Archive for March, 2003

Iraq as a precedent

March 19th, 2003 Comments off

One of the biggest concerns opponents of war with Iraq have raised is that the arguments used by the US constitute a precedent for any country that feels like attacking any other country that might represent a hypothetical threat. Ken Parish points to a piece by Eugene Volokh attempting to refute this argument. The main burden of his argument is the standard lawyer’s trick of distinguishing precedents. That is, Volokh takes a series of possible wars (China invading Taiwan, India invading Pakistan) and argues that an attack on Iraq isn’t really a relevant precedent. I think he’s missed a number of possible examples, most obviously the adoption of an even more aggressive stance by Russia in relation to Chechnya, Georgia etc. And retrospectively, the Bush doctrine could have been used by Saddam himself to justify his war with Iran as a pre-emptive strike.

But what really struck me in Volokh’s piece was the following

We might be slightly more troubled if democracies become slower to condemn non-democracies that act based on trumped-up claims of threat. Still, … the essence of sound foreign policy is distinguishing real threats from fake ones; most of the time, democracies will know when another country’s supposed justification for pre-emptive attack is well-founded.

The majority of the population in nearly all democratic countries has formed the judgement that the supposed justification of the US is not well-founded, but the attack is going ahead anyway.

This brings me to one final point. There’s been a lot of discussion of the inadequacies of the UNSC, its unrepresentativeness etc, and in a sense all of this is true. The fact remains that the UNSC has responded to the considered opinion of the majority of the world’s population, while the ‘coalition of the willing’ has not.

Categories: World Events Tags:

The Index of Economic Freedom

March 19th, 2003 Comments off

In the course of the discussion of liberalism and neoliberalism, I happened across the Index of Economic Freedom, which purports to measure the degree of economic freedom available to people in different countries. The top two countries for 2003 were Hong Kong (a dictatorship) and Singapore (a one-party state where oppositionists are routinely prosecuted for defamation etc). The situation was even worse in 1995 when another dictatorship (Bahrein) held the number 3 spot. Japan, a democracy, but one where a single party has had a monopoly of power for decades held fourth spot. The idea that you need an authoritarian government to promote economic freedom certainly seems to appeal to the Heritage Foundation, which publishes the index.

Another notable thing about the 1995 list is that the leading countries have not exactly been star performers in the subsequent period.

Update 21/3 As a number of commentators have pointed out, I was arguing pretty sloppily in attributing to the Heritage Foundation the view that ‘you need an authoritarian government to promote economic freedom’. I withdraw this claim. A more soundly-based inference is that there is not much correlation between economic freedom (at least as measured by this index) and political freedom.

Categories: Economics - General Tags:

A tiny bit of good news

March 19th, 2003 Comments off

Reuters reports that

The Palestinian parliament ratified the new post of prime minister on Tuesday, drawing U.S. praise coupled with disappointment over President Yasser Arafat’s retention of key powers …Bush had said the release of the long-awaited peace plan to end Israeli-Palestinian violence and establish a Palestinian state by 2005 was conditional on the appointment of a prime minister with “real authority.”

Asked if the newly created office met the standard Bush had set, a senior State Department official in Washington said: “Yes.”

Arafat is an obstacle to peace both because of his actual record of failure and because the Israelis won’t deal with him, so assuming the expected appointment of Mahmoud Abbas goes ahead, that is one obstacle out of the road. On the other hand, Sharon is an equally serious obstacle and there has so far been no US reaction to his rejection of the roadmap for peace. I don’t know what to make of endorsements of the Palestinian move by an unnamed “senior State Department official”. If this is Powell, it seems as if he’s unwilling to go on the record with the endorsement even though he did go on the record about ‘disappointment’.

Categories: General Tags:

Word for Wednesday (Definition: Liberalism)

March 19th, 2003 Comments off

It seems incongruous to be discussing such a pacific philosophy as liberalism in the context of imminent war, but liberalism as an idea will outlive both Saddam Hussein (not that that’s saying much) and George Bush.

The basic range of meanings associated with liberalism were set by John Stuart Mill in On Liberty which, fortunately is in the public domain. Reading Mill, we can distinguish three separate arguments associated with liberalism, listed in order of the importance Mill attached to them
(a) An argument for freedom of speech, thought and discussion, based not only on the rights of the individual speaker but on the social and intellectual damage done by restrictions on freedom of speech. As Mill observes, our own beliefs are weaker if we need to protect ourselves from counterarguments
(b) An argument that individuals should not be ‘protected from themselves’ in relation to ‘self-regarding’ acts such as taking drugs
(c) An argument for free trade (in the broad sense of laissez-faire) economic policies, based on classical economic theory. Mill says that doctrine of Free Trade,‘rests on grounds different from, though equally solid with, the principle of individual liberty asserted in this Essay.’ Mill observes that market transactions are social acts and may therefore be regulated without infringing individual liberty.

It follows that there is no logical inconsistency in accepting Mill’s arguments for individual freedom while rejecting or modifying the economic arguments for Free Trade and in fact, late in his life, Mill himself announced a commitment to a rather abstract form of socialism. Most of those whose thought descends directly from Mill’s liberalism similarly accepted substantial modifications to the classical theory of Free Trade, so that, in economic terms, most “liberals” in the US and UK are social democrats of one form and another.

However, beginning with Hayek, there has been a resurgence of versions of liberalism which focus on free markets. Hayek rejects Mill’s ranking arguing that freedom of action (most notably, freedom of contract) is at least as important as freedom of speech and thought. Radical versions of the Hayekian position are commonly referred to as ‘libertarian’.

More significant in practical terms has been the trend of thought often called ‘neoliberalism’, and also given a range of more-or-less pejorative labels such as ‘economic rationalism’ (in Australia), ‘Thatcherism’ (in the UK) and ‘the Washington consensus’ (in relation to less-developed countries). Just to confuse things, neoliberalism is also used in the US to describe a specific subgroup associated with the Democratic Leadership Council. I’ve given a lengthy discussion of neoliberalism here.

