Sunday, December 23, 2012

The Romance of Maps

[The range between the blue and pink areas of West Africa are the 'Mountains of Kong', which appeared on maps for 60 years until discovered not to exist in 1889.]



The "romance of maps" is hokum. Twenty years ago I was on a bicycle trip in Patagonia and riding along the South Atlantic coast of Tierra del Fuego. There was a whale skeleton on an empty beach. I let go of my usual skepticism and allowed myself some self-congratulation on having reached a genuinely remote and exotic place. Until I came to a tiny town somewhat away from the main road.



There were teenagers hanging around, clearly bored out of their minds, and counting the days until they could graduate from high school and get out of this boring dump of a town and leave for the Big Apple, Buenos Aires. Which showed that no matter how exotic a place may seem to travelers, to people who live there, it is always same-old, same-old.



The concepts of "romantic", "remote", and "exotic" are all failures of perspective and imagination.




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Thursday, December 20, 2012

How the UN Works

What if there is no fiscal cliff?


[John Maynard Keynes (1883-1946), founder of the conventional wisdom]

We have been led to believe that the sequester, the tax increases and spending cuts known collectively as the  fiscal cliff, will devour not only the US economy but also the world economy.  We cheer when Washington figures show themselves willing to negotiate to avoid it, as though they were warring Middle Easterners, almost without regard to the substance of the compromises reached.

The theory is that the sequester's tax cuts and spending increases will jointly cut demand so sharply that it will lead to falling sales and production and that will lead to supply chain layoffs, to workers losing jobs.   Marginal and even otherwise healthy businesses will go out of business, profits will fall and the stock market will tank.  The business climate will darken and the economic contraction will feed on itself.  There will be a serious recession or worse.  Falling on the heels of the Great Recession of 2008-2010, the two together will become a double-dip recession.

The Democrats will complain of the suffering of ordinary people in their tens of millions losing their livelihoods, of millions forced into destitution, tens of millions forced into desperation, hundreds of millions into uneasiness.  

The Republicans will complain of the suffering of hundreds of thousands of millionaires postponing purchases of yachts, limousines, summer villas, huge corporate bonuses, and all the other trappings of life to which respectable people of their class are entitled.  The way they will phrase it will characterize plutocrats as job-creators, never mind that their policies have un-created tens of millions of jobs during the past five years.

But is it true?   For the fiscal cliff to have all these terrible consequences requires that Keynesian economics work as it is expected to.  But it has not been working and has not worked in quite a long time.  If Keynesian economics worked, the one-and-a-half trillion dollars in stimulus money the administration pumped into the economy in various forms would have ended the recession years ago.  One could argue that the 1.5 trillion did indeed end the recession - now at the end of 2012 the stock market is up, unemployment is still high but at last decreasing.

The government's reflationary policy started in the latter part of the second Bush administration in mid-2008, almost five years ago.  Yet the Great Recession has lasted longer and has been more severe in both unemployment and reduction of gross domestic product than any since World War II and arguably is not yet over.  From which we conclude at least that Keynesian reflationary policy, i.e. large government deficits and other spending, either doesn't work or is counter-productive.  To the argument that the Obama administration's spend-and-lend policies have worked to end the recession, the obvious reply is that it has been five years now and that the recovery from the recession would likely have happened by now anyway, in the normal course of the business cycle.  Earlier recessions have ended sooner and without this much government intervention.

The textbook example of Keynesian economics not working is Japan.  In the 1990's Japan fell into a deflationary spiral from which it has not yet recovered.  The American government and others publicly demanded that Japan borrow and spend more to deal with the problem.  Japan did, and now in addition to chronic deflation (which has pushed the yen to all time highs against the dollar), they now also have a colossal debt, by far the highest in proportion to GDP of any developed economy - almost twice as high as Greece.

Japanese voters, discouraged by the persistent failure of government policies, have changed parties on an enormous scale and put the Liberal-Democrats back in power with a near-two-thirds majority in the parliament.  The LD's in spite of their name are neither liberal nor particularly democratic, for forty years they represented business, business-as-usual, and the US alliance, and presided over the post-war economic recovery.  

