Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Thu Aug 23rd, 2012 at 04:04:39 AM EST
It's been apparent for quite a while that the core myths of neoliberalism sit on the foundation of a neoliberal/right-wing narrative of what happened in the 1970s.
For many of the people now in power, the period of oil crisis and stagflation was a formative experience regarding economics. For people of my generation - not yet in power, but now adults in our 30s, sort of the middle of the voting populace - the 70s are the times we heard about from our parents and the media, with much neoliberal spin about unions etc.
Two interesting bloggers have brought up the 70s recently and there's lots of food for thought. Both posts are too long to quote in full:
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Tue Aug 7th, 2012 at 05:24:47 PM EST
Over at his blog, Interfluidity, Steve Randy Waldman has a really interesting post on Wealth as Insurance which operates in a zero-sum game. He proposes that this propels certain patterns of wealth accumulation and employment.
interfluidity » Trade-offs between inequality, productivity, and employment
I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future.
Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well.
An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game. Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger's material needs might easily be satisfied -- how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be "rich enough". Even if one's wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death. The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition. It is not enough to be wealthy, you must be much wealthier than most of your shipmates in order to rest easy. Some individuals may achieve a safe lead, but, in aggregate, demand for wealth will remain high even if every passenger is so rich their consumption desires are fully sated forever.
Our lives are much more like this cruise ship than most of us care to admit. No, we don't face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was "normal". When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought terrible so terrible that there simply isn't enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.
Mon Jun 11th, 2012 at 09:09:15 AM EST
Not news to ET, but it's worth marking it being said:
Austerity has never worked | Ha-joon Chang | Comment is free | The Guardian
It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.
As for the need to cut social spending to revive growth, there is no historical evidence to support it either. From 1945 to 1990, per capita income in Europe grew considerably faster than in the US, despite its countries having welfare states on average a third larger than that of the US. Even after 1990, when European growth slowed down, countries like Sweden and Finland, with much larger welfare spending, grew faster than the US.
As for the belief that making life easier for the rich through tax cuts and deregulation is good for investment and growth, we need to remind ourselves that this was tried in many countries after 1980, with very poor results. Compared to the previous three decades of higher taxes and stronger regulation, investment (as a proportion of GDP) and economic growth fell in those countries. Also, the world economy in the 19th century grew much more slowly than in the high-tax, high-regulation era of 1945-80, despite the fact that taxes were much lower (most countries didn't even have income tax) and regulation thinner on the ground.
The argument on hiring and firing is also not grounded in historical evidence. Unemployment rates in the major capitalist economies were between 0% (some years in Switzerland) and 4% from 1945-80, despite increasing labour market regulation. There were more jobless people during the 19th century, when there was effectively no regulation on hiring and firing.
So, if the whole history of capitalism, and not just the experiences of the last few years, shows that the supposed remedies for today's economic crisis are not going to work, what are our political and economic leaders doing? Perhaps they are insane - if we follow Albert Einstein's definition of insanity as "doing the same thing over and over again and expecting different results". But the more likely explanation is that, by pushing these policies against all evidence, our leaders are really telling us that they want to preserve - or even intensify, in areas like welfare policy - the economic system that has served them so well in the past three decades.
For the rest of us, the time has come to choose whether we go along with that agenda or make these leaders change course.
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Sat May 19th, 2012 at 01:24:35 AM EST
Yesterday, the paper edition of The Guardian had the following story on the front page:
Cost of Greek exit from euro put at $1tn | Business | The Guardian
The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was "tearing itself apart".
Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.
Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a "headwind" that could threaten the fragile American recovery.
Only of course, the paper headline was just: $1,000,000,000,000
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Fri Apr 20th, 2012 at 02:00:04 AM EST
Over at Flip Chart Fairy Tales is an interesting post. I don't know what to make of it, so I thought - diary time...
The end of the state as we knew it | Flip Chart Fairy Tales
Two reports about the cost of ageing and its fiscal impact came out last week. The IMF's Financial Stability Report concluded that the cost of longevity has been consistently underestimated. By 2050, it says, if people are living for even three years longer than current models predict, it would add 50 percent to the estimated costs of ageing. In short, then, governments and pension funds may have got their sums quite seriously wrong. The IMF calculates that, by 2050, the costs of ageing, including healthcare, welfare spending and pensions, will increase by 5.8 percent of GDP in the advanced economies.
