Catallaxy Files

Alan Kohler in an article commenting on Gina Rinehart’s raid on Fairfax has an extraordinary sentence.

These days big government is ascendant and capitalism is in crisis, thanks to an excess of debt plus the fragmenting, democratising, pirating effect of the internet.

Large public debts and effects of the internet are more a challenge for big government than capitalism.

A very thought-provoking piece from Steve Frank, picked up by a poster on the Dewey discussion group. He is responding to Obama’s rehetoric, recycled from the Progressive era a century ago when muck-raking and economically illiterate commentators managed to generate a reaction against the “Robber Barons” of the Gilded Age. The commentators did not make the essential distinction between market entrepreneurs who make their money by selling stuff that people want to buy (Gates, Apple) and political entrepreneurs who make their money from political connections and favoritism.

Teddy Roosevelt in 1910 delivered one of the most influential political speeches in American history, the one in which he announced his stand for a “square deal” for the common man and reaffirmed his belief in the responsibility of government to deal with social problems.

“When I say that I am for the square deal,” Roosevelt said, “I mean not merely that I stand for fair play under the present rules of the game but that I stand for having those rules changed so as to work for a more substantial equality of opportunity.”

So when Obama told the nation, “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules,” I heard the echo of earlier times.

But Frank points out that Obama is being very selective about the issues that he picks up from TR. In the same speech TR went on…

Our government, national and state, must be freed from the sinister influence or control of special interests. . .. We must drive the special interest out of politics. That is one of our tasks today.

I think that Frank would like to see that fed into Obama’s autocue.  The point is that the outcome of the push for TR’s square deal and more involvement from the government is the way we are at present. However on a second reading, Frank’s piece contains mixed messages. He wants a debate that addresses the real issues but he seems to have a foot in the camp of the people who want the high flyers to pay more tax. That is a worry. I thought he was a fan of the Tea Pa;rty. So we have to re-run the debate from the Progressive era and make the distinction between the two types of entrepreneurs.

Frank seems to be impressed by the rhetoric about Buffet paying less tax than his secretaries. But who created the jobs of the secretaries and all the other people who Buffet employs. What if we credit him with the tax that they pay?

I should have said this before I left town for the day. I meant to give MORAL  credit for the tax paid as a result of the jobs that he created. I thought anyone with a three digit IQ would have read it that way. Thanks to the Montster for screwing up the thread.

Something has come up in the It’s worse than that thread that really needs its own post.

Peter Whiteford makes the argument that the UK government is cutting expenditure (emphasis added).

The IFS calculate that if you take out social security and public debt interest repayments, then public spending in the first year of the Coalition government fell by 1.6% of GDP and by this coming April, it will have fallen by a further 1% of GDP.
So already actual figures tell us that taxes went up by 1.8% of GDP and spending on “positive things” went down by 1.6% of GDP, and in the year we are currently in the combined effect of tax increases and active spending cuts is another 1.6% of GDP in terms of changes in the fiscal balance.

This looks like austerity to me.

The spreadsheet Peter points us to is here (I’m looking at the nominal figures on the first sheet – he was quoting from the %GDP figures on the third sheet). This first problem with his argument is this, “if you take out social security and public debt interest repayments”. Now while I’m happy to believe that some spending is more important than other spending, why would you “take out” some spending when you have a spending problem? The fact of the matter is that UK government spending will be 688 billion pounds this year and 703 billion next year, up from 669 billion last year. The figures Peter alludes to (spending before social security and interest) are 449 billion this year, down from 450 billion last year. Yes – you read it right, the UK government managed to cut spending by 1 billion pounds if and only if you don’t count social security and interest – otherwise spending has gone up. That is austerity?

As I said in the original post

Decreasing the rate at which government spending increases is not austerity.

JC repeats that in reply to Peter

… how … can you define austerity when a country drops spending from 10% of GDP to 8.8%. That’s hysterical. It’s like living in some parallel universe.

