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Bookblogging: The end of the Great Moderation, What next?

September 2nd, 2009

In any book on policy thinking, the easy bit (not all that easy!) is to write about what’s wrong with existing ideas, in my case the zombie ideas I’m writing about. The chapter plan for my book includes, in each chapter, a section on “What next”. As regards the Great Moderation, which was essentially an interpretative claim about the data, it’s not really clear what to include. I’m leaving the details of macroeconomic thinking and policy for another chapter and writing about how society should handle risk. Comments and criticism appreciated as always.

I’m in the process of setting up a site at wikidot.com where the whole draft will be presented in wiki format. But I’ve been travelling and haven’t managed to get it going yet.

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The failure of the Great Moderation, like that of the Efficient Markets Hypothesis, has major implications for a wide range of government policies. The implications for the financial sector have already been discussed and we will look in detail at implications for fiscal and monetary policies in Chapter 3. But the central implications of the end of the Great Moderation relate to the need to reverse the Great Risk Shift, and reinvigorate the social and collective risk management institutions that constitute the social-democratic welfare state.

The end of the Great Moderation has already produced a massive increase in the economic risk faced by individuals, families and businesses. In the US, as many as 10 million households are expected to face foreclosure by 2012. Over the same period, and despite laws designed to make bankruptcy less accessible, it is likely that between 5 and 10 million households will face bankruptcy (of course, the two groups will overlap).

The collapse of stock markets has wiped out, or drastically reduced, the life savings of many workers. More fundamentally, it has undermined the idea of a shareholding democracy, in which most households have sufficient financial wealth, earning good returns, to be at least partially independent of wage income during their working years, and reliably capable of financing their own retirement thereafter. (More on for retirement income in Chapter)

Around the world, tens of millions of workers have lost their jobs, and tens of millions more will do so before the crisis is over. And even after economic growth has resumed, the impacts will be felt for a long time to come. In the absence of positive government action, unemployment will remain high for years after the economy hits bottom. The unstable state of the global financial system, and the lack of any significant movement towards more effective regulation, suggests there will be more shocks to come.

The increase in inequality that produced this increase in risk is most evident in the United States, but it has occurred, with a shorter or longer time lag, in many other countries, both developed and developing. Where the social democratic welfare state has remained strong, growth in inequality has been less marked. But it is no longer possible to suppose that simply slowing the pace of market liberalisation will prevent growth in inequality, and the growth in risk and insecurity it implies.

All of these changes mean that risk can no longer be ignored, or wished out of existence through financial market conjuring tricks. Only a renewed social-democratic analysis provides any coherent basis for a response.

Social democrats have long stressed the idea that we have the capacity to share and manage risks more effectively as a society than as individuals. The set of policies traditionally associated with social democracy or (in the US, political liberalism) may be regarded as responses to a range of risks facing individuals, from health risks to uncertain life chances.

In his pathbreaking book, When All Else Fails, Robert Moss surveys two centuries of American history, in which he presents the state as ‘the ultimate risk manager’. Moss distinguishes three phases of public risk management in the United States. Although the United States is atypical in important respects, Moss’s three-phase model provides a useful framework for discussion.

Moss’ first phase, ‘security for business’, encompasses innovations such as limited liability and bankruptcy laws, introduced in the period before 1900. Many of these risk management policies are taken for granted now, but they were vigorously debated at the time. Adam Smith, the father of mainstream economics, denounced limited liability companies as providing an open invitation to managers to enrich themselves at the expense of shareholders. His critique sounds strikingly familiar, but he did not foresee the development of businesses on a scale so massive that a vast number of shareholders was a necessity rather than an option. As for bankruptcy, the US Constitution adopted 1789 allowed Congress to legislate on the topic, but it took more than 100 years to reach agreement. In the intervening century, bankruptcy laws were adopted, and later repealed, on three separate occasions.

Moss’s second phase, ‘security for workers’, was produced by the shift from an economy dominated by agricultural smallholdings to a manufacturing-based economy in which most households depended on wage employment. Historically the phase includes Progressive initiatives such as workers’ compensation and the core programs of the New Deal like unemployment insurance and social security.

The third phase, ‘security for all’, began after World War II and includes such diverse initiatives as consumer protection laws, environmental protection and public disaster relief. These may be seen as responses to the ‘risk society’ (Beck 1992). Risks of environmental degradation and natural disaster are inherently social in their nature, and the success or failure of a society in responding to these risks is a measure of the capacity and responsiveness of its government.

The Great Risk shift in economic policy was part of a bigger backlash against social risk management, which was even more ferocious in the case of environmental risks. It’s hard to believe, looking at today’s debates, that the Clean Air Act of 1970 and Clean Water Act of 1972 were passed with overwhelming bipartisan support. Any proposal to protect the environment now produces automatic, and vitriolic, rejection from the political right.