Categories: General Tags:

HECS for criminals

March 19th, 2003 Comments off

Along with some colleagues (Bruce Chapman, Arie Freiburg and David Tait), I’ve been working on the idea of using the tax system to collect fines, thereby making fines a more attractive alternative to good behavior bonds on the one hand, and short prison sentences on the other. We recently published a working paper on the topic, and Ross Gittins gave an excellent summary of our case in today’s SMH. As he says, one way of looking at it is “HECS for criminals”.

Categories: Economic policy Tags:

The moment of truth

March 18th, 2003 Comments off

Until now, most of the big questions in the debate about Iraq have remained unanswered. The decision to go to war has answered a few, and I’ve been proved wrong on at least one. I thought Blair would refuse to go without at least majority support from the UNSC, and was wrong. The next big question relates to the main casus belli for the war, that Saddam’s “weapons of mass destruction” represent a threat justifying war. Unless Saddam accepts Bush’s demand that he go into exile, he will, if the argument for war is valid, certainly attempt to use his weapons, either against the invading armies or against Israel. The question of whether he is “deterrable” is now moot, since by staying on he is accepting almost certain death.

It follows that, if no WMDs are used during the war, but such weapons are “discovered” afterwards, the discovery must be presumed fraudulent. Frequent commentator, Derrida Derider, has been predicting such a discovery for some time.

In terms of hoping for the best, namely a short war with as few casualties as possible, I obviously hope no WMDs will be used.

Update A pro-war Op-Ed piece is of interest. Writing in the NYT, the unfortunately-named Anne-Marie Slaughter says

Soldiers would go into Iraq. They would find irrefutable evidence that Saddam Hussein’s regime possesses weapons of mass destruction. Even without such evidence, the United States and its allies can justify their intervention if the Iraqi people welcome their coming and if they turn immediately back to the United Nations to help rebuild the country (emphasis added).

As I’ve already pointed out, the second part of this is complete nonsense. Saddam has shown his ability to turn out cheering crowds, and so will the practitioners of “shock and awe”. In the absence of free and fair elections (clearly not contemplated for the foreseeable future) the views of the Iraqi people will be a matter of conjecture. And despite what was said (obviously to keep Blair on-side) in the Azores, the idea of “turning immediately back to the UN” is equally nonsensical. Does anybody suppose that the victorious Americans are going to let someone of Kofi Annan’s choosing administer Iraq? If not, why should anyone outside the “coalition of the willing” do Bush’s dirty work for him?

Further update 19/3 On the WMDs, the analysis in today’s Fin points out that, in military terms’, the “best” time for Saddam to use them is before the US attack commences, which means almost immediately. This is obvious enough – as Ken Parish points out, a massive US attack in the opening days will greatly reduce Saddam’s capacity for counterattack. And I’ll restate the basic point. If, in the face of an invasion aimed at killing him or seizing him for a war crimes trial, Saddam still refrains from using WMDs, only two conclusions are possible:
(a) there were no weapons; or
(b) they were not, even in the most drastic circumstances, a threat to the US

On the capacity to turn out cheering crowds, I’ve pointed out in the comments thread that Bush’s PR teams are capable of spinning an upsurge of grassroots support out of nothing in domestic US politics – it’s called Astroturf. With vastly greater resources at their disposal, they won’t need threats of terror to do the same thing in Baghdad. If the supporters of war believe their own case, why aren’t they advocating an Iraqi provisional government and free and fair elections?

Categories: General Tags:

Soon enough

March 18th, 2003 Comments off

Last week, I noted the mysterious absence of Jason Soon from Catallaxy. Now he has returned from a two-week unannounced hiatus, with a post that only deepens the mystery, hinting as it does at blog-related romance. Maybe it was that photo!

Anyway, welcome back, Jason!

Categories: General Tags:

Shock and awe

March 18th, 2003 Comments off

Since war now appears inevitable, we can only hope that it’s short and relatively bloodless, and hence must hope that the US military planners have got it right. The only way this can be true, it seems to me, is if the much-leaked “shock and awe” strategy, involving the largest bombardment in history, directed in Baghdad in the opening days of war, turns out to be one of those pieces of misinformation of which military planners are so fond. Such a strategy must surely cause massive casualties, both among civilians and among the Iraqi conscripts who are just as much victims of Saddam as anybody else.

Of course, if this strategy is adopted, we’ll probably never know. Saddam’s government will claim massive civilian casualties, the US will deny it, and when they reach Baghdad they’ll conduct an inquiry which will report that Saddam was lying. Unless there’s a repeat of the incident last time, when hundreds of people were killed in an air-raid shelter, it will be impossible to determine who, if anyone, was telling the truth.

But regardless of the number of casualties, the ‘shock and awe’ approach seems guaranteed to lead to disaster in the long run. The idea that, entering Baghdad after a bombardment of this kind, the US (or perhaps Anglo Alliance would be a better term) troops will be greeted as liberators seems nonsensical to me. I’m not saying they can’t arrange crowds with flowers – Saddam has no trouble doing this and neither will an occupying army – but the chance of any real popular support will be lost on the first day.

Categories: General Tags:

No peace

March 18th, 2003 Comments off

As The Age reports, Sharon has wasted no time in dumping the ‘roadmap’ for peace in Israel-Palestine, and explicitly rejecting the idea of an independent Palestinian state. Bush has yet to respond, but from his point of view there’s no need. This was a plan with a 72-hour shelf life – the time it took to get Tony Blair over the line for war with Iraq. Having served its purpose, it’s unlikely to be heard of again.

Categories: General Tags:

Reverse parking

March 17th, 2003 Comments off

Everyone has their pet hates and one of mine is people who block the road while they reverse into a parking space where the norm is to park forward. I used to think I was being irrational about this – after all, what does it matter whether people drive in and reverse out or reverse in and drive out. Today, I suddenly realised the asymmetry. If you reverse out, you have to give way to the traffic using the road. If you reverse in, you’re already on the road and through traffic has no option but to give way to you. So people who reverse in are in the same position as queuejumpers – violating a social norm for their own convenience.

