Crisis and the case for socialism

The coronavirus crisis is very different, at least in its origins, from the Global Financial Crisis. Both differ in crucial respects from other crises in living memory, notably including the Great Depression and World War II, as well a string of severe but not catastrophic crises that have affected the global economy and society. But thinking about them all together brings home the point that major economic crises are quite common events. The crisis of the past took each took between five and ten years to resolve. Even if the current crisis is shorter, we can draw the conclusion that crisis of one kind or another is not an aberration, but a regular occurrence in a complex modern society.

What they have in common is that the result in a need for urgent government action. The greater the capacity and willingness of governments to act to protect society from the economic damage associated with such crises the better, in general, the outcome has been.

The most immediate requirements for dealing with a crisis are a strong and comprehensive welfare state, and strong protections for workers. In the aftermath, we need a substantial economic role for government, including control over infrastructure and financial enterprises and public provision of services like health and education. In short, we need socialism.

(More to come soon!)

How to get to a UBI

Last year I published a book chapter arguing that the first step way to get to a Universal Basic Income was to expand the existing benefit system, increasing payments and removing conditionality (relevant extract over the fold).

This is often called a Guaranteed Minimum Income (GMI). I counterposed the GMI approach to the alternative of making a small payment to everyone in the community, and then trying to increase it over time. I suggested three initial steps

Assuming a ‘basic first’ approach is preferred, how might it be implemented? Three initial measures might be considered:

(i) increase unemployment benefits, at least to the poverty line;

(ii) replace the job search test for unemployment benefits with a ‘participation’ test;

(iii) fully integrate the tax and welfare systems

We are already on the way to taking these steps. Having floated the idea of a separate benefit for people who lose their jobs due to the virus crisis, the government has quickly abandoned it in favour of an increase in existing benefits. This is supposed to be temporary, and, in theory, at least, there has been no change in compliance efforts like work testing. But ‘temporary’ will turn out to be a long time, and compliance efforts are going to be impossible until things return to normal.

In a subsequent post, I”ll look at the alternative of a universal payment which might be increased from the levels in the stimulus package to an amount sufficient to live on.

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Will the virus crisis cause another derivatives crisis ?

I had an inquiry about this and am posting my response

Some relatively good news on this. The volume of over-the-counter derivatives, including Credit Default Swaps, has generally been declining since the Global Financial Crisis. It’s still large and a potential source of danger.  The place to go for detailed information is the Bank of International Settlements. Here’s a press release from late 2017 with a graph for the declinehttps://www.bis.org/publ/otc_hy1711.htmI’ve attached detailed statistical data.


I suspect, though, that the real problem this time will be in more standard forms of corporate debt. The long period of low rates has allowed corporations to load up on debt. This story from Forbes is useful
https://www.forbes.com/sites/mayrarodriguezvalladares/2019/07/25/u-s-corporate-debt-continues-to-rise-as-do-problem-leveraged-loans/#4c55672a3596
And you can get statistical data for the US from the St Louis Fed
https://fred.stlouisfed.org/tags/series?t=corporate%3Bdebt

How to stop the toilet paper panic

Thanks to Big Data, it would be easier to stop the toilet paper panic in its tracks.

Step 1: Announce that anyone holding more than, say, 50 rolls (per person in a household) must hand in the excess to a charity, and notify the government that they have done so.

Step 2: A week later, order supermarkets to hand over the data they collect on purchases, and raid people with large stocks that have not been surrendered. Confiscate the lot, and leave them with an ample supply of newspaper.

Is this a serious option, in view of the associated invasion of privacy? Given the kinds of restrictions on anti-social behavior that are going to be needed, I think it would be the right kind of signal to send. And, if we are scared about the potential misuse of this kind of data, this would prompt some proper restrictions once the emergency is over.

Zoom

I just gave my first UQ departmental seminar using Zoom. As in most places, our usual practice is to have visiting speakers present their work and meet colleagues in the same field. When large numbers of Chinese students were prevented from returning to Australia in the first round of the coronavirus epidemic, the cost to the university’s budget was such that nearly all travel, including paying for visitors’ travel was cancelled. As it’s turned out, a good thing to. This left big gaps in the seminar program, so I volunteered to present a paper in one of the vacant slots.

