Month: January 2009

China, me old China

John Quiggin22 Comments

This is a long overdue post, promised as a thankyou to my old friend Martin Ellison who managed the transfer of the blog from the old, slow and unreliable shared server to the new accelerated server a few months back. Anyone who has noticed the difference is welcome to add their thanks in comments.

As a return in kind, I promised a post on any selected topic within reason, and Martin asked about the Chinese economy, a subject on which I’ve regularly promised myself I will get up to date. So, here goes.

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What to do with nationalised banks ?

John Quiggin39 Comments

All reasonableTM commentators now agree that nationalisation of big banks like Citigroup, Bank of America and Royal Bank of Scotland must take place soon, explicitly or otherwise. As I said at just before the second (failed) Citigroup bailout) banks like Citi are not only too big to fail, they’re too big to rescue with any of the half-measures that have been tried so far.

It’s obvious that “If it were done when ’tis done, then ’twere well It were done quickly” and cleanly, without any dodges designed to hide the reality of nationalisation. The longer these zombie institutions are allowed to run on public money, but under the existing discredited managers, legally answerable to the private shareholders, the bigger the costs the public will ultimately face.

Nationalisation would resolve a lot of the difficult questions around ideas such as the creation of a “bad bank” to hold all the toxic assets accumulated during the boom. That’s critical as long as policy is aimed at turning the troubled banks around while keeping them private, but it’s unimportant once all the debts and assets have been taken on to the public balance sheet. Once the big banks are nationalized, the government can take its time salvaging whatever assets are still worthwhile and preparing for the reconstruction of a private banking system under a completely new system of regulation, a task that is likely to take several years.

The big question is, what should governments do with the banks once they own them? Clearly, there’s an imperative for banks to start lending again, but there is no benefit in making yet more bad loans. And, right at the moment, credit-worthy borrowers are hard to find. The immediate concern must be to ensure that commercially sound loans aren’t being constrained by the need to bolster bank balance sheets. Then, governments need to consider whether some form of support for loans, such as interest rate subsidies or guarantees (secured against assets seen as having a long-term value that exceeds their current market value) should be part of the policy response to the recession. Such policies have plenty of risk associated with them, but the risks are mitigated a bit if the guarantor and the bank owner are ultimately the same (in this case, the public).

Obviously, this is not the kind of question economists have spent a lot of time thinking about until fairly recently. I don’t imagine many of us would have expected, a year ago, to be reading the Wall Street Journal castigating Henry Paulson and the Bush Administration for the (partial) nationalisation of the Bank of America. No doubt plenty of mistakes will be made. But there is no time for leisurely reflection here. As in 1933, the next hundred days will make a big difference, one way or another.

Windschuttles and weathercocks

John Quiggin82 Comments

Amid the voluminous commentary on the Windschuttle hoax(es), the most telling, for me, was a summary of his political peregrinations from Guy Rundle at Crikey. It’s paywalled but I’ll quote the best bit:

The man who’s now editing Australia’s premier conservative magazine was advocating the revolutionary potential of LSD in the 60s, media studies as “radical pedagogy” in the early 70s, was enthusiastic for Pol Pot peasant-style revolts in the late 70s (“the oil is almost gone — soon the Aborigines and poor whites will rise up” he wrote in Nation Review in the late 70s) and re-emerged in the 90s, after the global collapse of the left, as a man who thought there was no Tasmanian genocide, that the White Australia policy was a left-wing plot, that John Steinbeck made up the Great Depression and that the British Empire could not have been cruel because its officers were Christians.

Like a mendicant Pope, he’s spent his life wandering from one state of certainty to the next, in the search for godknowswhat.

The only stage missed was his (“Killing of History”) period as a scourge of postmodernist and relativist theory and fan of the empirical approach of researchers like Henry Reynolds.

That brings to mind the more general phenomenon of migration from dogmatic left to dogmatic right, which I discussed quite a while ago here, and linked to Paul Norton.

As good as gold

John Quiggin28 Comments

My passing remark about the role of gold in the Panic of 1873 provoked plenty of discussion, so I thought I’d have a preliminary go at a post I’ve been thinking about for a while.

The global financial crisis has been an intellectual disaster for those supporters of free markets who rely on mainstream arguments such as the efficient capital markets hypothesis. But it’s been something of a boon for fringe free-market viewpoints such as those of the Austrian school and (an overlapping group), advocates of the gold standard. Members of this group have been predicting disaster at least as long, and (relative to their numbers) at least as loudly, as social democratic critics of financial deregulation.

So, it’s worth presenting my critique of the gold standard in several parts, which can be classed as microeconomic, macroeconomic, empirical and political, along with some miscellaneous points. I don’t claim any particular originality for it, but I’m presenting on the basis of my own analysis rather than directly citing a source (I’d welcome pointers on this)

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Short and sharp ?

John Quiggin151 Comments

Writing in the Oz, Alan Moran begins a case for wage cuts as a response to recession with the claim

Until the 1930s, recessions tended to be short and sharp, and financial ruin was largely confined to the speculators whose exuberance had diverted capital into ventures where it was less than productive.

Much the same assumption appears to underlie the thinking of those who propose a return to the macroeconomic policies of the 19th century, such as the gold standard. Economic statistics for this period aren’t exactly comparable to those available today, but, such as they are, they don’t support the claim. In the US, for example, the longest-ever recession, according to the National Bureau of Economic Research was that of the 1870s (following the Panic of 1873, which in turn followed the US shift from bimetallism to a gold standard). As the NBER data shows, 19th century recessions commonly lasted for more than a year.

