people. In fact, this is the very point of it. Technocrats have the theories and facts to make the right decisions, so they should be left to do it, free of the daily noise and fury of politics. But even if they had the right policies, they still have to convince the people that their policies will deliver some approximation of the collective good, otherwise the compliance with rules and norms any society rests on will break down.

This is the colossal failure of the European Union. It is bad enough that they designed institutions that have left us on the brink of disaster. But worse, they did so without ever bothering to explain what the benefits, costs, and likely risks of the project were. Now, again, the European policy elite wants us to write another blank cheque to the same people who have already let us down. It can't work.

Published thoughts on Italy

2011-11-22T03:29:00.000-08:00

Piece for Foreign Affairs: How Italy's Democracy Leads to Financial Crisis.

Blurb: Monti’s appointment fits an established Italian pattern: fiscal laxity under populist center-right governments followed by brief emergency periods of technocratic austerity under the center-left and EU. To make fiscal responsibility stick this time, Brussels should back Monti as he builds up a popular mandate for gradual reform.

Time for Germany to show leadership

2011-11-18T14:29:00.001-08:00

Great piece by (interest declared) my friends Matthias Matthijs and Mark Blyth in Foreign Affairs: Why Only Germany Can Fix the Euro. They argue that Germany is copping out of its responsibilities: 'As the eurozone's biggest economy, it was Germany's job to stabilize the system when the first signs of financial trouble appeared. Instead, it did precisely the opposite. Whether the euro survives depends on Frankfurt finally assuming its role as leader.'

The argument is similar to Wolf's but punchier. And there are some valuable home truths thrown in. That Germany's virtue is the mirror image of Southern Europe's supposed vices, that Germany can only be like Germany if others are like Greece, that deflation can only end in disaster, and that the answer lies with the ECB acting as a lender of last resort. Some great data snippets in there too: the Euro engineered the colossal current account imbalances within Europe that have created the problem. So

Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion.

Basically, the Euro locked Southern Europe into acting as the borrower of first resort for German savers. Then when the music stopped, they asked for it back, all at once. Too late.

Martin Wolf on Italy

2011-11-18T00:48:00.000-08:00

A characteristically clear and articulate analysis from the FT's Martin Wolf: Europe must not allow Rome to burn. Wolf argues that Italy can survive the crisis, but only with strong support from outside, and that means Germany authorizing the ECB to backstop Italian debt.

Given Guido Westerwelle's obtuse offerings in the same newspaper yesterday, the chances of this happening don't look good.

Important news just in

2011-11-17T16:12:00.001-08:00

You turn if you want to

2011-11-17T15:50:00.000-08:00

Like the markets, I'm oscillating between fear and terror on the future of the euro. On a good day, I'm simply deeply worried. On a bad day, I stick my head under a blanket. This article by Guido Westerwelle (Germany is not for turning on how to save the euro) is actually the kind of thing that keeps me under the duvet.

As well as the ritual commitment to standing firm and avoiding easy get-outs (we prefer to do things the difficult way), Westerwelle shows a touching faith in 'reforms'. So, he states, the way to tackle the immediate crisis is for 'Greece’s government (to) without further delay adopt and implement the necessary reforms'.

Right. Presumably in a minute he'll tell us what the reforms are. Yes, here goes: 'Only when states regain trust by immediate and thorough reforms, can the crisis be overcome.'

Yes, couldn't agree more. So, these reforms are....? Well, he doesn't say, but he does mention that 'Putting the European Central Bank’s printing presses to work... would have dire consequences, both raising inflation and dissipating vitally important incentives for reform'.

So reform is the key. The thing is, there are reforms and reforms. Germany spent most of the last two decades resisting reforms that Brits and Americans insisted were necessary to drag it out of the post-unification torpor. It did make major changes to labour markets and the welfare state, but avoided reforms in a host of other areas. So not all reforms are good reforms, at least for Germany.

Southern European countries have also adopted reforms. Labour markets have been liberalized, financial markets opened, public spending cut, pension ages increased. Not just now, but well before the crisis. Some of these reforms were beneficial, maybe some didn't go far enough. But the notion that reform will solve everything assumes that we know what reforms will restore growth, competitiveness and fiscal stability. And we don't.

Hanging the fate of the Euro on a vague and untested programme of 'reform' is wishful thinking at its most dangerous. It won't work politically, and it probably won't work economically. And it certainly won't deal with Germany's €182 billion trade surplus, which it lent out to the rest of the Eurozone thus creating the debts that we're all worrying about.

So much for the Monti effect

2011-11-16T01:27:00.003-08:00

I was hoping we would get more than just a few hours respite out of this (Europe edges higher as bond yields ease).

Bunga bunga economics

2011-11-14T16:35:00.000-08:00

Only just noticed this great op-ed by Paul Krugman.

Apart from the great opening line 'this is the way the euro ends — not with a bang but with bunga bunga', the really interesting point is this:

"Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. "

I've long believed that Europe was the main reason Italy had not ended up like Argentina. Maybe I was over-optimistic.

Economists at work

2011-11-14T08:37:00.000-08:00

Research by Mark Hallerberg and my LSE colleague Joachim Wehner finds that Economically-troubled countries are more likely to be led by those with economics training.

Although my colleagues suggest the causal chain runs the other way, it doesn't look good for Papademos and Monti... More seriously, placing faith in technocrats might make more sense if they hadn't been such enthusiastic promoters of the particular model of monetary union that has created this mess.

The Monti effect

2011-11-14T01:28:00.001-08:00

Depression or Inflation?

2011-11-13T15:36:00.000-08:00

Nice post by Simon Johnson at The Baseline Scenario: Johnson lays out neatly and concisely the choice facing Europe, and the world, at this juncture: monetization or depression.

The logic is that, as many others have been pointing out for a good while now, there is no feasible readjustment or recovery under the existing regime. Sovereigns will default unless bailed out, and Italy is too big to bail out unless this is achieved through the ECB printing money to buy up Italian bonds. And sovereign default would drag Germany down with the rest of us.

Johnson argues that there is a huge moral hazard problem here, but at this point we're just going to have to deal with that later. After all, what's the point of averting moral hazard by destroying the world economy?

'via Blog this'

The worst politician in democratic history?

2011-11-12T17:01:00.003-08:00

Well, he's actually gone and resigned (Silvio Berlusconi si è dimesso la piazza in festa grida: "Buffone").

He leaves behind a country on its knees, and still in denial for the most part about what is happening. Maybe Monti can start by telling people the truth - will Italy be able to face it?

Nouriel Roubini's prophetic words on Tremonti, Italy and EMU

2011-11-11T07:20:00.000-08:00

Paul Krugman reminds us of an incident in 2006 where Nouriel Roubini told Giulio Tremonti a few home truths, much to the Italian Finance Minister's disgust:

Italy’s Tremonti’s Temper Tantrums on EMU in Davos…a Sad Embarrassing Episode for Italy…

Pity Italians didn't pay more attention - it could have spared them a lot of trouble.

The Berlusconi question

2011-11-10T16:43:00.003-08:00

Some thoughts on the Italy drama, for BNN:

http://watch.bnn.ca/the-street/november-2011/the-street-november-10-2011/#clip565590

The Berlusconi effect

2011-11-08T06:18:00.001-08:00

(spread with German bonds, Bloomberg)
Today is a big day. Berlusconi could survive today's vote, in part because the opposition may well abstain to avoid the technical difficulties resulting from the failure to approve last year's government accounts. But even the Northern League is now calling for him to resign. It may take a few days yet, but I'll be putting some champagne in the fridge (or maybe Prosecco).