Risk and inequality are closely linked. On the one hand, the greater the risks faced by individuals in the course of their life, including the risk associated with differences in initial opportunities, the more unequal society is likely to be. On the other hand, as the financial crisis has shown, radical inequality in outcomes, such as that associated with massive rewards to financial traders, encourages risky behavior and particularly encourages a search for opportunities to capture the benefits of risky actions while shifting the costs onto others, or onto society as a whole.

A social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management. If individuals are to have security of employment, income and wealth, governments must act to establish and enforce the necessary legal and economic framework. The fact that government is the ultimate risk manager both justifies and necessitates action to mitigate the grotesque inequalities in both opportunities and outcomes that characterise unrestrained capitalism and were increasingly resurgent in the era of economic liberalism.

The interpretation of the welfare state in terms of risk and uncertainty may be illustrated by considering some of its core functions. For some of these functions, such as various forms of social insurance, the risk management function has always been emphasised. However, concern with risk has traditionally been a subsidiary theme.

For instance, the public provision of retirement income and of services like health or education have commonly been justified with reference to notions of redistribution, public goods and the provision of basic needs. However, these interventions may equally be supported in terms of risk management.

A risk-based analysis may be extended to encompass more general programs of income redistribution. In a risk-based view, redistribution may be seen as providing insurance against a particular kind of risk, namely the risk of being born poor, socially dislocated and without access to human and social capital. These ideas have been explored by a number of policy analysts in recent years, notably including Nicholas Barr, Ulirch Beck, Anthony Giddens, Jacob Hacker and Robert Moss/

As Giddens observed in his 1999 Reith lectures

the welfare state, whose development can be traced back to the Elizabethan poor laws in England, is essentially a risk management system. It is designed to protect against hazards that were once treated as at the disposition of the gods – sickness, disablement, job loss and old age.

Pursuing the same theme, Nicholas Barr offers the metaphor of the welfare state as ‘piggy bank’ as against the traditional view of the welfare state as ‘Robin Hood’. The Robin Hood interpretation implies a zero sum view of the world in which the state acts to help the poor at the expense of the rich, or, more generally, the well-ff. At any given point in time, this is exactly what happens. But, over the course of a lifetime, everyone faces the risks to which Giddens refers, to some degree or another. And, taking a longer perspective, even those who are unlikely to suffer from these risks are just winners in the bigger lottery of life chances, consisting, to a very large extent, of having the right parents.

Collective risk management through the welfare state helps to stabilize the aggregate economy. When incomes decline as a result of a recession, the design of a progessive tax system means that government tax revenues decline more than proportionally. This helps to cushion the impact on private demand and offsets the downward multiplier effects of an initial shock to the economy. Similarly, when unemployment rises, this produces an automatic increase in spending on unemployment benefits which is commonly amplified by expansion of benefits and the creation of

The mechanisms by the welfare state softens the impact of demand shocks are called ‘automatic stabilizers’, and, given robust welfare state institutions, the name is appropriate. But there is nothing automatic or guaranteed about those institutions. A balanced budget requirement such as exists in most US states, will force governments to cut expenditure precisely when it is most needed, producing, in Paul Krugman’s phrase ‘50 Herbert Hoovers’.

Similarly, if a government is so indebted that it can’t borrow money, or print money without the risk of inflation, an economic crisis will force retrenchment. That’s why its important to stress the ‘hard’ side shared by social democratic risk management and Keynesian demand management. Abandoning short term budget balance doesn’t mean that bills don’t have to be paid. Help when we face unemployment or health risks, or for those who are unlucky in their life chances, must be paid for by tax contributions made those who are, at least for the moment, healthy and well-off. Budget deficits to soften the impact of recessions must be matched by surpluses in good times. The ‘golden rule’ is to balance the budget over the course of the cycle.

No one can predict the future path of the economy with any accuracy. But at the aggregate level, we will almost certainly see more instability, with more frequent and sharper shocks, than during the false calm of the Great Moderation. And the end of the Great Moderation has not reversed the Great Risk Shift or, except partially and temporarily, the growth in inequality produced by the decades of market liberalism. The social-democratic response must combine better social provision to help people deal with risk at the individual and family level with a return to active use of fiscal as well as monetary policy to stabilise the aggregate economy. The two should be designed to work together, with social risk management policies that act as automatic stabilisers in the Keynesian sense and fiscal policies focused on helping those most directly affected by recession.

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  1. veltyen
    September 2nd, 2009 at 12:05 | #1

    “Similarly, when unemployment rises, this produces an automatic increase in spending on unemployment benefits which is commonly amplified by expansion of benefits and the creation of”

    Creation of what?

    Excellent and interesting as always.