Categories: Life in General Tags:

Monday Message Board

March 17th, 2003 Comments off

It seems like there’s nothing much left to say about war with Iraq, at least until the bombs start dropping, but there are plenty of other topics that need discussion. This is your weekly opportunity to air your views on any topic (civilised discussion and no coarse language please).

Categories: Regular Features Tags:

War and the FTA

March 16th, 2003 Comments off

I’ve been meaning to post on this for ages. It’s pretty clear that one reason the government is locked into supporting whatever the US does on Iraq is that Howard is desperate to secure a Free Trade Agreement with the US. It’s not of course, the only reason. Following the US is the automatic reaction of any Australian government, especially a Liberal one, and Howard initially thought that war would be popular. But the FTA is one reason that Howard (unlike, for example, Blair ) has been an unquestioning supporter of the US Administration. Now the cat is out of the bag. Trade Minister Mark Vaile says

like-mindedness with the United States on international issues including a war against Iraq will put Australia at an advantage in the talks.

The US negotiators are busy denying all this – they’d rather have us seen as a loyal ally rather than another member of the “coalition of the billing”.

Categories: Politics (general) Tags:

A politically correct blog on political correctness

March 16th, 2003 Comments off

I recently received an email from John Ray who ( with Peter Cuthbertson)

thought that a blog devoted solely to documenting the many idiocies of political correctness (which generally means Leftist correctness) might be an entertaining site for people to bookmark. So he and I have started up pcwatch. Have a look and see what you think.

I observed in reply

Generally, maybe, but not always. According to CNN, via Ezra Klein, via Calpundit

The cafeteria menus in the three House office buildings will change the name of “french fries” to “freedom fries,” a culinary rebuke of France, stemming from anger over the country’s refusal to support the U.S. position on Iraq. Ditto for “french toast,” which will be known as “freedom toast.”

However, John and Peter chose not to run with the story. It seems that only politically correct examples of political correctness will be reported on this blog. Still, political correctness, regardless of which political pieties are being observed, is often amusing and usually harmless. So John and Peter’s blog should provide some innocent, if one-sided, merriment.

In fact, the 1990s right-wing panic about political correctness was both sillier and more dangerous than absurdities such as the use of “gravitationally challenged” for “fat”. As I said, here, the belief that appropriate use of language will automatically bring about desirable social change diverts attention away from action to bring about such change and focuses it on verbal gymnastics. As I observed, during the PC panic

a handful of leftists playing verbal games were elevated into a tyrannical dictatorship, posing a fundamental threat to freedom of speech.

Glenn Reynolds has complained about political correctness more times than I can count, but when he sees it from his own side, in the Freedom Fries Flap, he gives a qualified defence, seeing it as a harmless way of sending a message even if ‘it does seem kind of silly at first glance’. Much the same could be said about political correctness in general.

Categories: General Tags:

What I'm reading

March 16th, 2003 Comments off

The Book of Imaginary Beings by Jorge Luis Borges, and The Name of the Rose by Umberto Eco, a natural pairing since Eco’s book is full of allusions to Borges. There’s a lovely set of illustrations of Borges’ beings here. Rereading these books for the first time in a decade or so, I wondered whether the idea of Borges’ Library of Babel as a metaphor for the Internet had occurred to anyone else. According to Google, the answer is “Only about 10,000 times”.

I’ve also been watching the new adaptation of Sons and Lovers. It will be interesting to see if this does anything for Lawrence’s reputation, which has declined precipitously in recent years under the combined impact of feminist criticism and the declining appeal of the Romantic ideal of the artist whose transcendent genius excuses his atrocious behavior and whose atrocious behavior is evidence of his transcendent genius. Picasso is the archetypal 20th century example, but in his case perhaps the genius is great enough to excuse the behavior.

Categories: Regular Features Tags:

Pollie with a blog

March 15th, 2003 Comments off

According to The Guardian, Labour MP Tom Watson is the first UK MP to have a blog. In an example of the reverse process, Jim Capozzola of The Rittenhouse Review is planning a run for the US Senate.

I was also interested by this para

Currently Mr Watson is transferring content from the original site – – to his new blog, powered by transferable type, at

I must investigate this “transferable type”.

Categories: Metablogging Tags:

A tale of four decades

March 15th, 2003 Comments off

There’s been a lot of talk about the microeconomic reform undertaken by the Hawke-Keating government and its claimed beneficial outcomes. It’s useful to compare the 20 years since the election of the Labor government with the 20 years that preceded it.

The period before 1983 encompassed the breakdown of the Bretton Woods system of fixed exchange rates, two major oil shocks, and two global recessions. In Australia, it includes the economic chaos that engulfed the Whitlam government and the failure of the Fraser government to cope with the wage push of the early 1980s. Despite this, average performance was as good as or better than the period since 1983.

One on measure, inflation, the period since 1983 comes out clearly ahead. Not only is the average rate lower, but inflation accelerated through the 1960s and 1970s. The inflation rate fell gradually during the Accord period, then rapidly during the ‘recession we had to have’ and has shown no sign of resurgence since then.

The rate of producitivity growth has been the focus of much recent attention. According to ABS estimates the annual rate of multifactor productivity growth over the last twenty years has been almost exactly equal to that the previous twenty years at around 1 per cent. Similarly the average rate of growth in GDP was about 3.6 per cent per year in both periods.
In two areas, performance since 1983 has been significantly worse than . The current account deficit rose rapidly to 5 per cent of GDP after the floating of the dollar, and has fluctuated around that level ever since. A comparison with the pre-float period (when deficits averaged around 2 per cent of GDP) is not really meaningful since, in a fixed-rate system, current account deficits are constrained by the availability of foreign exchange reserves, but deficits of this magnitude are widely regarded as being associated with the risk of a currency crisis.

Performance on unemployment has been even worse. The average unemployment rate for the period since 1983 has been 8 per cent, compared to about 4 per cent in the 1970s and less than 2 per cent in the 1960s In fact, the lowest unemployment rate realised since 1983 is higher than the highest rate reached at any time between World War II and the last few months of 1982.