Gavyn Davies on the Euromess

2011-11-07T15:12:00.000-08:00

Seeing Berlusconi finally on the verge of political oblivion produces mixed feelings, because in fact he has not been defeated by his own mistakes or political weaknesses. Instead, like the fall of Papandreou and Zapatero, it is a result of the fundamentally unsustainable nature of monetary union.

As Gavyn Davies points out in the FT, the German current account surplus more or less exactly corresponds to the current account deficit of Spain, Greece, Italy and Portugal. The stark implication of this is that

Viewed in this light, it is clear that there needs to be a capital account transfer each year amounting to about 5 per cent of German GDP from the core to the periphery. Without that, the euro will break up.

I wonder how many Germans have understood this. In any case, as Davies points out, there is not way this can happen under current arrangements (austerity, deflation and limited ECB intervention). And so the end game continues until the Southerners have had enough and opt for the Argentine route.

Berlusconi, Papandreou and the various corrupt networks they represented should not be exonerated, but ultimately the collapse of this phase of monetary union is not actually their fault. Ireland, with a very difficult social structure, economic regulation and political system (although corrupt enough in its own way) is in a similar mess. More enlightened politicians would probably not have averted disaster. The proof of this is that Spain, the star pupil of economic reform in Southern Europe, is barely better placed than Italy and Greece.

The sad thing is that Northern Europeans may happily blame corruption for the South's plight, but Southern citizens are not in the mood to listen to the sermon. Ironically, the humiliation of the bailout arrangements could end up stirring national pride and generating an alternative (and equally implausible) narrative: blame the Germans.

Berlusconi finally meets his match

2011-11-07T14:58:00.000-08:00

Yes, Berlusconi has dealt with pretty much anything that Italian politics has been able to throw at him over the years, but in the end the power of the bond markets is going to get him ("Va via": borsa su. "Resta": crollo I mercati e il destino del premier).

Brings to mind the famous phrase of James Carville, about the bond markets being far more powerful than a president, a pope, or a .400 baseball hitter.

Anyway, I think Silvio may well go tomorrow, if the vote in parliament on the government accounts doesn't produce a majority. If not, with bond yields hitting their Euro-era record today, it can't be much longer.

Happy birthday, my blog

2011-11-06T16:23:00.000-08:00

Yes, Unpublishable Thoughts has reached its third birthday. Despite the difficulties in posting regularly (I often don't) and coming up with insightful posts that add something to the crowded blogosphere (ahem, as I was saying...), it's still here.

Unfortunately, the main reason I started blogging - the financial crisis and the resulting recession/depression - is also still here. Three years on, things look increasingly desperate, and we're still a long way from the kind of political transformation that I fondly imagined would take place once the failures of free market idolatry were revealed to all.

By the way, my first post was a celebration of Obama's election victory, and shortly after I mused on the consequences of Britain's decision to stay out of the euro.

Roubini and Depression

2011-11-06T02:49:00.000-08:00

Krugman cites Roubini On Internal Devaluation characteristically predicting gloom and doom in Europe. I was optimistic about European leaders responding to the obvious disfunctions in the Eurozone institutions by enhancing the EU's capacity to do the kind of things states do when faced with asymmetric shocks. Now I'm not so sure. The failures of the past two weeks make it more and more likely another Lehman-style collapse will force their hand. By that stage, the distrust between member states and the increasing costs of resolving the problem will make it harder to cut the kind of deal that is needed.

In short, I'm depressed. Thanks, Nouriel.

Rogoff and Eurojunk

2011-11-04T05:25:00.000-07:00

Kenneth Rogoff weighs in to the debate surrounding the G20 (The eurozone does not need IMF help) in the FT today.

As well as rehearsing a few well known arguments about the inadequacy of the Eurozone's governance arrangements, he tellingly suggests that

it is hard to see much benefit in (the IMF's) involvement, aside from providing a fig leaf for large-scale European Central Bank purchases of euro sovereign junk bonds

And this gets to the nub of the matter. The only plausible way of keeping the Eurozone together is for the ECB to do what any national central bank would do when faced with a sovereign debt crisis - print money to buy the debt. This is off the table, for political reasons. But it is the only way out, and we will have to get there at some point. So how?

One way is the IMF route suggested by Rogoff, another messier, but more likely, route is that the money will be printed to bail out European banks when the default actually happens. Strangely, in the weltanschauung of the current global leadership, it makes more sense to bail out banks than states. The logic is the same, but of course the damage (political as well as economic) is greater.

There is a pattern in this whole saga. The policies that might work economically don't work politically, and viceversa (the now famous Eurovenn). But when the politically palatable policies fail, we edge towards the economically viable ones, albeit having raised their costs and created a lot of damage along the way.

A set of arrangements designed to have as little democratic legitimacy and executive efficacy as possible is proving catastrophic when faced with a serious crisis. The EU has to become something radically different, or jump back to the 1970s.

Berlusconi's Diplomatic Skills

2011-10-26T15:01:00.000-07:00

I wonder why the Germans are so nervous about Berlusconi's commitments to economic reform in exchange for financial aid?

What economists lack - Paul Krugman

2011-10-26T00:38:00.000-07:00

Paul Krugman's presidential address to the Eastern Economic Association (The Profession and the Crisis) identifies three failures of the economics profession in the present crisis: a failure to see the crisis coming, a failure to imagine such a crisis being possible, and a failure to draw on the insights of Keynesian economics to deal with it. For Krugman, the latter is the most serious failing, and it's hard to disagree - up to know we have had a series of fanciful invocations of austerity to deal with what looks for all the world as a kind of depression. After that approach did so well in the 1930s.

Meanwhile Joe Stiglitz is equally damning about this policy direction in his presentation of the report by the UN Economic and Social Committee. Two Nobel prize winners at odds with most of their profession: looks like time for a paradigm shift to me.

Mark Thoma makes a bold claim: Raise Taxes on the Wealthy

2011-10-24T10:46:00.000-07:00

It's pretty amazing how what used to be a platitude has become a taboo (at least in the US). The ever-reasonable Mark Thoma makes a restrained case for progressive taxation and gets disheartened by the aggressive bile he receives from online commenters.

Thoma points out that the US economy hasn't, by any serious measure, prospered as a result of the declining fiscal burden faced by the super-rich. But his argument also receives strong support from comparative analysis. A quick look around the advanced world shows that the most unequal societies are also the worst performers in the post-crisis scenario. In Europe, egalitarian Sweden, Holland and Germany are the strongest performers, whilst less progressive economies such as Ireland, Greece and Italy suffer (not to mention the UK). In North America, Canada is in much better shape than the US.

The crisis has laid bare the bankruptcy (figuratively and other) of the Anglo-American model of inequality-fuelled growth. Put another way, there is no equality/efficiency trade-off.

The world's population has doubled in my lifetime

2011-10-24T03:10:00.000-07:00

The world population has reached 7 billion, apparently.

According to the Guardian's interactive tool How big was the world's population when you were born?, this is more than twice the world population at the beginning of my life (3,376,111,993).

This freaks me out slightly. Because I'm not that old, really.

It's too hot to work

2011-10-21T13:53:00.001-07:00

Nice post by Kash Mansori at The Street Light: Where Exactly Are Those Lazy Southern Europeans, Anyway? Mansori points out that there is no evidence of lazy or feckless behaviour being any more prevalent in the South than in the North - working hours, overall employment, social spending and pensions are mostly close to the European average, although welfare coverage is on the whole less generous and working hours longer.

