Back on air

John QuigginLeave a comment

My technical problems have vanished as mysteriously as they arrived. Thanks again to Jacques Chester who stands between me and the mixture of frustration and wonder that is WordPress. Jacques supports quite a few of the political blogs in Oz, with an admirable willingness to assist bloggers of all viewpoints.

Normal posting to resume soon. But, if you use Facebook, be sure to check out my Facebook Public Page, and share posts there if you do that kind of thing. I’m also on Twitter, with the highly creative handle @JohnQuiggin

An undeserving alternative PM

John Quiggin233 Comments

Unless there’s a sudden turnaround in the polls, Tony Abbott will become Prime Minister of Australia. This will be the third time in my life that a Federal Labor government has been defeated, the other two occasions being 1975 and 1996. On both those occasions, despite substantial and enduring accomplishments, the government had made a mess of macroeconomic management, and the electorate, unsurprisingly, wanted to punish them. And, despite my strong disagreements with them (and with the way Fraser came to office), the incoming Prime Ministers had serious views on how best Australia’s future could be managed. Fraser has only improved since leaving office, making valuable contributions on the national and global stage. My evaluation of Howard, following his defeat, starts with the observation that he was ‘the most substantial figure produced by the Liberal party since the party itself was created by Menzies’.

Nothing of the sort can be said this time. The case put forward by the LNP is based entirely on lies and myths. These include the claims that
* Labor has mismanaged the economy and piled up unnecessary debt and deficits
* Australian families are ‘doing it tough’ because of a soaring cost of living
* The carbon tax/price is a ‘wrecking ball’, destroying economic activity
* The arrival of refugees represents a ‘national emergency’

None of these claims stands up to even momentary scrutiny.

Then there’s Abbott himself. After 20 years in politics, I can’t point to any substantial accomplishments on his part, or even any coherent political philosophy. For example, I’m not as critical of his parental leave scheme as some, but it’s totally inconsistent with his general political line, a fact that his supporters in business have been keen to point out. On climate change, he’s held every position possible and is now promising, in effect, to do nothing. His refusal to reveal policy costings until the second-last day of the campaign debases an already appalling process. He treated budget surplus as a holy grail until it became inconvenient, and has now become carefully vague on the topic.

Obviously, the fact that such a party and such a leader can be on the verge of victory implies that the Labor side has done something dreadfully wrong. It’s the oldest cliche in politics for the losing side to claim that the problem is not the policies but inability to get the message across. In this case, however, I think it’s true. Gillard lost the voters early on with stunts like the consultative assembly, and never managed to get them to listen to her for any length of time. Rudd was doing well in communicating his vision from his return to the leadership until he called the election. He then wasted three weeks on small-bore stuff apparently aimed at Katter party preferences. He seems finally to have rediscovered his voice, with the launch speech and his Q&A appearance, but I fear it’s too late.

Still, in the unlikely event that any undecided voters are reading this, I urge you to take a serious look at the alternative government, and place the LNP last on your ballot in both houses of Parliament.

Launch delayed

John Quiggin21 Comments

After a disappointing campaign, Kevin Rudd’s “launch” speech was excellent, both as a defence of Labor’s record and in setting out an agenda for the next term, notably with a long-overdue focus on the TAFE sector. Unfortunately, this announcement wasn’t the only thing that was overdue. What possible sense is there in “launching” the campaign with a week to go, when most voters have already made up their minds or turned off? This isn’t one of the quirks for which Rudd has been criticised – Gillard did the same thing in 2010, and the Liberals were only a few days earlier. I have no idea how the supposed experts who run campaigns cna think this is a good way to do things – it’s obviously not a good way of presenting voters with a reasoned argument[1]

If Rudd had given this speech three weeks ago, and campaigned around it, Labor would be in with a good chance. As it is, their best hope is that the corresponding piece of trickiness on the other side will backfire. This is Abbott’s decision to release his allegedly independent costings on Thursday, with the advertising blackout in place, and only a couple of days to go. It’s hard to see any creditable explanation of this, and it ought to be reason enough not to elect him as PM. But that seems unlikely.

fn1. In fact, I have no idea why these “experts” are given any credence. As the debate between pundits and psephbloggers has shown, here and in the US, the alleged experts don’t even have the basic (first-year uni) statistics needed to interpret an opinion poll, which means that they can not have, and never have had, the slightest idea whether their strategies were working. It’s just that one side always wins, and victory has a thousand parents, at least until failure the next time around shows them up. The classic example is Karl Rove, acclaimed or dreaded as an electoral genius, who humiliated himself by refusing to believe the 2012 election results, even when they were beyond doubt. Then there’s Dick Morris, the famed inventor of “triangulation” who also predicted that Romney would win in a landslide.

Market monetarism: a first look

John Quiggin91 Comments

One of the more confusing of the macroeconomic debate is the emergence of a profusion of schools of thought with very similar names, but very different viewpoints. The one I’ve had most to deal with is Modern Monetary Theory. I had a go at this topic here and . My brief summary is that MMT pretty much coincides with traditional Keynesian views in the context of a liquidity trap, but that I reject the claim commonly made in popular presentations of MMT, that increased government spending doesn’t imply increased taxation.

Then there’s New Monetarism, associated with Stephen Williamson. He and I had a set-to a while back, which entertained many but didn’t produce a lot of enlightenment, and left me disinclined to put a lot of effort into understanding the differences between New and Old Monetarism. (For the record, I’m pretty much an Old Keynesian, but I have learnt a fair bit from New Keynesians like Akerlof and Shiller).

The third entrant is “Market Monetarism” associated mainly with Scott Sumner (though Wikipedia tells me the term was coined by Lars Christensen). I was aware in general terms that Sumner advocated a more expansionary monetary policy in response to the current crisis (I agree), that he prefers Nominal GDP level targeting to inflation targeting as the basis for monetary policy (I agree again though I’d prefer targeting levels rather than growth rates) and that he thinks this would be sufficient to fix the problem without any role for fiscal policy (I disagree). However, I wasn’t really aware that these ideas formed the basis of a school of thought, and I still haven’t investigated the underlying theory in any detail.

Sumner has commented on my recent posts on fiscal and monetary policy with a couple of his own, so I guess it’s time for me to look more closely at what he is saying. A first response is over the fold.

Read More »

War and waste (crossposted at Crooked Timber)

John Quiggin34 Comments

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)

John Quiggin98 Comments

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)

John Quiggin53 Comments

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

Read More »

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

John Quiggin15 Comments

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.

LOVEINT

John Quiggin19 Comments

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”.