Markets, politics, and religion

One of the defining questions in global political economy is as old as it is meaningless: what's more important-- politics or economics? You could have a more meaningful discussion of "nature versus nurture," or "structure versus process," or "the chicken or the egg?"

"Politics" and "economics" established themselves, in part, by walling off and ignoring the fact that they are both elements of a larger, codeterminative, whole. What was once "political economy" divided itself into artificial disciplines that maintained the orderliness of the university at the expense of messy, interdependent understanding. (And please don't get me started on sociology and anthropology.) Since then, theorists have emphasized one element over another, setting one concept or relationship as the key to understanding. And it does simplify things, at least in the short term. Marx could start with the mode of production, and everything follows. Morganthau defined the national interest in terms of power, and built his structure on that. Waltz attempted to simplify still farther, making the distribution of power in a system the key to understanding and prediction. Neoclassical economics still begins with the myth of the rational man, and builds an enormous artifice from there.

Reality is more than that. The map is not the territory. The menu is not the meal. When pressed, the best theorists admit that, and talk about necessary tradeoffs. But as we press those maps into our students, or repeat them in our speeches, or assume them in our editorials, we reify.

We pay good money to go to the best restaurant in town, and we eat the menu.

Which brings me to Tucker Carlson. As a rule, I don't watch his show, or pay attention to what he has to say. Anyone on Donald Trump's speed-dial is someone I don't want to know. In fact, one of my favorite moments of live television is when Carlson, "from the right," and his long-time debating partner "from the left" were called on their left/right nonsense in his show on CNN, by none other than guest Jon Stewart:



The show went off the air soon thereafter. Carlson eventually moved to Fox, and polished his act.

But sometimes even Tucker Carlson gets something important. His critique of the American "elite" is on point.

Our leaders don’t care. We are ruled by mercenaries who feel no long-term obligation to the people they rule. They’re day traders. Substitute teachers. They’re just passing through. They have no skin in this game, and it shows. They can’t solve our problems. They don’t even bother to understand our problems.
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The idea that families are being crushed by market forces seems never to occur to them. They refuse to consider it. Questioning markets feels like apostasy. Both sides miss the obvious point: Culture and economics are inseparably intertwined. Certain economic systems allow families to thrive. Thriving families make market economies possible.  

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You’d think our ruling class would be interested in knowing the answer. But mostly they’re not. They don’t have to be interested. It’s easier to import foreign labor to take the place of native-born Americans who are slipping behind. 

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There’s no option at this point. But first, Republican leaders will have to acknowledge that market capitalism is not a religion. Market capitalism is a tool, like a staple gun or a toaster. You’d have to be a fool to worship it. Our system was created by human beings for the benefit of human beings. We do not exist to serve markets. Just the opposite. Any economic system that weakens and destroys families is not worth having. A system like that is the enemy of a healthy society.

Of course, he can't help but get into an anti-immigrant, culture-war theme as well.  But this particular point is correct: market capitalism (which we don't really have anyway, but we pretend that we do) is too often treated as a religion. And in a globalizing economy, if maximizing profit is the goal, there's no reason for any elite to place the interests of "their country"--the locals, the nationals, whatever you want to call them--ahead of what pays them. People recognize this. And they react: with Trump, with Brexit, with the rising tide of nationalism and protectionism.

And in the process they shoot themselves in the foot. The elites still game the system.  They have the resources and the motive to do it. If the balance sheet tips, they leave and take their assets with them. Even in the most "favorable" circumstances, if there was no place left to go, the people would round up the elites, form a circular firing squad, and shoot everyone.

Fortunately, some of the elites are figuring out that's a solution that hurts them, too. Eventually. So it boils down to how much they discount the future. Can they "cash out" before the casino collapses? "In the long run, we're all dead," Keynes joked. But it can get very unpleasant for everyone before that happens.

Unlike Carlson, I don't think the goal should be to move backwards. We need to have a sense of community, yes, but that community shouldn't be--can't be--Mayberry. It has to have room for everyone. Everywhere. Our telos can't be in preserving the past, but in exploring the future, together.