In fact, the prevalence of the grey economy should mean that Southern Europeans are working harder than the data suggests, although this is not an argument likely to impress Northern Europeans.

Of course, Southern Europe has its problems, and its history of corrupt leaders and authoritarianism have left legacies that continue to hold the region back. But the broad picture some Northern Europeans wish to believe in, of lazy Mediterraneans exploiting their virtuous neighbours, is based entirely on ignorance.

False Consciousness, Lesson 53

2011-10-11T15:28:00.000-07:00

The Gawker reports on a Right-Wing Version of 'We Are the 99 Percent' - it's called 'we are the 53%', apparently the half of Americans who pay federal income tax and work their fingers to the bone so that long-haired pot-smoking drop-outs can protest against Wall Street.

It's hard to know if the people posting their pictures and hard-luck stories really exist, and it's certainly unlikely they are very representative. But still, it's an astonishing read: post after post describes what a miserable exploited existence these losers have had, and then goes on to express pride at never having complained about their lot or asked for any government help (or so they claim). The idea that 'occupy Wall Street' might be about them getting exploited a bit less is clearly difficult for them to grasp.

This type of reasoning is probably not that typical of today's America, and instead reveals a very high resistance to cognitive dissonance on the part of the '53%'. However, the claims that never having asked for help, even in the worst circumstances, is some kind of American virtue does seem to resonate in the US. It certainly would sound strange in Italian or Greek, or probably for that matter, in German.

In any case, I prefer this version of the hard luck story:

Note Marty Feldman's convincing Yorkshire accent.

23 Things They Used to Tell You About Capitalism

2011-10-08T09:34:00.001-07:00

Ha-Joon Chang has written a great little book called 23 Things They Don't Tell You About Capitalism. An engaging speaker, he recently presented the book at LSE - the podcast here is well worth a listen too.

Although it's important to make these arguments, and Chang does a great job of it, the dominant feeling I'm left with is dejection and frustration. Why? Because what Chang is arguing is almost self-evidently true, and should barely need saying. Indeed, 25-30 years ago much of what he argues in the book constituted the conventional wisdom. Yet the idea that markets are social constructs, that regulation is a politically loaded issue, that individual productivity is not really individual, have now become quite radical things to say.

Why? Well we know there has been a sustained assault on social democratic values over the past thirty years or so, and that has been largely successful in pushing back the frontiers of political intervention in favour of justice and fairness. But why hasn't the left fought back? Why instead have social democrats been forced onto the back foot, constantly conceding defeat and allowing the political centre to move ever-rightwards?

The reason is that the left has lost its anchor. The right can argue in favour of free markets, and can push for more 'freedom' in the knowledge that there is always a tax to be cut or a regulation to be abolished. The left, however, no longer has an objective to push towards. Instead it hangs on to what it has, and what it has is less and less as the right pushes the Overton window in its own direction.

The left has become the centre. The right, by pushing further in the direction of its most radical goals, is able to redefine continually what the centre means. The left, without its old anchor, is unable to resist being dragged reluctantly to ever more pro-market positions.

The answer has to be to find an anchor again. For me, that has to be equality. Policy has to deliver greater equality, or it's not worth pursuing. The time has come to put down some markers.

Greenspan meets Max Weber

2011-10-08T09:05:00.000-07:00

So Alan Greenspan, perhaps the key architect of today's global economy (yes, that is not a compliment), has decided to weigh in on the Eurozone crisis and in particular on the North-South dimension of Europe's problems.

It's hard to know where to start, but here goes. The least interesting part of the nonsense Greenspan talks is that he rehearses the standard story about Mediterranean profligacy, of the Southern periphery living beyond its means as it hurtled to its inevitable reckoning with the harsh reality of the bond markets. This story is still popular, despite being debunked over and over, most recently by Mansori here. It is popular, of course, for the reason that it blames the victim, a common response on the part of the supporters of free market capitalism to the crises their prescriptions generate.

What more interesting is the apparently unselfconscious Orientalism of Greenspan's assessment of the Southern countries. Greenspan's analysis of the North-South divide in Europe goes as follows:

There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow suit.

What would this 'similar culture', based on 'northern prudence', involve? Well, for a start it presumably doesn't involve the Anglo-Saxon recklessness exhibited by Northern European countries such as Britain, Ireland and Iceland. So we are talking about particular areas of the North whose prudence is expressed in wage restraint and sound public finances: the countries generally referred to in the comparative political economy literature as 'social democracies'. So Alan comes out as an unexpected fan of large public sectors, high and progressive taxation, and strong trade unions. Who knew?

The counterpart of course is Southern fecklessness. Here we go back to a common refrain of blaming poor economic performance on climate. Greenspan cites approvingly the following words from Kieran Kelly:

if I lived in a country like this [Greece], I would find it hard to stir myself into a Germanic taxpaying life of capital accumulation and arduous labour. The surrounds just aren’t conducive.”

Never mind that the average yearly working hours of a Greek employee are the highest in Europe. It's just so hot, how can they ever do any work? A notion that nobody ever applies to Texas or Florida.

It's barely worth the effort of outlining all the ways in which Greenspan is wrong. But the fact that this kind of sub-racist nonsense can be given space in one of the best newspapers around is a sign of the times. The times are ugly, and what we thought was true wasn't. So why not just blame problems on those suffering them? It's a lot easier than trying to work out what went wrong, and admitting that powerful men like Greenspan didn't have the faintest clue what they were talking about.

The economy is a morality play

2011-10-07T11:12:00.001-07:00

Today Krugman ('Notes On The Eurobubble') gives Alan Greenspan another well deserved kicking for blaming the Euro crisis on profligate Southern Europeans getting their just desserts. Krugman points out that huge capital flows from Northern European pushed up demand, output and employment in Spain and other countries, leaving them high and dry when the bubble burst. To blame the Southern Europeans for their plight is therefore misleading moralizing.

Krugman has been berating conservative economists for some time for the tendency to see the economy as a morality play. The trouble is, the political economy is a morality play. Economic behaviour is deeply embedded in social systems within which moral claims, as well as material desires, drive human behaviour. The Eurozone could well collapse entirely because Germans find it so hard to cope with the idea that their supposedly virtuous behaviour will not bring its own reward. Krugman is right in terms of the models, but the very real presence of moral reasoning in the politics of the crisis is precisely why economic modelling alone cannot give us the answers.

Political market failure

2011-10-04T14:34:00.000-07:00

Thinking of Italy brings me naturally to thinking about the difficulty of making democracy work for the citizens. The inability of western governments to defend the basic economic interests of large segments of the population has become clear enough over the past 5 (or 20-30 if you were paying attention) years. Of course, no political scientist would make the ridiculous claims on behalf of democracy that some economists make on behalf of free markets. But still. What exactly do we except democracy to deliver?

The clearest statement on political market efficiency I can think of is Donald Wittman's The Myth of Democratic Failure. The interesting bit about Wittman is that he makes two ambitious (to my view implausible) claims: that the rational actor model explains politics well, and that an effective and 'efficient' democracy can be explained in rational actor terms. The resulting text is an entertaining lesson in the usefulness of functionalist reasoning and ad hocery wheeled out in support of a notionally deductive theory resting on individual rational action.

