In Politics, Let No Mean No

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right?  More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside.  The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition.  Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection.  The final tally would be the number of votes for minus those against.  In a two party/candidate race the final result would be the same.  In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative.  In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones.  They should have had that chance.

Lessons for the Eurozone from US Fiscal Federalism

If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues.  Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.

A Business Cycle Theory Suitable for a Parallel Universe

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

Education with a Twist—An Oliver Twist

Let’s let the newt speak for himself:

You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.

I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details.  Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Piggy No. 3: German?

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks.  He wears overalls.  In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm.  Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much?  (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)

The German Obsession with Inflation

As a footnote to the previous post, here is an observation about the German obsession with inflation.  Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich.  This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler.  That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization.  Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers.  The savings rate is high, and savings are distributed broadly.  Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest.  It is an act of self-denial that looks to the future—one’s own and that of the generations to come.  To have savings is to be free.  Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right.  The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance.  Germany is a savocracy.

The great threat to savings is inflation.  Long before hyperinflation destroys savings altogether, modest inflation chips at their edges.  Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality.  Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from.  Yes, they come from choices people make, but they also come from the income that make those choices possible.  Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit.  And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US.  In other words, the virtue of savings is inseparable from the vice of debt.  Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

Strike at California State University

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Väsen

I’m slow to get up this morning after a concert last night by this great Swedish folk group.  They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany.  Although they’ve been together for 22 years, this was the beginning of their first German tour.  (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys.  He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs.  While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional.  Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas.  Toward the end of the night they started to fool around, and this was good too.  Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events.  Not to miss.

Paperback version of The Confiscation of American Prosperity

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.

Discipline, Hard Work and Obscene Wealth

It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf.  Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.

Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”).  Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur.  Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.

Let’s get to the core issue.  Assume there are four individuals, A, B, C, and D.  A and B are at the struggling end of the working class, C and D are rich.  A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit.  Suppose their annual incomes look like this:

A: $20,000
B: $30,000
C: $200,000
D: $2,000,000

If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression.  But what would this have to do with the popular revulsion against an income distribution so skewed to the top?  The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom.  Think of that old Jesse Jackson speech:

I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.

What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor?  Like I said, I’m embarrassed for Tyler Cowen.

OWS and its “Leaders”: A Lesson from the 60s

To a large extent, the New York Times sets the news agenda for American journalism.  Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press.  So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street

An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.

This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America.  On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks.  It had a visceral distrust of leaders and authority, of having others speak for you.

Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers.  The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way.  Unfortunately, that was not all.  Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones.  Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.

But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest.  Our story, whatever it was, had little to do with its representation in the media.  We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.

Lessons?  They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function.  Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.

Naomi Klein on the Politics and Economics of Climate Change: Hit and Miss

Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo.  Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace.  This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.

A first time investigation of the architecture of the international ownership network

It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.

“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”

"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."

The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.

It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.