"Michael Ignatieff may have spent years teaching at Harvard, but he's not stupid."
--Rex Murphy
Thursday, January 29, 2009
Wednesday, January 28, 2009
Ideological Reluctance plus Political Expediency Equals Missed Opportunity
The January 2009 federal budget is about the same size that I was asking for (i.e. big enough to stimulate the economy and be consistent with other G-8 and OECD countries). And, I suppose that as a middle-class Assistant Professor and prospective first time home-buyer I should be delighted that I get to stay in the same tax bracket when my income pokes above $81,000, and that I can look forward to a little extra help when buying or renovating a home.
Nevertheless, I feel distinctly dissatisfied and uneasy about this budget. The $12 billion on infrastructure spending is called for, as is the $13 billion to free up credit, but what about human capital? There is a $1.2 billion shortfall in post-secondary funding compared to 15 years ago, but there wasn't a dime in this budget for that. There is no clear, targetted vision vision for re-tooling the economy for the 21st century economy and ecology, only a bunch of scatter-gun spending aimed at certain vote-rich constituencies. Can you imagine the withering sarcasm that conservatives would heap on an NDP budget that contained a DREE-sounding "Southern Ontario Development Agency" (SODA) dispensing a billion dollars over 5 years?
The $500 million spent on digitizing health care services, $225 million spent on broadband access, the $50 million for Quantum Computing and $35 million to promote graduate study are great, but one gets the feeling that those are just a few political targets among many, and not the focus of a future oriented strategy. Representatives of the Medical Research Community at CIHR and Genome Canada have pointed out that this budget provides money for buildings but not for research--a telling oversight. Is there anything here to relieve the staggering $13 billion in accumulated student loan debt in Canada? Expanding EI eligibility? Enhancing Early Childhood Education/childcare?
If a major reason that Canada lacks a surplus at the onset of this recession is the $12 billion in GST cuts that Harper has given us, and tax cuts are not the most effective stimulus, should more middle-class tax cuts be the answer?
Drop the SODA in favour of specific, targetted green and human capital infrastructure. Help home renovation that improves energy efficiency and reduces greenhouse gases, but skip the extra money for home buyers, cruise ships, and slaughterhouse expansion and put $2 billion dollars into post-secondary education: at least $1 billion of that for student debt relief and bursaries. Do as much as our American neighbours are for basic science and for alternative and green energy. And restructure and expand EI: the EI surplus is probably big enough to fund expanded EI eligibility. (A recent economic study showed that EI had the highest multiplier, of 1.61 for every dollar spent. Infrastructure spending came a close second at 1.59 but had two additional disadvantages: it was far slower to implement, and has its most concentrated effect in sectors that are not the hardest hit).
The General Lesson: A crisis is a terrible thing to waste. Invest more in people, and in the future.
Nevertheless, I feel distinctly dissatisfied and uneasy about this budget. The $12 billion on infrastructure spending is called for, as is the $13 billion to free up credit, but what about human capital? There is a $1.2 billion shortfall in post-secondary funding compared to 15 years ago, but there wasn't a dime in this budget for that. There is no clear, targetted vision vision for re-tooling the economy for the 21st century economy and ecology, only a bunch of scatter-gun spending aimed at certain vote-rich constituencies. Can you imagine the withering sarcasm that conservatives would heap on an NDP budget that contained a DREE-sounding "Southern Ontario Development Agency" (SODA) dispensing a billion dollars over 5 years?
The $500 million spent on digitizing health care services, $225 million spent on broadband access, the $50 million for Quantum Computing and $35 million to promote graduate study are great, but one gets the feeling that those are just a few political targets among many, and not the focus of a future oriented strategy. Representatives of the Medical Research Community at CIHR and Genome Canada have pointed out that this budget provides money for buildings but not for research--a telling oversight. Is there anything here to relieve the staggering $13 billion in accumulated student loan debt in Canada? Expanding EI eligibility? Enhancing Early Childhood Education/childcare?
If a major reason that Canada lacks a surplus at the onset of this recession is the $12 billion in GST cuts that Harper has given us, and tax cuts are not the most effective stimulus, should more middle-class tax cuts be the answer?