A sad irony in the poor outcomes on unemployment and the current account is that the case for radical microeconomic reform put forward in the early 1980s depended largely on these two variables. Policies of Keynesian stimulus, aimed at reduced unemployment had been abandoned as a result of blowouts in current account deficits. It was claimed that structural reform would eliminate barriers to growth in exports and thereby permit sustained expansion without growth in current account deficits.

Of course, these comparisons are primarily of historical interest. What matters is the outlook for the future.
The unemployment rate, at 6 per cent, is as low as it has been at any time in the past twenty years. But this is largely a cyclical outcome. Most estimates of the structural rate of unemployment (often called the non-accelerating inflation rate or NAIRU) have remained stationary or even risen over the past two decades.

The productivity statistics give similarly little ground for optimism. According to the ABS estimates, there was a surge in multifactor productivity growth between 1994 and 1998, but the annual rate of productivity growth has since fallen back to the long-run average of around 1 per cent. The fact that rapid productivity growth has not been sustained suggests that the surge of the mid-90s was due to once-off factors like the increase in the pace and intensity of work and not to a fundamental transformation.

Categories: General Tags:

Song for Saturday

March 15th, 2003 Comments off

After a long lag, this popular (??) feature returns.

Various bloggers have posted more-or-less absurd theories on the psychological bases of leftwing and rightwing political views. In the same spirit, I conjecture that optimism about war may be driven by experience of video games. As reported in the song below, I was very bad at video games, notably including Battlezone a shoot-em-up with tanks and missiles. Those interested in dating it can get a clue from the last line.


I’m an overgrown delinquent, as easily can be seen
I spend all of my money on a video machine
I’ve hung round pinball parlours and I’ve seen big tallies run
But as long as I’ve played at Battlezone, I’ve never cracked the ton

Hurrah me boys me pockes are full and I feel like going berserk
I’ll be down at me local poolhall soon as I get off from work
With me two-bob bits all piled up and both me sleeves rolled back
Today’s the day I makes me play for a century or the sack

I’ve blasted away at the supertanks, I’ve run them forward and back
I’ve dodged the flying missiles and I’ve peppered them with flak
I’ve copied the manoeuvres of the famous players I’ve met
But I’ve never succeeded in plastering up my own three initials yet

If I succeed as I mean to do I’ll make the effort pay
One coin’ll last for hours and I’ll play both night and day
Get me picture in the papers for everyone to view
And instead of dingoes you will read of the feats of JCQ

Tune The Backblocks Shearer

Categories: Regular Features Tags:

The Canadian option

March 14th, 2003 Comments off

For some time, the Canadian government has been floating ideas for a new UN resolution consisting of a set of specific demands with which Saddam would have to comply or face war. This is the kind of thing I’ve been advocating for some time. It would get away from the fatal ambiguity of 1441, which turns on the interpretation of words like ‘active compliance’ and ‘serious consequences’.

The idea had no hope while Bush thought he could get a resolution that effectively authorised war. It’s been revived by what initially seemed a clever move on Blair’s part – an ultimatum modelled on the 1914 Austrian demarche to Serbia, written so that Saddam couldn’t possibly accept it (the only important element was the first one, that Saddam should admit to having the weapons he has so far denied having). The difficulty for Blair is that he did not of course, admit that his proposal was designed to fail. Hence, he will find it hard to reject proposals for an ultimatum that incorporates many of his key demands, such as out-of-country interviews with scientists, but doesn’t contain anything guaranteed to be rejected. The ‘middle six’ countries are obviously keen for something like this, and the French are already hinting that they could be persuaded to accept a specific ultimatum backed by the threat of war, as long as it didn’t give the US the right to make a unilateral judgement that the conditions had not been met.

Blair’s big problem would then be persuading Bush to go along with such an approach. All the evidence is that Bush would refuse, but the arguments in favor are strong. Assuming Saddam is hiding weapons, he might reject the ultimatum, in which case Bush would get everything he wants – UNSC authorisation, British participation and almost-certain access to Turkish bases. Alternatively, out-of-country interviews might produce the long-sought ‘smoking gun’, again giving Bush a legitimate case for war.

On the other side of a coin, the alternative looks unattractive. Unless he could stop a vote altogether, Bush would be in the position of vetoing a UNSC resolution which would wipe out any pretence of a legal basis for the war and (if the opinion polls are right) leave him without majority support even in the US itself.

By far the best outcome for the world would be another six months of stepped-up inspections, during which time the great powers could turn their attention away from Iraq to the much bigger problem of North Korea. (Ideally, they’d do something about Israel/Palestine as well, but that would take the scenario from highly optimistic to totally fantastic).

Categories: World Events Tags:

Derivative destruction

March 14th, 2003 Comments off

I didn’t get around to blogging on Warren Buffett’s comments on derivatives when he made them a week ago, but I think that bloggers (including me, I admit) tend to be too concerned with immediacy. In this spirit, I’m reprinting a post from last year, with some topical bits deleted.

Another look at possible disaster scenarios for the world economy, this one perhaps the scariest of all. The starting point is a crisis in derivatives markets arising when ‘counterparties’ (those owing money on the transaction) for one of the big New York banks, such as J.P. Morgan Chase, refuse to pay up, either because they can’t or because they allege fraud. This has already happened in a small ($1 billion) way in the case of Mahonia, one of the shonky subsidiaries set up by Enron with the aid of JP Morgan. If it happened on a large scale it could cause a cascade of defaults. How big could it get? The short answer is “Huge”

“At the end of 2002’s first quarter, the notional value of derivatives contracts involving U.S. commercial banks and trust companies was $45.9 trillion, according to the Office of the Comptroller of the Currency’s bank derivatives report. ”

That’s trillion , not billion. For comparison, annual US GDP is around $10 trillion.

The ratios involved are staggering. JP Morgan alone is involved in assets with a gross value of 23.2 trillion, or around 500 times the firm’s capital base. This is comparable to the leverage exercised by Long Term Credit Management before its collapse. But before you panci too much, virtually all of this is hedged in some way.

