Today is my last day in DC and I had a very enjoyable lunch with several members of my group blog, Crooked Timber. The group was me, Henry Farrell, Maria Farrell, John Holbo and Micah Schwartzman, making one of the largest collections of Timberites in one place ever to take place. I also met bloggers Russell Arben Fox and Daniel Drezner, both in town for the American Political Science Association. I’ve had an enjoyable and productive time here, but I’ll be very glad to be back in Oz, and home in Brisbane.
Katrina, Kobe and Kyoto
The still-developing disaster of Hurricane Katrina has some obvious parallels with the Kobe earthquake ten years ago. Both were predictable (and widely predicted) events. The damage from Kobe took years to fix, and it’s already obvious that the same will be true of Katrina.
Equally significantly, weaknesses in the state response to Kobe had big psychological impacts in Japan. The earthquake came at a time when the Japanese economy was recovering from the bursting of a huge property bubble, but when triumphalist rhetoric about the strengths of the Japanese state, and the inevitable dominance of Japanese ways of doing business, was stronger even than during the 1980s. The failure of the initial government response to the disaster and the mismanagement and pork-barrelling that characterised the reconstruction effort went a long way towards reducing confidence.
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Simplifying taxes
In addition to spurious claims about the burden of the top marginal tax rate, one of the standard complaints about taxation in Australia concerns the excessive length of the tax code. There’s a fairly typical example in this SMH piece (sent to me by Jack Strocchi). Let’s start with Phil Ruthven, who says that all federal taxes could be replaced with a simple 10 per cent tax on all revenues (I assume this refers to gross turnover of businesses). He might be right, but such a tax would be economically disastrous. It’s sometimes referred to as a cascade tax, since it applies to the same item each time it moves down the processing chain, creating massive distortions. It is in fact, the same as the Easytax, proposed by Pauline Hanson a few years back, though she proposed only a 2 per cent rate. I analysed it in this post a while back.
A more defensible, but still incorrect claim is that the complexity of the tax code is generated primarily by concessions. I’ll respond to this in a later post.
Katrina and the economy
People are already wondering what effect Hurricane Katrina will have on the US economy. So far, most of the discussion I’ve seen has focused on very simplified Keynesian or GDP-based views of the economy, in which the resources that go into rebuilding New Orleans and the surrounding regions count as a net addition to economic activity.
As far as the national accounts go, this may be right. As the name says, GDP is a gross measure, which means it takes no account of depreciation, including the massive destruction caused by events like hurricanes. Depending on how things like insurance payouts are counted, there could easily be an increase in measured GDP. The main lesson from this is that, if you’re interested in economic welfare, don’t look at GDP.
But I don’t think the old-style Keynesian story, in which a reconstruction effort brings unused resources into use and thereby stimulates more economic activity, is likely to be applicable. I assume any injection of funds will come primarily from the national government, which is already running massive deficits, to the point where its capacity for fiscal stimulus is pretty much exhausted. The impact of any further expenditure will almost certainly offset, in part by cuts to other areas, but even more by tighter monetary policy and upward market pressure on interest rates.
The immediate reaction of oil prices shows how tightly stretched the entire market has become, but I don’t think the effect on supplies will be great enough to have much effect in the medium term (say in six months time). However, that’s just a guess.
The real problem I haven’t seen discussed much so far is what will happen if, as is now predicted, it takes three to six months to pump all the water out of the city of New Orleans. In the absence of well-designed and large-scale intervention, that would imply bankruptcy for the vast majority of private businesses based in the city. This in turn would imply unemployment for many people who might otherwise return, and a whole lot of second-round effects working through supply chains. It’s unclear what kind of economic activity will survive, beyond a tourist market centred on the French Quarter (apparently relatively undamaged).
Even in the best of all possible worlds it would be hard to design a policy response to a disaster of this magnitude and duration. In practice, based on recent past experience, I think we’re likely to see some impressive rhetoric, a lot of gigantic boondoggles as favoured interests cash in on the reconstruction program, but not much effective alleviation of hardship or coherent thinking about sustainable economic recovery.
Brush with fame
Among the things I did in New York was visit Tim Smeeding, an economist at Syracuse University who works on income distribution and related issues. Coincidentally, he’s quoted in this NYT story today on the continuing increase in the US poverty rate.
