Here is the statement, obviously intending to put to rest the continuing dispute about the advantages of a welfare state versus Anglo-Saxon style capitalism:
"To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken." [Emphasis mine]
However, I find the author's arguments in support of this point (or the lack of thereof) unconvincing.
The article also contains a useful list of the existing economic tools for fighting recessions/depressions:
"Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits."
Tuesday, August 30, 2011
Thursday, August 25, 2011
More on stimulus vs. austerity discussion
The Economist is currently hosting a debate about the nature of the current economic situation in the US and the possible ways to improve it.
The pro-stimulus advocate describes the nature of the current recession as follows:
"... a rare type of recession that happens only after the bursting of a nationwide asset-price bubble financed with debt. In this type of recession, now called balance-sheet recession, the private sector is actually minimising debt instead of maximising profits because the liabilities it incurred during the bubble days are still on the books while the assets it purchased with borrowed funds have collapsed in value, leaving its balance sheets seriously underwater and in need of repair." [Emphasis mine]
(This was a subject of one of my earlier posts.)
The stimulus-based solution to the problem is then formulated as:
"Since the government cannot tell the private sector not to repair its balance sheets, the only way for the government to keep the economy from collapsing is to borrow and spend the unborrowed savings in the private sector and put them back into the economy's income stream. And this stimulus must be maintained until the private sector has regained enough financial health to borrow money again."
On the opposing sides, the doubts regarding the value of the stimulus and temporary tax cuts are summarized as follows (see my other recent post regarding the tax cuts):
"A main implication of their work is that permanent tax cuts have a lasting effect, but temporary tax cuts do little or nothing. Recipients of a temporary windfall reduce debt or save. The same is true of a one-time increase in spending. The teachers and firemen who kept their jobs for a year because states received large transfers from the federal stimulus in 2009 did not run off to buy a car or furniture. Most of them knew that temporary assistance comes to an end quickly, as it did. Many of their jobs ended. By saving instead of spending, they prepared for an uncertain future." [Emphasis mine]
Hence, the proposed austerity measures are:
"Here are some useful first steps. Reduce uncertainty about future tax rates by adopting a long-term plan to reduce entitlement spending. Declare a five-year moratorium on new regulation, except for national security. Adopt an inflation target with enforcement to make sure that high inflation will not return. Pass the trade agreements. And pay for reduced corporate tax rates by closing loopholes."
The pro-stimulus advocate describes the nature of the current recession as follows:
"... a rare type of recession that happens only after the bursting of a nationwide asset-price bubble financed with debt. In this type of recession, now called balance-sheet recession, the private sector is actually minimising debt instead of maximising profits because the liabilities it incurred during the bubble days are still on the books while the assets it purchased with borrowed funds have collapsed in value, leaving its balance sheets seriously underwater and in need of repair." [Emphasis mine]
(This was a subject of one of my earlier posts.)
The stimulus-based solution to the problem is then formulated as:
"Since the government cannot tell the private sector not to repair its balance sheets, the only way for the government to keep the economy from collapsing is to borrow and spend the unborrowed savings in the private sector and put them back into the economy's income stream. And this stimulus must be maintained until the private sector has regained enough financial health to borrow money again."
On the opposing sides, the doubts regarding the value of the stimulus and temporary tax cuts are summarized as follows (see my other recent post regarding the tax cuts):
"A main implication of their work is that permanent tax cuts have a lasting effect, but temporary tax cuts do little or nothing. Recipients of a temporary windfall reduce debt or save. The same is true of a one-time increase in spending. The teachers and firemen who kept their jobs for a year because states received large transfers from the federal stimulus in 2009 did not run off to buy a car or furniture. Most of them knew that temporary assistance comes to an end quickly, as it did. Many of their jobs ended. By saving instead of spending, they prepared for an uncertain future." [Emphasis mine]
Hence, the proposed austerity measures are:
"Here are some useful first steps. Reduce uncertainty about future tax rates by adopting a long-term plan to reduce entitlement spending. Declare a five-year moratorium on new regulation, except for national security. Adopt an inflation target with enforcement to make sure that high inflation will not return. Pass the trade agreements. And pay for reduced corporate tax rates by closing loopholes."
Sunday, August 21, 2011
Middle-Eastern logical twists
In view of the recent violence in Israel and Gaza, there are some who perceive as strange the fact that Israel retaliated against the Popular Resistance Committee (PRC) in Gaza, despite the latter's denial of any complicity in the Eilat attacks.