But political science also makes less strong claims about democratic efficiency as a matter of course. The notion that governments could fleece the population systematically is rarely entertained. Yet at the moment this is what seems to be happening across the advanced world, with little in the way of organized reaction (as yet).

Which is the key - 'organized reaction'. Democracy requires organization - leaving political action to isolated individuals doesn't get us very far. And the difficulties of organization - the free rider dilemma, the danger of hierarchy, the asymmetric access to political influence - produce colossal inefficiencies in the political market. Political scientists need to start thinking about how these inefficiencies, coupled with economic disaster, could destabilize what we assume to be well entrenched democratic institutions.

Panem et circenses

2011-10-04T14:21:00.000-07:00

Italy gets another downgrade, its Finance Minister blames it on his own government not calling early elections and instead hanging lifelessly onto power, yet most attention seems to be focused on Amanda Knox.

What was that about bread and circuses? Italy is currently suffering from a form of paralysis, apparently unaware that it is about to become an over-sized Greece.

Irrationality and morality

2011-10-04T06:26:00.000-07:00

Paul Krugman has an interesting post pointing out the usefulness of economic modelling in times of uncertainty, where

'experience — the kind of experience business people gather over years in the market –ceases to be a helpful guide, whereas models and deep historical knowledge have at least a hope of getting at what’s really going on'

I think he's right, up to a point. The problem is though, that what he's trying to model is a world in which most people have no access to the kind of abstract reasoning and deep historical knowledge he can draw on. And that can end up vitiating the models.

I can see a kind of circularity to all this. The models tell us what we should be doing, but they only work if we do what we should be doing. If we introduce the diversity of agents, then we can get somewhere: so assume very bounded rationality for consumers, investors and voters, and more 'rational rationality' on the part of policy makers, and you may get a guide to policy. But policy itself is just as subject to the boundedness of rationality.

A further irony occurs to me. The boundedness of rationality comes across in the ideologically driven hyper-rational models of 'fresh water' economists, who desperately try to cling on their rational expectations models, for (often) moralistic reasons.

I've got a headache now.

Dimon may well be right, and Carlos Tevez is a reliable employee

2011-10-04T04:24:00.000-07:00

Words fail me.

Oh, alright, here goes. Steven Rattner in the FT understands Jamie Dimon's bad mood, but gently reminds him that 'the rage of the citizenry demands tough new bank rules'. If only that were the problem.

Tough new bank rules are required because people like Jamie Dimon have enriched themselves beyond belief at the expense of the real economy, and will do it again given half the chance. I honestly don't want to live in the Mad Max world which would follow another round of hyper-leveraged madness from Dimon and his friends.

The striking thing about Rattner's tone - beyond the sycophancy - is the absurd expression of sympathy towards one of the most unaccountable and powerful individuals in the world. Rattner 'feels his pain' because JPMorgan 'conducted itself more responsibly than most of its peers.'

Sure, JP Morgan didn't go bust itself, but it would have done had governments allowed its counterparties to fold. And 'conducting yourself better' than other insolvent financial institutions is not a big ask. But above all, JPMorgan is one of the select bunch of too-big-to-fail institutions that would have to be bailed out if things went wrong. So how on earth can it be considered 'unfair' for Morgan to be subjected to the same rules facing the other major participants in the casino? He may have a point about shadow banking, but that point is better made if you at least are playing by the rules you demand for others.

Jamie Dimon's $16 million pay package (2010, sans bonus) is not the ideal pulpit for demanding a 'level playing field'. It is instead a measure of how the masters of the universe have entirely lost touch with the miserable reality facing the rest of us. Until some evidence of the social usefulness of Jamie Dimon can be found, I think we're entitled to view his opinion as a particularly tasteless case of chutzpah.

Munchau loses it

2011-10-03T07:56:00.001-07:00

Wolfgang Munchau, in today's column Eurozone fix a con trick for the desperate, describes the latest solution for the Eurozone crisis as "the equivalent of putting explosives into a can, before kicking it down the road". The grounds for this are that the leverage involved in turning the European Financial Stability Facility into something powerful enough to hold back the markets turns it effectively into a CDO.

Munchau used to be a measured, cautious and conservative commentator. The fact that he is using such strong language these days totally freaks me out.

How To Save Europe

2011-10-02T15:25:00.000-07:00

The Baseline Scenario has a neat piece on the Eurozone crisis. The key passage is the following:

Greece and some other countries have serious budget difficulties. But most of the European periphery also faces a current account crisis – something has to be done to increase exports or reduce imports or both. If the exchange rate can’t depreciate, wages won’t be cut, and “fiscal devaluation” proves unworkable, activity in these economies will need to slow down a great deal in order to reduce imports and bring the current account closer to balance – unless you (or the Germans) are willing to extend them large amounts of unconditional credit for the indefinite future.

And as these economies slow down, their ability to pay their government debts will increasingly be called into question.

So, it's a colossal loan or the end of the Euro. Johnson identifies Italy in particular as a problem, since under low growth and high interest rates its debt could grow pretty quickly, and it's already at the upper limit of what's sustainable. But how happy will Germans be to bail out Italy under its current leadership?

Another crisis and choice for European social democracy

2011-09-28T14:55:00.000-07:00

Just following on from What Ed should have said.... I've had some thoughts about what the crisis means for social democracy. OK, I'm not the only one, and probably none of this is strictly original, but hear me out while I try to make sense of it to myself.

Scharpf's argument was that Keynesianism in one country was dead. The response of mainstream social democracy was to adopt orthodox fiscal and monetary policies which, depending on the reading, would either secure full employment, or at least prevent the worst outcome - 70s style stagflation. The idea was that stability could be achieved by national governments in the context of globalization by following the right policies.

The crisis has blown that idea out of the water. Although Greece is the exception that proves the rule, governments in many countries - Ireland, Spain, even the UK at a stretch - were actually ticking all the boxes, and were still roundly screwed by the crisis. The reason for this was that mobile capital creates such a high degree of uncertainty and volatility that government policies, no matter how carefully designed and credible, cannot compensate for the shocks financial flows bring about.

The conclusions we can draw are, in my view, point in diametrically opposite directions. We can pessimistically take this as a given, and design even tighter and more credible fiscal and monetary institutions to lock in stability and stave off financial volatility. Might work for Germany, I guess, but in the end it's only a matter of time before those rules too would be torn apart by financial shocks.

Alternatively, we can bring back capital controls. Now the technicalities of how this would work are not my area of expertise, and I doubt it is straightforward. However the alternative (see above) is surely worse. If even hyper credible commitments and ultra rigorous decision-making rules don't protect you from shocks, than it's hard to see what else can be done, save all of us attempting to become little westernized Chinas with 40% savings rates (yes, exactly).

So, it's got to be back to some updated form of Bretton Woods. That, or a descent into chaos.

The Eurovenn

2011-09-28T14:43:00.000-07:00

Every now and again it's useful to remind ourselves what political science is (should be) for:

The Euro crisis according to Martin Wolf, according to Paul Krugman.

What Ed should have said

2011-09-28T06:27:00.000-07:00

In 1976, Jim Callaghan famously lectured the Labour conference thus:
"We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists"

20 years ago Fritz Scharpf developed this argument more systematically through a comparative study of four European economies, which concluded, like Callaghan, that Keynesianism was finished. The alternative, which Labour eventually developed under Blair and Brown, was to adopt strict fiscal and monetary policies to entrench macroeconomic stability and low inflation. The disastrous failure of this model makes 1976 look like the good old days.