(“Notional value” is the total value of the contract, and J.P. Morgan’s direct exposure to those derivatives was $51 billion as of Dec. 31, or less than 1% of the notional value, according to the firm. About 80% of the company’s exposure was with investment-grade counterparties.)

The bulk of the exposure is in interest rate swaps, which are fairly well understood and seem to pose only modest risks in themselves. But there’s still around $1 trillion in more recent derivatives involving securitisation of various kinds of debts. This securitisation is sound only if the credit rating agencies have got their risk assessments right, which in turn requires that the accounts on which those assessments are based should be valid. A few years ago, when the market in debt derivatives was starting up, this assumption seemed safe enough, but now it looks a lot more dubious. The big danger is that defaults in the debt derivatives market could spread to the much larger interest rate derivatives markets.

How likely is it to happen? In view of the extent to which standards have been compromised in the financial world, some significant breakdown in derivative markets, leading to the failure of at least some players, seems more likely than not. On the other hand, the full-scale meltdown scenario, while far more plausible today than even a year ago, remains a low probability event.

[A side issue in all this is that ‘gold bugs’ (that is, supporters of a gold standard with a conspiratorial view of the world) are prominent in promoting concerns about derivatives. The link as far as I can tell, is the belief that central banks and/or big institutions like JP Morgan are using futures contracts (one of the most basic forms of derivative) to keep down the price of gold. I don’t buy this, but I’d be interested if anyone has any related angles of which I’m unaware]

Categories: Economics - General Tags:

Likud and the war on Iraq

March 14th, 2003 Comments off

There’s a growing controversy over the role of a group in the Administration that is generally described as “neoconservative” and “strongly pro-Israel”, and which is pushing for war with Iraq. The leading figures are Perle and Wolfowitz – like the majority of neoconservatives, both are Jewish. Criticism of this group naturally raises the spectre of anti-Semitism, leading to a good deal of consternation about how, if at all, their role can legitimately be discussed Kevin Drum at Calpundit asks

What I’d like to see are some reasonable guidelines for discourse, guidelines that suggest which lines of attack on neoconservatism are reasonable and which ones aren’t, and what kinds of criticism of Israel are legitimate and which ones aren’t. If there were any consensus on this, it would make both criticism and defense of neocon theology a lot easier and a lot less polemical. It would make it a lot easier for me, anyway.

I begin with the observation I’ve made in my own defence against accusations of anti-Americanism

A government, even a democratically-elected one, is not the same as the country it governs. Both citizens and non-citizens can oppose the policy of a government without being hostile to the country it governs

With this point in mind, it’s easy to see that “pro-Israel” is not a very accurate description of the neoconservatives. Most people in most Western countries are pro-Israel in the sense of supporting Israel’s right to exist within secure boundaries and hoping that Israelis and Palestinians will reach a peaceful settlement of their differences. What distinguishes the neocons is not their support for Israel, but their support for the Likud Party, its leader Ariel Sharon and its policy of aggression. A few neoconservatives are unconditional supporters of whatever Israeli government holds office, but the majority are active partisans for Likud, and welcomed the failure of the Barak-Clinton peace initiative (due to a piece of unconscionable bungling on Arafat’s part).

The worst thing about the Perle-Wolfowitz group is not their support for war with Iraq per se, but their advocacy of a strategy in which an American-controllled, but nominally democratic Iraq is supposed to pressure the Palestinians and their supporters into a peace with Israel on terms acceptable to Likud. These haven’t been spelt out, but Sharon’s past performance shows that it will mean a Bantustan-style state with Israel annexing much of the West Bank and probably maintaining some sort of hegemonic right to intervene.

This policy is wrong, and it’s doomed to failure. Hence, it’s bad for Israel.

More importantly in the short run, of all the conflicting agendas that will emerge following an American conquest of Iraq, this is the one that will do most to ensure a disastrous outcome. The idea of a democratic Iraq involves a lot of wishful thinking, but, as Daniel Drezner argues, it might just be possible given a strong US commitment to nationbuilding. The idea of a democratic, pro-Likud, Iraq is a chimera.

Until the prospect of war with Iraq came up, I avoided commenting on the Israel-Palestine situation since it’s complex, emotionally charged and didn’t directly involve Australia. But Australia is now involved and our troops are likely to be enmeshed in attempts to implement a disastrous policy.

My final point is the converse of all the others. Suppose that instead of pursuing the policy he’s actually adopted, Bush had acted first to impose on both Sharon and Arafat a peace settlement along the lines of the Clinton-Barak plan, with US peacekeeping forces to ensure that both sides adhered to the settlement, then demanded international support for the removal of Saddam as a quid pro quo. Would anyone in the Arab world or in Europe have resisted him? I doubt it.

Update Ken Parish and Gary Sauer-Thompson both have useful, and independent, contributions on this topic. As Ken notes the BlogGeist is at work
Update 15/3Maybe Bush is attuned to the BlogGeist. He announced a new (but v sketchy) initiative on this topic today.

Categories: World Events Tags:

An assassination in the Balkans

March 13th, 2003 Comments off

The assassination of Zoran Djindjic, Prime Minister of Serbia and the leader of the democratic forces there, apparently by paramilitaries/mobsters (the two groups are much the same) is bad news. The NYT gives pretty good coverage. Hopefully the people of Serbia won’t let the mobsters win.

Categories: World Events Tags:

International Man of the Year!

March 13th, 2003 Comments off

According to the International Biographical Centre of Cambridge, England, I have been nominated as International Man of the Year. I join such luminaries as Professor Emmanuel Bosanquet, formerly (I am not making this up!) Senior Lecturer at the University of Outer Mongolia Astronomy Research Department.

There’s no prize money, but the commemorative plaque and medal are excellent value at $US580. This should be no problem as I expect shortly to receive a substantial commission for a transaction involving the export of gold from Nigeria.

Categories: World Events Tags:

Irony alert

March 13th, 2003 Comments off

One thing I’ve discovered in blogging is that irony is a dangerous weapon. Even after I started bracketing it with warnings [irony alert on] … [irony alert off] people persisted in reading me literally.