While there may be no proof (in the open media) of the PRC responsibility for the attack, it seems that even the critics of the retaliation against PRC are so deeply absorbed by the situation that they take for granted many things that must seem awkward to an objective observer.
Let us try to evaluate the situation objectively:
A group of armed men from country A entered country B, murdered several people, and escaped back to A. Elsewhere this would be considered and act of war, and B would demand an investigation and compensation from A, threatening a just retaliation. A resolution by the UN Security Council would follow as well.
It is Egypt's obligation as a state to fight the crime in its territory, whether it threatens Egyptians or the citizens of other countries. And it is Egypt who has to prove that the terrorists were not Egyptians and that Egypt did not have hostile intentions towards Israel. And even then Egypt still would have the responsibility towards the families of the victims.
All this does not happen, and the Israeli defense minister, Ehud Barak, has correctly hinted that Egypt is a failed state (just by definition of a state failing to exercise such state functions as fighting crime and protecting its borders.) Yet, in an awkward twist, it is Israel that has apologize for stating this fact. And it is Israel that has to carry out an investigation into the deaths of several Egyptian soldiers, who were caught in gunfire when the Israeli border guards chased the terrorists.
Let us note that the lack of the Egyptian complicity in the terrorist attack is far from obvious: some commentators claim that, in order to remain unnoticed by the Israeli guards, the terrorists infiltrated into Israel in front of an Egyptian outpost, with likely knowledge of the Egyptian army. The fact that the infiltrators were retreating towards a group of the Egyptian soldiers, which resulted in several Egyptians killed, raises questions regarding the Egyptian army possibly covering the terrorists's retreat.
However, the worst thing that has been made obvious by these events is the Israel's fear to alienate Egypt, which prevents Israel from demanding from Egypt the actions that are required by the international law (i.e. the investigation and the compensations to the victims.)
I don't blame the government for this - it just shows how bad the geopolitical situation is for Israel.
While there may be no proof (in the open media) of the PRC responsibility for the attack, it seems that even the critics of the retaliation against PRC are so deeply absorbed by the situation that they take for granted many things that must seem awkward to an objective observer.
Let us try to evaluate the situation objectively:
A group of armed men from country A entered country B, murdered several people, and escaped back to A. Elsewhere this would be considered and act of war, and B would demand an investigation and compensation from A, threatening a just retaliation. A resolution by the UN Security Council would follow as well.
It is Egypt's obligation as a state to fight the crime in its territory, whether it threatens Egyptians or the citizens of other countries. And it is Egypt who has to prove that the terrorists were not Egyptians and that Egypt did not have hostile intentions towards Israel. And even then Egypt still would have the responsibility towards the families of the victims.
All this does not happen, and the Israeli defense minister, Ehud Barak, has correctly hinted that Egypt is a failed state (just by definition of a state failing to exercise such state functions as fighting crime and protecting its borders.) Yet, in an awkward twist, it is Israel that has apologize for stating this fact. And it is Israel that has to carry out an investigation into the deaths of several Egyptian soldiers, who were caught in gunfire when the Israeli border guards chased the terrorists.
Let us note that the lack of the Egyptian complicity in the terrorist attack is far from obvious: some commentators claim that, in order to remain unnoticed by the Israeli guards, the terrorists infiltrated into Israel in front of an Egyptian outpost, with likely knowledge of the Egyptian army. The fact that the infiltrators were retreating towards a group of the Egyptian soldiers, which resulted in several Egyptians killed, raises questions regarding the Egyptian army possibly covering the terrorists's retreat.
However, the worst thing that has been made obvious by these events is the Israel's fear to alienate Egypt, which prevents Israel from demanding from Egypt the actions that are required by the international law (i.e. the investigation and the compensations to the victims.)
I don't blame the government for this - it just shows how bad the geopolitical situation is for Israel.
Saturday, August 20, 2011
Keynes vs. Hayek debate is still alive
Here is an enlightening article about the two theoretical approaches to the economic crises, pioneered by John Maynard Keynes and Friedrich von Hayek. The author claims that the Hayek's approach has been discredited, and that the Keynesian stimulus is the only salvation to the World economy. (In case you have no time to read the whole article, I provide a few relevant quotes below.)