So Ed could do with saying:
"We used to think that you could cut your way out of a recession, and increase employment by reducing Government spending. I tell you in all candour that that option no longer exists"

It's a tough sell, but to refuse the challenge condemns Labour, should it win, to the kind of centrist no man's land Obama finds himself in. The electorate have to be told what is going on, however counter-intuitive it is. There is nothing to gain by offering a softer version of Cameron's Hooverism.

A new stability pact

2011-09-26T08:50:00.000-07:00

In view of the previous post, it should be clearer than ever that the talk of balanced budgets is entirely missing the point (even forgetting for a moment how stupid such rules are in practice). A real stability pact would call governments to account if their current account balances exceeded a certain share of GDP - hey, why not 3%? And by this I mean in either direction - creditor nations and debtor nations would both have to act.

This of course will not happen, because the prevailing ideology is still that financial markets are rational and not prone to the damaging bouts of euphoria and gloom which come close to destroying the Eurozone. The only certainty is that the current approach will fail. What happens after that is anyone's guess.

The Euro crisis is nothing to do with budgets

2011-09-23T14:29:00.000-07:00

Krugman and Mansori on the Origins of the Euro Crisis: it's all about capital flows. The countries now in trouble were not all running fiscal deficits, but they were all running trade deficits, and that seems to be the best predictor of sovereign debt crisis.

So it turns out that the 'recklessness' that Southern Europe supposedly engaged in was allowing German and other Northern European savers to invest their money there. Doesn't quite have the same ring as the morality tale about budgets.

The political science of zombie economics

2011-09-23T09:40:00.000-07:00

Reading Quiggin's wonderful Zombie Economics: How Dead Ideas Still Walk among Us, I'm left with a similar warm feeling of self-righteousness I get reading Krugman, but at the same time a sense of frustration. The frustration comes from the absence of any clear idea of the politics of all this: how, in a democracy, can such clearly disfunctional and regressive ideas still prosper, even when it is clear they are failing the vast majority of the electorate?

Obviously, it is hardly Quiggin's job to explain the politics: that should be down to us. What can political science offer? Well, for me the direction must be in reviving that old-fashioned approach to the study of politics that sees it as the study of collective action, of institutions, and which seeks to explain institutions in terms of genuinely political variables, rather than reducing them to aggregates of individual maximizing decisions. Here I can self-interestedly cite political parties as key intermediaries between social interests and political institutions. Why did political parties buy into the zombie ideas Quiggin dissects when there should have been obvious gains for any politician that could offer something better?

A couple of ideas occur to me. First, that democracy has been associated historically, in the classic modernization formulation, with the emergence of a large middle class and lower inequality (which sustains power-sharing, as in Boix's game theoretic account). On this reading, we could suggest that increased inequality also undermines democratic institutions in such a way as to reinforce the hierarchical and oppressive dimension of market capitalism. This would be a social-structural explanation for the success of regressive ideas.

Next, the parties literature documents a secular decline in the organizational strength and mobilization capacity of political parties. This limits the ability of elected politicians to mobilize resources to challenge free-wheeling capital. In this sense, there is a problem with the organizational infrastructure necessary to sustain economic interventionism, so that parties give up on non-zombie ideas. This is a modified resource mobilization theory.

Finally, social and cultural changes may affect the degree to which people can be convinced of policy ideas which are probably in their interests, but simply do not resonate (or maybe even dissonate). Individualization makes people reluctant to throw in their lot with others, and therefore resistant to social democratic ideas, even when all the evidence suggests that for most people these ideas are obviously in their interests. The metaphor that comes to mind is the angry driver in the traffic jam, railing against the other drivers rather than thinking of a collective solution that would get everyone to work on time at a fraction of the cost. This would be normative-culturalist (false consciousness?) explanation of the success of zombie ideas - they may be wrong, but they should be right.

As an after-thought, all of this offers a hint about the weird anti-science trends we're seeing these days, especially in the United States. Man-made global warming may be right, but to believe in it, for most people, is a leap of faith, involving trust in institutions (universities, the scientific professions, the government). If the patterns identified above are a problem for economic ideas, then why shouldn't they be a problem for other theories about how the world works? Bachmann's campaign against the HPV vaccine is probably no different in its essence than trickle-down economics or any of the other zombie ideas which are almost certainly wrong, yet politically enjoy the gift of eternal life.

That sinking feeling

2011-09-22T09:43:00.000-07:00

Global growth fears sink world stocks - FT.com:

Irony of ironies: this is probably our best bet for a policy change in the right direction. Ultimately, markets do want austerity, but in the Augustinian sense: they also want growth, and if growth requires printing money and running deficits, they want that too. Just not printing money and running deficits in currencies they're holding.

If investors show their lack of confidence in a policy that is designed purely to give them confidence, then policy change is the only response that makes any sense.

Greece to stay in the Eurozone by destroying its economy

2011-09-22T03:07:00.000-07:00

Greece slashes more jobs and spending as it vows to stay in eurozone | Business | The Guardian:

That should do the trick... But seriously, exactly how does this help Greece stay in the Eurozone? The inevitable consequence of this policy is a deeper recession, and markets know this and will price Greek debt accordingly. Since austerity will neither reduce the deficit (because of its devasting effect on the denominator) nor reassure the markets, how does it help Greece stay in the Eurozone?

My suspicion is that the only 'positive' effect of this austerity to reassure German voters that Greece is truly suffering, and therefore not escaping its due punishment for fiscal misdeeds. If that is indeed the mechanism, then we have officially installed a penal system in place of a monetary union.

Sado-masochism, the cargo cult and the crisis

2011-09-21T04:35:00.000-07:00

I share the despair of many of the smarter commentators (economists and non) out there who are lamenting the failure to adopt appropriate policies to deal with the slump. How can we explain the reluctance to drop the austerity nonsense and do something for growth, the only real way to deal with our debt problems? Well, here are some inchoate thoughts on this paradox.

First, I'm pretty sure the current arrangements challenge even the softest forms of rational choice theory. Whichever way you look at it, the choice for pain in the present for no certain benefit in the future has something self-defeating and masochistic about it, particularly since the pain doesn't even net out into clear benefits for any sub-group within the economy.

Second, it confirms the power of dominant ideas, and the difficulty of getting rid of these ideas when they have been proven wrong (see Quiggin's wonderful Zombie Economics). After all, you could hardly hope for a better disconfirmation of the policy mix (basically unquestioned in elite circles before 2008), based on financial deregulation, central bank independence and privatization, than what is happening now. Yet we still hang on to these failed ideas, in a way which is starting to look like the Polynesian cargo cult - policy-makers lay out the same prescriptions that seemed to work before 2008, and patiently wait for the crisis to end.

Finally, it illuminates the crucial role in all of this of political parties as intermediaries between policy and the public response. People are clearly hugely pissed at what is going on, yet there is no real policy alternative being presented by existing political parties, hence the lack of policy change. At some point, public anger will elicit some response from elected politicians, but in the meantime they continue to preside over an economic disaster, and in some cases have managed to mobilize popular discontent in favour of policies that are certain to fail miserably (see the entire Republican party in the US).

All this suggests we need to fundamentally rethink our models of democratic politics. I'll just throw that out there, because for now I have only the vaguest idea about how we are supposed to do this.

Success

2011-09-17T03:04:00.000-07:00

Another week has passed, the Euro is still standing. Let's just take it one day at a time.