But after all, this is an Australian blog and irony is not exactly an archetypical Australian trait. Surely New York sophisticates, not to mention the British masters of irony, would handle this kind of thing better. Apparently not. Andrew Sullivan, a Brit living in New York (I think) and seemingly as sophisticated as they come, responds to Paul Krugman on the Budget deficit, saying

here’s the economic expert, Krugman , on the looming deficit:

[R]ight now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P.

I take Krugman’s broader point about the deficit, and agree with it. But why such contemptuous sloppiness? There’s a critical difference between 2 and 4 percent of GNP. Isn’t there?

Sullivan probably doesn’t follow the economic debate all that closely. But surely he must have noticed that estimates of the US Budget deficit have been rising steadily, with a new higher estimate announced every six months or so.

I apologise for laboring the point, but rather than risk any reliance on irony I’ll spell it out in excruciating detail. Krugman is not making a series of guesses, but giving an ironic description of the steadily deteriorating outlook. The US Budget deficit for this year was first estimated at around $US 200 billion (2 per cent of GNP), then around $US 300 billion and now looks likely to be closer to $400 billion. Krugman is hinting that this trend is likely to continue.

Categories: General Tags:

Thursday thoughts

March 13th, 2003 Comments off

My piece in today’s Fin (subscription required) on US deficits and the approach of “banana republic” status develops arguments thrashed out on the blog. I’m finding this a very useful way of clarifying my ideas. It’s headed US debt will come back to bite and is paired with a piece from Robert Bartley of the WSJ supporting Bush’s tax cuts.

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Word for Wednesday (Definition: Social Democracy )

March 12th, 2003 Comments off

I’ve finally got back to this feature, in which I write a weekly essay on a word or concept of interest. To help Googlers, I’m making the heading more self explanatory

As I’ve noted, the word ‘democracy’, until recently one of the most fiercely contested in the language is now fairly straightforward. “Social democracy’ by contrast, remains tricky although as with some other hard-to-define concepts you know it when you see it. The basic tenet of social democracy is that major social decisions should be made democratically rather than being determined by tradition or the outcomes of market interactions in which individuals have influence proportional to their endowments of property rights. Most of the broader connotations of the word ‘democratic’ that go beyond strictly political/constitutional meanings are associated with a social-democratic outlook. An example is Furphy’s famous characterisation of his book Such is Life – temper, democratic, bias, offensively Australian.

In practice (and unlike socialism which I’ll discuss another day), social democracy is a fairly well-defined social order. Although it has no perfect exemplar, it has been realised, more or less, in most European countries, to a lesser extent, in Britain and its former colonies and, in to a much lesser degree in the United States. It is a social and economic system which includes a mixed economy with both public and private enterprises and an acceptance that society has a whole has a responsibility for protecting its members against the standard risks of the modern lifecourse (illness, unemployment, old age and so on) and for providing everyone with equal opportunities to develop their potential to the maximum extent possible. An immediate implication is that, while absolute equality of incomes is not necessary, inequality should not be permitted to reach the point where some citizens have massively more power than others, and where their children have a big headstart over other children.

All of these claims are rejected to a greater or lesser extent, by the ideology that dominated political debate in the last quarter of the 20th century, which is most commonly called neoliberalism. The central claim of neoliberalism is that a democratic political order can coexist with radical social inequalities and that democratic government should not intervene to offset such inequalities.

From the crisis of Keynesian social democracy in the early 1970s until the financial crises of the late 1990s, social democracy lost ground fairly steadily. But the neoliberal program has failed in New Zealand, the United Kingdom, Eastern Europe and, most recently, in its heartland, the United States. Some form of modernised social democracy looks likely to be the dominant idea of the 21st century, as it was for most of the 20th.

Categories: General Tags:

Rumsfeld dumps Blair!

March 12th, 2003 Comments off

This report just came out in the Guardian, and is worth reproducing nearly in full (omitting a bit at the end about the EU).

Washington was forced to admit for the first time last night that it might have to start the war against Iraq without British forces because of the internal political problems heaping up for Tony Blair.

The US defence secretary, Donald Rumsfeld, said that Mr Blair’s difficulties had caused the White House to contemplate going to war without its closest ally.

After talks with his British counterpart, Geoff Hoon, Mr Rumsfeld said that the British role in an assault was now “unclear” and that Washington was well aware that the Blair government’s freedom of action might be restrained by a rebellious parliament.

“Their situation is distinctive to their country and they have a government that deals with a parliament in their distinctive way,” Mr Rumsfeld said. “And what will ultimately be decided is unclear as to their role; that is to say, their role in the event a decision is made to use force.”

Mr Rumsfeld’s remarks provoked a mixture of panic and fury in Downing Street and the Ministry of Defence last night. After frantic telephone calls between Mr Rumsfeld and Mr Hoon, the Pentagon issued a clarification of Mr Rumsfeld’s remarks, although there was no retraction.

In the written statement, Mr Rumsfeld added: “In my press briefing today, I was simply pointing out that obtaining a second United Nations security council resolution is important to the United Kingdom and that we are working to achieve it.”

The row over his remarks came amid growing tension between Washington and London on the diplomatic front. Sharp differences have emerged over the British strategy in pursuit of a second resolution authorising war.

Britain insisted yesterday that it was close to winning over the six “undecided” security council members and that the vote will go ahead this week.

Mr Rumsfeld said that if Britain failed to participate in the initial assault, it could still have a role in the post-Saddam policing of Iraq.

Going to war without British troops would represent a complication for US military planners, who are struggling to craft an alternative to using Turkey as a launch pad for a northern offensive.

The absence of Britain from the invasion force would also represent a serious political blow for George Bush, who has sought to convince American public opinion that he is not acting unilaterally.

Mr Rumsfeld said discussions were under way between Washington and London on a “daily or every other day basis”, and that the prospect of going to war without Britain was now being actively contemplated.

“That is an issue that the president will be addressing in the days ahead, one would assume,” he said.