The OECD's report on fiscal consolidation, also out last week, came up with a very similar figure. If current levels of benefits and care are to be maintained, it estimated an increase in age-related spending of 6 percent of GDP by 2050. These figures don't differ that much from the ones I pulled together from various sources last year. The consensus there was around 4 percent of GDP by 2030, so add another twenty years and 6 percent looks like a reasonable guess. It's impossible to predict so far ahead with any accuracy but the general consensus seems to be that ageing populations are going to cost a hell of a lot.
The problem, as both reports point out, is that the economies with the highest percentage of oldies are also the ones with the highest public debt levels. The increased costs of ageing, says the IMF could, by 2050, see the UK's debt rising to 130 percent of GDP, the US and Germany's to 150 percent and Japan's to 300 percent!
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Mon Apr 16th, 2012 at 05:37:44 AM EST
Edward Hugh of AFOE submitted an essay for the Wolfson Prize.
You can access the full version here, it ranges far and wide in an attempt to address the question set by the prize, which is about how a country might leave the Euro.
For me the most interesting part was his assessment of "what did Germany gain from the Euro?" This is something I've had some thoughts about, but didn't have time to investigate. To me it's an essential topic in trying to disentangle the claims of "virtue" and "laziness" that have been bandied around in discussion of the Euro crisis.
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Fri Apr 13th, 2012 at 04:22:29 AM EST
Over on Slashdot, some MIT fusion researchers answer some community questions. If you're interested in the technology there's some interesting bits there and I recommend it.
But there's one piece that I want to quote, because the number in it really got me thinking:
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Wed Jan 11th, 2012 at 05:18:44 PM EST
In line with the suggestion in talos' diary The gaping abyss of neoliberal "reform" here are some thoughts on the sinister religious cult that is the Austerians.
Thu Dec 29th, 2011 at 03:45:31 AM EST
I've been ranting in the physical world for more than a week or two about the "Learned Helplessness" of our leaders and the dominant economic consensus. Now it's finally inspired a rambling diary...
Today, it seems Krugman is channelling me:
The Defeatism of Depression - NYTimes.com
The Defeatism of Depression
A number of people have asked me to weigh in on David Brooks's piece today. Sorry, not gonna do a tit-for-tat. Let me instead just make a more general point.
All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it's unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus -- and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.
There is nothing -- nothing -- in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn't, ultimately, economic; it's political, brought on by an elite that would rather cling to its prejudices than turn the nation around.
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Tue Dec 27th, 2011 at 08:23:03 AM EST
Recently, we've had lots of discussions about Eurozone imbalances, with Migeru pointing out that without investment in the productivity of workers in countries like Spain, the imbalances are destined only to return - no matter what temporary solutions are found in the next few months.
This brought my mind back to an occupation from the boom days, when I (and I think many at ET) could see the world economy heading towards some kind of finance system "iceberg" but we didn't have a good handle on the impacts.
Back then, I was looking at the patterns of migration, inside the UK and inside the reunified Germany - and wondering what it all meant. I still don't know what it "means" in some ways, but the Eurozone experience has added to the picture...
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Sun Dec 25th, 2011 at 06:47:41 PM EST
Reading "The Swerve" - a book about how a particular text from Ancient Rome helped kickstart a cultural change around the Renaissance...
Poggio of Florence, witnessing the lack of modesty around bathing in Baden around 1420, contrasts the anxious, work-obsessed, overly-disciplined Italians, with happy-go-lucky, carefree Germans...
Post your own examples of changing stereotypes below...
Sat Aug 20th, 2011 at 05:19:23 AM EST
When I was young and trying to get my mind around how the world works, I was told that bank loans come from deposits.
- If you want business investment, you have to have savings - typically the savings of ordinary people.
- It doesn't matter how rich someone gets, even if they don't spend their money, it remains in the system because their savings enable loans.
Mon Aug 8th, 2011 at 08:35:54 AM EST
The quoted article below is about a study that tells an unpopular story about the British NHS. It's a story of relative success.
No system is perfect and there are many specific areas in which UK health services fall down. For example:
- Mental health treatment - underfunded and really patchy quality across the country.
- Treatment of ligament/tendon problems - there's a bias towards physiotherapy and against doing operations for these injuries in the UK. It's one of the places where the rationing may be considered to bite in comparison with other countries (esp. in Europe.)
Still, the crucial element of the study is that in lots of tangible ways, the NHS provides a good service - absolutely comparable with other developed countries around the world - and spends less than many of the them. One can question whether the metrics used in the report prove one system is better than another, but it's clear in my opinion that the claims of NHS inferiority aren't backed up by the figures.