At this point Peter manages to avoid that question by denying he ever said anything about 8.8% – true, he didn’t but it is quoted in the post and that is what the whole argument is about.

JC is alluding to a point made by Scott Sumner (in the post I linked to).

I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus. If the deficit is third largest in the world, it should have been second largest, or first largest.

A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.) But that shouldn’t cause a recession. Think about the Keynesian model you studied in school. If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession? That’s not the model I studied. Deficits were supposed to provide a temporary boost to get you out of a recession. At worst, you’d expect a slowdown in growth.

Now for the comparison with Steve Kates – he argues the Keynesian model is horribly wrong. I agree but the problem is that all these “austerity will cause a recession” arguments are not even the Keynesian model.

But that seems to be Peter’s argument – a decrease in the budget deficit constitutes ‘austerity’ and will cause a recession.

More importantly do you or Sinclair understand the difference between levels and changes?.

Yes – we also know the difference between black ink and red ink. Red is when your expenditure is greater than your revenue and black is when your revenue is greater than your expenditure.

The argument the austerity types are pedalling is a variation of the Micawber principle – here is the original

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

That should now read

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and tuppence, result austerity.

That is the argument we are being invited to believe. I, for one, am underwhelmed.

While contemplating the state of climate science and the results we have obtained from massive public investment, my eye happened to fall upon a passage in a book that was written in New Zealand to refute the myth of historical determinism and the chosen people (or class, or race, or religion). That myth was the intellectual motor of Marxism/Leninism and possibly fascism, and possibly Radical Islam.

The passage was a part of a critique of the psychologial theory of human progress, that it is driven by the progressive tendency of the human mind. The author commented that there are other tendencies of the human mind like forgetfullness, indolence and dogmatism.

If we wish to replace this surprisingly naïve theory by a more tenable one, we have to make two main alterations. First, we have to attempt to find conditions of progress, and to this end we must try to imagine, for example, conditions under which progress would be arrested. This immediately leads to the realization that a psychological propensity alone cannot be sufficient to explain progress, since conditions may be found on which it may depend. Thus we must, next, replace the theory of psychological propensities by something better; I suggest, by an institutional (and technological) analysis of the conditions of progress.

He speculated about ways to arrest scientific and industrial progress, for example by closing down (or subjecting to political control) laboratories for research, scientific periodicals, congresses and conferences, universities and printing presses.  That process has made giant strides in Big Science funded by Big Government. So there is no need to be surprised by the climate scam, it was predictable!

The process is proceeding apace in the arts under our current “soviet” regime. As Tim Blair put it “Dance arts monkeys, dance! For money”

Steve has a post below commenting on the latest Krugman op-ed.

It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
…
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

Steve is annoyed by the approach Krugman takes, but before we get to that what about the facts? First things first – here is the graph.

Looks to me that the UK has regained its peak – but it gets worse. What austerity policy? The UK has a massive budget deficit (according to Scott Sumner 8.8 percent of GDP).

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP). Lots of people blame ECB policies for the recession, but Britain is not in the eurozone. Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).

Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors. I suppose if you are a Keynesian you’d say that the housing/banking problems in Britain were worse, and hence you need more fiscal stimulus than Germany or Sweden. Fair enough, but if deficits are already near the largest in the world, trailing only Egypt and Greece, you’re taking a pretty big gamble to commit to an indefinite number of years of even more massive deficits in the hope it won’t be negated by slow NGDP growth produced by the BOE. After all, debts do need to be repaid (or at least serviced.) And the taxes required to service the enlarged national debt will eventually impose significant deadweight costs on the economy.

As Don Boudreaux writes

As for actual spending amounts, I logged a few minutes on the Internet to discover that British-government spending – adjusted for inflation – has risen every year since the start of the financial crisis. This spending in 2011 was 16 percent higher than it was in 2007, and is projected to be even higher in 2012.

Krugman might argue that the U.K.’s budget deficit and government spending should be even higher. But he’s wrong to write as if it’s beyond doubt that the policy pursued today by the British government is indeed one of austerity.