Drop the SODA in favour of specific, targetted green and human capital infrastructure. Help home renovation that improves energy efficiency and reduces greenhouse gases, but skip the extra money for home buyers, cruise ships, and slaughterhouse expansion and put $2 billion dollars into post-secondary education: at least $1 billion of that for student debt relief and bursaries. Do as much as our American neighbours are for basic science and for alternative and green energy. And restructure and expand EI: the EI surplus is probably big enough to fund expanded EI eligibility. (A recent economic study showed that EI had the highest multiplier, of 1.61 for every dollar spent. Infrastructure spending came a close second at 1.59 but had two additional disadvantages: it was far slower to implement, and has its most concentrated effect in sectors that are not the hardest hit).
The General Lesson: A crisis is a terrible thing to waste. Invest more in people, and in the future.
Tuesday, January 06, 2009
Why I think that the President of the C.D. Howe Institute is wrong
C.D. Howe Institute president William Robson thinks that the experience of Japan since the early 1990s confirms his view that Keynesian ideas are of limited usefulness, even under current conditions. (See "We Are All Keynesians Now? No", Globe and Mail Dec. 30, 2008).
Funny, the most recent winner of the Nobel Prize in Economics, Paul Krugman, completely disagrees. Here is how Krugman interprets the same evidence: “Short-term interest rates were close to zero, long-term rates were at historical lows, yet private investment spending remained insufficient to bring the economy out of deflation. In that environment, monetary policy was just as ineffective as Keynes described. ...And when the Bank of Japan found itself impotent, the government of Japan turned to large public works projects to prop up demand. ...[D]epression-like conditions might well have returned without the guidance of Keynesian economics.”
I suppose that Mr. Robson, a practical man, is himself a slave to some defunct economist---Milton Friedman, perhaps?
Funny, the most recent winner of the Nobel Prize in Economics, Paul Krugman, completely disagrees. Here is how Krugman interprets the same evidence: “Short-term interest rates were close to zero, long-term rates were at historical lows, yet private investment spending remained insufficient to bring the economy out of deflation. In that environment, monetary policy was just as ineffective as Keynes described. ...And when the Bank of Japan found itself impotent, the government of Japan turned to large public works projects to prop up demand. ...[D]epression-like conditions might well have returned without the guidance of Keynesian economics.”
I suppose that Mr. Robson, a practical man, is himself a slave to some defunct economist---Milton Friedman, perhaps?
“First, let's euthanize all the rentiers”: putting some class back in the Keynesian prescription
(The following article appeared in The Edmonton Journal on January 19, 2009 on p. A15.)
One of the hallmarks of a Great Book is that it often illuminates our condition even when it is supposedly “wrong”. A case in point is the prediction made by John Maynard Keynes in The General Theory of Employment, Interest and Money that the low interest rates of the 1930s would persist indefinitely into the future, with positive implications for social justice: “If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the sensible way of gradually getting rid of many of the objectionable features of capitalism (p.221).” ... “This state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. ...I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (p. 376).”
Regrettably, although lower rates and correspondingly ineffective monetary policies today demonstrate the relevance of Keynesian analysis, they probably do not represent a long-term trend. What we are experiencing now is probably just another episode of temporary incapacity and failure on the part of private investors, financiers, and financial institutions. The rentier class—those who make their money on bond interest and other speculative financial investments—are still not about to wither away, at least not on their own.
Fortunately, Keynes’s failure in 1936 to anticipate the return of high interest rates or the future advent of persistent inflation was not fatal to his theory. The main point of his book was to show that even under laissez-faire conditions of complete price flexibility it was possible, and moreover likely, that an economy would tend toward less-than-full employment, owing to a lack of effective demand. It was the corpus of classical economics since Adam Smith that was flawed, since it had been unable to explain this fact. That central insight that remains both relevant and true in the very different world of the 21st century.
Today’s ideological heirs to the classical tradition have given an overwhelmingly neoliberal cast to globalization, through their preference for free markets (backed by technical arguments for “more competition” and for the superiority of monetary over fiscal policy); and through their elevation and celebration of the new rentiers. Culturally, the successes of global hedge funds made speculative raiding by highly leveraged institutions of finance capital appear acceptable, even glamorous. Not to be outdone, leading Wall Street investment banks were allowed by a sympathetic U.S. government to get into the act, through such financial innovations as the “collateralized debt obligation” —which made the securitization of subprime mortgages possible—and “auction rate securities”—which could pay higher interest than regular bank deposits, because they were not subject to pesky capital requirements or deposit insurance. A shadow banking system worth $4 trillion was created, rivalling the conventional banking system in size and importance, but with the same kind of financial vulnerability that made the Great Depression possible.