This is not the story you'll read in UK government briefing documents, or in many of the press reports. The right wing agenda is to break up the integrated, national service and bring in marketisation and competition. Their claimed basis for this is "improved efficiency" - this report reminds us that it is more about funnelling government expenditure into private companies...
I'd encourage you to read the whole thing.
Tue Aug 2nd, 2011 at 11:39:10 AM EST
Reading a rambling and not all that coherent article on the state of the global economy, I came across this interesting snippet:
Crash Club - what happens when three economies collide | Mike Davis | Comment is free | guardian.co.uk
In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Last week, Moody's reported that the Chinese banking system was concealing one-half-trillion dollars in problematic loans, mainly for municipal vanity projects. Another rating service warned that non-performing loans could constitute as much as 30% of bank portfolios.
Real-estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.
Tue Jul 26th, 2011 at 03:38:46 AM EST
A story of the system of healthcare in Singapore:
Singapore is not so clean, Mr Murdoch | Chee Soon Juan | Comment is free | guardian.co.uk
Letchmi (not her real name), a 40-year-old Singaporean woman, stood in the dock and pleaded guilty to pilfering $743 from the cash register where she worked as a cashier at a local supermarket. She told the judge in mitigation that she stole the money to pay for her medical expenses and that she had a 10-year-old daughter to fend for. She produced medical records to back up her plea. She had returned all the money that she had stolen. Unmoved, the prosecution pushed for a deterrent sentence. The judge imposed a fine of $2,000.
This is a scenario played out repeatedly all over Singapore. The unforgiving high cost of living in the city, coupled with low wages, has led many to commit crimes out of financial desperation. It is, of course, trite to argue that just because one is poor doesn't mean that one is entitled to commit criminal acts. There are many who face economic hardship but don't resort to crime.
I came across this story today and thought it worth recording. There are many more like it and I'll try to record them over time.
The statistics in comparative health studies are imperfect and fuzzy, but as in economics, they point fairly well in a certain direction. I've learned the hard way that those on the right have little interest in interpreting the figures fairly, they prefer to cite anecdotes. One place they often cite as a haven of "private healthcare working properly" is Singapore.
The reality is that it depends very heavily on your income level.
[The linked article moves on to other realities in Singapore - well worth a read.]
Mon Mar 7th, 2011 at 05:40:23 AM EST
With two recent diaries, Krugman confronts the fact that the patterns that seem correlated with past enrichment of society are breaking down:
Falling Demand for Brains? - NYTimes.com
As I recall, I was the only contributor who obeyed instructions; everyone else was too concerned about loss of dignity. Anyway, I decided to write the piece around a conceit: that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing -- indeed, replaced more easily than a lot of manual labor. Here's the piece: I still think it's a fun read.
So here's the question: is it starting to happen?
Today's Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research. And then there's Watson, of course, who -- which? -- can beat almost everyone except my Congressman at Jeopardy.
In my mind this raises several questions. One is whether emphasizing education -- even aside from the fact that the big rise in inequality has taken place among the highly educated -- is, in effect, fighting the last war. Another is how we have a decent society if and when even highly educated workers can't command a middle-class income.
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Wed Jul 14th, 2010 at 12:27:52 PM EST
It's hard to trim this article to be a reasonable quote - so I encourage you to read it all. It's not news, we've discussed the illusory nature of some of the financial sector profits that have been booked plenty of times, but it's good to see the Bank of England publishing research on the topic...
Banking's risky business | Larry Elliott | Comment is free | guardian.co.uk
Not since the Great Depression of the 1930s had the public held the financial sector in such low esteem. Yet that was not the picture of the banks painted by government data. The national accounts published by the Office for National Statistics showed that the financial sector was making its biggest contribution since the mid-1980s to the UK economy; between the third and fourth quarters there was a record increase in the value of the services provided by the banks.
Confused? Clearly, there's something not quite right about a state of affairs where banks are both contributing massively to the economy while at the same time being rescued from collapse. Fortunately, an answer to this conundrum was provided given today in a paper by Andrew Haldane, the Bank of England's director of financial stability. It also has much wider ramifications, which we'll get to later.
Haldane's paper, given at a London School of Economics' conference on the future of finance argues that the answer to the puzzle lies in the way the ONS measures the value of financial services.
FISIM is calculated by subtracting the interest rate on deposits from the interest rate on loans and multiplying by the number of outstanding bank balances.