The endgame

2011-09-08T14:00:00.000-07:00

Greece is now at the point where default is an inevitability - market prices suggest 91% probability of default within 5 years, at which point the game is over. I've no idea what Schauble and the others are thinking of doing, but the threat of contagion to Italy is even more terrifying, as one observer points out: "If Italy defaults, nearly every bank in Europe would feel the impact or go bust, either because they own debt or they are counterparties to debt".

Yet we're still involved in this silly game about deficits and fiscal targets. That way lies madness. Money has to be brought under political control here, or the whole financial system will collapse. Moreover, that political control cannot be the creditor nations bossing the others around - they're are as much to blame as anyone else.

Europe's Shotgun Wedding

2011-09-08T02:32:00.000-07:00

Here's a longer than usual post on Europe:

Europe’s Shotgun Wedding

It is difficult to deny the parlous state of the European project. The sovereign debt crisis in the Eurozone periphery is placing enormous strain on the institutions of the European Union and on the relationships between member states. The powerlessness of the EU’s executive and legislative institutions has been set in stark relief by the activism of the barely accountable European Central Bank, which is reaching way beyond its mandate to keep European banks and sovereigns afloat. Meanwhile the hostility of Germans and Finns to the bailouts of the peripheral countries is matched by the resentment felt by those suffering the spending cuts demanded in return. The European project appears to be falling apart.

And yet, there are good reasons for believing that European integration could be about to accelerate. Not of course, because of any putative sense of European solidarity and togetherness on the part of voters or political elites: appeals to national self-interest have rarely been so popular. Further integration may not be desired by anyone, but it could be forced upon Europeans by the consequences of its decision two decades ago to adopt a common currency. Europe has often moved forward through an inexorable logic in which past decisions to pool sovereignty have consequences which necessitate further moves in an integrationist direction (the so-called ‘spillover effects’). Monetary union may prove yet another example of this. The decision to create a single currency has, in the space of just a decade, generated its own (catastrophic) spillover, and the logical, perhaps the only, response is to enhance the role of European institutions to resolve the second order effects of the creation of the Euro.

Critics of the EMU project argued back in the 1990s that the Eurozone was not an ‘optimal currency area’, and that monetary union without the development of supranational institutions to manage fiscal and redistributive policies would prove disastrous. Ignored at the time, this argument appears close to unanswerable in hindsight. Monetary union not only failed to bring about a convergence in inflation rates between Eurozone nations, it achieved the opposite effect, as destabilizing capital flows from surplus countries (chiefly Germany) led to an economic boom in Ireland, Greece and Spain. The resulting trade deficits run by periphery countries in the 2000s proved unsustainable, and the post-2007 credit crunch slammed their economies into reverse, wrecking their fiscal balances and spooking bond markets.

Although well understood by economists, the current account balances inside the Eurozone have been almost entirely ignored in the public debate, in favour of a simplistic narrative in which spendthrift Southern Europeans are entirely responsible for their current debt problems. In the case of Greece, this narrative clearly has some merit, with successive governments running structural deficits in good times while concealing the true state of public finances. But Spain ran a substantial budget surplus in the years preceding the crisis and had a debt to GDP ratio almost half that of Germany. There was no reason at all for Spain’s leaders to fear an abrupt descent into the fiscal abyss, and the markets took the same view, pricing Spanish bonos as barely any riskier than German debt. Even Italy, despite carrying the third largest public debt in the world, had in fact stabilized its public accounts before Euro entry and ran consistent primary surpluses right until the credit crunch. German and French breaches of the Stability and Growth Pact confirmed that the GIIPS (the four Southern European member states and Ireland) were, on the whole, no more inept at managing their public finances than the Northern Europeans.

The budget deficits facing the peripheral countries are largely a consequence of the crisis, not its cause. They are a reflection of the collapse in internal demand resulting from an unexpected correction in Eurozone current accounts. The unexpected end to the capital flows from Northern Europe which had financed large trade deficits in the first years of monetary union caused a dramatic collapse in investment and output, tearing a hole in tax revenues and forcing up government spending. Exhorting periphery states to embrace austerity is only likely to make deficits worse, because there is no alternative source of demand to drive economic activity. Potential export markets are themselves depressed, and cutting wage levels in the periphery to regain competitiveness, in the absence of Eurozone inflation, would have brutal contractionary effects even if were at all politically feasible. Even without the complication of sovereign debt risk, the prospects for the periphery would have been a grim menu of deflation and a long wait for external demand to appear from somewhere. But doubts about government solvency in the periphery remove even that unattractive option.

So the recent attempts to repair the damage within the existing framework of monetary union, through limited bailouts from Northern taxpayers in exchange for austerity packages in the debtor countries, appear doomed. The costs of the bailout strategy have spiralled as more countries have been dragged into the self-fulfilling prophecy of sovereign default risk. Greece, Portugal and Ireland, amounting to only 7 % of Eurozone GDP, could perhaps have been rescued by decisive action, but the addition of Spain and the Italy to the danger list makes the bailout strategy entirely incredible, with predictable consequences in the bond markets. With the spreads of both of the larger GIIPS heading north, two much more radical scenarios, with entirely opposite implications, have emerged.

The first scenario is disintegration: the reversal of the process of ever greater European economic integration and cooperation. In this scenario neither core nor periphery member states are prepared to meet the costs of staying together: German, Dutch and Finnish taxpayers refuse to sign up to the rescue of the profligate South, whilst in the periphery austerity packages founder on the rocks of collapsing output and/or political instability. The result is sovereign default in Greece, and some or all of the other periphery countries. But this would not in itself solve the crisis, since the competitiveness problems would remain, and periphery governments would still face the problem of financing budget shortfalls without the help of the private markets. If we add to this the resulting chaos in the Eurozone financial system, default could well lead to the exit of Greece and others from the Euro itself.

There are very strong reasons for believing that European leaders will avoid such an outcome at all costs, since it damages everyone. The periphery countries would benefit enormously from having their own currencies, since it would make the price and wage adjustment they require economically feasible and politically survivable. The example of the UK, which suffered a far worse financial crisis than any of the Eurozone states but avoided (so far) a run on its debt, is an appealing one. However the GIIPS cannot easily emulate the UK because they have to extract themselves from the Euro first, and doing so would likely cause such financial disruption as to outweigh the benefits of competitive devaluation. Perhaps more importantly, the creditor countries also have every incentive to avoid Euro exits. Germany is on the hook in two ways: first its trade surplus is almost entirely with the Eurozone, so Euro exits would undermine its main export markets. Second, German and French banks are exposed to periphery government debt to the tune of hundreds of billions of Euros. Default and or/exit would bring down the German banking system, requiring colossal bailouts at a time of declining growth prospects. In this respect, it is worth remembering that Germany’s own debt/GDP ratio is already a far from virtuous 81 %.

The incalculable risks of this first scenario mean that the alternatives, however unpalatable, will prove more appealing. A second scenario can be traced, in which further integration provides the Eurozone with the necessary policy instruments to address the imbalances and weaknesses revealed by the crisis. What exactly would this integration involve? The most immediate problem – the risk of sovereign default in the periphery – will inevitably require a degree of burden-sharing and risk-pooling, most likely through the emission of Eurobonds backed by the governments of the entire Eurozone. In this solution, demanded insistently by Italian Finance Minister Tremonti, peripheral government debt would be backstopped by German’s fiscal credibility, reducing debt servicing costs (whilst raising yields on German debt). Whatever form this pooled sovereign risk involves, EU institutions will have to be redesigned in order to manage it, enhancing supranational authority.

