It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.Weird Science film
Month: January 2009
A bit more on bank nationalisation
Here’s my article from yesterday’s Fin
Charles Stross seminar at Crooked Timber
Among other things, I’ve been busy over the last few months putting together a Crooked Timber book event discussing the work of Scottish science fiction writer Charles Stross. The idea is that members of the CT group, and some invited guests write posts on the book(s) in question, the author responds and the whole thing is thrown open to comments. Our guest line-up this time is stellar, including Brad DeLong, Paul Krugman and Ken MacLeod. If you’re interested in SF, the literature of ideas in general or the future of book reviewing, go and have a look.
25 years of the Mac
The Macintosh computer just turned 25 Johnny Got His Gun move . I bought one of the original 128K Macs not long after they came out. I remember being reluctation to shell out $50 for a box of 10 400k floppy disks (these were the the 3.5″ type that weren’t actually floppy, and became standard on IBM PCs quite a few years later). I thought I was unlikely ever to need 4 megabytes of storage, so I got the store to sell me what was left in a box they’d already opened. And I was pretty dubious that anyone could really use the 512K of RAM offered in w the top-of-the-line “Fat Mac” which came out soon afterwards. It didn’t take me long to discover my error and upgrade.
I’ve owned just about every model since then**, and Macs have been a huge part of my life. I’d find it hard to estimate the increase in my productivity* associated with using Macs instead of typewriters or command-line computers back in the 1980s and early 1990s. This question was the subject of long-running religious wars which persisted until quite recently, but after the emergence of Windows it became pretty clear that the Mac style of computing was the only serious option, and that people who didn’t want to use Apple Macs for one reason or another would only have to wait a few years for the MS knockoff (next instalment, Windows 7).
For a while in the 90s, it seemed likely that Windows would prevail, but the return of Steve Jobs to Apple changed all that. Now, there’s a lot of talk that minimal net-based computers will take over, but such talk has been round many times before (smart terminals, thin clients and so on) and never gone anywhere. At this point in my life, I’m pretty confident Macs will be around as long as I am.
* That was before blogs which soaked up an awful lot of that excess productivity, though with lots of compensating benefits.
** Though not, IIRC, the Mac SE/30, listed here as the best Mac ever. At the time it came out, I was using a Mac II at work, and a much-upgraded original Mac at home.
The Australian case for nationalisation
The speed with which bank nationalisation has risen to the top of the policy agenda has found the economics profession largely unprepared. The literature on property rights that developed in the 1970s produced a range of arguments in favour of private as opposed to public ownership which had at least some influence on the widespread adoption of privatisation policies in the 1980s and 1990s. Although subsequent theoretical and empirical developments, such as the discovery of the equity premium puzzle and developments in agency theory cast doubt on the claims of the original literature, the profession had moved on, and showed little interest in revisiting the issues. As Joshua Gans observes,
the main contributions have come from Australian economists who did this research a decade ago only to be told by international journals that as privatisation had occurred everywhere by then, no one was interested in the conditions under which government ownership would be preferable.
and notes “I guess that view is wrong.” Unsurprisingly, I was among those who tried, with limited success, to interest the international profession in this question.
It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
Refuted economic doctrines #4: individual retirement accounts
The news that, on average, superannuation investments lost nearly 20 per cent of their value last year Johnny Got His Gun movie download comes as no surprise, and its likely that there are plenty of unrealised losses still on the books. Still, while the losses on the stockmarket have been as bad here as anywhere, we can take some comfort in the fact that Australian superannuation funds, like Australian banks, don’t seem to be in the same trouble as some of their overseas counterparts. As the government scrambles to keep the financial system operational, it’s natural to ask what, if anything can be done about this.
In the short term, the answer appears to be, nothing, or very little. Fortunately, for most people the losses are, in a sense, notional, wiping out the spurious gains of previous years. It’s only for those at or near retirement that the crash presents an immediate economic problem. Given that the demand for labour is plummeting, the government could perhaps consider an ex gratia payment to people who choose to retire now. There are all sorts of problems with this, and in normal times, such a proposal would never pass muster, but plainly, these aren’t normal times.
Looking to the longer view, this is more than a bad year for superannuation funds. The crash and the way it came about undermines the fundamental premise that has driven Australian retirement income policy for the past decade: that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts, is the best way of financing retirement. The old age pension, in this view, serves as a residual for those who don’t manage to save enough.
This privatised approach (also represented in Bush’s failed attempt to reform Social Security in the US) is has been largely discredited by the crash. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk. Morover, the idea that stocks will always perform better than bonds over the medium term (say a decade) has been proved false. This is a central premise of long-term investment advice.
We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.
Update 27/1/09 The New York Times agrees. And today’s Fin has a piece from Robert Shiller denouncing the efficient markets hypothesis. I’d better get cracking with more refutations, while there are still plenty of doctrines left to refute.
Back in November, I observed that Australia’s economic situation felt something the opening of Nevil Shute’s 1957 novel, On the Beach, where a nuclear war has devastated the Northern Hemisphere. Australia has not been hit, but a lethal cloud of fallout is gradually drifting southwards.
The fallout has certainly hit now. Huge job losses are being announced across the board, but particularly in the mining sector, which was booming only a few months ago. The government is already contemplating radical action to respond to the likely withdrawal of most foreign banks from our financial markets, and it needs to be similarly radical in its response to the imminent collapse of the labour market. For now, I’ll restate what I wrote in November, hopefully with more to come on this topic
Job creation gets a bad name from silly projects exemplified by the (apparently apocryphal) case of ‘painting rocks white’, so they tend to be a last resort. But the alternative of wage subsidies is least effective during the initial contraction phase of a recession, when employers are cutting back or freezing their staff numbers.
It’s precisely at this time when some well-timed projects could do a lot of good. In this respect the recently-announced assistance to local governments looks like a good idea.
Finally, while there are good reasons for governments to pick up the private sector slack as regards infrastructure investment, it’s important to remember that the days of large gangs of workers swinging picks and shovels are long gone. Physical infrastructure projects have many potential merits, but large-scale job creation is not among them.
The biggest employment gains nowadays come from expanding the services sector, and particularly human services such as health and education. The financial services sector has also been an important source of growth since the 1970s, but the jobs being cut there now are unlikely to return for some years, if they ever do.
In which I disagree with Paul Krugman
As James Surowiecki points out here, my views on what’s entailed in bank nationalisation differ significantly from those of Paul Krugman. Krugman, like quite a few other advocates of nationalisation, has in mind models like the Resolution Trust Corporation and the Swedish nationalizations of the 1990s, where the government took insolvent institutions into temporary public ownership, liquidated the bad assets and returned them to the private sector. These solutions worked well because the global financial system as a whole was solvent and liquid, even though some sectors (US S&Ls, Swedish banks) were not.
What’s needed in the present case is not only to fix the problems of individual banks, problems on a much bigger scale than have been seen before (even in the leadup to the Great Depression, the financial sector played a smaller role in the economy than in the recent bubble), but to reconstruct a failed global financial system. It’s kind of like rewiring an electrical system in near-meltdown, while keeping the power on (this is possible, but tricky and dangerous). The job is likely to be much slower than the rescues mentioned above, and the institutions that emerge from it will be very different from those that went in.
But, contra Surowiecki this time, this only strengthens the argument for nationalisation. Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.
fn1. Krugman is well-known for being right when lots of others have been wrong, so take this into account in assessing the arguments.
For the first time in the history of this blog, George Bush is not the President of the United States.