With the political systems in Europe and the US seemingly incable of taking action to prevent a fresh recession, Martin Wolf looks at what levers are left to pull:
Nouriel Roubini, also known as “Dr Doom”, predicts a downturn. “A stopped clock”, some will mutter. Yet he is surely right that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the is eurozone stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes, a panic and back to bad fundamentals are large, with further economic contraction ahead.
Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for manoeuvre – and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it. Much more could also be done to hasten deleveraging of the private sector and strengthen the financial system. Another downturn now would surely be a disaster. The key, surely, is not to approach a situation as dangerous as this one within the boundaries of conventional thinking.
Wolf says he'll tackle potential solutions next week, but it sounds to me like he's coming down on the side of Rogoff, who wants mortgage cramdowns and nominal GDP targeting to inflate away the giant overhang of debt that is choking the economy to death.
Writing in the FT this evening, John Kay rips the face-skin off the modern economics profession, exposing the machine beneath:
The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.
Kay's argument is with the dominant schools of thought in macro- and financial economics - the dynamic stochastic general equilibrium model, the capital asset pricing model, and the efficient market hypothesis. It's a mouthful, but there are really just two things you need to understand about them. The first is that all three are part of an approach to economics that operates by deduction: economists cook up axioms, like "prices at all times reflect the best possible estimate of the underlying value of assets", then use modelling and math to work out how they affects decision-making by groups of individuals in the real world. It's this kind of "rigorous" and "elegant" stuff that gets you published in the big economics journals or a job on Wall Street.
The only other thing you need to know is that these models are the same ones that led people like Alan Greenspan to conclude that ever-rocketing house prices and huge levered bets on dodgy mortgages were just fine because financial market players had every incentive to police themselves.
It is a way of looking at the world that has been massively, if not completely, discredited by events. Yet somehow, its proponents have once again managed to seize control of the recovery debate. In their way of thinking, the reason the machine shop down the road won't hire new workers today isn't because of a lack of orders for machine parts, but because the owner is worried about higher taxes and interest rates at some point in the future. In this view, stimulus never works and we need "austerity now". So here we are partying like it's 1937 by cutting spending at a time of high unemployment and stalling growth. That these same people who were so wrong heading into the crisis are being trusted to help us find our way back out is simply incredible.
Check out the whole article - it's an epic takedown, definitely worth the time.
Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.
The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.
But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
Aye, so if what we have been going through since 2008 is a massive, ongoing deleverating, then it's Japan, not past US recessions, that is a more appropriate guide to what can happen if policymakers get things wrong. Assuming this is the case, then I have a question: What has been the impact on Japanese living standards during its two decades of contraction and stagnation? Everyone talks about Japan's 'lost decade', but I have yet to see a good writeup in the press about what it really means. Have retirees been thrown out on the streets? How many TVs does the average Japanese family own today vs 15 years ago? What's been the cost, in real-world terms, rather than aggregates, to everyday people?
Cities and local governments make lots of promises: to their citizens, workers, vendors and investors. But when the money starts to run out, as it has in Central Falls, some promises prove more binding than others. Bond lawyers have known for decades that it is possible, at least in theory, to put bondholders ahead of pensioners, but no one wanted to try it and risk a backlash on Election Day. Now the poor, taxed-out city of Central Falls is mounting a test case, which other struggling governments may follow if it succeeds.
If Central Falls, a city of about 19,000, is able to reduce the benefits its retirees now get — something they will fight — it would not only unsettle the millions of public workers and retirees across the country, but also reshape the compact between governments and their workers.
How can you look a retiree in the eye and tell him you're shredding his pension to make sure that a bondholder is made whole? Thousands of people in this town and many others just like it planned their lives around that money being there. And now instead of giving it to them you have local governments going back on the agreement in order to make sure that muni bondholders don't take a haircut. It's a godawful mess. Do it, and you're bankrupting pensioners, many of whom are no longer employable, while telling current workers they can't trust any of the promises they themselves have been made. Don't do it, and the city becomes unfundable. With a city forced to pay its way in cash, taxes on basic services will either go up or those services will disappear. If one city goes, interest rates across the state or even the rest of the country could go up, increasing the cost of borrowing for everyone else who is trying to avoid the Catch-22. Either way, today's workers are stuck financing retirement benefits that they themselves will never get to enjoy. This a recipe for a complete collapse of the social contract and wholesale inter-generational conflict.
An anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.
The president and Congress must recognize that an AA-plus country, to remain AA-plus, must focus on growth, not debt reduction, in the short term. We have a debt problem — but primarily a crisis of aggregate demand. A 21st-century Keynes would have recognized this and sounded the alarm, pointing out that policymakers from a fiscal perspective are pointing us toward recession and the destructive 1930s instead of a low-growth but still breathing U.S. economy of the 21st century.