Mr Rumsfeld’s comments and Mr Blair’s intensive attempts to garner more support for a second resolution mean that the next 72 hours could be the most dangerous of the prime minister’s time in power.

Failure to secure the resolution might force him to accept that British forces cannot participate in the invasion.

According to British sources, Washington is alarmed at the extent to which the British government is prepared to be flexible in offering compromises to the six “undecided” members.

Cameroon, Guinea, Angola, Mexico, Chile and Pakistan yesterday demanded that the proposed US-British ultimatum, set last week for March 17, be extended to allow Iraq 45 days to disarm.

They also suggested that Saddam Hussein be given a short list of disarmament tasks to complete.

The White House spokesman, Ari Fleischer, insisted that the proposal to push back the March 17 deadline by a month was “a non-starter.” But the UK ambassador to the UN, Sir Jeremy Greenstock, offered the six an extension to the end of the month and was ready to concede ground over the benchmarks.

British sources hinted that Mr Bush was becoming alarmed at being dragged into an increasingly messy process.

Mr Blair desperately needs the second resolution to prevent revolt by his ministers and MPs.

Panic gripped Downing Street on Monday after the French president, Jacques Chirac, said in a televised interview that he would veto the resolution.

Mr Blair has apparently been told by government lawyers that without a second resolution, it will be illegal for Britain to participate in war.

My instant analysis is that Rumsfeld’s comments have just about killed any chance of British participation in a war. They are a gratuitous kick in the teeth for Blair, and the reported “panic and fury” in Downing Street reflects this. A lot of consequences follow:

(1) If the US dumps Britain, this will probably mean that there will either be no second resolution, or one that the US rather than France will have to veto.

(2) If Britain pulls out and there is no second resolution, the Turkish government won’t try a second Parliamentary vote.

(3) Howard will probably stick with Bush although even this isn’t clear – I suspect he’ll be writing his own political obituary if he supports a war now.

(4) If (1)-(3) happen, even the participation of Qatar cannot be counted on.

(5) The logistic chaos arising from the consequences I’ve spelt out would either delay war for weeks/months or push the US to adopt some sort of high risk strategy. The risk could be military (a hastily rejigged plan for a land invasion) or political (a carpet-bombing campaign with massive Iraqi casualties).

(6) Contemplation of consequences like (1)-(5) might deter Bush from going ahead

All this raises the question of why Rumsfeld would have spoken as he did. But I think a sufficient explanation is that Rumsfeld doesn’t have a clue what he’s doing.

Anyway, that’s as good a reaction as I can give at zero notice. Comments and further information would be much appreciated.

UpdateThis is stunning. All the British media are running this as a lead story, but the US media have ignored it completely – the NYT buries Rumsfeld’s comments halfway down a long piece entitled US Would Accept Short Extension of Iraq Deadline and the others don’t mention them at all as far as I can see. It’s no wonder the Administration is doing such a lousy job of rallying world opinion.

Meanwhile, Steven Den Beste (who seems perfectly attuned to the thinking of the Rumsfeld faction in the Administration, though he says, and I believe, that he has no inside contacts) pushes the case for dumping Blair and going it alone. He also notes reports that

The Turkish government is letting us deploy troops secretly for a northern front despite last week’s parliantary action. If true, that’s welcome news.

On the contrary, it’s a potential disaster for both Bush and the Turkish government if it’s exposed, as it surely must be if the troops are to be used.

One minimal side benefit of all this is that should put an end to all those tiresome arguments about whether Bush’s policy is ‘unilateralist’. Rumsfeld has clearly staked out a unilateralist position with no fig-leaves about a ‘coalition of the willing’. It remains to be seen whether Bush will be foolish enough to back him.

Further update Not surprisingly, Calpundit and Maureen Dowd share my assessment of Rumsfeld’s remarks as gratuitously stupid. A bit more surprisingly, so does Andrew Sullivan.

Categories: World Events Tags:

The banana republic yet again

March 11th, 2003 Comments off

A week ago, I wrote of “the developing attitude of the Republican establishment towards government debt, which is essentially that of banana republic populism”. Now I’m seeing the analogy everywhere. On reasoning identical to that I put forward a few days ago, Paul Krugman says

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that “a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.

It would be nice to imagine that Krugman reads my blog, but I will content myself with the more modest claim that I’m attuned to the Zeitgeist.

Update Google reveals that on Feb 8, Krugman used the phrase “sheer banana-republic irresponsibility” to describe Bush’s fiscal policy. So I probably picked it up from him, then forgot about it. The Zeitgeist works in mysterious ways.

Further update Max Sawicky responds with two arguments against Krugman. One is based on the efficient markets hypothesis which, as I observe in the preceding post has been conclusively refuted by the experience of the NASDAQ boom. Max says

Krugman says the bond market hasn’t figured out what’s going on yet. Excuse me? P Krugman is a keener judge of interest rate movements than the bond market? I don’t think so.

I disagree. If I can be a better judge of the value of dotcom shares than the whole of Wall Street (and I clearly was, as noted below) what’s implausible about Krugman (who’s a good deal smarter than I am) being a keener judge than the bond market.

Max’s second point is a restatement of the old left line in favour of deficits. He says

Deficit delirium in the end is a conservative political stance. It precludes the necessary growth of the welfare state. What became a tactical gambit under the Clinton Administration — the use of deficit scares to fend off tax cuts — has become a civic religion. It’s bad religion.

Again I disagree. I accept the Keynesian case for temporary deficits in periods of recession, but a sustained budget deficit must be financed either by inflation (a tax on money holdings, and not a particularly good one) or debt (deferring tax from the present to the future). I don’t have a religious objection to either option, and sometimes they are necessary but, they are rarely the best option. In my opinion, the most economically and politically sustainable way to finance public expenditure is through broad-based taxes on income, wealth and consumption, including hypothecated levies that bring home the link between tax and expenditure.

Categories: Economics - General Tags:

After the boom

March 11th, 2003 Comments off

The third anniversary of the peak of the NASDAQ boom has produced a fair bit of commentary. As an economist, I think the biggest impact, still only dimly-perceived, is the refutation of the efficient markets hypothesis.

