Year: 2008

What have the Romans ever done for us?*

John Quiggin46 Comments

Most long-lived dictatorships have at least some positive achievements, and, the world being what it is, most dictators have some unattractive enemies. These facts have generated a couple of marathon threads at Crooked Timber, following Chris Bertrams post’ on Castro and mine on Suharto** , not to mention vast numbers on Saddam.

What are the implications of these facts, both for the policies we should support and for the moral judgements we should offer? I have a couple of fairly obvious points to make about policy, and some less clear thoughts about moral judgements.

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Lowering the NAIRU

John Quiggin96 Comments

Among the relatively few points the opposition has scored in this Parliament has involved the unwillingness (or, in the Opposition’s telling, inability) of Treasurer Wayne Swan to respond substantively to a question from Malcolm Turnbull about the level of the NAIRU (non-accelerating inflation rate of unemployment), AKA “the concept formerly known as the natural rate”.

At this point I was going to refer readers to Wikipedia but, as with quite a few economics articles, it’s not entirely satisfactory. However, rather than complain, I’ve edited it to include a slightly better explanation.

Coming back to Australia, the fact that inflation is rising suggests that, if the NAIRU exists, we are now below it. It doesn’t seem as if there is much scope for fiscal and monetary policy to be tightened further. Given the risk of a breakdown in global credit markets, raising interest rates any further seems very dangerous. And the tax cut promises (which should be kept – the credibility of political processes is more important than the risk of inflation) mean that the scope to tighten fiscal policy is limited.

What remains is the possibility of reducing the NAIRU by improving the performance of labour markets. Education and training will help in the long term, but not so much in the short run. What is needed is to take advantage of the tight labour market to reduce long-term unemployment and to bring discouraged workers back into the labour market. At this phase of the cycle, the best policy instrument to achieve this goal is a targeted wage subsidy. Employers who take on workers moving off unemployment and disability benefits, or re-entering the labour force after a long absence should receive a subsidy for a period of say, three to six months. I’ll try to post a bit more on this, and why it’s superior to suggested alternatives like cutting minimum wages, before too long.

Howard haters

John Quiggin157 Comments

Throughout the last few years of the Howard government, anyone who criticised the government, or suggested that Howard was not the best person to be Prime Minister of Australia, could be sure of being labelled a “Howard hater”. A quick Google finds this trope being used regularly by Miranda Devine, Paul Sheehan and Gerard Henderson, and being taken up by their numerous blogospheric supporters.

This was always silly. Perhaps there were people motivated to oppose the government because of a personal animus against Howard rather than his actions and policies, but if so I never met any. Of course, people who disliked Howard’s policies tended to dislike Howard, and some people who hated Howard’s policies hated Howard as a result, but using a term like “Howard hater” to explain opposition to the government is like explaining the effects of opium by reference to its dormitive qualities.

The real motive underlying the use of “Howard hater” as a term of attack was the recognition that he and his government never commanded enthusiastic support from most Australians, merely a judgement that they were better than the alternatives on offer. Once this changed with Labor’s (long overdue) choice of Kevin Rudd as leader, the government was doomed.

Tonight’s Four Corners suggests that much the same was true of Howard’s colleagues. While only Costello and a couple of his closest supporters came across as Howard haters, most of the rest showed a notable lack of enthusiasm, and willingness in retrospect, to blame Howard for the government’s defeat. Tony Abbott’s undiminished loyalty just enhanced the contrast with the rest of the crew.

In terms of policy, the most startling revelation was Joe Hockey’s claim that members of the Cabinet voted for WorkChoices, including the abolition of the “no disadvantage” test, and were then shocked (or pretended to be) that people were disadvantaged. This news ought surely to sink resistance to Labor’s reforms, and may indeed have been intended to achieve this purpose.

Here comes the big one

John Quiggin53 Comments

My column in last week’s Fin was about the spreading crisis in financial markets. In the same week, we saw the first indication* that the crisis was spreading to the market for credit derivatives. The possibility of a full-scale financial crisis arising from these markets, which financial market bears have been talking about for years. Whereas the losses from sub-prime loans and related derivatives markets are likely to be in the hundreds of billions, the nominal volume of outstanding contracts in the credit derivatives markets is in the tens of trillions, and interest rate swaps are in hundreds of trillions.

Such amounts cannot possibly be repaid by anybody, so a breakdown in these markets would imply either wholesale bankruptcy or a government rescue involving the abrogation of existing contracts on a scale unprecedented in history. Either way, as noted in the article, large classes of financial assets, and the associated financial markets, may simply disappear. Hundreds of trillions of dollars in derivative contracts may be unwound, reversing the explosion of asset and transaction volumes over the three decades since the Bretton Woods system of financial controls broke down in the 1970s.

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