Archive for August, 2013

War and waste (crossposted at Crooked Timber)

August 30th, 2013 34 comments

Even by left/liberal standards, I seem to have become an extreme pacifist. That’s surprising to me, because I was a mainstream liberal internationalist 20 years ago, and I haven’t changed my views in any fundamental way. In particular, I don’t have any fundamental objection in principle to war, or even to constraints like the need for a UN resolution. I’ve just looked at the experience of those 20 years, and reconsidered earlier wars, and I’ve concluded that the consequences of war and revolution are nearly always bad. Even ‘successful’ wars cost more, in terms of lives and wasted resources, than the benefits they deliver.

I don’t particularly like being out on a limb, so I’m generally encouraged to find other people starting to think the same way. In particular, I was pleased to see this column by Matt Yglesias, making the point that Military strikes are an extremely expensive way to help foreigners with specific reference to Libya. I made exactly the same case at the time.

With a little more ambivalence, I read this piece by Tom “Suck. On. This” Friedman who observes that Middle East oil no longer matters, and concludes

Obama’s foreign policy is mostly “nudging” and whispering. It is not very satisfying, not very much fun and won’t make much history, but it’s probably the best we can do or afford right now. And it’s certainly all that most Americans want.

I don’t share the tone of regret (“Happy the land that has no history” is my view), but apart from that, Friedman is very close to the view I put in the National Interest a year ago, that there is no clearly defined U.S. national interest at stake in the Middle East and, more succinctly, in this comprehensive plan for US policy on the Middle East … [^1]

Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is an expensive waste of money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)?

[^1]: The joke doesn’t quite work as a link. You have to imagine the [click to continue] fold after the first para.

Categories: World Events Tags:

A note on the ineffectiveness of monetary stimulus (updated and corrected)

August 26th, 2013 98 comments

A commenter on the previous post raised the idea, promoted by the “market monetarist” school, that monetary policy is so effective as to make fiscal policy entirely unnecessary, at least when interest rates are above the zero lower bound. My views on this issue were formed by the experience of the late 20th century, and in particular, the recession that began in 1990, following steep increases in interest rates. Having planned a “short, sharp, shock”, the RBA started cutting rates in January 1990.

They didn’t go for 25 basis point moves in those days. Over the period to March 1993, rates were cut by more than 12 percentage points, from 17.5 per cent to 5.25 per cent. Over the same period, unemployment rose from 6 per cent to nearly 11 per cent, a record for the period since the Depression, and stayed around that level well into 1994, until the adoption of the Working Nation package of fiscal stimuuls active labour market policies. As I said in the previous post, tight monetary policy can reliably cause recessions, but expansionary monetary policy in a deep recession is “pushing on a string”.

Update As pointed out by Mark Sadowski in comments, these are nominal rates of interest. To get the real rate, which is more relevant, you need to subtract the expected rate of inflation, which fell from around 7 per cent to around 4 per cent over this period (as measured by surveys, and by the premium for inflation-adjusted Treasury bonds). So, you get a 9 percentage point reduction in the real rate from 10 per cent to 1 per cent. This doesn’t make much difference to the story. Most economists would regard policy as contractionar/expansionary if real interest rates are above/below the long-run neutral level, about 3 per cent. So, we still have a shift from strongly contractionary to moderately expansionary.

However, market monetarists want to argue that the stance of policy should be assessed relative to a policy rule (Taylor rule or NGDP) that already incorporates a prescription of cutting rates when GDP falls and unemployment rises. This doesn’t make a lot of sense to me. It’s like arguing that Obama’s stimulus was actually a contractionary policy because it wasn’t as big as (according to a standard analysis based on Okun’s Law) it should have been. It’s partly a question of semantics, but it’s associated with the claim that, if only rates had been cut even more, we wouldn’t have had the recession, or would have recovered quickly. Having been around at the time, I disagree.

Fiscal multipliers and employment (wonkish)

August 26th, 2013 53 comments

With two weeks to go in the election campaign, we still haven’t seen anything resembling a budget proposal from Tony Abbott and the LNP. Various people have made estimates of the cost of his promises and the cuts likely to be needed to fund those promises and return to surplus. My main concern is that Abbott has locked himself so thoroughly into the rhetoric of surplus that, in the event of a downturn or recession, he will feel compelled to adopt the kinds of austerity measures that have had a disastrous impact in Europe and prevented any real recovery in the US. To make this point properly, we need some numbers. One way to get such numbers is with a macroeconomic model. That gives you some better precision, but often hides the key assumptions. Instead, I will give a very simple Keynesian analysis, yielding back-of-the-envelope estimates.

For illustration, I’ll assume a public expenditure cut of $10 billion a year – the calculation is linear so it can be scaled up or down as needed. In a recession, the fiscal multiplier is likely to be around 1.5 (that’s the value used by Christina Romer when she pushed for a larger fiscal stimulus in 2009, and consistent with recent estimates by the IMF). So, the impact of the cut, when multipliers are taken into account is $15 billion or around 1 per cent of national income (or GDP if you prefer that measure).

