A Xmas present from Campbell Newman

One of the jobs I had marked on my calendar for the holiday season was dismantling the second interim report of the Costello Audit Commission, due to be delivered on 30 November. While it’s obviously necessary to respond to these exercises in deception, I can think of plenty of better ways to spend the summer break. Fortunately, Campbell Newman turned out to be even less keen on defending the report than I was on attacking it. The government has announced the report won’t be released after all, so we won’t see anything more from Costello until February. Thanks, Can-Do!

Armistice Day

After more than a decade of war in Iraq and Afghanistan, there’s a chance Australia might finally be at peace next Armistice Day. Most combat operations in Afghanistan will cease early next year, and we can hope that the final pullout will take place not too long after that. In my lifetime, Australia has been involved in three long wars, none of which have produced the promised results. In two of them, Iraq and Vietnam, the pretext for war was clearly fraudulent. The overthrow of the Taliban regime, which had sheltered Osama bin Laden, was plausibly justified on grounds of self-defence, but the conduct of the war, and particularly the decision to invade Iraq, ensured that the effort would end in failure, as it has done. The best that can be said about the wars of the last decade is that they have been less costly, at least in Australian lives, than was Vietnam.

What is really striking, looking at the recent past, is how much has been achieved by peaceful means. In our own region, Indonesia has been transformed from a dictatorship (generally seen as representing a long-term military threat) to a stable democracy, which has largely overcome the challenges of terrorism, religious violence, natural disasters, and the attempts of the military to retain its central role in politics and business. With the aid of Australian peacekeepers, East Timor has made a start on a difficult road out of poverty. Elsewhere in the world from Eastern Europe to South America to the Arab world, seemingly durable dictatorships have collapsed or handed over power, mostly without the intervention of foreign governments.

Saying that war should be the last resort sounds like a platitude. But it is among the most important lessons we learn from history. Those who choose war rarely achieve the outcomes they expect and usually bring disaster on themselves as well as others. War in self-defence is sometimes necessary, and there are rare occasions when outside intervention can prevent an immediate human catastrophe. Fighting wars for justice, or democracy, or national honour, or to prevent future wars is a path to ruin.

The end of the tax revolt

The crushing losses suffered by Republican culture warriors in the US elections shouldn’t blind us to the fact that from the viewpoint of the 1 per cent, the culture war is just a useful distraction to ensure that those they are exploiting never combine against them. The big issue for them is taxation, and the opening round will be the struggle to keep the Bush tax cuts and the preferential treatment of capital gains. They’ve had an unbroken sequence of wins on these issues ever since California passed Proposition 13 in 1978. But things are finally turning around.

Over the fold, a piece on this topic that should be coming out in The Conversation next week

Read More »

Mulligan talks his book

Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.

Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.

Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.

To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.

It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.

Read More »

Reality bites

The most striking political development of the last decade or so has been the abandonment, by the political right, of any concern with reality. Mitt Romney ran the most deceitful and dishonest campaign in US political history, vowing not to be deterred by fact-checkers. His partisans, in the US and Australia have made denial of reality an artform. This approach has had some remarkable successes, notably in delaying action against climate change. But there is always the risk that deception will turn into self-deception and the US Presidential election illustrated that, with the emergence of “poll trutherism”, the belief that the polls pointing to Obama’s re-election were skewed in order to encourage Democratic turnout.

Now that poll-based predictions have turned out to be as close to accurate as statistical theory would predict, how will the right react? I can think of three possibilities

(a) Going deeper down the rabbit hole with the idea that the “increase Democratic turnout” strategy ensured that the polls were a self-fulfilling prophecy
(b) Attempting to return to reality on this issue, while maintaining delusional positions on other issues, and maintaining faith in the pundits who led them astray this time round
(c) A serious attempt to shift to a policy discourse based on evidence and analysis rather than talking points in support of positions chosen on a basis of tribal faith

I can’t imagine much progress towards (c). Apart from anything else, most of the existing rightwing commentariat would be unemployable if this were required of them. So far, I haven’t seen much evidence of (a), but it may well be bubbling below the surface. Still, at this point (b) looks most likely.