  2. Tom Hickey
    September 2nd, 2009 at 13:08 | #2

    Individual risk assumption is magnified enormously in societies in which urbanites and suburbanites dominate, i.e., all developed countries. When agriculture was the predominant livelihood, the majority of households were relatively self-sufficient and few were dependent on income from firms. The industrial revolution reversed that balance, creating new risks for individuals and families, as Charles Dickens so graphically described in his novels. Now the developing world is going through a similar transition.

    However, economic philosophy — much of economics is still based on ideology rather than science — has not kept pace sufficiently with shifts in household risk assumption. Income from employment is necessary for survival, not only progress. Therefore, if a government is to avoid becoming a failed state employment must be the highest economic priority, not growth. The way to balance the desire for growth with the need for employment is through social insurance that reduces household risk owing to business and financial cycles.

    To call social insurance “welfare,” implying gratuitous handouts that are unfairly redistributive, is to prejudice the case. For example, a principle problem facing the US politically and economically lies in providing social insurance in the face of libertarian opposition to unfair redistribution, charactering such transfers as handouts for the votes of the indigent. Of course, in addition to philosophical disagreements a lot racism is involved in this opposition. Since racism is not a rational matter, it is difficult to overcome. Failure to recognize such practical considerations in political economy disjoins theory from reality.

    On the other hand, a good theory provides the framework for political debate and activism. It is important to show that libertarian economics was perhaps suitable in rural, agricultural and pre-industrial societies where individual responsibility and incentive were paramount values and where it was impractical for the state to deal with societal risk through social insurance. But, “You’re on your own,” is insufficient for dealing with risk in contemporary society, where the principle should be, “We’re all in this together,” in order to properly address social risk. Altruism is not only a moral imperative and ethical consideration, it makes good sense economically in the type of society in which we live. The neoliberal idea that market fundamentalism, being most efficient economically, should dictate policy to society, rather than social needs dictating economic policy, is an ideological presumption, and not a scientific law, as it is often represented.

  3. WombatSteve
    September 2nd, 2009 at 13:09 | #3

    Well argued as usual, except the final sentence of this para appears to contradict the rest:

    “Collective risk management through the welfare state helps to stabilize the aggregate economy. When incomes decline as a result of a recession, the design of a progessive tax system means that government tax revenues decline more than proportionally. This helps to cushion the impact on private demand and offsets the downward multiplier effects of an initial shock to the economy.”

  4. September 2nd, 2009 at 23:27 | #4

    Wealthfare state catallactic capitalism maximizes reward for the elite.

    Welfare state bureaucratic statism minimizes risk for the populus.

    Social-democracy is the Hegelian synthesis

  5. TerjeP (say tay-a)
    September 3rd, 2009 at 06:55 | #5

    I don’t mind if you want to share risk and minimise it. Just don’t force the rest of us to participate.

  6. Tim Dymond
    September 3rd, 2009 at 12:35 | #6

    ‘I don’t mind if you want to share risk and minimise it. Just don’t force the rest of us to participate.’

    Under present economic arrangements people are often given no choice except to bear their own risks. Other people being at risk also puts me at risk. This isn’t something you can address through choice coloured glasses.

  7. John Quiggin
    September 3rd, 2009 at 13:40 | #7

    Terje, I’m pretty sure the answer to your point is in Locke.

    Updated to Australian conditions, there are jumbo jets leaving Australia daily for any place you want to go. If you want to make absolutist claims, make them somewhere else. If you want to live here and enjoy property rights created and enforced by Australians acting collectively, persuade the rest of us that your policy preferences make sense.

  8. Tim Tempest
    September 3rd, 2009 at 14:27 | #8

    @TerjeP (say tay-a)

    Terje, but of course the vast majority of us have just been forced to participate in a generational project that systemically moved wealth up to a small minority. We weren’t asked, vote notwithstanding, if we wanted to participate in this. It was forced on the populations of the world via the non-accountable Washington consensus, the rejection of which cut off any country so daring from capital markets.

    Companies and wealthy individuals, by virtue of their negotiating position vis a vis workers, don’t ask workers if they want to participate by giving up more than their work generates to provide welfare to shareholders and the executive. Should we change the rules so workers don’t have to participate in enriching capital wielders with their work? Let workers have control over companies to determine their own wages? Because companies wield far greater control over their lives than the government, in forcing you to participate, would over you.

    Wealth is less an index of utility than of fortune. Fortune of parentage, of position, of country of origin, of a system that distributes more to the ones with the most. In this sense, your wealth is not just your own and your worth is not well measured by it .

    Finally, we’re a society, not simply a bunch of individuals. Every dollar you take from your business links back to a communal effort, a body of laws, a peaceful population and so on that provides you with the framework to take it. If you don’t want to acknowledge that framework, why would a population want to provide you with it? The next step, if the framework supported by the vast majority of moderate to low income people does not served them, is instability. Why would the majority provide the wealthy with the stabilty to undercut their welfare?