Call it old-fashioned, but since this economic crisis is at bottom a financial one, perhaps our course of action today should be guided not only by Keynesian arguments about fiscal and monetary policy (i.e. stimulative deficits, internationally coordinated, combining needed public works with more purchasing power in the hands of those with the highest marginal propensity to consume), but by a more Keynesian attitude toward financiers. A policy that any financial institution that functions like a bank and needs to be rescued like a bank deserves to be regulated like a bank. An effort to reconceive international financial institutions such as the IMF so that they are once again focused on development and economic fundamentals instead of playing confidence games with currency speculators, an approach that has repeatedly exacerbated economic crises rather than averting them. Perhaps a Tobin tax to blunt speculation, better regulate international financial flows and level the investment playing field. And, even if it turns out that the new rentiers, with their imaginative arsenals of currency, credit and stock manipulations, will continue to play more important roles in guiding capitalism than Keynes had either expected or hoped, a clear signal that from now on they will be restrained and disciplined at least as much as the governments they have recently held in thrall.
One of the hallmarks of a Great Book is that it often illuminates our condition even when it is supposedly “wrong”. A case in point is the prediction made by John Maynard Keynes in The General Theory of Employment, Interest and Money that the low interest rates of the 1930s would persist indefinitely into the future, with positive implications for social justice: “If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the sensible way of gradually getting rid of many of the objectionable features of capitalism (p.221).” ... “This state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. ...I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (p. 376).”
Regrettably, although lower rates and correspondingly ineffective monetary policies today demonstrate the relevance of Keynesian analysis, they probably do not represent a long-term trend. What we are experiencing now is probably just another episode of temporary incapacity and failure on the part of private investors, financiers, and financial institutions. The rentier class—those who make their money on bond interest and other speculative financial investments—are still not about to wither away, at least not on their own.
Fortunately, Keynes’s failure in 1936 to anticipate the return of high interest rates or the future advent of persistent inflation was not fatal to his theory. The main point of his book was to show that even under laissez-faire conditions of complete price flexibility it was possible, and moreover likely, that an economy would tend toward less-than-full employment, owing to a lack of effective demand. It was the corpus of classical economics since Adam Smith that was flawed, since it had been unable to explain this fact. That central insight that remains both relevant and true in the very different world of the 21st century.
Today’s ideological heirs to the classical tradition have given an overwhelmingly neoliberal cast to globalization, through their preference for free markets (backed by technical arguments for “more competition” and for the superiority of monetary over fiscal policy); and through their elevation and celebration of the new rentiers. Culturally, the successes of global hedge funds made speculative raiding by highly leveraged institutions of finance capital appear acceptable, even glamorous. Not to be outdone, leading Wall Street investment banks were allowed by a sympathetic U.S. government to get into the act, through such financial innovations as the “collateralized debt obligation” —which made the securitization of subprime mortgages possible—and “auction rate securities”—which could pay higher interest than regular bank deposits, because they were not subject to pesky capital requirements or deposit insurance. A shadow banking system worth $4 trillion was created, rivalling the conventional banking system in size and importance, but with the same kind of financial vulnerability that made the Great Depression possible.
Call it old-fashioned, but since this economic crisis is at bottom a financial one, perhaps our course of action today should be guided not only by Keynesian arguments about fiscal and monetary policy (i.e. stimulative deficits, internationally coordinated, combining needed public works with more purchasing power in the hands of those with the highest marginal propensity to consume), but by a more Keynesian attitude toward financiers. A policy that any financial institution that functions like a bank and needs to be rescued like a bank deserves to be regulated like a bank. An effort to reconceive international financial institutions such as the IMF so that they are once again focused on development and economic fundamentals instead of playing confidence games with currency speculators, an approach that has repeatedly exacerbated economic crises rather than averting them. Perhaps a Tobin tax to blunt speculation, better regulate international financial flows and level the investment playing field. And, even if it turns out that the new rentiers, with their imaginative arsenals of currency, credit and stock manipulations, will continue to play more important roles in guiding capitalism than Keynes had either expected or hoped, a clear signal that from now on they will be restrained and disciplined at least as much as the governments they have recently held in thrall.
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