So how do we do that? American progressives talk about a "Green New Deal," long on goals and short on details. That can be one of the starting points. Trump rallies his troops in opposition to American "socialism" (as if he had any idea what the word means). That can be one of the starting points, too. But both are thinking too small. The economics of the world is global. The politics of these proposals is national. At least the progressive's vision has the potential to be universalized--certainly not now, maybe not soon, but someday. "America First," if it comes down to "America Only," means we've lost before we've begun. And by "we" I mean everyone--Americans and the world.

I seem to have drifted somewhat from the original point. Oh, well, the advantage of a blog is you can post a first draft. Maybe it will prompt a discussion, and I can better figure out what I'm talking about.

Millennials are the new peasants

Yet another reminder that the statisitical mean, when dealing with the distribution of wealth, is a terrible way of understanding the world.

Who Has Done the Best Since the 2008 Meltdown? Hint: Not Millennials | Big Think

Too Big for Bonuses

English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

"Michael," of "Bankers Anonymous," does a very nice job of taking apart the argument in favor of large bonuses for Wall Street bankers.  As he points out, it makes perfect sense to have a system of bonuses regularly in excess of annual salaries in a business noted for risk, with a premium on rewarding the very best and brightest. Accept the assumptions, and the conclusions follow.

BUT..and you knew this was coming, didn't you?...when dealing with "Too Big to Fail" banks THE ASSUMPTIONS ARE NOT TRUE.  Risk is minimized and underwritten by the public underwriting of losses for megabanks.  Much as Freddie Mac and Sallie Mae were (are) ostensibly "private" institutions, set up by government, supported by government, guaranteed (formally or informally) by government, the superbanks have grown (with the regulatory and policy collusion of government) to the point that they are, in fact, not private in most important ways.

"Michael" puts it better than I:

...As long as you know the government’s got your back, you’re not really private. 

If you’re Too-Big-To-Fail, you’re Amtrak in my book.  None of you should get more than a few hundred thousand annually.  And that’s being generous. 

Now, before you accuse me of being a Communist, or a Wall Street hater, let me clarify. 

I love private enterprise. 

I applaud successful hedge fund managers, for example, and I do not begrudge their extraordinary compensation, provided they follow the rules and manage capital for willing investors. 

One of the keys to my applause, however, is my belief that any of those hedge funds could disappear tomorrow, as a result of a bad bet, misplaced customer funds, or a faulty computer algorithm, and no government entity will step up to save their bacon. 

I long for the day when the employees of Wall Street banks can reap legitimate profits, if they deserve it, or similarly disappear without a whimper, if they deserve it. 

If the Too-Big-To-Fail banks managed to break themselves into systemically irrelevant parts, I would have no problem with their executives paying themselves massive bonuses in good years.  They’d have earned it. 

But until that day, when they’re finally Too-Small-For-Bailouts, please don’t pretend that they’re anything more than a big NASA – a bunch of smart people in a big room full of flat screens, filling an important government-subsidized mission – working on the taxpayer’s dime.

Logically, you can't have it both ways. If the banks (or any other entity) are so important they function as a public utility--and that's essentially the justification for the bailout--they need to be regulated as a public utility, and their jobs need to be compensated in a way and to a degree similar to those of any other public utility.

Are Banker Bonuses Fair? - Business Insider

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Don't suffer the embarrassment of economic disfunction

This is what journalism looks like

You may have missed this.  And even if you'd seen it you might not have recognized it.  It's called journalism.  We used to have it in the United States.