    We’re all forced to participate. Generally this is called ‘obligation’ and it is a mark of maturity to bear it. Mature people realise that there is more to it than mere force.

  9. Joseph Clark
    September 3rd, 2009 at 17:55 | #9

    I don’t doubt your defense of an authoritarian state is heartfelt. But there must be some point where this would it could go too far even for you. If it did, and you spoke up and argued for liberty, how would you feel if someone called you immature for doing so?

  10. Alice
    September 3rd, 2009 at 20:07 | #10

    Choice shmoice… there is so much garbage put about in the name of choice and “liberty”….ha ha. Give up your working rights because you have the “choice” to negotiate with your employer (yeah right…delusion central for the majority). Give up worrying about excessive market power becuase the poor befuddlued consumer has the “choice” to spend his dollar at only two places…
    “free choice” when there is less choice …so in the interests of no government intervention we sit back and choose not to spend at all. Thats the increasing reality of choice. I didnt choose to watch the rich get richer while the poor get poorer and the middle class got shoved down in this country.
    I want my real choices back…. Not slavery parading in the clothing of “choice”.

  11. Tim Tempest
    September 4th, 2009 at 01:48 | #11

    I’m not defending an authroitarian state. And you are not arguing for Liberty but for privilege.

    We live in a society that favours those who have power and own capital. The entire cannon of law keeps the populatr will in check and its legitimate ambitions unfulfilled. Property law itself, in its various structures in the Western world protects and enhances the positions of the wealthy at the expense of everyone else.

    The obligations that are mainly born in society or not born by the rich but by those of moderate means, obligations in terms of the authoritarian work structures they are forced to endure, the taxees they cannot excape from because they can neither afford expensive advice nor foreign places to move their meagre means, the pathetic vote they give in a system where the real power lies not with them but with the wealthy who ensure the system will only produce a majority of candiadates who will not change anything that can alter the terms between the wealthy and the poor.

    So don’t mischaracterise what I’m saying. Obligation is in the warp and weft of society. It is not authoritarian to point this out. Right now, the wealthy have few obligations, the rest have most. Western states are authoritarian for the majority right now. It is time, and this is really obvious, for the wealthy to take up their own share. Of course this is a ludicrous statement because they structured society in the last quarter century simply to avoid this.

  12. Alice
    September 4th, 2009 at 11:44 | #12

    @Tim Tempest
    Exactly Tim…I agree. The wealthy did structure society over the past twenty five to thirty years simply to increase their take….with all these cutsie models that promised nirvana if we just waited at the table for their scraps after they completely gorged themselves…thats what trickle down has amounted to..
    Even now they have closed loopholes so that execs cant pay themselves a golden handshake more than a years salary without getting shareholders to vote they are in there for all they are worth pressuring for two years without a shareholders vote. Even then, have we changed the law so they cant ignore the shareholders vote (probably not).
    Try a few weeks golden handshake… which the average employee in this country gets.

  13. gerard
    September 5th, 2009 at 10:35 | #13

    There is a fantastic thread on Metafilter from the other day with a ton of links that will take a while to read through: How Did Economists Get it So Wrong?, links including this one on the EMH: one of the most remarkable errors in the history of economic thought.

    I wasn’t sure if I should post this here or on Weekend Reflections. I think here, since it’s closely related to the subject of your Zombie Economics book.

  14. Alice
    September 5th, 2009 at 16:36 | #14

    Gerard – that is an interesting link – its relevant to JQ. Some speaker was talking to 200 finance professors and asked them how many had taught EMH to students (all hands went up). The speaker then asked them – how many of you believe it?…only two hands stayed up.
    I recall as a student in the early 1990s almost every lecturer coming out with the words “economic rationalism” and how markets would work it all out and how there was this mystical efficiency point which the market would arrive at, if you just left it alone. I recall sitting in yet another lecture, with yet another lecturer, having the words “economic rationalism” and “market efficiency” dropped again…and I distinctly recall thinking in about 1991 or 1992

    “what is it with this economic rationalism thing???…how come suddenly a number of lecturers, from a number of schools (management, accounting, econ and fin), were coming out with the same jargon?” but worse, I recall sitting in the lecture theatre, as student, thinking….”as if that will work.”

  15. gerard
    September 5th, 2009 at 19:04 | #15

    well Alice I’m an econ student since the beginning of this semester (the so-called “Master of International Economics and Finance”, since UQ only lets BEcon grads take the “Masters of Economics”) and my Micro and Macro lecturers don’t even pretend to believe what they are teaching from the textbook – they freely admit to it being totally divorced from reality.

    which makes me wonder… if they know that the model is such a poor representation of what it’s trying to describe, then why don’t they teach something else? I guess because this is the readily available body of theory known as “economics” and whether or not it is scientific is not the point.

