Sandpit

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

To be clear, the sandpit is for regular commenters to pursue points that distract from regular discussion, including conspiracy-theoretic takes on the issues at hand. It’s not meant as a forum for visiting conspiracy theorists, or trolls posing as such.

The General Theory and the Special Theories

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.

The special theory Keynes wanted to replace was that of classical economics, in which the economy always tends to full employment unless governments or unions get in the way. The implication of classical economics, articulated in the Great Depression by Mellon (“liquidate the rottenness”) and in the Lesser Depression by the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.

The disastrous failure of austerity, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has an even stronger hold on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the Global Financial Crisis of 2008. That accounts for just about everyone in the political class aged over 40, with the exception of a handful of people who have stuck to positions taken in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders** .

Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending is going continue long after the pandemic is controlled, either by continued restrictions or the development of a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the US).

But if we can fight off the push for austerity, there’s another special theory that needs to be dealt with. Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a “liquidity trap”. This is a situation where the economy is so depressed that cutting interest rates to zero has no effect on demand – people pile up money rather than spending it. The only solution is for the government to spend money creating jobs (expansionary fiscal policy). And, as long as the liquidity trap continues, governments can keep increasing spending, financed either by money creation or zero-interest bonds.

The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more. MMT advocates, like Stephanie Kelton kind-of admit this, but continuously seek to dodge the point. Here for example MMT advocates Nersiyan and Wray suggest that the Green New Deal can be financed without “taxing the rich” (a problematic term for progressive income taxation, since so few people admit to being rich) relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”. “Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

Nersiyan and Wray draw on Keynes’ proposals in “How to Pay for the War”, which do include measures such as rationing and deferred pay, as well as large trade deficits. But the central point underlying Keynes analysis was that the war could not last forever. One way or another, the struggle with Hitler would be decided. In these circumstances, and with the total mobilisation needed for a life-or-death struggle, measures like deferred pay and rationing represent a way of sharing a necessary sacrifice. These were additional to, not a substitute for, steep increases in income and consumption taxes

A permanent change, like the original New Deal or a Green New Deal can’t be sustained with temporary wartime expedients or expansionary fiscal policy. What is needed is a transfer of resources from private consumption and privately directed investment to public use. That can be achieved through various forms of predistribution, reducing the incomes of those receiving an excessive reward at present, or through taxation. While both need to be pursued, it’s unlikely that predistribution can do all the work.

Keynes got this right in 1937, when he said “the boom not the slump is the time for austerity at the Treasury”.

*This just struck me, but of course I’m not the first to notice. Here’s James K Galbraith, attributing it to Robert Skidelsky. Still, good company to be in and Galbraith says not many others have made this point. And, it has been pointed out on Twitter, Pigou made much the same point in his critical 1936 review.

** If I had ever achieved any political influence, I would also fall into the category

The end of ecomodernism

I was due to appear tomorrow before the Environment and Planning Committee’s inquiry into Nuclear Prohibition in Victoria, but I’ve just been advised that it’s been deferred until after the lockdown. I’d just finished writing a supplement to my earlier submission which concluded that there was no real support for the kind of ‘grand bargain’ I’d earlier proposed, combining a commitment to a rapid phase-out of coal with a removal of the prohibition on nuclear power. It’s over the fold.

Read More »

Masks (repost from a month ago)

Now that the World Health Organization has finally endorsed a recommendation for wearing masks in public, it’s time for Australia to do the same.

The most important case is that of public transport including air travel. Urban public transport is vital, but until we take the necessary steps on masks, we will be stuck with recommendations to avoid peak hour travel, guaranteeing a return to private cars and congestions

The airlines have been the biggest transporters of the pandemic and have continued to behave irresponsibly, packing planes as full as possible without any requirement for masks. It’s time for government to step in and order them to require masks as a condition of travel.

Update: Obviously, the Victorian outbreak has increased the urgency of this. The Rail, Tram and Bus union has called for compulsory masks on public transport, but we will probably need to go to a general requirement for masks in all public places

Shellenberger

Michael Shellenberger’s “apology essay” is the last gasp of “ecomodernism”

Although ecomodernists make a lot of claims, the only one that is distinctive is that nuclear power is the zero-carbon “baseload” energy source needed to replace coal, and that mainstream environmentalists have wrongly opposed it.

Historically, there is something to this. It would have been better to keep on building nuclear plants in the 1980s and 1990s than to switch from oil to coal, and it was silly for Germany to shut down nuclear power before coal

. But none of that is relevant anymore, at least in the developed world. Solar PV and wind, backed up storage are far cheaper than either nuclear or coal. As a result, there have been very few new coal or nuclear plants constructed in developed countries in recent years.

Several countries (Belgium, Austria, Sweden) are already coal-free and most developed countries will be by 2030. So, ecomodernism is obsolete.

At this point, Shellenberger is faced with the choice between admitting that the mainstream environmentalists were right or explicitly going over to the other side. He has chosen the latter.

(From Twitter using Spooler)

The Economic Consequences of the Pandemic

That’s the title of a book I’ve agreed to write for Yale University Press (their editorial director) Seth Ditchik commissioned my previous two books, Zombie Economics and Economics in Two Lessons when he was at Princeton UP.