It is worth however noting that the Keynes vs not-Keynes division among the American economists passes precisely along the Republican-Democrat divide. This seems consistent, since the Democrats support more socialist society with a greater role of the government in regulating markets. But in Europe, which is essentially the Democratic ideal of the welfare state, the view seems to be just the opposite - the European Union response to the escalating debt crisis consists of imposing more and more austerity measures in Greece, Spain, Ireland, Italy etc.
This is probably the result of the different economic backgrounds, resulting in the drift of the two continents towards the middle ground, which humorously could be described as the difference between "Continental" and "English-speaking" approach.
The quotes: according to Hayek "the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.
But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust."
The Keynes's position is just the opposite: "under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations."
Consequently the two economists offered different recipes for dealing with economic crises: "Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending."
The last recession is commonly blamed on the sub-prime mortgage crisis: the sharp drop in the price of real estate assets made these assents cheaper than the amount of money previously borrowed to purchase them. This explanations seems to be taken directly from the Hayek's book. Ironically, the stimulus approaches (i.e. more spending) adopted by both George W. Bush and Barack Obama, are the prescriptions taken from Keynes.
It is worth however noting that the Keynes vs not-Keynes division among the American economists passes precisely along the Republican-Democrat divide. This seems consistent, since the Democrats support more socialist society with a greater role of the government in regulating markets. But in Europe, which is essentially the Democratic ideal of the welfare state, the view seems to be just the opposite - the European Union response to the escalating debt crisis consists of imposing more and more austerity measures in Greece, Spain, Ireland, Italy etc.
This is probably the result of the different economic backgrounds, resulting in the drift of the two continents towards the middle ground, which humorously could be described as the difference between "Continental" and "English-speaking" approach.
The quotes: according to Hayek "the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.
But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust."
The Keynes's position is just the opposite: "under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations."
Consequently the two economists offered different recipes for dealing with economic crises: "Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending."
The last recession is commonly blamed on the sub-prime mortgage crisis: the sharp drop in the price of real estate assets made these assents cheaper than the amount of money previously borrowed to purchase them. This explanations seems to be taken directly from the Hayek's book. Ironically, the stimulus approaches (i.e. more spending) adopted by both George W. Bush and Barack Obama, are the prescriptions taken from Keynes.
Monday, August 1, 2011
One more political failure by the West
Germany has called for a United Nations Security Council meeting to discuss the situation in Syria. Although no more is in the offing than a tough condemning resolution, China and Russia has already threatened to veto it.
Let us note that:
1. The crackdown on Syrian opposition has been going for several months already, and more than a thousand people have been killed. Yet, the ambassadors of all major Western countries are still not recalled from Damascus, and President Obama only now, after the massacre of 80 people in Hama, realized “the true character of the Syrian regime.”
2. The Muslim Brotherhood, on the other hand, has not remained silent: "Syria is witnessing a war of sectarian cleansing. The regime has linked its open annihilation with the crescent of Ramadan. It is a war on the identity and beliefs of the Syrian nation ... on Arab Muslim Syria."
Conclusion? In Syria the West has lost both moral ground and political influence in the "Arab Street". The Muslim Brotherhood gained.
Let us note that:
1. The crackdown on Syrian opposition has been going for several months already, and more than a thousand people have been killed. Yet, the ambassadors of all major Western countries are still not recalled from Damascus, and President Obama only now, after the massacre of 80 people in Hama, realized “the true character of the Syrian regime.”
2. The Muslim Brotherhood, on the other hand, has not remained silent: "Syria is witnessing a war of sectarian cleansing. The regime has linked its open annihilation with the crescent of Ramadan. It is a war on the identity and beliefs of the Syrian nation ... on Arab Muslim Syria."
Conclusion? In Syria the West has lost both moral ground and political influence in the "Arab Street". The Muslim Brotherhood gained.
Tuesday, July 26, 2011
For good or for bad, nuclear energy is the future
Yukiya Amano, the head of the International Atomic Energy Agency, made it clear that the number of nuclear reactors in the World is likely to increase in the nearest future.
This statement is valuable for two reasons:
1. IAEA's head is probably the most informed person in the World in regard to the developments involving the nuclear energy.
2. He is neither a political leader, nor representative of the nuclear industry, nor environmentalist, and as such can afford to be more objective than anyone else. This is even more underscored by the fact that Mr. Amano is Japanese, who probably finds it hard to be dispassionate about teh recent Fukushima accident.