What happened in the fourth quarter of 2008 was that banks assumed there would be a massive increase in defaults on loans. They responded, entirely rationally, by increasing interest rates to cover the expected losses. That meant the gap (spread) between interest rates on deposits and interest rates on loans widened, the value of the financial sector's services as measured by FISIM increased, and this showed up in the national accounts as an increase in output.
"In other words," Haldane says, "at times when risk is rising, the contribution of the financial sector to the real economy may be overestimated." If he is right, the recession during the winter of 2008-09 was probably even worse than the official statistics suggest.
But there are longer-term implications too. The waves of financial liberalisation seen in Britain from the early 1970s to 2007 were justified on the grounds that the City was booming, providing higher returns to the economy than other sectors. Indeed, as Haldane notes, finance outstripped the rest of the economy in terms of growth by around 1.5 percentage points a year.
But what if that growth was in large part the result of higher risk taking, manifested in the increased leverage of the banks and speculative trading in increasingly exotic financial instruments? Haldane wonders whether the contribution made by the financial sector these past few decades has been more mirage than miracle. Looking at how the returns to banking have reversed as some of the risks they were taking have materialised, there is only one answer: mirage
Thu Apr 22nd, 2010 at 04:46:37 PM EST
John Hagel is one of those "business gurus" whose work is very much a mix of the interesting and the ideological.
He has a new book out and a blog promoting it... one part of it touches on something that seems very interesting:
Edge Perspectives with John Hagel: Economic Recovery? Don't Count On It.
In our new book, The Power of Pull, we summarize the metrics that we developed for the Shift Index - the first attempt to quantify the longer-term trends that have been re-shaping the business landscape over the past four decades. Of the 25 metrics in the Shift Index, one metric in particular stands out: return on assets for all public companies in the US. Since 1965, return on assets has collapsed by 75% - it has been a sustained and substantial erosion in performance. There is no evidence of any flattening of this trend, much less turning it around.
Sat Apr 17th, 2010 at 08:07:30 AM EST
With the Greek member of the Euro herd under (some? imperfect?) protection by other members... the hyenas look for another stragger - Portugal?
The Next Global Problem: Portugal « The Baseline Scenario
What happened to the global economy and what we can do about it The Next Global Problem: Portugal
with 65 comments
By Peter Boone and Simon Johnson
The bailout of Greece, while still not fully consummated, has brought an eerie calm in European financial markets. It is, for sure, a massive bailout by historical standards. With the planned addition of IMF money, the Greeks will receive 18% of their GDP in one year at preferential interest rates. This equals 4,000 euros per person, and will be spent in roughly 11 months.
Despite this eye-popping sum, the bailout does nothing to resolve the many problems that persist. Indeed, it probably makes the euro zone a much more dangerous place for the next few years.
Next on the radar will be Portugal. This nation has largely missed the spotlight, if only because Greece spiralled downwards. But both are economically on the verge of bankruptcy, and they each look far more risky than Argentina did back in 2001 when it succumbed to default.
The main problem that Portugal faces, like Greece, Ireland and Spain, is that it is stuck with a highly overvalued exchange rate when it is in need of massive fiscal adjustment. Portugal spent too much over the last several years, building its debt up to 78% of GDP at end 2009 (compared to Greece's 114% of GDP and Argentina's 62% of GDP at default). The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal's debt-GDP ratio should reach 108% of GDP if they meet their planned budget deficit targets. At some point financial markets will simply refuse to finance this Ponzi game.
To resolve its problems, Portugal needs major fiscal tightening. For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a 5.4% of GDP primary surplus by 2012. With a 5.2% GDP planned primary deficit this year, they need roughly 10% of GDP in fiscal tightening. It is nearly impossible to do this in a fixed exchange rate regime - i.e., the eurozone - without massive unemployment. The government can only expect several years of high unemployment and tough politics, even if they are to extract themselves from this mess.
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Tue Mar 9th, 2010 at 09:31:55 AM EST
In yesterday's open thread, I posted this excerpt from an interesting blog by Rebecca Wilder:
The endgame for Europe: wage cutting and the battle for exports
Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009.
After an email exchange with Marshall Auerback, and thinking more about the cross-section of Europe, I now see a very scary trend emerging across Europe: the fight for exports.
Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's-share of trade occurs withing the boundaries of Europe.
And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!
Comments focussed on the hyperbole about sovereign defaults... but I think the heart of the piece asks questions about an important assumption - is export-led growth the panacea?
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