  16. Alice
    September 7th, 2009 at 13:36 | #16

    Gerard – you tell me?? I think there needs to be a ground level up overhaul of models in econ taught to students as some sort of explanation of the real world. Perhaps we need to start with demand and supply having some sort of “natural” ability to reach equilibrium..

  17. Sebastian
    September 7th, 2009 at 22:28 | #17

    Yes, I know we all get warm fuzzy feelings talking about the welfare state, living in harmony like one big happy family, sharing all our things, singing Kumbaya etc.

    I know that there is a near-zero probability that anything I could say would convince you to change what are most probably your long-held attitudes towards the welfare state and social(ist) “democracy”. And no doubt you could probably spin a nice long tale about how great everything works in the welfare state using a complex analysis replete with markov chains, dynamic programming, differential equations etc.

    This is what I suggest: instead of doing the above, perhaps you might like to set aside an hour or two on a weekday and go for a walk through the local bus interchange, or perhaps to the local Centrelink office, and see the REAL results of the Welfare State. But only if it’s not too far a walk from your Ivory Tower.

  18. jquiggin
    September 7th, 2009 at 22:35 | #18

    Hmm, Sebastian, maybe you’d like to take a similar walk in a society without a welfare state. I have and the results are a lot more disturbing than a visit to the local bus interchange.

  19. Sebastian
    September 7th, 2009 at 23:03 | #19

    Perhaps the greatest irony of all is that a Keynesian feels himself justified to right a book on “zombie ideas”. Keynesianism is the biggest Zombie of them all. It was delivered a body blow in the late 70s, lay semi-dormant for several decades (even though it never really went away), and now this financial crisis has given it the electric jolt in needed to get it rambling along like some metaphysical Frankenstein’s Monster, leaving economic destruction in its wake.

    I would also like to point out a risk minimisation technique that my grandparents told me about, something which has had a profound influence on my life. While Barr may characterise the Welfare State as a social ‘piggy bank’, my grandparents gave me a REAL piggy bank, and taught me the virtue of thrift.

    I know that such a concept comes as a shock to those brought up drinking the Keynesian Kool Aid, but my dear old grandparents, poor working class folk from the silver and zinc mines of Broken Hill, realised that putting aside money was the best means of achieving some measure of security.

    Of course, I realise that savings is not exactly feasible these days, given that the great economists of our age have taught us that the answer to all our troubles is a continual debasement of the currency, and the only thing that can keep the fabric of society hanging together is more and more spending on consumer goods and instant gratification.

    I also can’t quite see where everyone got this idea that we’ve been experiencing laissez-faire capitalism for the past 30 years – it’s not like government has become any smaller. When they “repealed” Glass-Steagal (forgive me if the spelling is incorrect), the bill was 900 pages long – surely a repeal would’ve only required 1 page? All this so-called “deregulation” was simply re-regulation, in favour of particular groups. What you all call “capitalism” is simply socialism for the rich, you just refuse to call it socialism because it’s not YOUR idea of socialism. What we’ve had more than anything else over the last 30 years has been “Stealth Keynesianism” .

  20. Donald Oats
    September 7th, 2009 at 23:15 | #20

    Then there are the hidden welfare state handouts which everyone seems to like. The baby bonus for example. I’m more than happy to see the back of that sort of “welfare”. Welfare for those who’ve fallen on hard times is surely not too much to expect of a modern democratic society.

    A friend of mine suffered from a psychotic episode of mania – the manic part of “manic-depressive”, and within a short period of time that left him out of a job and out of a marriage. So who should look after someone like him? His ex-wife? His family, who live several hundred kilometres away, and who have their own health problems to deal with? Or should society provide some welfare for people like him? I know which I prefer.

  21. Michael of Summer Hill
    September 7th, 2009 at 23:21 | #21

    Sebastian, are you the blogger that sings Onward Christian Soldiers in your sleep?

  22. Alice
    September 7th, 2009 at 23:31 | #22

    Oh and Don – dont forget the childcare subsidies for wealthyn woroking parents and the education susbidies for private schools….I wonder if Sebastian minds Kings College getting drunk on his so called “Keynesian koolaid” whilst the aboriginies are still seeing nothing on the ground and the homeless and unemployment queues are growing? No the government may not have shrunk Sebastian because when the neoliberals, like Howard got in, the feast of taxes was too much for them not to hand out to their mates. That aint no welfare state. Thats an inbred welbred welfare state.
    But they did practice their neoliberalism on ordinary Australian working families, stripping away their rights to a decent weeks wages in the name of market “flexibility and crony capitalism” whilst they handed out their shrinking taxes to people who didnt need it.
    Stealth Keynesianism Sebastian calls it, but it wasnt that at all, under the coalition – it was blatant theft.
    So you want your conservative government back do you Sebastian?? Did they do you any favours?? Go ask the Australian public if they want them back? I think they would rather have Keynesian Koolaid any day than Neoliberal crony capitalist bullies.