This statement is valuable for two reasons:
1. IAEA's head is probably the most informed person in the World in regard to the developments involving the nuclear energy.
2. He is neither a political leader, nor representative of the nuclear industry, nor environmentalist, and as such can afford to be more objective than anyone else. This is even more underscored by the fact that Mr. Amano is Japanese, who probably finds it hard to be dispassionate about teh recent Fukushima accident.
Sunday, July 24, 2011
Conditional morality
We now know more about the Oslo massacre - even though the murderer was a crazy man acting alone, there are many legitimate questions to ask about those who encourage the right-wing extremism and about the availability of guns. Both these factors contributed to the possibility of this tragedy.
Yet, there is one more factor that is not likely to be discussed much, even though it should be. Especially in the light of the revelations that the gunman himself described his actions as "gruesome but necessary".
Indeed, modern society accepts murder... if the murder is "justified". This is true as in popular culture, as well as in politics. All of us have seen many movies where a lone hero massacres scores of people out of revenge or simply because they are deemed "bad guys". While the hero's arch-enemy in these movies is usually a murderer himself (which still hardly justifies the extra-judicial justice), on the way to this arch-enemy the hero massacres dozens of nameless guards, soldiers, policemen, storm-troopers etc. (Storm troopers are particularly faceless, and therefore their murder is particularly easy.)
In our political life we accept murder, if the murdered people are terrorists, mercenaries, soldiers serving dictator etc., even though sometimes these people have no choice not to be on the side of our enemies (particularly soldiers). We also accept murder, if it is committed by rebels, freedom fighters or if it is done in the name of "resistance" (which are all just euphemisms for terrorism.) Many young people admire Che Guevara, even though he was nothing but a "professional revolutionary" - a person who committed murders for the sake of his political ideals.
But when we justify murder in the name of what seems "right" to us, we have to face the fact that someone will eventually commit the murder in the name of what seems "right" to him/her. And the Norwegian murderer's statement that his actions were "gruesome but necessary" means precisely that - he thinks that he is "right". Like many of our contemporaries he forgot that what makes the murder a crime is not the fact that it is illegal and punished by law, but the fact that it is morally wrong - always wrong!
Murder is always wrong! And when Norwegian government minister met with Hamas leader, despite Hamas's refusal to accept the international demand for renouncing violence, or when it supported a statehood bid by the Palestinian authority that is now allied with Hamas - the Norwegian government sent a wrong message: The murder is acceptable, if the murderer believes that his goal is noble.
Yet, there is one more factor that is not likely to be discussed much, even though it should be. Especially in the light of the revelations that the gunman himself described his actions as "gruesome but necessary".
Indeed, modern society accepts murder... if the murder is "justified". This is true as in popular culture, as well as in politics. All of us have seen many movies where a lone hero massacres scores of people out of revenge or simply because they are deemed "bad guys". While the hero's arch-enemy in these movies is usually a murderer himself (which still hardly justifies the extra-judicial justice), on the way to this arch-enemy the hero massacres dozens of nameless guards, soldiers, policemen, storm-troopers etc. (Storm troopers are particularly faceless, and therefore their murder is particularly easy.)
In our political life we accept murder, if the murdered people are terrorists, mercenaries, soldiers serving dictator etc., even though sometimes these people have no choice not to be on the side of our enemies (particularly soldiers). We also accept murder, if it is committed by rebels, freedom fighters or if it is done in the name of "resistance" (which are all just euphemisms for terrorism.) Many young people admire Che Guevara, even though he was nothing but a "professional revolutionary" - a person who committed murders for the sake of his political ideals.
But when we justify murder in the name of what seems "right" to us, we have to face the fact that someone will eventually commit the murder in the name of what seems "right" to him/her. And the Norwegian murderer's statement that his actions were "gruesome but necessary" means precisely that - he thinks that he is "right". Like many of our contemporaries he forgot that what makes the murder a crime is not the fact that it is illegal and punished by law, but the fact that it is morally wrong - always wrong!
Murder is always wrong! And when Norwegian government minister met with Hamas leader, despite Hamas's refusal to accept the international demand for renouncing violence, or when it supported a statehood bid by the Palestinian authority that is now allied with Hamas - the Norwegian government sent a wrong message: The murder is acceptable, if the murderer believes that his goal is noble.
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