Related articles

• What Real Journalism Looks Like: Vincent Browne v The ECB (ritholtz.com)

Why I am not an Austrian economist

I do, however, empathize which much of what they do, and why. A lot of social science is model-building and smuggled assumptions. Where I disagree is with their assertion that they are immune from doing the same things. A good case in point can be found in Mark Crovilli's article on "absolute" knowledge and science. If you are interested, follow the discussion in the comments section. We'll see if anyone responds to mine:

Excellent article. One of the great things about a well-reasoned argument is you can identify precisely where you you disagree with it. In this case, everything up to "absolute certainty in science cannot be acquired by means of the "scientific method" and the collection and interpretation of empirical evidence. For beings that lack omniscience, collection and interpretation of empirical evidence can only yield imperfect and subjective beliefs about how the world works" makes perfect sense to me.

However, the statement "absolute certainty in science can only be acquired by discovering propositions about the world that can be known to be true a priori — propositions that cannot possibly be thought to be false" smuggles in an assumption I do not agree with: that there are statements about the real world that can be known a priori. I see no reason to assume such things exist, and every reason in my experience to assume they don't. Cases where things have been suggested as a priori true about the world that exists (as opposed to a world or system set up by a theorist) seem to me to be cases of a failure of imagination. The real world--whatever that is--is not only stranger than we imagine, it's probably stranger than we *can* imagine. All our concepts are imperfect simplifications.

Thus, partial "explanation" is the best we can do. See what works, see what doesn't, revise our models appropriately. If you want "absolute" knowledge from science, you're going to be disappointed.

(in my opinion, of course--that goes with the territory)

I suspect one of two things will happen. Either (a) my point will be completely ignored, or (b) it will trigger rage among the true believers. People love to protect cognitive consistency. I hope I'll learn something interesting. Maybe the students of Mises can teach me more than I've given them credit for.

What Is a Scientific Theory? - Mark R. Crovelli - Mises Daily

Why I am not a "big-L" libertarian

The short answer: for the same reason I'm not an anarchist, or a communist, or whatever--I don't trust absolute principles.

The long answer is articulated by nobel-prize winning economist Ronald Coase in a classic interview:

Reason: Though you are now known as a leading free market economist, you started your intellectual career as a socialist. Why and when did your political views change? 

Coase: They changed gradually. What was most important was the work I did on the economics of public utilities at the London School of Economics. I studied the results of municipal operation of utilities and the effects of nationalization, particularly in the post office. This led to grave doubts about nationalization. It didn't produce the results people said it did. My views have always been driven by factual investigations. I've never started off--this is perhaps why I'm not a libertarian--with the idea that a human being has certain rights. I ask, "What are the rights which produce certain results?" I'm thinking in terms of production, the lives of people, standard of living, and so on. It has always been a factual business with me. I discovered that municipal operation didn't work as well as people said it would, and nationalization did not either. 

Reason: You said you're not a libertarian. What do you consider your politics to be? 

Coase: I really don't know. I don't reject any policy without considering what its results are. If someone says there's going to be regulation, I don't say that regulation will be bad. Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't. 

Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation? 

Coase: This is a very interesting question because one can't give an answer to it. When I was editor ofThe Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies--perhaps all the studies--suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn't mean that if we reduce the size of government considerably, we wouldn't find then that there were some activities it did well. Until we reduce the size of government, we won't know what they are.

(Thanks to Virginia Postrel for reminding me of this interview.)

It's about estimating and observing consequences, within the context of an ethical framework.  What is the right end to achieve, and how do you avoid a means whose anticipated and unanticipated consequences are worse than the original problem you want to solve? Today, in an era of "negative marginal returns," large-scale government action often (usually) makes things worse.  But not always.

Thus, when I hear Ron Paul talk about reducing America's military presence around the world, I think he's on the right track.  I'm willing to be persuaded otherwise, but the knee-jerk interventionism of the past sixty or so years doesn't seem to be supported by the evidence.  When he talks about ending trade treaties, I want to learn what he'll replace them with.  The world is too interdependent for economic artarky.  International law and organizations have emerged, piecemeal for the most part, because they meet a need.  When he talks about removing all social safety nets, even for catastrophic and random events, he sounds wrong both morally and economically.