While politicians demagogue about the debt ceiling and entitlements, it's clear to anyone who talks to real people that the problem with the economy is that nobody has any money. Shocking, I know. I was back in the US recently for the first time in over a year. You can't go far without coming across a giant big box store built for conspicuous consumption that just isn't there anymore. I walked into an Orvis store - they sell fishing gear and upscale flannel. A 3000 sq ft store just south of Myrtle Beach and at the height of tourist season it was basically empty - just me, my dad and a lonely sales clerk. As long as households are deleveraging, the bubble-era demand that Orvis was counting on when it decided to build that store, stock it up and employ the people who work in it isn't coming back. The financial markets have been saying this for some time now - 10-year Treasury yields have collapsed despite the S&P downgrade, suggesting that investors are more worried about a recession than long-term debt sustainability for now. Now Bill Gross - the ultimate bond vigilante - is spelling it out in plain English. If the idealogues yelling "austerity now!" won't litsen to him, they won't listen to anybody.
Light-touch policing was never as light as it looked. The bobby always had behind him as firepower the authority of society’s prejudices. A consensus across classes that certain behaviours will not be tolerated is a powerful deterrent. But Britain’s police have had no such authority at their disposal for a long time now. British culture — at least its urban culture — has grown too diverse for common agreement on what is unacceptable public behaviour, short of violence. Even where such agreement exists, the authorities have been reluctant to enforce it. British culture has always been individualist, but in the last 50 years it has become radically anti-authoritarian. This disposition has to do with the project of dismantling the class system. Reformers have thrown out the baby of authority with the bath water of privilege.
And this is a tragedy. Britain has chosen a different kind of liberty, one that does not rest on shared values. That is, it has chosen an American-style liberty, and this will have to be safeguarded in an American way. If violence is the only kind of behaviour police are permitted to counter, then they will be outfitted for countering violence, not for talking to children about keeping the sidewalks tidy. The alternative to maintaining order through consensus is through fear.
TEPCO workers were using a polymer mixed with shredded paper and sawdust to try to close off pipes through which the water has flowed into a cracked concrete pit at the Fukushima Daiichi plant, from where it has run into the sea. An earlier attempt to seal the crack with cement failed to stop the leak.
Amid mixed messages about problems and progress, the effort — called a “top kill” — continued for a third day, with engineers describing a painstaking process of trying to plug the hole, using different weights of mud and sizes of debris like golf balls and tires, and then watching and waiting. They cannot use brute force because they risk making the leak worse if they damage the pipes leading down to the well.
Deepwater Horizon, Fukushima, even arguably the financial crisis are all part of the same trend. Complicated systems that spin out of control, more than anyone thought possible. Low-risk high-impact events are turning out to be more common than the models say.
When I first saw this article in the Miami Herald on Friday I thought it was an April fool's joke:
Forget about the tussles between unions and lawmakers, the Legislature and governor, Democrats and Republicans.
The real knock-down, drag-out fight this session is over commercial interior design.
Tears and cheers have punctuated hours of testimony as licensed interior designers warn lawmakers that lives will be lost to flammable fabrics and paints if they don’t keep regulation of the profession in place.
“Buildings do not burn. Interiors do,” Gail Griffin, a professor at Miami Dade College’s School of Architecture and Interior Design, told the House Appropriations committee Wednesday.
She scolded the panel for their ignorance.
“Do you know the color schemes that affect your salivation, your autonomic nervous system?” she said. “You don’t even have correct seating. And somebody chose that for you.”
But apparently not. It turns out Florida is one of three states in the country that require interior designers to be licensed. Getting rid of the requirement would let anyone set up shop as a designer. The interior designers who benefit from this cartel-like structure are naturally, very concerned:
A couple of weeks ago, Tampa interior designer Michelle Earley told the House Business and Consumer Affairs subcommittee her expertise means she knows to avoid fabrics that contribute to the spread of hospital-acquired infections.
“By not allowing interior designers to be specialists and focus on the things they do, what you’re basically doing is contributing to 88,000 deaths every year,” she said.
Oh, the humanity! I really feel for those helpless residents of the 47 other states where these sorts of protections aren't in place. Life there must be terribly un Feng Shui. Back in the real world, the only losers from deregulation here are the designers who will no longer enjoy artificially inflated profits that come from their artificially created cartel. Dismantle it, and aspiring designers will no longer have to shell out thousands of dollars to get certified. Specialist deisgners - hospitals, etc - will continue to offer specialist services. Building codes, presumably will remain in place. Shutting down these kinds of job-killing practices is just the kind of thing that Democrats and Republicans should be able to agree on.
So, the New York Times is rolling out its paywall to new readers today. As someone who wants to see journalism find its footing in the 21st century, I wish them the best. I think the key will be to get the count of free articles per month right. 20 per month is generous - the Financial Times started its funnel paywall system at 30 free articles per month, but soon realized could crank the number of free articles per month down (way down, I think to 1 or 2 now) while still maintaining a decent flow of free readers through to the paid side of the fence. It'll be interesting to get another data point on the FT-style model. I suspect that for the NYT and other papers specializing in more general news, it's going to be difficult to keep that number of new subscribers drawn through the funnel to the other side of the paywall up so long as there are large numbers of "good enough" free alternatives.
The Antikythera Mechanism was developed in ancient Greece 2000 years ago and dragged up from the seabed in 1901. It took a hundred years to figure out how the few surviving fragments fit together, and what the thing was supposed to do. Turns out it was a computer:
This may be the coolest thing I've ever seen. But it's also a bit like learning that the Romans had underfloor heating and running water. That whole engine of human progress thing? It also runs in reverse.