By the time the seminar was scheduled to happen, budget cuts were the least of our worries. Lectures were stopped for a week while we switch to all-online teaching, and (nearly all) meetings were cancelled. So, I decided to present the talk from home using Zoom. It went quite well, even though my home Internet is a bit flaky (the much-delayed National Broadband Network is supposed to arrive here next month, and may improve things). In the subsequent discussion, it was pointed out that we could invite people from outside the department to take part. For example, one of our PhD students had a paper accepted for a conference that’s been cancelled, and could ask some of the key people who would have been there to hear the presentation.

It also struck me that we could have gone back to the originally scheduled speaker, and had them do a Zoom presentation. That leads immediately to the question: why carry on with the tradition of flying colleagues in to have them talk to us, when they could just as well do it from home (or at least, from their home campus)? The difficulties are much less than those with online-only teaching.

Of course, I would say that. I’ve been pushing the merits of videoconferencing and related technologies for decades, and regularly respond to travel invitations by offering a video presentation rather than attendance in person. But now that lots of people are experiencing the process and finding it works reasonably well (and in fact has substantial advantages), returning to the old ways once the crisis is over may be too difficult to justify, especially since our budget is going to be stringently rationed for a long time to come.

Option value

Like most of us, I’m not expert on epidemiology. But I have spent most of my life studying risk management. In the current crisis, one of the most relevant issue,s and the one that policymakers seem to be ignoring is that of option value. To see what’s involved, consider a policy choice like shutting down bars and cinemas, as opposed to waiting two weeks to see what happens. If, in two weeks time, it turns out the virus has been contained, the ban can be reversed and the loss is that of the two week shutdown,. On the other hand, if the virus spreads through contact in these venues, there is no way of limiting the damage to two weeks.

Nearly all the time, this reasoning favors aggressive early action. The exceptions are actions like cancelling events scheduled some months in the future. Deferring the decision would increase losses in the event of a cancellation, but keep open the option of going ahead if the situation improved.

Sadly, there seems to be no sign that those in charge of the policy response understand this. Rather, the reasoning seems to be to wait until they are sure a risk-reduction measure is necessary before implementing it. That is a recipe for avoidable disaster.

Videopresentation invitation

I didn’t get a lot of responses to this invitation back in 2008, but I’m hoping for more now. I can offer video presentations on a wide range of topics (climate change, water, infrastructure, digital economy & culture, employment and macro policy in general, among others).

As regards technology, it seems that Zoom is state of the art now. I’m hoping to have that set up so I can do it from home, which will allow more flexibility about time.

Repost from 2008

With the release of the Garnaut report, it’s time for me to look again at ways to reduce my carbon footprint. I’ve been trying to reduce air travel, turning down invitations and offering to do videoconferences instead. That’s had some success, but mostly people aren’t set up to handle video, and, by the time invitations are made, there are often arrangements in place that make it difficult.

So, I’m going to take the initiative, and announce that I’m available to offer video presentations on a wide range of topics (climate change, water, infrastructure, digital economy & culture, employment and macro policy in general, among others). It’s easiest for me in business hours (9-5 pm, Mon-Fri, AEST) as that’s when I can use the UQ facilities, but I’m willing to look at alternatives at other times, if there’s someone who can handle the setup.

Obviously, I can only do a finite number of presentations, either in person or by video, so get in with your request.

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How coronavirus will wallop Australia’s economy – and what the government must do

The Guardian has a number of short pieces from economists on the likely economic effects of the coronavirus, and what should be done about it. Here’s mine

The government has finally recognised the correctness of the Rudd government’s response to the GFC

The Australian economy was slowing even before the bushfire catastrophe and the arrival of coronavirus. The economic costs of the bushfires, including damage to property and infrastructure, long-term health effects of smoke exposure and ecosystem destruction were massive, but the main effects on GDP will be felt by the tourism sector. The damage to Australia’s international image from widespread vision of the fires, accompanied by critical commentary to the effect that, as a climate laggard, we have brought this on ourselves, will be long-lasting.

The arrival of the coronavirus, just as the last bushfires were extinguished will have a greater short term impact on economic activity, almost certainly resulting in two or more quarters of negative growth. With an underlying growth rate of 0.5% per quarter, a 5% contraction in the 10% of the economy most exposed to the effects of coronavirus would be sufficient to reduce growth to zero.

It appears that the government has finally recognised the correctness of the Rudd government’s response to the GFC, and will follow that path, with some marginal attempts at product differentiation. It is likely that the effect on the budget balance will be substantially greater than the $10bn currently being discussed, and that the recent decline in the ratio of public debt to GDP will be reversed. In these circumstances, the massive tax cuts for high income earners, legislated for 2024-25 will probably prove unaffordable.