Now we can use Okun’s Law to estimate that the cut will raise the unemployment rate by around 0.5 percentage points. Taking participation rates into account, employment will also fall by around 0.5 per cent (about 50 000 jobs).

A bunch of qualifications and observations over the fold

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Cronyism and the global city again (crosspost from

August 24th, 2013 15 comments

Alex Pareene at Salon points to a bunch of evidence showing, in essence, that the rich look out for themselves and their kids, and no one else, then to a piece by Andrew Ross Sorkin defending nepotism in the US, and by extension in China. There was a time, not so long ago, when Asia’s reliance on guanxi and similar networking practices was denounced as ‘crony capitalism’, to be contrasted with the pure and hard-edged version to be found in the US. This was supposed to explain the vulnerability of Asian economies to the crisis of 1997, and the stability of the US, then well into the Great Moderation.

A few years later, in the very early days of blogging, I wrote a post pointing out that the eagerness of financial sector workers to congregate in the same physical location, even though their work was supposed to be based on objective evaluation of data transmitted by computer, was pretty good evidence that the “global city” phenomenon, much in vogue at the time, was just guanxi writ large.

I turned that into a magazine article at Next American City (now Next City, whose web site seems to have lost it). Then I wrote a longer and more academic version and submitted it a lot of journals in economic geography, urban geography and so on, none of whom were interested. I think it stands up well in retrospect (much more so than most of the ‘global city’ literature, at any rate), but of course I’m biased.

At any rate, at least now everyone, and not least a defender and beneficiary of the system like Sorkin, is comfortable with the notion that capitalism is a rigged game, in which the ability to fix the next round is part of the prize for winning this one.

Update/clarification I’ve implicitly taken the efficient markets hypothesis as a benchmark, and assumed that features of the financial sector (for example, physical colocation) that can’t be explained by EMH are likely indicators of cronyism. It’s possible to take the view that the financial sector does things that are inconsistent with EMH, but nevertheless socially beneficial. An obvious example is the kind of opaque, over-the-counter derivatives that Dodd-Frank has tried to ban, and that the finance sector is lobbying hard to protect: it seems clear that doing these kinds of deals would benefit from face-to-face contact. So, if such deals are, in aggregate, socially beneficial, my argument fails – the converse also holds.

Categories: Economics - General Tags:


August 24th, 2013 19 comments

The drip feed of revelations about spying by NSA, related agencies and international subsidiaries like ASIO/ASIS, is taking on a familiar pattern. Take some long-held suspicion about what they might be up to, and go through the following steps

1. “You’re being paranoid. That can never happen, thanks to our marvellous checks and balances”
2. “Well, actually it does happen, but hardly ever, so there’s no need to worry about it”
3. “OK, it happens all the time, but you shouldn’t be worried unless you have something to hide”

An example which must have occurred to quite a few of us is whether NSA employees can spy on current or former partners, potential love interests and so on. Until a few days ago, this was at stage 1. Now, it’s been admitted that this not only happens, but it has a name “LOVEINT“. Still, we are told by the great defender of our liberties Dianne Feinstein, this has only happened on a handful of occasions (Stage 2).

All very reassuring, until you read the following

Most of the incidents, officials said, were self-reported. Such admissions can arise, for example, when an employee takes a polygraph tests as part of a renewal of a security clearance.

In other words, while NSA monitors everything you and I do all the time, it relies on witchcraft to detect wrongdoing by its own employees. I guess we’ll just have to hope that NSA staff are too busy snooping on our emails to read any of the 194 000 Google hits on “how to cheat a polygraph”.

Categories: World Events Tags:

The failure of austerity in Europe

August 22nd, 2013 30 comments

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

Categories: Economic policy Tags:

NBN: we would have been better off without privatisation

August 22nd, 2013 42 comments

I have (over the fold) a piece in The Guardian, making the fairly obvious point that both the need for a publicly-owned NBN and much of the cost are the result of the decision to privatise Telstra, and to rely on “facility-based competition” to drive new investment.

Add in the failure of electricity reform, PPP toll roads and airport privatisation, and there’s not much in the way of success from the infrastructure reforms of the 1990s. Then, of course, there’s the collapse of the much-feted productivity boom.

And yet Australia is exceptionally prosperous. A little bit of that, particularly in Queensland and WA, is due to the mining boom. But most of it is the simple fact that, by a combination of good luck and good management, we’ve gone 20 years without a recession.

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Categories: Economic policy Tags:

Reading the economic theories of Rudd and Abbott

August 20th, 2013 53 comments

That’s the headline for my latest piece in Crikey, over the fold

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Categories: Economic policy, Oz Politics Tags:


August 19th, 2013 63 comments

A new sandpit for long side discussions, idees fixes and so on.

Categories: Regular Features Tags:

Monday Message Board

August 19th, 2013 38 comments

It’s time for another Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language. Lengthy side discussions to the sandpits, please.