The big-L Libertarian Party bills itself as the "party of principle," and I admire that.  I also fear it.  The Bolsheviks were a "party of principle," too.  When political principles become so absolute that they get in the  way of observing and thinking and adapting to change, it's time to rethink the principles.

How bad is it?

Porter Stansbury, already noted for his gloomy predictions about the American economy, finds "the numbers tell us America is in decline... if not outright collapse."  His analysis starts with an estimate of real per capita GDP/time, based on a market-basket of currencies and/or gold.  Even this has pitfalls.  But, anyway, he uses a commodity index (the CRB) until 1975, and after the US is off the gold standard he switches to gold, and the chart looks like this:

I don't know that this is the best way to estimate what is going on, but clearly something is.  And this misses what may be the greatest problem of all: that per capita GDP tells us nothing about the distribution of wealth.  Things got better, it seems, in the years from Reagan to George W. Bush--but how much of that was consolidated in the hands of a few?  Even ignoring that, however, after 2001 things look bad for almost everyone.

Why bring this up here?  Because economic failure promotes desperation, and crime, and a police state mentality.

Stansbury connects the decline to an ethic of entitlement, coupled with vast (and unpunished) corruption at the top.  Henry Paulson and Tim Geitner should be behind bars for lying to Congress and providing more accurate insider information to old associates.  Congress doesn't do anything about it (perhaps because the Congress as a whole has an ever-widening gap with their consitutents, based in part on their exemption from insider-trading laws).

He also wants to claim that there's a direct correspondence to the Great Society programs, either by design (to buy off troublesome groups) or error (the basic errors of large-scale government planning systems).  That's debateable, but what isn't in doubt are the numbers--and the spiral of poverty and crime and incarceration they represent.  Some data points, again from Stansbury:

According to the NAACP, Texas taxpayers spent $175 million in 2009 to imprison residents from a small part of Houston – only 10 zip codes out of 75. Thus, people from neighborhoods that are home to only about 10% of the city's population account for more than 33% of the state's entire $500 million annual prison spending. These neighborhoods are overwhelmingly poor and African American. 

In Pennsylvania, taxpayers will spend $290 million in 2009 to imprison residents from just 11 of Philadelphia's neighborhoods, representing about 25% of the city population. On this relatively small urban area, the state will spend roughly half its $500 million prison budget. These neighborhoods are overwhelmingly poor and African American. 

In New York, taxpayers will spend $539 million to imprison residents from only 24 of New York City's 200 different neighborhoods. Only 16% of the city's population lives in these areas, but they will account for nearly half of the state's $1.1 billion prison budget. These neighborhoods are overwhelmingly poor and African American.

This is not about race, or at least not only about race.  In Detroit, where twenty-seven percent of African-American males graduate from high school, only nineteen percent of white males do so.  In practical terms, in an economy that's increasingly technical and global, these people have little or no chance.

My dad used to be a principal in the schools of St. Louis.  Eventually, he ended up in charge of the school for incarcerated minors.  I'm not sure what's worse: that he found that to be one of his safer assignments, or the fact that some of his students would commit crimes to get off the streets and return to the relative safely of his school.

Today, this country has more than seven million people in prison or on parole, more that any other industrialized state.  The prison population has grown from less than half a million people to more than 2.5 million today--and the building and running of prisons has become a profitable growth industry.  What does that say about us?

Stansbury identifies villians: democrats, republicans, government employee unions, big business.  I don't agree with all of his analysis.  But it's worth a look at the start of what is likely to be a very, very difficult year.

The Navy of the future

Practicing to block the Straight of Hormuz

Member of the Iranian Parliament says the military was set to practice operations to block the Straight of Hormuz, one of the key choke points for world energy supplies. The Iranian military has not confirmed this, but you can probably expect a rise in oil prices just on the emotional impact of the possibility.

As it is, most of the crude oil and liquefied natural gas of Saudi Arabia, Qatar, Kuwait, Iraq, the Emirates (and Iran) have to pass through the four-mile wide shipping channel, currently patrolled by the U.S. Navy.

