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.
Month: March 2003
International Man of the Year!
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.
Irony alert
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.
Thursday thoughts
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.
Word for Wednesday (Definition: Social Democracy )
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.
Rumsfeld dumps Blair!
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.
The banana republic yet again
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.
After the boom
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.
Hypocrisy on Iraq and Indonesia
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).
The quiet anti-American
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
John Quiggin 