The new prime minister, Shenzo Abe, is a new kind of LD, nationalistic, anti-Chinese, and not particularly impressed by the United States as an ally.  He is talking about revising the pacifist post-war constitution and re-militarizing Japan.  He is also a hawk on the economy and proposes borrowing and spending even more aggressively than recent governments.  

Insanity they say is repeating the same things that didn't work before.  A fully militarized Japan was unable to completely defeat the backward, impoverished, anarchic China of the 1930's and '40's.  That they would want to confront the resurgent, nuclear-armed China of the 21st Century seems a fool's errand.  Similarly, even more aggressive borrowing-and-spending when it hasn't worked so far is also not clearly a great policy.  The problem for Japan is that there is as yet no better theory than Keynesianism, even though it seems not to work any more. 

Britain in the 1970's and 1980's experienced an economic condition known as "stagflation", a combination of stagnation and inflation.  In the Keynesian model that should not have been possible - moderate inflation should have encouraged investors and businesses to invest in new plant and equipment to protect the value of their dwindled-by-inflation cash assets, and that should have led to economic growth.  But it didn't.  It was not until the structural reforms of the Thatcher era that the British economy began to thrive.  That the Thatcher reforms were imposed brutally, even cruelly, is beyond question.  But they did eventually work.  

The point is that more radical and structural changes are needed to repair a dysfunctional economy.  Mere Keynsian or monetarist tinkering have not worked in Japan, nor in Britain nor now in the US , and in all likelihood will not work in the future.  

The reason to spend money on the poor is to relieve their hardships, which are especially severe in hard times.  The government should spend money on the poor because it is the right thing to do.  But giving the poor money in hope that their increased spending power will reflate the economy has not worked and apparently will not work.

The reason to save the automobile industry was that it was the right thing to do, not because it saved the economy.  It probably didn't.  Lending vast sums to banks at effectively zero interest probably achieved less than nothing because the banks refused to lend it to the public.

Which brings us back to the sequester.  Keynesian theory says that simultaneous tax increases and spending cuts should be sharply deflationary.  Which is why it is called the fiscal cliff that Keynesianism tells us we will fall off if the sequester goes into effect.  

What if it isn't true?  What if there is no fiscal cliff?  If the parties in Washington are unable to agree, the tax increases and spending cuts will substantially reduce the government's 2013 deficit.  If I were an investor or was making expansion and hiring decisions for a corporation, the optimum environment in which to invest would be one of stability, of a long series of balanced or nearly balanced budgets.  If I were planning for the future - the likely future return on my investment on new plant, equipment, and hiring - I would want clarity and predictability.  

Government spending and interest rates would interest me only for short term investments.  For long term investments that would become the infrastructure of the future economy, I would want stability and predictability more than anything else.  The same would be at least as true if I were a foreign investor.  A stable low-deficit policy would likely attract a flood of foreign capital which would force interest rates still lower.  

Investors want sustainable economic policies.  Without a foreseeable future, an investment is always a pig in a poke.  When investing millions or billions that is not what one wants.  The fact is that none but the smallest deficits are endlessly sustainable and even those only so long as there is at least commensurate growth.  An unsustainable policy is one that must inevitably change or become ruinous.  Whether the future is ruin or unforeseeable, it is not a hospitable climate for investing or hiring.

If I were making decisions about expansion and hiring, I would want to see government deficits reduced and government economic policy predictable.  The sequester will do that more than any policy either party is proposing.   Judging by history, if no agreement is reached and the sequester goes into effect, not only will the sky not fall nor the economy fall off a cliff,  it might be the best thing that could happen to us.





Monday, December 17, 2012

Thursday, December 06, 2012

High Flight


Oh! I have slipped the surly bonds of earth,
And danced the skies on laughter-silvered wings;
Sunward I've climbed, and joined the tumbling mirth
Of sun-split clouds, --and done a hundred things
You have not dreamed of --Wheeled and soared and swung
High in the sunlit silence. Hov'ring there
I've chased the shouting wind along, and flung
My eager craft through footless halls of air...
Up, up the long, delirious, burning blue
I've topped the wind-swept heights with easy grace
Where never lark or even eagle flew --
And, while with silent lifting mind I've trod
The high untrespassed sanctity of space,
Put out my hand, and touched the face of God.

                                                                                John Magee (1922-1941)



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Saturday, December 01, 2012