Categories: Regular Features Tags:

Krugman, Keynes, Kalecki, Konczal

August 18th, 2013 22 comments

Paul Krugman’s recent columns, responding in various ways to JM Keynes, Michal Kalecki and Mike Konczal have made interesting reading, signalling a marked shift to the left both on economic theory and on issues of political economy.[^1] Among the critical points he has made

* Endorsement of Kalecki’s argument (which he got via Konczal) that “hatred for Keynesian economics has less to do with the notion that unemployment isn’t a proper subject of policy than about the notion of shifting power over the economy’s destiny away from big business and toward elected officials.”

* Rejection of the Hicks-Samuelson synthesis of Keynesian macroeconomics and neoclassical microeconomics and advocacy of (at a minimum) comprehensive financial controls

* Abandonment of the idea that the economics profession is engaged in honest intellectual debate, in favor of the conclusion that the rightwing of the profession, including leading economists, is characterized by denialism and bad faith. As he says, while many economists would like to believe otherwise ” you go to economic debates with the profession you have, not the profession you want.”

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Categories: Economics - General Tags:

I’m underwhelmed …

August 15th, 2013 43 comments

… to put it mildly, by Kevin Rudd’s endorsement of the Coalition/IPA proposals for a variety of tax and policy distortions to subsidise economic activity in Northern Australia.

I get that a certain amount of this kind of thing is to be expected in an election campaign, but I hope we don’t see too much more of it.

Categories: Economic policy, Oz Politics Tags:

We’re only ‘doing it tough’ out of envy

August 14th, 2013 58 comments

That’s the title of my latest piece in Crikey, over the fold

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Categories: Economic policy, Oz Politics Tags:

Labor, hiding its light under a bushel

August 7th, 2013 96 comments

A bit belatedly, a piece I posted on Crikey a couple of days ago, bemoaning Wayne Swan’s failure to tell the story of the government’s success in managing the GFC. His obsessive pursuit of a return to surplus with a fixed target date suggests to me that he never really saw Keynesian fiscal policy as anything other than a once-off emergency measure, and that the credit for the government’s courage in 2009 must go to Ken Henry and Kevin Rudd. Regardless, the government should be winning the economic debate hands down, instead of being on the defensive.

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Categories: Economic policy, Oz Politics Tags:

Oz, NZ and the election

August 5th, 2013 46 comments

Following my earlier discussion of relative economic performance in Australia and NZ, I’ve been chatting with people in the NZ Treasury, and also with some of the macroeconomists in my own department. Its given me a number of research ideas I hope to pursue in the future, both with respect to possible ways the NZ-Oz gap might be bridged and more general implications about macroeconomic theory.

In the circumstances of the election what matters is the suggestion by Tony Abbott and others on the political right that New Zealand is a model for Australia to follow as regards macroeconomic policy. The key point is that NZ had a smaller stimulus than we did, and looks set to return to surplus a little earlier, though of course we know how unreliable such projections can be.

If, like Abbott, Hockey and (on even-numbered days) Robb[1], you regard budget surpluses as the paramount measure of good economic performance, there’s a case to be made here. But if you think that employment and economic growth are more important, Australia looks a whole lot better, as you can see from the graphs below.

Standard economic theory suggests that, when two countries have access to the same technology, comparable education systems, free labour and capital movements and so on, any initial differences in income levels should gradually be evened out. Instead, the Oz-NZ gap has widened since the GFC. Anyone who could seriously suggest NZ as an economic model should not be entrusted with the management of our economy.


fn1. Not to mention Peter Costello and Wayne Swan, who seemed to view the stimulus that saved us from recession as an embarrassing departure from normality.

Categories: Economic policy, Oz Politics Tags:

Election on 7 September

August 4th, 2013 87 comments

At least that’s what I’m reading. As I’ve argued before, I think this is a mistake for a number of reasons. In fact, I spent a fair bit of yesterday working up a piece arguing the case for allowing Parliament to sit again, and holding an election in October. [Irony on] If only I had run it on Friday, the course of history would doubtless have been changed [Irony off]. It’s now only of academic interest, in the pejorative sense of the term, so I’ll turn my attention to issues that actually matter.

My views on the election are simple. Whatever the weaknesses of the Rudd government, it’s far preferable to the disaster that Abbott would give us. So, I’ll certainly be putting Labor ahead of the Coalition in the House of Representatives. I’ll probably give my first preference to the Greens, though if my vote matters in Ryan, Labor will have swept Queensland. Both Labor and Greens have good local candidates, so I’d happily support either, and I’ll equally happily give my last preference to the LNP incumbent, unless someone truly awful runs.

The big issue is the Senate. Regardless of the Lower House outcome, it’s critical that a Labor-Green majority should be returned, and therefore that Labor and the Greens work together. This was one of Rudd’s big weaknesses last time round, and hasn’t been helped by some statements from his frontbench, or from perceptions on both sides of the way the last Labor-Green deal worked out.

Categories: Oz Politics Tags:

Weekend reflections

August 1st, 2013 117 comments

Last weekend reflections got spammed, so I’m opening another, which makes space for longer than usual comments on any topic. Side discussions to sandpits, please.

Categories: Regular Features Tags: