War and waste (crossposted at Crooked Timber)

Even by left/liberal standards, I seem to have become an extreme pacifist. That’s surprising to me, because I was a mainstream liberal internationalist 20 years ago, and I haven’t changed my views in any fundamental way. In particular, I don’t have any fundamental objection in principle to war, or even to constraints like the need for a UN resolution. I’ve just looked at the experience of those 20 years, and reconsidered earlier wars, and I’ve concluded that the consequences of war and revolution are nearly always bad. Even ‘successful’ wars cost more, in terms of lives and wasted resources, than the benefits they deliver.

I don’t particularly like being out on a limb, so I’m generally encouraged to find other people starting to think the same way. In particular, I was pleased to see this column by Matt Yglesias, making the point that Military strikes are an extremely expensive way to help foreigners with specific reference to Libya. I made exactly the same case at the time.

With a little more ambivalence, I read this piece by Tom “Suck. On. This” Friedman who observes that Middle East oil no longer matters, and concludes

Obama’s foreign policy is mostly “nudging” and whispering. It is not very satisfying, not very much fun and won’t make much history, but it’s probably the best we can do or afford right now. And it’s certainly all that most Americans want.

I don’t share the tone of regret (“Happy the land that has no history” is my view), but apart from that, Friedman is very close to the view I put in the National Interest a year ago, that there is no clearly defined U.S. national interest at stake in the Middle East and, more succinctly, in this comprehensive plan for US policy on the Middle East … [^1]

Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is an expensive waste of money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)?

[^1]: The joke doesn’t quite work as a link. You have to imagine the [click to continue] fold after the first para.

A note on the ineffectiveness of monetary stimulus (updated and corrected)

A commenter on the previous post raised the idea, promoted by the “market monetarist” school, that monetary policy is so effective as to make fiscal policy entirely unnecessary, at least when interest rates are above the zero lower bound. My views on this issue were formed by the experience of the late 20th century, and in particular, the recession that began in 1990, following steep increases in interest rates. Having planned a “short, sharp, shock”, the RBA started cutting rates in January 1990.

They didn’t go for 25 basis point moves in those days. Over the period to March 1993, rates were cut by more than 12 percentage points, from 17.5 per cent to 5.25 per cent. Over the same period, unemployment rose from 6 per cent to nearly 11 per cent, a record for the period since the Depression, and stayed around that level well into 1994, until the adoption of the Working Nation package of fiscal stimuuls active labour market policies. As I said in the previous post, tight monetary policy can reliably cause recessions, but expansionary monetary policy in a deep recession is “pushing on a string”.

Update As pointed out by Mark Sadowski in comments, these are nominal rates of interest. To get the real rate, which is more relevant, you need to subtract the expected rate of inflation, which fell from around 7 per cent to around 4 per cent over this period (as measured by surveys, and by the premium for inflation-adjusted Treasury bonds). So, you get a 9 percentage point reduction in the real rate from 10 per cent to 1 per cent. This doesn’t make much difference to the story. Most economists would regard policy as contractionar/expansionary if real interest rates are above/below the long-run neutral level, about 3 per cent. So, we still have a shift from strongly contractionary to moderately expansionary.

However, market monetarists want to argue that the stance of policy should be assessed relative to a policy rule (Taylor rule or NGDP) that already incorporates a prescription of cutting rates when GDP falls and unemployment rises. This doesn’t make a lot of sense to me. It’s like arguing that Obama’s stimulus was actually a contractionary policy because it wasn’t as big as (according to a standard analysis based on Okun’s Law) it should have been. It’s partly a question of semantics, but it’s associated with the claim that, if only rates had been cut even more, we wouldn’t have had the recession, or would have recovered quickly. Having been around at the time, I disagree.

Fiscal multipliers and employment (wonkish)

With two weeks to go in the election campaign, we still haven’t seen anything resembling a budget proposal from Tony Abbott and the LNP. Various people have made estimates of the cost of his promises and the cuts likely to be needed to fund those promises and return to surplus. My main concern is that Abbott has locked himself so thoroughly into the rhetoric of surplus that, in the event of a downturn or recession, he will feel compelled to adopt the kinds of austerity measures that have had a disastrous impact in Europe and prevented any real recovery in the US. To make this point properly, we need some numbers. One way to get such numbers is with a macroeconomic model. That gives you some better precision, but often hides the key assumptions. Instead, I will give a very simple Keynesian analysis, yielding back-of-the-envelope estimates.