I’ll start with the introduction from a piece I wrote for the Fin last year, which ran under the titleMarket theory unravels

Although the name gives the general idea, the efficient markets hypothesis is hard to state in simple terms. To complicate matters further, the hypothesis comes in a variety of intensities, from weak to very strong. The weakest version simply says that it is impossible to predict shares prices based on their past behavior. This is bad news for day-traders and chartists, but does not matter much to the rest of us.

In the strongest version of the efficient markets hypothesis, market prices for assets such as shares represent the best possible estimate of their value, taking account of all available information, public or private. Moreover, markets yield the most efficient possible allocation of risk. Markets are not perfect, but, they are claimed to be better than any alternative institution, including governments.

Although the statistical evidence generally doesn’t support strong versions of the efficient markets hypothesis, statistical testing is never going to finally refute an idea that’s so obviously appealing to a lot of people.

But I think the experience of the NASDAQ bubble has fatally undermined the efficient markets hypothesis, for several reasons.

First, in terms of scale, financial magnitude and worldwide publicity, it was far bigger than any previous bubble. Trillions of dollars in market capitalisation were lost and at least one trillion dollars was dissipated in investments that ranged from unsound to absurd. Millions of individual investors made and lost large amounts of money.

Second, it was widely recognised and denounced as a bubble, even as it developed. Here’s a piece I wrote in 1999 criticising dotcoms in particular, but the speculative nature of the boom had been recognised as early as 1996, when Robert Shiller coined, and Alan Greenspan popularised the phrase ‘irrational exuberance’.

Third, all the ‘checks and balances’ that are supposed to prevent a bubble were present and all were ineffectual or counterproductive. It’s hard to recall, but there was a time when people believed that stock market analysts served a positive role in informing financial markets. Accountants, debt rating agences and regulators have been as thoroughly discredited as analysts, but all clearly failed to their job.

Most notable of all, but less noticed was the failure of counter-speculators to burst the bubble. George Soros lost billions in 1998 and 1999 by short-selling stocks that were grossly overvalued. By the time the bubble reached its peak three years ago, the bears had all retired to lick their wounds – it was only when the bulls finally ran out of money that the madness stopped.

The implications of rejecting the efficient markets hypothesis are profound. As I observed in the AFR piece quoted above

Judging by the experience of other bubbles, share markets will take years to recover from the 1990s. The social and political implications will emerge even more slowly. Political programs like privatisation, cultural attitudes based on the idolisation of ruthless CEOs, and much of the ideological framework of the last two decades have been founded on the efficient markets hypothesis. They will not vanish overnight. But they are doomed, nonetheless.

Categories: Economics - General Tags:

Hypocrisy on Iraq and Indonesia

March 11th, 2003 Comments off

The pro-war case sinks to a new low in today’s Oz. David Martin-Jones wants to nail Australian opponents of war with Iraq with hypocrisy because they supported intervention in East Timor without UN authorisation. The only problem is he can’t find anyone to pin the tag on, apart from unnamed Sydney demonstrators who accused Howard of being “In bed with genocide” (a slogan which could equally refer to Australia’s long-standing complicity in the illegal occupation of East Timor), and (also unnamed) figures in the ALP who wanted Howard to “do something”. As far as I know, no significant public figure in Australia advocated a military intervention to forcibly eject the Indonesians, even in the period of militia rampages after the referendum, and of course, the actual intervention took place only after the Indonesians had announced their withdrawal.

In fact, it’s Martin-Jones who’s the hypocrite here. Suharto was an evil dictator who invaded a neighboring country in defiance of the UN and murdered hundreds of thousands of people in both Indonesia and East Timor. The moral case for an invasion to overthrow him was just as strong as the case against Saddam, but we didn’t hear it from Martin-Jones or, as far as I know, from anyone currently supporting war. Of course, the practical arguments against an invasion were so overwhelmingly strong (militarily risky, bound to generate hostility in the region and resentment of occupying forces, likely to lead to the breakup of the country etc) that no-one even contemplated it, but people like Martin-Jones contemptuously dismiss similar concerns in relation to Iraq.

(As someone will doubtless point out, there’s still the separate issue of WMDs, but the US case here has fallen to pieces – the only reasonable argument for invasion is based on the nature and history of Saddam’s regime).

Categories: World Events Tags:

The quiet anti-American

March 10th, 2003 Comments off

In a post entitled America and the Left, Ken Parish has returned to the theme that, in criticising the Bush Administration, I am taking an anti-American line. I should note before going any further, that Ken has posted a comment to the effect that he regrets the personal nature of his criticism. However, he doesn’t withdraw the basic claim that, if you oppose the foreign policy of the US government all or most of the time, you are anti-American.

As Ken correctly says, of US governments since 1960, the only ones whose foreign policy I agreed with were those of Carter and Clinton (I should add that my judgement of the Kennedy administration is purely retrospective. I’m just old enough to remember where I was when Kennedy was shot, but I’m pretty sure I’d never heard his name before that day).

I could quibble with this in a number of ways. For example, I’m on the record as an admirer of both Eisenhower and FDR, and I have mixed opinions about Truman, so if I can start the clock in 1932, I come out almost exactly neutral. If you add in domestic policy, where I admire LBJ, I can just about qualify as pro-American.

But the main point is that Ken’s whole position (one that is shared my many supporters of the current US Administration) is nonsensical. I’ve had strong opinions about Australian politics for over thirty years. For all but three of those years I’ve been more critical of the government than supportive (and even in those three years my feelings were mixed by the end). I’ve publicly attacked governments of both parties, week in and week out, for the last decade, and have been attacked with vigour in my turn. In that entire time, as far as I can recall, no-one has ever accused me of being anti-Australian or unAustralian, and I’m sure that no-one who made such a claim would be taken seriously.

A government, even a democratically-elected one, is not the same as the country it governs. Both citizens and non-citizens can oppose the policy of a government without being hostile to the country it governs

Categories: World Events Tags: