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Propaganda works

by Cyrille Sun Feb 9th, 2014 at 04:59:31 AM EST

As I recently wrote about, we are once again hearing calls for selling, well,everything public. And a French nominally (yes, already only nominally) socialist president is announcing a major turn rightwards -economically, that is- despite being at the helm of a country that has been performing markedly better than tenants of Aust(e)rian orthodoxy, such as the Netherlands or Finland.

And, you know what: he's getting praise for it.

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Let's pause and think how that can be. The root causes will maybe tell us why, but to start with there is a very strong driver: people know, they just know, that only private sector jobs are for real (I've been explained by a French hedge-fund analyst that any extra public job in France destroyed two private-sector ones. No, he could not quote the study or give a sensible mechanism. But he knew it). When you are lucky and talk to someone who realises that public jobs are for real -hi there teachers, nurses, firemen..., you may still be told that only private sector-jobs are good quality ones.

In fact, I was told just that over dinner by a friend, while discussing the François Hollande press conference. After stating that he was convinced that of course supply created its own demand, because "look at the I-phone" (OK, first, that's not what it means, and Hollande specifically said that the point was to produce more and that it would produce the demand, which has nothing to do with a successful marketing campaign, then far from all product launched make it to market leader, then... oh, well...), he ventured that because my explanation of why Say's law was a fallacy was strikingly obvious, Hollande, who is not stupid, cannot have meant that. I greatly doubt it, but was willing to move on. His point was that this was not the highlight of the conference, rather than at last some clear truths were being spoken, such as the fact that only the private sector produces quality jobs.

This was an intelligent man with no obvious hatred of unsuccessful people, so I would not claim that it was just bigotry, far from it. However, this was also someone who has, for years, mostly interacted with rather well-off people working in private companies, so an echo chamber effect may be present.

I tried to ask questions and argue. To my question about what he meant by State jobs not being real jobs, he answered that it was clearly so since the State could not generate any revenues, and thus only had costs, that had to be financed by private, ie real, jobs. I could (should?) have taken time to ask whether we should conclude that a teacher, a firefighter, a policeman were not doing real jobs just because they were not directly charging for it. Or that the source of State financing did not need to be taxes on private sector jobs.

But I simply pointed out that the State was quite capable of revenue-generating activity (and, indeed, since some people pay for school and healthcare, teachers and public doctors should fall within that category). I was asked for an example and suggested that a State-owned power plant would get revenue commensurate with the electricity provided. The answer was that then it was invariably at much too high a cost for the service provided. I had to point out that electricity, at the time of talking, was cheaper in France than in most EU countries. His answer was that "the scandal is that electricity is so expensive even though we have nuclear power". I admit to being unable to follow the reasoning. If you reckon that nuclear is cheaper and that the private sector is always better, then how come you don't get cheaper private sector nuclear? Unless you reckon (as the UK shows) that the private sector can hardly manage to produce nuclear power, but then if the State is able to do something the private sector cannot do, doesn't that defeat the premise that the State is always less successful?

But this did not shake his belief: I was then told that the private sector was always more efficient because there was a shareholder who would get rid of management as soon as any waste appeared. This was interesting on many level -not least because that is, I feel, the usually trotted out rationale.



First, rack your brains and try to come up with situations where shareholders were able to depose a company's management because there were too much avoidable costs (big companies, please, since we are comparing with the public sector there). I'm not saying that it NEVER happens, but it would have to be pretty common to provide a systematic cap on private sector cost structure -one that needs, for the purpose of the argument, to make it sufficiently strong to have enough cash to pay strong dividends (6% ROE appears to be the expected norm, crazy as it may sound) and still be cheaper.

I can think of very few where the company's capital was highly diluted. Yes, CEOs are sometimes put in very difficult situations and are persuaded to leave (so are public sector executives, by the way -probably even more frequently), but that is very rarely from a vote at the AGM. Yet it cannot be because there was never a reason to do so: companies do fail often, or are rescued from bankruptcy. And when capital is highly concentrated, the reasons for a fall in favour can be very varied. A perceived need to promote someone's nephew is a common one, for instance. To suggest that having shareholders makes the private sector hugely (remember -it needs to be over 6% cheaper to even begin to make sense), you'd need to have found a way to entirely do away with the principal/agent issue, and then some.



Second, whatever the power of the shareholders, their incentives are by nature (and increasingly so) shorter term than the State's. States expect to be around forever. Shareholders would delude themselves if they thought they were immortal, and in any case the average time a position is held these days has dropped considerably (if I believe an investment banker, it is in the range of a second, although I reckon he was confusing average and median. Still...). Indeed, the incentive to control costs in big firms is typically Does a highly short-term focus make jobs better "quality"? Not with my perception of the word anyway.

And it's not just about shareholder incentives: States borrow -to the extent that they need to, which is the case for France as it no longer has a Central Bank- at a lower rate than the private sector. Therefore, any activity that needs to purchase long-lasting equipment gives the public sector a strong cost-structure advantage.



Third, much of economic activity involves externality. As I told my friend immediately, I don't see any particular reason for my local hairdresser to belong to the public sector (not that it would be an absolute catastrophe if it were, as long as I could get my hair cut the way I want it cut. Not that my private-sector hairdresser really does, actually, but it's never bothered me for very long). However, a lot of economic activity (and, in Depression times, pretty much any economic activity) will have strong externalities, where a private actor will simply not have enough direct impact on itself to have any particular reason to aim for the right optimum. Sometimes, even the State is far too small: think of things like climate change, or halieutic resources, which are world-wide problems where any given State, be it the size of the USA, is a minority recipient of the costs involved, and therefore a natural player in the tragedy of commons.

If the way a company does business is likely to harm public health, it will not be a major problem for its P&L, and you may expect suboptimal efforts at reducing the risks. In fact, that is true of all major risks, even when the company would be killed in the process: it has limited liabilities, and any actor may have gone before the problem occurs. Of course, it can even be too big to fail, and therefore not be in any danger at all. We are not short of direct evidence that the financial sector can be liable to taking more risks than is socially optimal.



Finally (well, I'm sure there could be other points but let's wrap it up), data. In the end, whatever the theoretical reasons why it should not be obvious that the private sector performs better necessarily, it would seem that what matters is what actually happens (and I do believe that efficiency is not the only objective -but that seemed to be what we were discussing). I did mention to my friend that, despite his statements that public sector meant colossal waste, the public sector seemed to compare favourably in quite a few direct comparisons. For instance, it costs far less in overheads to administer a public fund (say, Social Security in the US) than a private pension fund, or indeed headquarters costs for a bank -yet they are pretty similar activities. His reply was that it could not be compared, although he did not say why -my take was that it was a case of rejection of the approach because of a dislike to the conclusion.

In the end, he asked me why I wanted that the public sector ran the whole economy. I replied that I said no such thing, that there were some businesses where I did not see any pressing reason for the State to be involved at all -like my hairdresser. He then said "at least that's reassuring, because I was under the impression that you wanted to go all Russia".

Ah. Russia. Well, this is a long enough post as it is, so I'll have to leave for another post what the example of Russia does and does not tell us. Let's just for this one time point out obvious reasons why it was not a decisively meaningful comparison there:

-To simplify things, Russia banned the private sector. That is very different from creating public employment. Nobody (well, pretty much nobody) suggests banning private sector employment. Of course, some people will tell you that it is the same result in the end, because the private sector cannot compete where there is a public option. That is an interesting opinion, but one that would seem to be somewhat inconsistent with the view that the private sector always performs better. In fact, in this case, the State would not even compete at all, since the point is to employ people that the private sector is currently not employing (see Spain, Unemployment of).

-Russia was poor compared to the G7 in the late 1980s (today's commodities prices would have made a huge difference to that, by the way). Russia was also desperately poor compared to the same countries in 1916 -probably more so than in the 80s. In the meantime, most of the developed world did their utmost to prevent them trading, and to exacerbate their already present tendency to spend too much on the military. Many countries did not have a communist regime and also failed to massively outcompete the G7 over the same period. Trotting them out as a refutation of the role of public spending in a mixed economy is neither here nor there.

The horror in Russia was much more closely linked to political violence and lack of liberties. That is something that can also be said of, say, Pinochet's Chile, despite it being the testing ground of Chicago Economics, the most right-wing of all.

But this is what it is. Again, let me repeat that this was an intelligent man, and not a naturally mean one. A few days later, I heard another, similarly kind man, although also one who would probably spend most of his life talking to senior managers, state that he expected the economy to pick up because Hollande was at last turning to the right direction and "the confidence will grow over 2014". Paul Krugman will go down in history as the person who coined the "Confidence Fairy" -it is apparently alive and well in France. Never mind that no model can explain how it would work, never mind that we have many years of data in many countries, all pointing in the same direction, people in France know, they just know, that this is the way to go.



And I suggest that a lot of it is groupthink. I am told that this is the view of Economics that is taught in business schools. And while I have been advised that people may find it tiresome that I openly defend some of my beliefs, it is never considered tiresome to promote right-wing slogans in the business world, certainly not at management level and above. Add in a drop of survival instinct from those who don't feel it makes much sense, and very soon you have all the making of a perfect echo chamber. Never will it be considered distasteful in wealthy company to complain about punitive taxes on the rich (despite them being at record lows) or on companies. But try and suggest that something should be done to diminish inequality and/or rents, and you might as well have directly applied to the social pariah club. We have, like Orwell anticipated with newspeak, moved into a situation where it is a condition for admission in any somewhat influential circle that one voices right-wing propaganda, or at the very least nods in agreement when it is spoken.

And I don't think we'll get very far until we break this unison.



A version of this diary was posted on my blog Anachronicles.

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I had a fun experience at work the other week. I went over some macroeconomic forecasts in preparation for a project, and then told my boss "this bullshit is fit only to make astrology look respectable by comparison." His response was "let's keep them on the table, I'll look them over."

So we come to our weekly meeting, and he asks me if I have understood why the trends go up in the forecast when they are consistently down in the historicals. Because he finds that strange. I tell him that they are up in the forecast because they are down in the historicals. The logic being that the economy cannot indefinitely depart from the long-run trend, so whenever it has departed from trend, the best guess for next year is that it will be closer to the long-run trend.

His response was along the lines of "but that's silly." I told him that yes, yes it is. But that is how these forecasts are made - it's a fundamental property of the statistical models in use. "By our guys down in forecasting?" he asked. To which I answered "by everyone. World Bank, IMF, Treasuries all over the world, Central banks, etc., etc."

The forecasts in question did not end up featuring in the final product.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 8th, 2014 at 11:25:06 AM EST
Unless your boss has no statistics background I am surprised that he did not learn about 'reversion to the mean'. And if equilibrium means anything it should imply reversion to the mean. Glad to see you are having fun in your job. It is always good to enjoy one's work and having a good boss is important.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 8th, 2014 at 12:45:15 PM EST
[ Parent ]
Perhaps his boss has too much of a stats background and knows that "regression to the mean" works only if the mean was honestly and accurately established and the inputs have not changed since then.  Otherwise there is no way of telling where you're headed other than to a new mean.
by rifek on Sun Feb 9th, 2014 at 06:53:51 PM EST
[ Parent ]
Prognosis economic growth in Greece:

(source)

Prognosis economic growth in Netherlands:

(source)

Note: red line is what has happened in the above graph. The Netherlands Bureau for Economic Policy Analysis had it wrong 14 times in the past 3 years.

by Bjinse on Sat Feb 8th, 2014 at 01:02:09 PM EST
[ Parent ]
Andw when the Netherlands lost its AAA, Dieselbomb came out and said that was just an encouragement to double down on austerity.

When in a hole, keep digging!

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Feb 9th, 2014 at 04:08:09 AM EST
[ Parent ]
just heard her give a speech at guildhall, london.

she said some good things, but i didn't find her very convincing.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Feb 8th, 2014 at 02:11:01 PM EST
[ Parent ]
Her, who?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sun Feb 9th, 2014 at 04:06:49 AM EST
[ Parent ]
sorry, lagarde

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sun Feb 9th, 2014 at 05:24:36 AM EST
[ Parent ]
And a French nominally (yes, already only nominally) socialist president is announcing a major turn rightwards -economically, that is- despite being at the helm of a country that has been performing markedly better than tenants of Aust(e)rian orthodoxy, such as the Netherlands or Finland.

And, you know what: he's getting praise for it.

Not by anyone with a clue.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Feb 8th, 2014 at 11:39:46 AM EST
True, but it is a regrettable fact that this speech was very well received.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 8th, 2014 at 12:58:42 PM EST
[ Parent ]
Sorry, should have added: "in France"

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 8th, 2014 at 12:59:05 PM EST
[ Parent ]
It was well received everywhere by the chattering class. But "real economists" were flabbergasted: see 'France by the Numbers' on Mart Thoma's Economist's View.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Feb 8th, 2014 at 07:27:36 PM EST
[ Parent ]
It shows Hollande cravenly caving in to the prejudices of the great wealth holders in Europe. Not only does he have little comprehension of economics, but neither does he show any integrity towards the interests of his electorate. Perhaps he dimly apprehends that he has blown it with his base and just hopes to be well treated by the wealthy in retirement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 8th, 2014 at 11:59:50 PM EST
[ Parent ]
I don't know about craven but it is a total capitulation of France, possibly an act of desperation by a President that has squandered his popularity at a staggering pace, and the final death knell of the European social-democratic establishment as a progressive force.

Wolfgang Münchau: The real scandal is France's stagnant economic thinking (FT.com, January 19, 2014)

First, when you try to solve a shortage of aggregate demand through supply-side policies, the results are not going to be any different in France than they were elsewhere. Some targeted structural reforms such as the introduction of a single labour contract would indeed be a good idea because it could help bring down youth unemployment. But this is not going to happen. Mr Hollande's reforms are of the tax-cut and spending-cut variety. Do not romanticise his U-turn two years into his term and compare it with François Mitterrand's similarly-timed adoption of the "franc fort" policy in 1983. The purpose of the Mitterrand's decision was to allow France to coexist in a semi-fixed exchange rate regime with West Germany. It was a political choice of macroeconomic adjustment, not one of supply-side voodoo and ideological convergence.

...

The French policy shift will have an immediate impact on the eurozone periphery. If France goes to the trouble of aligning with Germany on German terms, expect no mercy for others. The message of righteousness will be broadcast in stereophonic quality.

The third significance lies in the fact that the new consensus spans the entire mainstream political spectrum. If you live on the European continent and if you have a problem with Say's Law, the only political parties that cater to you are the extreme left or the extreme right.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sun Feb 9th, 2014 at 04:24:19 AM EST
[ Parent ]
Münchau:
The purpose of the Mitterrand's decision was to allow France to coexist in a semi-fixed exchange rate regime with West Germany. It was a political choice of macroeconomic adjustment, not one of supply-side voodoo and ideological convergence.

However, Hollande's choice is, at bottom, the same: monetary co-existence with Germany, or, more broadly, the absolute rule of French policy is that France's lot is cast in with Germany. That choice gives France no room to manoeuvre. The "suppy-side voodoo" is an attempt to put a varnish on an indeed desperate scheme to mimic Germany's past social "reforms" (even down to inviting Peter Hartz).

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 9th, 2014 at 04:54:31 AM EST
[ Parent ]
The Euro is not a German plot for world domination but a French self-goal.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sun Feb 9th, 2014 at 01:05:59 PM EST
[ Parent ]
You re totally right, it s pretty unbelievable that our elites have been so eager to drop a currency/system they had control on for the DM basically.I am still at lost to understand what they were really trying to achieve.

The Franc Fort Policy - EuroDM has condemned two generation to be stuck in life for no good reason, with politicians "forced"( but do they even realize it?) to rewrite the same policies (Austerity/desindustrialization/vicious cycle) again and again.

it would be a joke if is was not so sad that only the FN seems to have a clue on what s happening and what to do to return to growth/get out of the cycle( the UPR is pretty spot on on it but irrelevant).

by fredouil (fredouil@gmailgmailgmail.com) on Thu Feb 13th, 2014 at 06:46:25 AM EST
[ Parent ]
Since, no one has said it explicitly yet, thank you for an excellent posting!

This was a concise attack on all fronts of the privatization shock doctrine that has been peddled for as long as I can bother to remember by "socialists".

The amazing thing is that they truly believe(d) in it...

To be fair, in Greece, the entrenchment of favoritism, cronyism, and lack of accountability was (is) so strong that it seemed impossible to gather sufficient political capital to address it from within a state enterprise. These enterprises were (are) used for political gain and their managers changed with every new government.

Not that it is not the right thing to try and achieve - it is just too expensive politically while privatization could be embraced by both stripes...

A very very difficult situation leading the way to the current endgame.

Orthodoxy is not a religion.

by BalkanIdentity (balkanid _ at _ google.com) on Sun Feb 9th, 2014 at 10:28:34 AM EST


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