Cutting spending should not be cutting proposed future spending but cutting actual spending. Decreasing the rate at which government spending increases is not austerity. Decreasing the actual dollars being spent would be austerity.

I was just sent this disgusting article by a friend without comment. This is Paul Krugman trying to show how Keynesian economics has now shown its mettle based on the evidence that economies around the world are collapsing. Read this, and then I will come back with something more to say.

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

It was me not Krugman who wrote back in 2009 that if governments took the policy actions they took, then the outcome would be the disaster of major proportions that we now actually have. I said our economies would not recover. I said unemployment would remain high. I said investment would not return to anything like their previous rates. I argued prosperity would not return.

This was merely the application of classical business cycle theory which Keynes overturned in 1936. There may have been a few of these folk who lived on until the 1960s and 70s. But by then they were without policy relevance and had gone from the world of policy debate. Today all we have are various cuts of Keynesian theory and a vaguely classical Austrian economics that does not treat Say’s Law as anything other than peripheral. As for the classical theory of the cycle, there are few enough around who use this economic theory to make sense of events.

What really has embedded into me the recognition of how far from understanding what has gone wrong economic theory now is has been the return of this vindicated Keynesian triumphalism with hardly a word of response from any economist who might actually get a hearing in any paper or media outlet today.

I said in 2009 that what you see now is exactly what you would get if you did the things they were doing. And I have been meeting with economists during this brief trip of mine who are on the more market side of things but not one of them has a genuinely anti-Keynesian anti-stimulus theoretical story to tell. They still talk about monetary policy errors often going back to before the financial crisis. And they talk of debt and deficits. None tell a story of policy failure in 2009-11. Where is the critique of the stimulus? Where’s the theoretical flaw? What did governments do wrong? Is it just debt or the deficit, or is there something more?

Until I ventured forth on this trip, I had assumed that at least economists on the conservative side of the fence had a critique that even if not the same as mine, would at least focus on the stimulus and why it not only did not work but in fact made things worse. They would point out, in their own ways, that the depth of our current problems stemmed from the stimulus. Well forget it. Every economist I have met with so far thinks about macro using some version of aggregate demand as a reasonable proxy for events.

Well, I am meeting a whole lot more over the next two weeks and I am going to find out what it is with great specificity that they believe has gone wrong.

My question really is this. Just exactly what is wrong with what Krugman wrote? This is what I want to know. What’s wrong with Krugman and Keynes?

It’s two in the morning. I’m going to bed.

Not so long ago there was a clear distinction between news and opinion, with the former dominating. This has changed substantially over the past decades, especially with the advent of blogs. Opinion now dominates – perhaps reflecting growing demand for commentary.

There is nothing wrong with the relative growth of opinion over news – it helps us understand the world and to make sense of events. Yet we need to read opinion with care – there is an inherent bias in opinion writing to which writers succumb.

Catallaxy too has a bias – we look at the world with a focus on the individual rather than the collective. We try to examine incentives which drive behaviour. Above all, Catallaxy writers understand opportunity cost. In a sense, Catallaxy has a ‘right wing’ bias, although it is a jewel amongst the predominantly left-wing blogs and opinion pieces in newspapers.

Catallaxy also is mainly about opinion, with the occasional example of news. When I speculated that Kevin Rudd would be deposed as Prime Minister that was opinion. When Sinclair reported that he had been deposed – that was news.

There are a number of ‘sins’ which now infect journalism:

• masquerading opinion as news
• not citing sources
• not checking facts
• excessive use of  pejorative adjectives (for example: “extreme right wing commentator” or “climate change denier”)
• ignoring evidence which contradicts the argument.

The events of Australia Day when activists attacked the Lobby restaurant leading to the evacuation of the Prime Minister and Opposition Leader from the restaurant bring further focus on the role of the press gallery and media management in the Prime Minister’s Office. Lazy reporting (and bias) has led to press gallery journalists repeating statements from the PMO as if it were news.