In Australia, the long and deep depression of the 1890s, and the substantial wage cuts imposed during that depression (with employers getting the full backing of governments) were a major factor in the formation of the Labor Party and the shift to a parliamentary, as opposed to a purely industrial strategy, for the labour movement.

Are sockpuppeteers criminals?

John Quiggin10 Comments

The Lori Drew case, in which a US woman set up a Myspace account under the name “Josh Evans” to torment a teenage girl who had fallen out with Drew’s daughter, and drove her victim to suicide, has some legal implications of interest to bloggers. Drew was ultimately sentenced to jail, not for her cruel prank and its fatal consequences, but for “unauthorized access to a computer system” by virtue of the false name under which the account was created. On the face of it, the same offence is committed (at least under US law) every time a commenter on a blog or noticeboard uses a sockpuppet to evade bans or blocks, or to post under multiple identities in violation of contractual terms.

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Science vs the Right: state of play

John Quiggin143 Comments

I stopped arguing with self-described “skeptics” on the topic of global warming some time ago, and I don’t intend to start again. I am however interested both in trying to promote sensible policy outcomes and in considering the broader political and cultural implications of the debate. For this purpose, there is no need to argue about hockey sticks, global warming on Mars or any of the other talking points that chew up so much time on the Internets (for anyone who is actually in doubt on any of these points, this is a useful resources

I’ll start with some facts that are, if not indisputable, at least sufficiently clear that I don’t intend to engage in dispute about them
(i) All major scientific organisations in the world[1] endorse, in broad terms, the analysis of the Intergovernmental Panel on Climate Change which states that the world is getting warmer and that, with high (> 90 per cent) probability, this warming is predominantly due to human action
(ii) Most prominent politicians[2], thinktanks, activists, commentators and bloggers on the political right in Australia, the US and Canada (along with a large section in the UK) reject, or express doubts about, this analysis. The uniformity of views is particularly notable among conservative thinktanks.

The dispute between mainstream science and the political right has now been going on for at least fifteen years, and has already had some profound impacts. At the beginning of this period, the right could plausibly present itself as the pro-science side of the “Science Wars” in which the enemies were the massed forces of leftwing postmodernism (a powerful force, given their near-total control over departments of English literature), sociologists of science and the wilder fringes of the environmental movement. However, this was always a storm in a teacup, ignored by the vast majority of scientists.

By contrast, the current war is being fought for high stakes, with the end result either a disastrous defeat for the institutions of mainstream science or the intellectual discrediting of the entire political right. There has been no significant convergence between the two sides. On the contrary, even as confidence in the mainstream scientific consensus was solidified be the released of the IPPP Fourth Assessment Report in 2007, the rightwing opponents of science were buoyed by the La Nina event of early 2008, which produced a sharp, but temporary drop in temperatures, particularly in the Pacific. Comparisons with the El Nino peak of 1998 enabled them to announce that global warming had stopped, a point which was amplified in vast numbers of opinion pieces, blog posts and public statements, though not, to my knowledge, defended by any peer-reviewed statistical analysis.

Even such an obvious fact as the melting of Arctic ice, confirmed in the most direct fashion possible by the announcement of regular shipping routes around the Pole, with associated territorial claims, has been the subject of endless quibbles (attempts to restate these quibbles in comments will be deleted).

Furthermore, unlike the endless culture war disputes where the debating tactics of the right have been developed, there is a fact of the matter regarding anthropogenic global warming, which will sooner or latter become undeniable. Either global warming will continue, finally confirming the mainstream scientific viewpoint, or it will not.

Given the accumulation of scientific evidence, the odds are pretty strongly in favour of the first outcome. Scientific conclusions supported by a diverse range of independent theory and evidence sometimes turn out to be wrong, but you wouldn’t want to bet on it. Even more rarely, non-scientists with an axe to grind turn out to be right where scientists are wrong, but you really wouldn’t want to bet on that.

This raises the question of why the right has been so keen to double down on this issue. Of course, there’s no organised process by which an anti-science viewpoint on climate change and other issues is agreed on as a central orthodoxy from which dissent is prohibited, but you only have to look at the output of the political right in the English speaking countries to see that this outcome has been realised.

There are many explanations, perhaps so many that the outcome was overdetermined – powerful economic interests such as ExxonMobil, the hubris associated with victories in economic policy and in the Cold War, tribal dislike of environmentalists which translated easily to scientists as a group, and the immunisation to unwelcome evidence associated with the construction of the rightwing intellectual apparatus of thinktanks, talk-radio, Fox News, blogs and so on.

The issue is not going to go away, regardless of the short-term success or failure of attempts to reach a global agreement to stabilise the climate. The more clearly the political right is identified with the anti-science side of this debate, the harder it will be to salvage any of its existing institutions.

In a two-party system, even total intellectual incoherence will not prevent a political party from winning office when its opponents fail. But I’m surprised at the extent to which supporters of free markets have been willing to tie their case to an obvious imposture.

fn1. The only partial exception of which I am aware is the American Association of Petroleum Geologists, which takes an equivocal position
fn2. For reasons of political necessity, some rightwing politicians occasionally make statements endorsing mainstream science on global warming. But only a handful (John McCain being the most prominent) give more than a half-hearted assent, and many (Brendan Nelson is an archetypal example) give different positions depending on the audience and the way the political wind is blowing on the day.