Back on air
I’m back on air now, after my longest time in some years out of Internet contact, in upstate New York, where I’ve been visiting my friend and colleague Bob Chambers by the shores of beautiful Lake Skaneateles. We spent a few days tossing ideas for new papers around, and generally getting away from day-to-day pressures. I’m now back in DC (Maryland actually) and glad to be turning homeward, though, as usual, I’ve had a very pleasant stay here.
I can see that I’ve missed more news than usual over such a period, and it will take me a bit of time to absorb it all. I’ll start by expressing my best wishes to the people of New Orleans and other areas affected by Hurricane Katrina. I lived in cyclone-prone areas for quite a few years, but never experienced anything worse than a category 3, which was scary enough for me.
I’ll try to post soon on the economic consequences of all this. Most notable is the fact that a local disruption like this could push the price of oil over $US70/barrel. The guys who predicted $100/barrel not long ago must be feeling pleased with themselves.
As for the Australian political news, it’s startling, but I’ll wait until I’m better-informed before I say anything about it. Feel free to jump in with your own interpretations.
Monday message board
I haven’t got time to post anything substantive right now, but I’ll put up the Monday Message Board as usual Civilised discussion and no coarse language. Also, again, nothing about football this week, please.
Weekend reflections (early edition)
I’m going to be off air for a few days. So I’m throwing it open, a little early to Weekend Reflections. Please comment on any topic of interest (civilised discussion and no coarse language, please).
The London Tube shooting again
The news about the shooting of an innocent man, Jean Charles de Menezes, on the London Underground just gets worse. We’ll have to wait for the results of the current inquiry, and possibly longer before any firm conclusions can be reached (many recent inquiries in Britain have been politicised to the point of whitewash, so there are no guarantees here). Still, it’s hard to conceive of any explanation that doesn’t involve serious stuffups and multiple layers of coverup, going up as far as Metropolitan Police Chief Ian Blair.
One point that hasn’t been mentioned or not much is the implications of this tragedy for any assessment of the anti-terrorism effort. In a case as public as this one, and with a victim as obviously innocent as Mr de Menezes, it was impossible to keep the truth from coming out sooner or later, but it still took nearly a month. Suppose that the victim had been a Muslim – it seems certain that he would have been labelled a terrorist, at least by the method of undenied leaks used to accuse de Menezes of being responsible for his own death.
And for those prone to argue that we shouldn’t be so concerned about a single death in a situation where terrorists have killed dozens, what about failures in the opposite direction? Suppose that in the course of recent operations, mistakes were made that allowed accomplices or masterminds of the bomb plots to escape. How likely is that such things would ever come to light, given the culture of coverup that has been revealed here? And if failures don’t come to light, they won’t be corrected.
The great illusion
The Israeli withdrawal from Gaza, now apparently complete, and the IRA’s announcement that it has ended its armed campaign are notable events in themselves, and bring a little closer the end of two of the longest-running conflicts in the world today, though in both cases there are still plenty of problems
They’re also interesting in the bigger question of whether, and when, the strategy of pursuing political objectives by the use of force (terrorism, guerilla warfare, or conventional) makes sense. In Northern Ireland, and in Israel/Palestine we’ve seen this strategy pursued with vigour by different groups, and it’s reasonable to ask whether any of these groups is better off than if they had stuck to purely peaceful, or at least strictly defensive, methods.
Israel’s settlements in Gaza and the West Bank were set up partly in the hope of securing Israel proper against attack, and partly in pursuit of territorial expansion. Now, after the loss of many lives and the expenditure of vast amounts of money, the Gaza settlements have been abandoned, and it seems clear that the same will eventually happen to most of the settlements on the West Bank. Compare the actual outcome to an alternatives of either unilateral or negotiated withdrawal to the 1967 borders. Can anyone argue that Israel is better off with the approach it has taken.
On the Palestinian side, it seems most unlikely that the final settlement will be on better terms than those on offer at the Clinton-Barak-Arafat summit, and no obviosu reason to suppose that similar terms could not have been obtained years earlier if the PLO had been willing to offer them. Has the pursuit of the armed struggle yielded anything positive?
All the same points apply in relation to Ireland. The position the IRA is accepting now is essentially the same as that of the Sunningdale agreement in 1973. Extremists on both sides rejected this agreement and it collapsed. Thirty years later, neither side has achieved anything beyond entrenching violence and gangsterism (now effectively apolitical)/.
John Quiggin 