  23. Sebastian
    September 7th, 2009 at 23:50 | #23

    “Sebastian, are you the blogger that sings Onward Christian Soldiers in your sleep?”

    Not that I’m aware of, but I’m sure if I did somebody would’ve told me, or thrown a shoe at me. Besides, I don’t know at what point in my spiel I alluded to being a devout Christian; I am simply a devotee of sound money and personal responsibility as opposed to a system where the state wipes your bottom and blows your nose from the cradle to the grave. I must say, however, that I dislike the phrase “cradle to the grave”; it implies that the participants in the Welfare State leave the cradle at some point, which, if you visit Europe, is obviously untrue. It’s a continent of overgrown children as far as I’m concerned.

    In response to Quiggin’s comment, I would like to know the non-Welfare State country he went wandering through that made him feel so unsafe – I have trouble thinking of a country that doesn’t have a Welfare State, or if it doesn’t, it usually has no propensity to enforce property rights.

    @Donald: I see a big difference between a “safety net” and a Welfare State. I don’t actually have a problem with a safety net for the disabled and chronically ill; nor do I have a real problems with temporary (and modest) measures for those who have genuinely fallen on hard times. I think charity would be more than adequate, but the pragmatist (and economist) in me realises that people prefer something with certainty to something without certainty. And for somebody who finds the very notion of positive rights absurd, that’s a big effort. To me this a big difference from a system where somebody collects 50%+ of your income, stirs it around in a big pot and then dishes it out in an arbitrarily determined, “socially just” manner. Minus administration fee, of course – the Great Welfare Churn à la Quiggin, if you will.

  24. Michael of Summer Hill
    September 7th, 2009 at 23:59 | #24

    Sorry Sebastian, but I’m a bit thick and slow these days but are you one of the true believers in the Protestant ethic?

  25. Sebastian
    September 8th, 2009 at 00:04 | #25


    Nice strawman. I say that I’m against the Welfare State, and infer from that that I’m some neoliberal member of the religious right who votes for the Liberals like they’re a footy team. I’m not a conservative, and I never voted for Howard or the Coalition. In fact, despite its considerable flaws, I still consider the Hawke/Keating government to be vastly superior, having laid the foundations for the success of the Howard years (the Rudd government, however, is a considerable regression). They spent too much, yes, but so did the Liberals, and they’re supposed to be the party of small government and personal freedom.

    In fact, given how Howard and his cronies expanded the Welfare State, he should be your hero, not mine. As I said before, you basically got socialism with Howard, you’re just kicking and screaming because it wasn’t the socialism that you wanted.

    As for Work Choices: from what I understand, they weren’t particularly good laws. If people want to organise themselves into unions, and negotiate better conditions, good for them. Then again, it shouldn’t however give unions the right to march through peoples’ work places and act like foul-mouthed thugs.

    Anyway, my attitude to work is that you show up for work on time and do a good job, you don’t get fired. If you’re unhappy with the wages or conditions, you leave, and the employer can’t stop you. Call me old fashioned, but that’s basically all there is to it.

  26. Michael of Summer Hill
    September 8th, 2009 at 00:17 | #26

    For some reason I don’t believe you Sebastian, a good Christian would help his fellow ACTU comrades.

  27. Sebastian
    September 8th, 2009 at 00:29 | #27

    I will say that you are correct in one way: Keynesianism, be it Stealth Keynesianism, military Keynesianism or any other variety, is blatant theft. Whether you like it or not, it’s what Howard practised, it’s what Reagan practised (he may have cut taxes, but government expenditure was massive under his administration), it’s what Bush and Obama have been doing. It doesn’t turn out the way you like, so you just cover your ears and go “na, na, na, not listening” but that doesn’t change a thing.

  28. Sebastian
    September 8th, 2009 at 00:30 | #28

    Michael of Summer Hill :Sorry Sebastian, but I’m a bit thick and slow these days but are you one of the true believers in the Protestant ethic?

    “… I’m a bit thick and slow these days…”

    Can’t say that’s the sort of thing I’d own up to…

  29. Sebastian
    September 8th, 2009 at 00:31 | #29

    And by the way, I meant to reply to Alice in #27, not me, although the context should make it clear.

  30. Michael of Summer Hill
    September 8th, 2009 at 00:53 | #30

    Hic Sebastian, you should look on the bright side of things. As a good Christian, your taxes have gone to help all those in need and in line with ACTU policy. Forget about the tripe the Libertarians put out, it’s all nonsense. I’m stuffed and going to bed. Sweet dreams.