UPDATE 1-Iran army declines comment on MP's Hormuz exercise remarks | Energy & Oil | Reuters

Oil on the flames (cute title, huh?)

Exxon-Mobil is throwing in with the Kurds in the upcoming battle over Iraq.  The battle takes off again.

Whatever the prospects of finding oil in the north of Iraq, observers are surprised that Exxon is prepared to hang its future in Iraq on the outcome of the power struggle between Iraqi Kurdistan and the central government. Control of the right to explore for oil and exploit it is crucial to the authorities on both sides since they have virtually no other source of revenue. 

The Kurds have won a degree of autonomy close to independence since the fall of Saddam, and the ability to sign oil contracts without reference to Baghdad will be another step towards practical independence and the break-up of Iraq. A parallel would be if the Scottish government were to sign exploration contracts in the North Sea without consulting London. 

What makes the Exxon-KRG deal particularly inflammatory, says Mr Shahristani, is that three of the six blocs where Exxon is planning to drill are understood to be "across the blue line – that is outside the border of the KRG". This means they are in the large areas in northern Iraq disputed between Arabs and Kurds since 2003, but where the Kurds have military control. 

The government must now decide if it will make good on its threats and replace Exxon at a mammoth oil field called West Qurna 1 at the other end of the country, north of Basra. Iraqi oil officials hint that Royal Dutch Shell might replace the American company. 

Both sides have much at stake. The Iraqi government is totally reliant on its oil revenues to pay its soldiers, police force and civilian officials. It needs vast sums to rebuild the country after 30 years of war, civil war and sanctions. In 2009, it began to expand its oil industry by signing contracts with firms such as BP, Royal Dutch Shell and Exxon to boost production in under-exploited and poorly maintained fields. 

These companies thereby gained access to some of the largest fields in the world, each with reserves of more than five billion barrels. Vast sums are being invested, mostly around Basra in the south of Iraq. Oil output, now at 2.9 million barrels a day, is due to rise to a production capacity of 12 million b/d by 2017, potentially putting Iraq on a par with Saudi Arabia as an oil exporter.

Since the Kurds have had a bad deal for generations, my sympathies are with the Kurds.  But even if they succeed to get the state they want, the transition is going to be hard.

Exxon's deal with the Kurds inflames Baghdad

The Eurozone

Thanks to Frank Jacobs and his Strange Maps.

Policy wonks rejoice!

 Economists Get Online Platform for Policy Debates - WSJ.com

Everyone else--it might prove to be an excellent cure for insomnia.

The impossible triangle

It's coming down to the crunch.  The Eurozone is caught in its version of the "Impossible Triangle" in international finance: among states you can have unrestricted trade in currencies and/or fixed exchange rates (or, in this case, a single currency) and/or sovereign financial and monetary policies, BUT YOU CAN'T HAVE ALL THREE AT THE SAME TIME.  Something has to give.  So what will it be?

EUROPE: Changing The Rules In The Middle Of The Game:

I have been writing for a very long time about the changes needed to the EU treaty if Europe is to survive. Specifically, last week I noted that Angela Merkel has made it clear that the independence of the ECB must not be compromised. This week Sarkozy and the new prime minister of Italy, Mario Monti, agreed to stop their public calls for such changes (at least until their own crises get even worse, would be my guess). And Merkel has called for a new, stronger union with strict control of budgets as the price for further German aid for those countries in crisis. In seeming response: 

“The European Commission on November 23 proposed a new package including budget previews at EU level, the establishment of independent fiscal councils and growth forecasts, closer surveillance of bailout recipients and a consultation paper on Eurobonds. There is also a growing consensus among EU policy makers on the need for the adoption of fiscal rules in national legislation. However, it is far from clear whether EU countries would accept the implicit loss of sovereignty this would involve and agree to treaty changes enshrining legally enforceable fiscal oversight at EU level. The German Chancellor, Angela Merkel, is willing to support a change in Germany’s own constitution if the EU Treaty change to that effect is agreed first.” ( www.roubini.com)But this means a major treaty change that must be approved by all member countries. Note that Merkel wants the treaty change first, or at least the language, before she takes it to German voters, which will certainly be required, since what she is suggesting is not allowed by the present German constitution. Without the changes stated clearly and explicitly in advance, it is unlikely, as I read the polls, that German voters will go along. Merkel has made it clear that any proposed changes will be limited to fiscal issues and central control and not touch on the ECB’s independence. She is adamant against eurozone bonds and putting the German balance sheet at risk (see more below). 