When we first discussed the book, I took the view that most of the writing would have to be done after November, since the outcome of the US presidential election would be crucial to developments in the US and globally. I’m now working on the assumptions that
(a) Biden will be the next president
(b) he will have a workable majority in Congress.
(c) mainstream Democrats recognise the need for radical change, and Biden will align with the mainstream position as he always has done

The first of these assumptions was problematic until recently, but seems safe enough to work on now. The third, I’ll leave for comments.
That leaves the question of a workable majority. Roughly speaking, I mean that the Dems have enough votes in the Senate to abolish or restrict the filibuster and pass the kind of program I’ll be advocating (allowing for a couple of defections, that would be 52 or more). Winning that many seats is still a stretch on current polling, but not out of reach.

The immediate question is that of how to get rid of the filibuster. Doing so pre-emptively would be problematic in all sorts of ways. Biden needs to start with the 2008 Obama playbook of reaching out across the aisle in the spirit of bipartisanship. But unlike in Obama’s case, once the proffered hand (or perhaps elbow bump) of friendship is slapped down, as it surely will be, Biden needs to point to his electoral mandate and whip up the necessary votes. Obama realised this, to some extent, in his second term, but by then he had a hostile Congress.

More concretely, I’d suggest starting with health care. Biden should call on the Repubs to drop their endless campaign against Obamacare, and work together on fixing the health systme. He should start with a proposal to expand Medicaid to all states, with incentives redesigned to get around (at least arguably) the Supreme Court’s 2012 ruling that States had to have a “genuine choice”. Biden should offer the Repubs a chance to have a say in the framing of the legislation with the aim of bringing the country together.

Politically, this ought to be a no-brainer for the Repubs. The fact that Oklahoma voters just passed a referendum to expand Medicaid over the opposition of the governor, ought to make it clear that this is a fight they can’t win. But given that they are still fighting to abolish Obamacare, it seems unlikely that they will see this.

Even if Congress passes the legislation, it could still be invalidated by the Supreme Court. But, unlike 2012, this would be a fight that Roberts couldn’t win, since Congress could keep tweaking the law and sending it up again. Repeated rulings in favor of the Republicans on an issue where they have almost no public support https://www.kff.org/medicaid/poll-finding/data-note-5-charts-about-public-opinion-on-medicaid/ would provide the ideal case for expanding the Court so as to nullify the Gorsuch and Kavanagh appointments.

This isn’t the only test case Biden could use. But it seems like an obvious place to start.

Trumpism after Trump

Predicting election outcomes is always risky (for example, the People’s Action Party could lose the current election in Singapore), but life involves taking some risks. So I’m going to predict that Trump is going to lose in November, and lose badly*. He is far behind in the polls, substantially further than in 2016. More relevantly perhaps, the resurgence of the pandemic in Arizona, Florida and Texas has ended any chance that the economy will be successfully reopened and the pandemic clearly under control by November, not to mention giving the citizens of those states very personal reasons to vote against him.

What will happen to Trumpism after Trump’s defeat, in the US and globally? Here are some very disorganised thoughts.

A big part of Trump’s appeal is that he is a winner, and a big part of Trumpist mythology comes from wins against the odds, as with Brexit and Johnson and, more periphally, with the re-election of the Morrison government in Australia (which had the good sense to dump most of its ideology for the duration of the crisis, but is now returning to its roots). With that gone, Trump’s support will be much weakened So, the stage will be set for a fight in which the hard neoliberals who controlled the party before Trump attempt to reassert themselves, breaking with Trump’s explicit racism while still trying to keep the Repubs white voting base behind them.

On the other hand, Trump has lots of supporters who will refuse to accept the reality of a defeat (not enough, I think, and particularly not enough in positions of power, for him to stop the election or overturn its result). And there are more competent Trumpists, in the mould of Viktor Orban, keen to push an ethnonationlist, racist and authoritarian policy program without Trump’s clownish demagoguery.

Internationally, a defeat for Trump probably won’t make much difference to the ethnonationalist voting base of the Trumpist right. That base has always been there, ready to turn out whenever some other group can be identified as the enemy. But it will, I think, have a significant effect on the right wing of the political class. Some of them will find themselves outside the bounds of legitimate discussion (this is already happening in a small way in Australia), while others will engage in some quick reinvention.

The big question is whether hard neoliberalism can recover. On the one hand, the financial sector still has huge economic power, which usually translates into political power. And the common-sense economics of the Swabian housewife still retains its grip on many. On the other hand, just about everything that is identified with hard neoliberalism (globalisation of trade and financial flows, the hypertrophic growth of the financial sector, trickle-down economics and more) is massively unpopular. That’s particularly true of those under 40, who never experienced the illusory prosperity of the 1990s, or the crises of the 1970s (minor by comparison with the last decade, but a massive shock to expectations conditioned by the postwar boom).

The best hope for the US right is that Biden and the Democrats are unable to fix the catastrophic mess they will inherit. More on this soon, perhaps.

  • I meant to have a footnote about the possibility of Trump rejecting the election outcome, but covered it with a parenthetical statement.

Monday Message Board

Back again with another Monday Message Board.

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