  31. Sebastian
    September 8th, 2009 at 01:32 | #31

    @Michael of Summer Hill
    As the good Christian that I (allegedly) am, you can rest assured that I will be praying for your soul. I too shall go to bed, so that I can exercise my Protestant work ethic bright and early tomorrow morning

  32. jquiggin
    September 8th, 2009 at 06:30 | #32

    Sebastian, you’ve commented at length without saying anything beyond the tritest of libertarian talking points (that the failed financial system wasn’t really deregulated), that have been discussed to death here, and without any indication that you are going to make any useful contribution to improving the book. Can I request that you put future comments in one of the open threads, rather than here?

  33. Alice
    September 8th, 2009 at 06:31 | #33

    What I dont like Sebastian is thieves masquerading as having the best economic policy solution …then practising a twisted form of Keynesianism (so twisted it could no longer even be called Keynesianism) that redirects resources from the less well off to the wealthier. That is not Keynesianism at all..and Id go so far as to say the very principles of Keynesianism have been not only ignored but debased by a succession of neo liberal governments. Whether you get a smaller government or not…I really couldnt care less. I would like to see Keynesianism restored and the thieves thrown out of their temple with their false ideologies like “trickle down” and market fundamentalism. Im sure you are a good christian and some of those, like the Brethren, were handsomely rewarded under Howards government – but sadly he went too far with workchoices because it stopped all those good christians going to church on Sundays (too busy working). Now that really upset Hillsong didnt it?

  34. Alice
    September 8th, 2009 at 06:33 | #34


  35. Michael of Summer Hill
    September 8th, 2009 at 07:05 | #35

    Sebastian, it is good to hear that you believe in the basic tenets and doctrine of predestination to save your soul, for those don’t follow the Protestant ethic and exploits of Schmidt in Taylor’s Scientific Management will never get to heaven and see God. I knew you were one smart cookie.

  36. Sebastian
    September 8th, 2009 at 19:26 | #36


    John, a number of points:

    i) You should note that I only brought up the idea of regulation vis-a-vis the financial crisis once. Other than that, I made a conscious effort to restrict my posts to those which concern the Welfare State and your beloved Omniscient Government. Any superfluous comments were a result of your drooling lackeys making suppositions about my (largely non-existant) religious tendencies.

    ii) Given that most of what you have been saying amounts to what I would consider “trite Keynesian talking points” (ooohh, free markets and inequality is teh evils!), it is somewhat ironic and more than a tad hypocritical to accuse me of doing the same from a “libertarian” (I say pragmatic) viewpoint.

    iii) Seriously, don’t ever mention a “right” to medical care in front of my mother. She would give you an earful, about the ferals who come into her family general practice, putting their feet all over the seats and stinking of booze (provided by the Almighty Welfare State), invoking their “‘human roights’ (sic., intentional) to see the doctor”. Yes, I realise that you are probably safe on this point, given that I can’t see you two running into each other.

    iv) As for your book, as you can guess it’s highly unlikely that I will read it (although I have read a fair bit of Krugman, so pigs may yet fly). I would actually be interested in finding out how you plan to facilitate generous economic transfers to your favoured social groups, while not completely suppressing their urge to maintain a certain level of self-sufficiency. For whose benefit are we going to ration medical care? How are we going to determine who are the genuine low-income earners, and who are those whose preferences are heavily skewed in favour of leisure? Or are we going to emulate the Europeans, supposedly the healthiest people in the world that, for some unknown reason, take the largest amount of sick leave?

    v) It might also be good to know how you measure inequality. While simply mentioning the word will throw Alice into a fit of indignation, I would like to know why this is such an evil and not just some value judgement. Of course, actually quantifying inequality is fraught with statistical difficulties – how do you plan to circumnavigate these pitfalls?

    Despite the fact that we obviously have fundamental differences in opinion, I am nonetheless fairly impressed that you take the time to reply to your readers, and will desist from posting to this thread.

  37. Alice
    September 8th, 2009 at 19:36 | #37

    Seabastian – did you nuture sarcasm or was it nature that did it to you?

  38. Sebastian
    September 8th, 2009 at 20:15 | #38

    To which sarcasm do you refer? If it was complimenting Comrade Quiggin on not being too aloof to respond to those who post on his blog, well that, I’m afraid, was actually genuine.

    If, as I suspect, you refer to my comments on your propensity for self-righteous indignation and emotional outbursts (riddled with references to ‘working families’, ‘ordinary Australians’ and the other mainstays of Ruddspeak), that WAS sarcasm.

    Not sure if it’s nature or nurture (I only did one semester of sociology, and that was enough pseudo-science for me – although economics as it’s currently taught in universities is hardly any better). Perhaps you can help me? What is it called when your sarcasm stems from having to sit through the verborrhea of your fellow students, endlessly moralising about this sorry state of affairs over a lukewarm latte, and about how the world would be perfect if only they could organise everything for the masses?