Sadly the Government’s ministerial offices are filled with juveniles out to make political points that would be shameful on a university campus let alone in the Federal Government. Under Rudd and Gillard the role of spin has grown out of control, probably taking the worst from the former NSW Labor government. Under previous Federal administrations – both Labor and Coalition  - there was a level of dignity and judgement to be observed in ministerial staffers, especially those employed in the senior offices such as the PMO and Treasurer’s Office. No longer. The worst examples of poor judgement seem  to come from the PMO.

Unfortunately journalists allow this to persist – being witting (or unwitting) accompanists to those juvenile pranks which bring dishonour to the institution of Government and to the Prime Minister.

So we need to change the incentives – a key focus of Catallaxy. One privilege reserved  to the press gallery journalist is the press pass (Parliament House pass). Any journalist who is shown to have abused his or her position, including by repeating Ministerial statements without checking or sourcing should have his or her Parliament House pass removed for life.

We would then see more “The Prime Minister’s Office said …” rather than repeating some line as if it were true.

Jerry Jordan has a great parable that relates lemonade stands to government spending.

It usually surfaces with an entrepreneurial adolescent deciding it would be a good idea to sell lemonade at the curbside to passersby

Parents, wanting to encourage the idea that working and making money is a good idea, drive around to buy the lemon, sugar, designer bottled water, cups, spoons, napkins, a sign or two, and probably a paper table cloth.

Aside from time and gas, the outing adds up to something north of $10. At the opening of business the next day, the kids find business is slow to nonexistent at $1 per cup. So, they start to learn about market demand and find that business becomes so brisk at only 10 cents per cup that they are sold out by noon, having served 70 cups of lemonade and hauled in $7.

The excited lunch-time conversation is about expanding the business. A stand across the street to catch traffic going the opposite direction; maybe one around the corner for the cross-street traffic. The kids see growing revenue; the “investors” see mounting losses.

There is a strand of economics, we’ll call it the K-brand, that sees all this as worthwhile. They add together the $10 spent by the parents to back the venture and the $7 spent by the customers and conclude that an additional $17 of spending is clearly a good thing. Surely, the neighborhood economy has been stimulated.

If you’re laughing after reading that – remember it’s your tax dollar doing the stimulation. Anyway, read the whole thing.

(HT: Cafe Hayek)

Tony Abbott gave a speech at the Press Club where he made some comments about reducing government spending.

At the heart of our plan for a stronger economy is getting government spending down and productivity up so that borrowing reduces, the pressure on interest rates comes off, and taxes can responsibly come down.

Right now there are some comments over at Twitter suggesting that government spending is already lower than the Howard government average. I estimate that average to be 24.15 percent of GDP. This financial year the government expects to spend 24.8 percent of GDP – while next financial year the government expects to spend only 23.6 percent of GDP. That has long been Wayne Swan’s strategy, promise that next year things will be better. Anyway, I’ve plotted the history of government spending using data from the latest MYEFO over the period 1996-97 to 2011-12.

Just looking at averages is a bit misleading – the trend under Howard was down – not down enough nor fast enough but there is a sharp contrast with the current spending practices of the current government.

Happily, I was not detained by the police upon my return, suggesting that liking the suburbs may not be a crime in Australia after all.  Here is another dispatch below.

To tell you the truth, I am not sure I have EVER hung around with so many pretentious, self-serving poseurs/tosspots in the one place.  I particularly  like the fact that the really important people, particularly the African leaders (who come with large accompanying parties),  insist on having a limousine and driver on permanent stand-by.

There were a whole lot of limousines parked outside my hotel – and this when it was -15 degrees outside.  The drivers had no choice but to leave the cars running.

Oh, and this would be for the leaders of the group of countries that needs a massive climate change adaptation fund paid for by the ‘rich’ countries.

For many of them, it was limousine to helicopter to corporate jet.  Gosh, you wouldn’t expect them to have to drive to Zurich and catch a commercial flight?