For illustration, I’ll assume a public expenditure cut of $10 billion a year – the calculation is linear so it can be scaled up or down as needed. In a recession, the fiscal multiplier is likely to be around 1.5 (that’s the value used by Christina Romer when she pushed for a larger fiscal stimulus in 2009, and consistent with recent estimates by the IMF). So, the impact of the cut, when multipliers are taken into account is $15 billion or around 1 per cent of national income (or GDP if you prefer that measure).

Now we can use Okun’s Law to estimate that the cut will raise the unemployment rate by around 0.5 percentage points. Taking participation rates into account, employment will also fall by around 0.5 per cent (about 50 000 jobs).

A bunch of qualifications and observations over the fold

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Cronyism and the global city again (crosspost from crookedtimber.org)

Alex Pareene at Salon points to a bunch of evidence showing, in essence, that the rich look out for themselves and their kids, and no one else, then to a piece by Andrew Ross Sorkin defending nepotism in the US, and by extension in China. There was a time, not so long ago, when Asia’s reliance on guanxi and similar networking practices was denounced as ‘crony capitalism’, to be contrasted with the pure and hard-edged version to be found in the US. This was supposed to explain the vulnerability of Asian economies to the crisis of 1997, and the stability of the US, then well into the Great Moderation.

A few years later, in the very early days of blogging, I wrote a post pointing out that the eagerness of financial sector workers to congregate in the same physical location, even though their work was supposed to be based on objective evaluation of data transmitted by computer, was pretty good evidence that the “global city” phenomenon, much in vogue at the time, was just guanxi writ large.

I turned that into a magazine article at Next American City (now Next City, whose web site seems to have lost it). Then I wrote a longer and more academic version and submitted it a lot of journals in economic geography, urban geography and so on, none of whom were interested. I think it stands up well in retrospect (much more so than most of the ‘global city’ literature, at any rate), but of course I’m biased.

At any rate, at least now everyone, and not least a defender and beneficiary of the system like Sorkin, is comfortable with the notion that capitalism is a rigged game, in which the ability to fix the next round is part of the prize for winning this one.

Update/clarification I’ve implicitly taken the efficient markets hypothesis as a benchmark, and assumed that features of the financial sector (for example, physical colocation) that can’t be explained by EMH are likely indicators of cronyism. It’s possible to take the view that the financial sector does things that are inconsistent with EMH, but nevertheless socially beneficial. An obvious example is the kind of opaque, over-the-counter derivatives that Dodd-Frank has tried to ban, and that the finance sector is lobbying hard to protect: it seems clear that doing these kinds of deals would benefit from face-to-face contact. So, if such deals are, in aggregate, socially beneficial, my argument fails – the converse also holds.


The drip feed of revelations about spying by NSA, related agencies and international subsidiaries like ASIO/ASIS, is taking on a familiar pattern. Take some long-held suspicion about what they might be up to, and go through the following steps

1. “You’re being paranoid. That can never happen, thanks to our marvellous checks and balances”
2. “Well, actually it does happen, but hardly ever, so there’s no need to worry about it”
3. “OK, it happens all the time, but you shouldn’t be worried unless you have something to hide”

An example which must have occurred to quite a few of us is whether NSA employees can spy on current or former partners, potential love interests and so on. Until a few days ago, this was at stage 1. Now, it’s been admitted that this not only happens, but it has a name “LOVEINT“. Still, we are told by the great defender of our liberties Dianne Feinstein, this has only happened on a handful of occasions (Stage 2).

All very reassuring, until you read the following

Most of the incidents, officials said, were self-reported. Such admissions can arise, for example, when an employee takes a polygraph tests as part of a renewal of a security clearance.

In other words, while NSA monitors everything you and I do all the time, it relies on witchcraft to detect wrongdoing by its own employees. I guess we’ll just have to hope that NSA staff are too busy snooping on our emails to read any of the 194 000 Google hits on “how to cheat a polygraph”.

The failure of austerity in Europe

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

NBN: we would have been better off without privatisation

I have (over the fold) a piece in The Guardian, making the fairly obvious point that both the need for a publicly-owned NBN and much of the cost are the result of the decision to privatise Telstra, and to rely on “facility-based competition” to drive new investment.

Add in the failure of electricity reform, PPP toll roads and airport privatisation, and there’s not much in the way of success from the infrastructure reforms of the 1990s. Then, of course, there’s the collapse of the much-feted productivity boom.

And yet Australia is exceptionally prosperous. A little bit of that, particularly in Queensland and WA, is due to the mining boom. But most of it is the simple fact that, by a combination of good luck and good management, we’ve gone 20 years without a recession.

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