  39. Michael of Summer Hill
    September 8th, 2009 at 20:36 | #39

    Sebastian my mate, are you OK? I suggest you go and see a doctor if you are not feeling well and take a sickie like the Europeans.

  40. Sebastian
    September 8th, 2009 at 21:03 | #40

    @Michael of Summer Hill
    Fool, one does not take “a” sickie like the Europeans; one takes at least 20-30 if one hopes to emulate the “progressive” and “enlightened” people of Europe.

    I guess 3 hours lunch break simply isn’t enough for the poor dears…

  41. Michael of Summer Hill
    September 8th, 2009 at 21:06 | #41

    Sebastion my mate, what’s your beef with the Australian way of life?

  42. Alice
    September 9th, 2009 at 10:46 | #42

    For someone who is relatively new here Sebastian – you seem to know a lot about me. Are you a sock puppet Sebastian? have you got any other names you spread your rampantly anti social democracy views under?
    I am entitled to my views Sebastian and you can give me Rudd any day (even though he isnt going as far as I would like with government investment and government job creation) over that creature Howard who brought down workchoices on to Australian workers and “working families”. Yes, thank goodness our society woke up to attitudes like yours (everyone who is disdvantaged can eat dirt as long as I dont have to pay higher taxes…) at the last election. Why dont youb take your prosetylising back where it belongs Seabastian – to the beaten minority where you can whinge all day long about “big governments and the need for lower taxes” with your equally small petty minded associates.
    Oh and stick with short sharp black – I wouldnt give your types milk or sugar for your lattes.

  43. Alice
    September 9th, 2009 at 10:50 | #43

    And add a whole squeezed lemon to your short sharp black because your views are a lemon.

  44. Sebastian
    September 9th, 2009 at 22:20 | #44

    Yes, you are entitled to your views. That doesn’t mean that they shouldn’t be based on some realistic assumptions, rather than assuming something is “right” simply because it gives you a nice, warm, fuzzy feeling, as I suspect they are.

  45. Jill Rush
    September 10th, 2009 at 00:13 | #45

    Prof Q As I read this I wondered if there was going to be any comment in this or a future chapter about the capitalist version of risk management ie the insurance industry which has created any number of products for income protection and for other risks. Wasn’t the insurance industry a central component of the pack of cards which led to the GFC?

  46. Alice
    September 10th, 2009 at 09:25 | #46

    Better my views than your narrow libertarian views which are more a quasi religion, not any form of realism, have only proved harmful to the extent they have been tried, didnt result in trickle down, are now accompanied by acute denial of the inherent failures of this view, and which leave me feeling stone cold…just like the block headed republicans in the US who are attempting to stymie Obama’s reforms of their broken health system.

  47. Sebastian
    September 10th, 2009 at 11:29 | #47

    It’s spelt RepubliKKKan, by the way. Oh those evil RepubliKKKans! How dare they object to the plans of God-Emperor Obama, the Immortal Light! Everybody knows that Obama’s health plan was so perfect that nobody would ever get sick again, and yet these fools resisted it – it’s obvious that they are the cronies of the tobacco industry! Dissent shall not be tolerated…

    By the way, I’m deeply sorry that nobody trickled on you.

  48. Donald Oats
    September 10th, 2009 at 11:50 | #48

    Sorry Prof Q, but I’ve lost track of what issues you are covering in 6/7 myths of the title, so apologies if I’m covering something already dealt with.

    I agree with Jill Rush that a good long look at modern insurance (AIG and other behemoths) practices for financial innovations and the vanilla financial products. As the GFC has amply demonstrated (and the 1982 recession too) the insurance itself creates a risk category all of its own, namely the risk of belief that insurance is certain when in fact the success of a call on insurance is dependent upon the state of the financial system at the time of the call. If the US government and other governments hadn’t arranged a line of credit for AIG to draw upon, it would have been game over in 2008.

    The particularly dangerous period is near the peak of a boom market, where the current success of financial innovations puts downward pressure on insurance premiums, partly due to the fact that the relatively low failure rate of finanical products seemingly makes insurance unnecessary. Of course, near the peak of a boom is the period where insurance is warranted. This plays out over time to create insurance claim discounting and the insurer rationalises this by reducing their assessment of risk in a boom market. As the great philosopher Homer would say, “Doh!”

    The real question is how can we avoid or at least compensate for the uncertainty of a call on insurance? Is it even possible to devise a strategy to cover all relevant states of the financial system? Insuring the insurer, and reinsurance don’t work for periods such as September 2007 to mid-2008.

  49. Alice
    September 10th, 2009 at 11:51 | #49

    Charming….as ever. Its a wonder you are still here…

  50. jquiggin
    September 10th, 2009 at 13:19 | #50

    Sebastian, you are limited to one comment a day from now on. Others, please don’t respond.

Comments are closed.