You will be pleased to know that the behaviour of one of our most senior business leaders was in complete contrast – exemplary, in fact.  She changed her shoes to walk between venues and to functions in the evening.  And she could not have been more friendly and considerate to everyone. She was returning to Australia on a commercial flight.

An American couple I had got to know – they were staying at the same hotel – had become concerned that I was not enjoying Davos.  I was missing the real Davos, they claimed.

For this reason, I attended one of the Ideas Labs on the future of cities, at their suggestion.  All was going quite well. There are some interesting issues surrounding the economic benefits of urbanisation, as well as the costs of congestion and loss of social amenity if cities grow too large.

I was being constructive and listened intently to the role that artists can play in urban renewal and adding to the vibrancy of city life.

The suggestion that I was a criminal came from left-field.  And my sin?  I like living in the suburbs.  The Professor of Architecture barked at me, “the suburbs come close to being criminal”.  Suburbs are responsible for profligate and irresponsible use of energy, it seems. The only future is higher vertical density.

When I tried to explain my position – that people have different tastes and preferences and these should be accommodated – I quickly realized that I was on a hiding to nothing.  None of the group had any sympathy for my position at all.

Since I was well and truly on the losing side, I decided to bait the group by pointing out the many fundamental errors that town planners have made in the past by trying to impose their visions for urban development in ways that don’t work or satisfy people’s wants.  Anyone been to Milton Keynes recently?  And let’s face it, Canberra has some basic flaws and it was planned from scratch.

The interesting thing about social engineers – the top-down planners of this world – is that they can both acknowledge past mistakes and continue to assume that, this time around, their advice will be perfect and capable of implementation.  It is really a version of von Hayek’s fatal conceit.

Now some of you may be asking whether there were any worthwhile sessions at Davos.  The one on the prospects for emerging economies was informative and entertaining.  The Deputy Prime Minister of Turkey was very impressive and had a good command of his brief.  Turkey has been growing strongly over the past several years.

The representative from Brazil was less impressive.  And I had not realized that there are real tensions between Brazil and China.  In explaining his country’s recent decision to increase the rate of tariffs on cars and trucks, he explained that his government just “wants to protect our jobs.”  Have we ever heard that before?

I particularly liked the young Vietnamese entrepreneur who jumped up to explain that he had started an engineering business that now employs 14,000 workers.  But because much of his business is with Japan, he needed to employ engineers and IT experts fluent in Japanese.  His response?  He has set up his own university that delivers courses in engineering and IT in Japanese, English and Vietnamese.  Some of his workers have now been poached by Japanese companies, which rather confirms the quality of the offerings.

Stephen Roach, former chief economist from Morgan Stanley and now Professor at Yale University, is a China fan, but expects growth to moderate in that country.  He is adding the MIST countries to the BRICS – Mongolia, Indonesia, South Korea (but this is already a rich country) and Turkey.

Another highlight was hearing Niall Ferguson discuss the eurozone crisis in terms of his earlier predictions that the currency union would never work and his current view that a fiscal union and federal arrangements will be the only means of saving the euro.

His estimate of the transfers that Germany would need to make to the rest of the eurozone counties to have a fully functioning federation was 8 per cent of GDP.  Given the political impossibility of this outcome, he predicted a result where the indebted economies have no or low growth for years and go cap-in-hand from time to time to be bailed out by Germany.  Angela Merkel’s term, More Europe, is actually code for More Germany.

The performance of the UK’s prime minister, David Cameron, was very striking. Not only is he  a consummate performer – he took unscripted questions from the audience – he was the only leader at Davos to stand up for the benefits of free markets.  This position was reinforced by the Chancellor of the Exchequer, writing in the Financial Times Weekend – “what we need now is a greater application of free-market principles, not cosy protection for vested interest.”  The relief of reading those words.

But to tell the truth, I can’t wait to get home, to a place where there are more rational and sensible thinkers per head of population than I ever realised.