Author: John Quiggin

Krugman wins Economics Nobel

John Quiggin86 Comments

Paul Krugman has been awarded the 2008 Nobel prize for economics[1]. The rules of the prize, honoured more in the breach than in the observance in economics, say that it is supposed to be given for a specific discovery, and Krugman is cited for his groundbreaking work in the economics of location done from the late 1970s to the early 1990s.

The reality, though, is that economics prizes are awarded for careers. Krugman’s early work put him on the list of likely Nobelists, but his career took an unusual turn around the time of the 2000 election campaign. While he has still been active in academic research, Krugman’s career for the last eight years or more has been dominated by his struggle (initially a very lonely one) against the lies of the Bush Administration, its supporters and enablers. Undoubtedly, the award of the prize in this of all years, reflects an appreciation of this work on behalf of truth in economics and politics more generally.[2]

The crew at Crooked Timber, of which I’m part, have a more parochial reason for cheering this outcome. Paul has generously agreed to take a part in a CT seminar on the work of Charles Stross, which should be published in the next month or so. Without giving too much away, there are some Nobel-related insights in his contribution.

fn1. Strictly speaking, the Bank of Sweden prize in Economic Sciences in honour of Alfred Nobel, or something like that.
fn2. Doubtless, Republicans will complain about being implicitly identified, yet again, as enemies of science and of truth. But they’ve made their bed and must lie in it (in both senses of the word).

The fiscal policy response to the crisis

John Quiggin23 Comments

With the effective nationalisation of the banking system now accepted as necessary (Australia’s comprehensive guarantees amount to public assumption of the risks of ownership, and hopefully the fees to be paid by the banks will reflect this) attention has turned to the role of fiscal policy.

Getting fiscal policy right involves a delicate balancing act. On the one hand, there is the short-term need for stimulus. On the other hand, the combination of a large stimulus and a bailout/nationalisation package imply big deficits, which will have to be recouped in the future.

In the Australian context, the Opposition is calling for an immediate pension increase and the bringing forward of the next stage of tax cuts. That’s a plausible line, although other opportunities for stimulus through public expenditure need to be explored. But the obvious, though unstated, quid pro quo is that the ‘aspirational’ tax cuts proposed for the next Parliament should be taken off the table. It will take a long time to restore the budget balance after the kind of stimulus that is needed here.

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Now we're getting somewhere

John Quiggin33 Comments

The British government has abandoned proposals for non-voting preference shares and is moving towards full-scale nationalisation of the banking sector. According to the London Times(h/t Felix Salmon) the latest proposals would leave the government owning 70 per cent of Royal Bank of Scotland and 50 per cent of Halifax. The London stockmarket is likely to be closed, and it seems unlikely that many banks will remain private by the time it reopens. Presumably, with Morgan Stanley and Goldman Sachs in deep strife, the US can’t be far behind, though Paulson is still talking nonsense about non-voting shares. Still, it’s only three weeks ago that he was opposing any kind of public equity, and only six weeks ago that he was claiming that there were no real problems.

As the Times says, no-one knows how much toxic sludge will turn up when the government finally gets access to the books, but it seems unlikely that most governments will be overwhelmed in the way that Iceland has been. The capacity of developed-country governments to raise additional revenue is huge, easily enough to cover trillions in bad debt over a few years. So, once the sector is nationalised it should be possible to get lending flowing again. And, the prospects for an orderly shutdown of the massively overgrown markets for derivatives like credit default swaps suddenly seem a lot better.

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A bad move

John Quiggin59 Comments

The Rudd government has made its first big mistake in handling the financial crisis. The just-announced proposal to guarantee bank accounts up to $20 000 is worse than useless. Given that lots of people hold more than $20 000 in individual bank accounts, they have an obvious incentive to diversify, which means large scale withdrawals. The possibility of this turning into a run is far from remote. Turnbull’s suggestion of $100 000 is better, but the only serious option is an unlimited guarantee.

Update Some good news on this. Once we have a guarantee of $100K or more in place, the extra liability associated with an unlimited guarantee will be modest, while the gain in simplicity will be substantial, and the argument for exercising direct control over bank lending will be unanswerable. Of course, as a colleague pointed out in the course of email discussions on this point, the real problem is the banks’ reliance on overseas borrowing. I’ll be discussing some proposals on this before too long I hope.

We are all socialists now

John Quiggin47 Comments

A couple of days ago, I thought my call for full-scale nationalisation of the banking sector would remain beyond the pale of political acceptability for at least a week. But in today’s paper I read the following, very sensible assessment

Inevitably, the US, Britain and Europe are going to end up with nationalised banking systems in one form or another, and with governments guaranteeing not only their deposits but probably all their liabilities. The nationalisation will be a temporary emergency measure. But for some time at least the systemically important banks effectively are going to be public utilities and must be regulated accordingly.

This taxpayer rescue of banking systems opens up a new and potentially very important avenue for unfreezing bank lending and restoring the flow of credit. If governments effectively control the banks, what is to stop them from demanding that they start lending again?

And what wild-eyed socialist wrote this? Alan Wood in the Australian.

Meanwhile, calls for a guarantee of bank deposits are gaining force.

Of course, none of this constitutes a shift to socialism in any meaningful sense of the term. But it does mean, for quite some time to come, the end of neoliberalism (or free-market liberalism or whatever you want to call the set of ideas centred on the proposition that markets can do a better job than governments in managing risks of all kinds). The question of what will replace neoliberalism has come up so suddenly, and in such chaotic circumstances, that no-one has a clear answer. I’m confident that the response must be broadly social democratic, but there are a lot of details that need to be filled in.

Note The spam filter has been rejecting comments because of the ci*lis problem in the post title. I’ve fixed that, but commenters will probably need to asterisk the S word (Soci*lism) to avoid the filter.