Simply staving off default will not end the crisis. The Eurozone also needs to resolve the imbalances which left the periphery so exposed after the credit crunch. The German economic model, based on high savings rates, wage moderation and fear of inflation, interacted fatally with a periphery lacking a sound basis for converting capital flows into productivity gains. The result was a brutal shock for the GIIPS when the money dried up, without the appropriate policy instruments (monetary policy, competitive devaluation) to allow for adjustment of relative wages. If Germany will not countenance the higher German and Eurozone inflation needed to accelerate the process of adjustment, then some way needs to be found to channel German surpluses to the periphery. Some kind of pooled fiscal sovereignty, on a far larger scale than anything so far attempted in the EU, would appear the most effective way of achieving this.

Why on earth should Germany accept an increase in debt servicing costs, an increase in domestic inflation, and tax increases to pay for economic recovery in the South? Because the alternative is worse. German virtue is the flip-side of the periphery’s vices: Germany’s trade surplus is the counterparty to the periphery’s trade deficits, and the excessive debt taken on by the GIIPS was loaned in large part by German banks. The collapse of the Eurozone would mean insolvency for German financial institutions accompanied by job losses in the manufacturing sector. European integration means that no member state can isolate itself entirely from problems in another. The more serious the problem, the more grief is shared amongst states whose economies are deeply inter-connected.

Of course, it is one thing to recognize the nature of the problem, another entirely to adopt the appropriate solutions, particularly when none of them are remotely appealing. Further integration has all the features of a shotgun wedding, the core and periphery tying the knot out of desperation rather than desire. For the wedding to go ahead, European leaders and voters need to be convinced that the alternative would be even worse. At the moment there is no evidence that we are close to this realization. European leaders, Mrs Merkel in primis, have an awful lot of explaining to do.

Having a Laffer

2011-09-07T14:28:00.000-07:00

So, whilst the deficit reduction strategy of the UK government runs into the not entirely unexpected collapse in economic growth, a fierce rearguard action is being organized to abolish the 50% tax rate for high earners introduced by Gordon Brown.

Perhaps the best comment on this is from Newsthump, the satirical web paper: '50% tax rate damages people who pay 50% tax rate, say people who pay 50% tax rate'. But beyond the obvious self-interest at play in these demands, it's worth examining just what is so bad about the 50% tax rate.

First, there is a bunch of evidence that the tax take has gone up as a result of this (estimates suggest it will raise £12.5 billion more over five years). £12.5 billion does not eliminate the deficit on its own, but it's not small change.

Second, are we sure that we really don't want high earners to leave? The damaging effects on the economy would stem from disinvestment, or the providers of valuable services no longer providing them here. But so much of this money is rent-seeking that I'm not that sure these effects would be so terrible.

Third, if we accept that the highest paid will leave the moment we tax them a little more, then we may as well give up on the idea of a cohesive society - so much income is now concentrated in few hands that failure to tax that income properly leads to extremely disruptive social divisions. We've seen a bit of that recently.

In any case, what's striking here is that various western countries have recently seen their highest paid citizens arguing that they should pay more tax. Britain's wealthy, it seems, are entirely free of this kind of social responsibility.

Cameron's Big (Broken) Society

2011-08-19T02:38:00.000-07:00

So here's the product of my 'worliday'. An web article for Foreign Affairs on the consequences of the riot for the coalition government: http://www.foreignaffairs.com/articles/68199/jonathan-hopkin/david-cameron-and-the-london-riots

Holidays?

2011-08-15T11:16:00.000-07:00

Apparently the new trend is 'worlidays', where we are on holiday but still working, thanks to our handheld devices and dongles.

I think this is a terrible idea, but if the world financial system starts to collapse and your city goes up in flames while you on holiday, what are you supposed to do?

London burning

2011-08-08T14:36:00.000-07:00

Depressing, but depressingly predictable. Perhaps the saddest thing is to see that rioting seems to be rather more about looting than protest. But I guess it's hard to separate out the two.

Still, it's disconcerting to see how quickly the police can lose control of the capital. And the power vacuum at the top of the Met resulting from the Murdoch business can't be helping. This government is starting to look seriously out of its depth.

Back to the 1930s

2011-07-27T03:48:00.000-07:00

It's become a bit of a commonplace - at least on economics blogs - to compare the mess we're currently in to the Great Depression of the 1930s. There are good reasons for making the comparison. But what about the politics? Here and there people have alluded to the politics of the Depression and its contribution to the rise of Nazism and Fascism. Mostly though it is assumed that the consequences of prolonged economic crisis will be different.

I'm beginning to wonder if we can make that assumption. The events in Norway are scary enough, but far more terrifying are some of the reactions to them. In the US Glenn Beck likened the teenagers at the Labor Party summer camp to the Hitler Youth. OK, the man's now unemployed and needs publicity, but... In Italy, Vittorio Feltri, one of Berlusconi's longstanding attack dogs, accused the victims on Uloya island of being 'incapable' and 'selfish' in their inability to stop the killing.

Some moral line is being crossed here. The question is: how many others will follow the lead of these two crypto-fascists? In a healthy democracy, these people would never work again as journalists. But with powerful business interests behind them, who knows? Beck is probably finished, but Feltri will remain, polluting the Italian political environment, as long as his boss can hang on to power.

Cameron resigns

2011-07-21T05:48:00.000-07:00

OK, he hasn't. In fact, he probably won't resign over the phone-hacking affair. The reason for this is that although it is entirely implausible that he behaved properly in his hiring of Andy Coulson and his broader relationship with New International, it is probably impossible to prove that he lied to the House or breached the ministerial code in any flagrant way. The flood of resignations at NI and the Met has come close to engulfing him, but his sheer bravado in the Commons yesterday saw him through.

So the summer recess saves his bacon for the moment. However, he is rapidly using up his stock of political capital over this. Other clouds loom on the horizon, notably the stagnant economy and the risk of major financial turbulence originating in the Eurozone. Suddenly, the odds are this government may struggle to see out its five-year term.

A bad week for media tycoons

2011-07-11T23:58:00.000-07:00

It's extraordinary that after decades of hijacking the democratic process by blackmail, bullying and bribery, Murdoch and Berlusconi are both on the brink of losing everything.

What does this mean, if anything?

It could be just a coincidence, but that seems far-fetched. More likely the crisis has opened up Pandora's boxes all over the place, by emboldening critics and undermining established systems of power and influence. We can only hope.

Berlusconi has been severely weakened by the sex scandal 'Rubygate', and now faces the impact of a bribery sentence that will cost me hundreds of millions of euros. More importantly, probably, the markets have now decided that Italy is the next eurozone pinata they can beat. How long can a weak and discredited government last under the pressure of the bond markets? Italy, let's remember, has the third largest sovereign debt in the world, and is far less credible than the other two (the US and Japan).

As for Murdoch, well, who expected that? He might yet recover, but he's also made a lot of enemies along the way and if they have any sense, they will try to finish him off before he can get back up. Full marks for Ed Miliband who has gone out on a limb and, so far, has come out winning.

No sex please, we want politics

2011-06-11T16:31:00.000-07:00

Well, maybe I'm the exception here. I'm as entertained as anyone by public figures making idiots out of themselves, but is there any sound theory of democracy that requires marital fidelity of our representatives? What exactly would we gain by removing all sexual misbehaviour from the democratic institutions? Are over-sexed politicians really more likely to lie to the people than the chaste (Italians: compare Andreotti and Berlusconi. Who is more honest?)? This is just a huge distraction from the issues that actually matter to people, and we really shouldn't pretend otherwise.