But will the rest of Europe go along with what would be a major alterations of their own individual sovereignty and their ability to adjust their own budgets, no matter what? And agree to all this in time to deal with the current crisis? Such changes will be controversial, to say the least. And they would require, if I understand, the yes votes of all 27 European Union members, or at a minimum the 17 eurozone members.

Unfortunately (?), some, but not everyone, are panicing:

On Friday, Standard & Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk. 

While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that.  “We cannot be, and are not, complacent on this front,” Andrew Bailey, a regulator at Britain’s Financial Services Authority, said this week. “We must not ignore the prospect of a disorderly departure of some countries from the euro zone,” he said. 

Banks including Merrill Lynch, Barclays Capital and Nomura issued a cascade of reports this week examining the likelihood of a breakup of the euro zone. “The euro zone financial crisis has entered a far more dangerous phase,” analysts at Nomura wrote on Friday. Unless the European Central Bank steps in to help where politicians have failed, “a euro breakup now appears probable rather than possible,” the bank said. 

Major British financial institutions, like the Royal Bank of Scotland, are drawing up contingency plans in case the unthinkable veers toward reality, bank supervisors said Thursday. United States regulators have been pushing American banks like Citigroup and others to reduce their exposure to the euro zone. In Asia, authorities in Hong Kong have stepped up their monitoring of the international exposure of foreign and local banks in light of the European crisis. 

But banks in big euro zone countries that have only recently been infected by the crisis do not seem to be nearly as flustered. 

Banks in France and Italy in particular are not creating backup plans, bankers say, for the simple reason that they have concluded it is impossible for the euro to break up. Although banks like BNP Paribas, Société Générale, UniCredit and others recently dumped tens of billions of euros worth of European sovereign debt, the thinking is that there is little reason to do mo

Evidently, the French banks are convinced someone MUST save them.  Denial?

'via Blog this'

No room to cut the "defense" budget?

Of course, comparing expenditures is a crude measure of capabilities, but

I think there must be SOME room to trim.  Pity that if the DoD has its way the cuts will probably protect the pork at the expense of the things (like training) that are really needed.

UNCTAD sounds the alarm (again)

DocuBase Article: Least Developed Countries Report 2011

Hard talk

I mentioned this in class the other day. The whole interview (from BBC) is worth the time. For many people, the idea of "saving" the Eurozone is turning into a (sad) joke. One of my favorite quotes:

"...you know how screwed up Europe is when you have a German pope and an Italian central banker."

The real fun begins around the 12:30 mark.

One nation under law

Telling it like it is

As usual, the traders (whose livelihood depends on having clear perceptions) are a lot more accurate than the politicians (whose livelihood depend on distorting the perceptions of others) and more likely to tell it as it is.*

*Unless they are on CNBC, or course, where their primary job is to sell bad stock tips to gullible investors.

UPDATE (Sept. 30th):  It appears this guy's a real clown.  Not a professional trader, runs a failing professional speaker's business.  On the other hand, he's not one of the "Yes Men" and he's saying what many are saying elsewhere--just not on BBC.

For the undergraduate IR student

Freshmen with an interest in international relations ask me where they should start. What should they read? Fortunately, Steven Walt has put together a very good list.

My "top ten" books every student of International Relations should read | Stephen M. Walt:

They're not necessarily "the best," nor are they a complete list, but they are classics, relatively easy to read, and give you a feed for how people who analyze this stuff for a living think.