Weiner didn't sexually assault, or even meet, the women involved here. He didn't pay for sex, or have sex, with any of them. They were not minors. Neither does it appear that they were at all unhappy about what he was tweeting. It's embarrassing in the extreme, and his wife could well feel cheated (virtually) and humiliated, but all in all it's hardly in the Clinton/Gingrich league. Having said that, knowing not to use an open messaging service like Twitter to send reserved information to one person is a sign of serious foolishness, which maybe should disqualify Weiner from public office.

But overall, there is a serious problem here, in that new social media are recording ever greater amounts of information about what we do, think or say, and preserving it for ever. So the search for sexual scandal is going to intensify, and the democratic process - and indeed society in general - is unlikely to benefit.

Played like a fiddle

2011-06-06T02:56:00.000-07:00

The fiddle is Nick Clegg, the player, the Tory party. Clegg negotiated a referendum he was unlikely to win, and in exchange gave up a large chunk of his small parliamentary delegation. The man's a genius.

A good time for a European government

2011-06-06T02:47:00.000-07:00

It's pretty amazing that in the current climate, serious people are calling for an enhancement of the European Union's political clout. There are good reasons for the EU becoming more of a political union, but there are two big - correction, colossal and insurmountable - problems.

Problem One: imagine the result of a referendum in Ireland on the creation of a European Finance Ministry. Or indeed, in Germany.

Problem Two: do we really think that giving someone like Jean- Claude Trichet more power is going to solve our problems? The political union that would work would involve German taxpayers absorbing Greek liabilities. That's not on the table, now or ever.

So we're still stuck. Europe has too much power, and not enough. And the only way out that is politically feasible is: less Europe.

So much for austerity

2011-06-06T02:40:00.000-07:00

Well, well, well. Doesn't look good for growth-friendly fiscal consolidation. Will they bottle it? I think so. Will this be enough? Hmmm.

Generation Rent

2011-06-05T10:13:00.000-07:00

Suddenly people are taking an interest in housing. About time, since as well as its key role in the collapse of the Great Moderation, housing is one area where the UK could do with a serious rethink: let's face it, British housing is either incredibly expensive or of lousy quality, and often both.

Andrew Rawnsley presents what is actually a pretty sound analysis of the housing issue in today's Observer. His conclusion: we need to build more houses. He's right of course, but there is a problem. First, this government will never allow the planning liberalization that is required, because its voters are key beneficiaries of the current situation. Second, the places where we need housing to be built are already occupied - basically London and the South-East, and the more vibrant northern cities. Although southern England is nowhere near as full as some people suggest, there isn't a whole lot of free land waiting to be built on.

So, the answers are tricky - which of course is why nothing has been done about the problem so far. And, as ever, our social fractures and secular backwardness in infrastructure are big obstacles. People pay heavily to live in places where social problems are less serious; if we could deal with social problems, new areas of housing would become available. People could commute from empty to full parts of the country if we had decent infrastructure. But the measures required to achieve all this are expensive and politically difficult.

This is one of the many areas of British politics where policy change proves impossible - the Westminster model, despite its supposed concentration of power at the centre, actually contains myriad veto points on closer inspection.

Good inflation, bad inflation

2011-06-05T08:57:00.000-07:00

There is good inflation, and there is bad inflation. Good inflation is asset price inflation, because it makes powerful and middling groups richer. Bad inflation is wage-push inflation, caused by workers getting pay rises in excess of average productivity gains. As long as you have that straight, then you will have understood current economic policy orthodoxy, which is otherwise mind-bogglingly confusing.

Dean Baker is as ever the best source of analysis on this: the points he makes here, which are obvious now (although still beyond those in charge of policy), were less obvious back in 2006, when he was already making them.

So, we live in a world were rising fuel prices are bad (even though they effectively discourage us from doing things we should be doing less, like polluting and congesting), but rising house prices are good. Now, if we think about it, rising house prices are only unambiguously good for people who own multiple properties, or people with no or few children. People on middle incomes who have made big gains in the housing market, have not really gained that much, unless they are happy to move to a remote area to live in a mobile home. And if they have kids, their kids will be worse off, and will probably never leave home.

So, in these inflation-phobic times, we really should be targeting zero house price growth. But what chance is there that that will happen?

What's in their tea?

2011-06-03T14:07:00.000-07:00

At the risk of sounding a bit naive, the news that John Edwards is being prosecuted for misusing campaign funds to hide the fact that he had a secret mistress and child set me wondering. Exactly why are so many (male) politicians caught out by this kind of scandal? I mean, can you really expect to become President of the United States these days without anyone noticing that you have undeclared children? Add this case to Berlusconi, Strauss-Kahn and Newt Gingrich and suddenly Bill Clinton starts to look like a pretty reliable kind of guy.

So what's going on? Well one possibility is that politicians are up to what everyone else is up to, and that I've led a sheltered life. So the scandals are just a typical sample of the peccadillos offered up by the general population. But somehow I'm not sure - I mean, how many people do you know who've left not one, but two wives because they each had the misfortune to fall ill?

Second, politicians get caught out because they're no more monogamous than the general population, but more likely to try and cover up their flaws, leading to Clintonesque scenarios where the crime becomes lying about it.

Third, and most intriguing, is the hypothesis that politicians - or at least male ones, which for the moment still means most of the pack - are testosterone-addled crazies, and that's why they go into politics. Certainly, politics is about craving adulation as much as anything else, and the same traits might lead to an over-representation of philandering in high office.

Either way, the more we obsess about this kind of thing, the less time is left to argue about how to drag ourselves out of the morass of economic depression, climate change and social injustice. Maybe that's what Newt's up to.

If we just ignore it, it will go away

2011-06-03T13:48:00.000-07:00

What? The crisis of the Eurozone, of course, and in particular the huge dilemma posed by the insolvency of the Eurozone periphery, and therefore of the French, German and other banks that lent them the money.

So here's the next installment. I give Greece a year.

Berlusconi discovers limits

2011-05-30T12:56:00.000-07:00

... to Italy's patience. After winning elections for years despite a long list of judicial proceedings and dubious friends, Berlusconi has finally found out how to alienate his electorate: by engaging in sex parties with underage girls in the middle of a deep economic crisis. Berlusconi's party has lost Milan, the jewel in their crown, as well failing to recover Naples (whose centre-left administration, lets remember, filled the city with piles of stinking rubbish), Turin or Bologna. Milan is a very big deal, since Letizia Moratti (sister of the Inter Milan president) lorded it over the city for over a decade, with little opposition.

It's probably not the end, but it looks like the beginning of the end. And when Italians turn against their leaders, things can happened quickly, as Bettino Craxi - who never made it home from his holidays - found out. The parallels with Craxi are enticing - boss of Milan, at the heart of an intricate network of corrupt exchange, prime minister for a record length of time (in the 1980s) - Craxi's empire fell apart in the space of weeks in 1992 after Milanese prosecutors started investigating allegations of bribery in a care home. The same care home was the subject of investigations, once again, a few months ago. Sign the winds are changing once again?

Greece, again

2011-05-30T01:51:00.000-07:00

Greece set for severe bail-out conditions, according to the FT.

Well, that should work.

Man United 1 Barcelona 3

2011-05-29T15:37:00.001-07:00

Sublime doesn't cut it.