Seeking reliable, objective sources on economics and energy-policy issues
Pres. Obama should read Tim Harford via Tyler Cowen:
From Tim Harford, about the UK:
…as Mr Summers pointed out, even China seems to have been shedding manufacturing jobs over the last couple of decades. Perhaps the data deceive here, but the Chinese manufacturing boom seems to be more about increasing output per worker than employing more workers. If the Chinese can’t generate jobs through manufacturing I am not sure we should be expecting too much from that strategy.
(…) “Anyone who has cash at the moment can buy a lot of things for very little money in Hungary.” Signs that read “eladó” (For Sale) hang on houses, ruined buildings and cars all over the country. But there are no buyers.
This is a followup to my last post on Hungary based on the essays by Jakab Andor. Today Spiegel Online posted an informative analysis by Clemens Höges, who describes the process by which Hungarians lost their democracy. Lesson don’t elect a 2/3 majority who can rewrite the constitution to keep power. Excerpts:
Not Abiding by Deficit Rules
Hungary is running out of money — and the economy is faltering badly. Rating agencies have downgraded the country’s sovereign bonds to junk status, and creditors are now charging the government about 10 percent in interest on new loans. Last week, the European Commission even threatened to withhold funds in 2013, arguing that Budapest is not abiding by the deficit rules.
But the country’s real problem is Viktor Orbán. The German newspaper Die Welt has called the right-wing nationalist prime minister of European Union member state Hungary, whose Fidesz Party holds a two-thirds majority in parliament, a “Puszta Putin,” a reference to the plains of Hungary. A new constitution, which guarantees him a frightening amount of power, has been in effect since Jan. 1. Orbán has removed the word “Republic” from the country’s official name, which is now simply “Hungary.” His supporters are staunchly behind his “national revolution.”
A new media law intimidates critical journalists, and some have already been fired. Orbán has also enacted new laws that have forced the courts to bend to his will. He has reduced the powers of the country’s Constitutional Court, and judges are now appointed by an agency headed by the wife of a fellow party member. Orbán now wants to force older judges — in other words, those who were not appointed by his party — into early retirement.
The calamity began in May 2006. Gyurcsány, still a Socialist at the time, had just won the parliamentary elections in another coalition with the liberals. His government ran the country for four years “using the social democratic method,” he says, “raising taxes and spending money.” For example, civil servants received a 50-percent pay raise, and Hungarians were led to believe that this was how things would continue. It was also what Gyurcsány had promised during his election campaign. But he knew that, in fact, this was not a sustainable situation.
To address his concerns, he invited members of his parliamentary group and a few experts to a government retreat on Lake Balaton. He told them how things stood with the country’s finances. “But they didn’t understand me. They kept insisting and after three hours, I couldn’t take it anymore.” Then, he erupted. With the doors closed and no journalists in the room, Gyurcsány said that he and the party had lied to the people. “We lied in the morning, in the evening and at night.”
In the ensuing weeks, he forgot exactly what he had said at the retreat, but someone had brought along a recording device, and it all came out in September. It was a massive scandal, bringing protesters into the streets and giving Orbán numerous opportunities to humiliate the prime minister. But Gyurcsány had been elected, and he followed through with his austerity program. Then came the economic crisis, and Gyurcsány had to save even more money.
(…) If Gyurcsány had called for new elections earlier, at least Orbán would not have achieved the two-thirds majority that has allowed him to rewrite the constitution as if it were a piece of scrap paper, says András Vértes. “As a result, we now have more of a political than an economic problem.” Vértes, who is not aligned with any party, was considered as a transitional premier after Gyurcsány’s resignation. But he told the members of parliament that if he were appointed to the position, he would only bring experts into his government, not politicians. He also insisted that every member of his parliamentary group sign a pledge stating that they would not vote against these experts for an entire year.
It killed his prospects. Vértes laughs, as he sits between palm trees in the offices of GKI, the economic research institute he heads. The country’s largest, it works primarily for the European Union, with Vértes and his team keeping Brussels informed about what is happening in Hungary.
‘We’re at an Impasse’
Orbán is unpredictable, his policies are arbitrary, and he is playing around with the economy, of which he has little understanding, says Vértes. For example, Orbán imposed a special tax on banks that “practically eliminates their profitability.” The tax appeals to many Orbán supporters, because they already see bankers as gangsters. The premier is forcing a crisis tax on major companies mostly in the telecommunications and energy sector — also a popular idea, because it mainly affects foreign companies. Orbán has introduced a 16 percent flat income tax which, says Vértes, benefits high income earners and is disadvantageous to ordinary citizens.
The consequences, says economist Vértes, are that the banks no longer lend money, the telecommunications companies are hardly investing anymore, and consumer spending is taking a hit. “Now we’re at an impasse.”
Free Exchange on the Obama SOU:
STATE of the Union addresses tend to be long, winding affairs, filled with a grab bag of policy ideas that will alternatively appeal to and irk people across the political spectrum.
(…) Perhaps more distressing, he implied in several places that the reason to become more like China was that only by doing so could America defeat China, and others, at economics. Consider the line:
Our workers are the most productive on Earth, and if the playing field is level, I promise you – America will always win.
Leaving others, one is forced to conclude, to lose—not once, not occasionally, but always. And what is likely to be the outcome of unending defeat? Destitution? Are we to hope that other countries are left with no gainful employment opportunities at all? If that means dreadful poverty, then Mr Obama ought to be dragged before an international tribunal. But maybe it’s not so bad, in which case we have to wonder why it’s so damned important to “win” whatever contest it is we’re having. Is the implication that it’s possible to get by all right, to not be poor, without having lots of demanding manufacturing jobs? That doesn’t sound so bad, actually; are we sure America doesn’t want to sign up for that? Of course, if this is the nature of economic activity, and if America is determined to defeat other countries, it’s worth asking whether it wouldn’t make sense to deliberately sabotage other places, or bomb them; after all, it’s hard to lose to a country whose people are dead. On the other hand, if victory is so important, we might expect other countries to retaliate, or preemptively attack. Maybe it would be better if the world divided itself into two competing but fairly isolated factions locked in a sort of “cold war”.
A thoughtful Interloper piece on the current Bain Capital media bonfire. An excerpt:
(…) The Other End of the Pendulum
It is possible to view the socioeconomic conditions of 2005 as the converse of 1975. Thirty years ago, corporate management was largely powerless in the face of labor power, taxes were extreme and government intervention was the “vampire squid” of the age. Profits sucked and unless investors were fully exposed to the major geopolitical clusterfuck of Iran-related East tensions, returns were scarce to non-existent. Beginning with Reagan, the pendulum began to swing back, slowly crushing labor and, for our purposes, culminating with the repeal of Glass-Steagall.
To be employed in finance in the 75-05 period was to believe fully in the primacy of bottom line, profit-related orthodoxy. If nothing else, it sustained the efforts to clear the political and regulatory anti-business, socialist clutter of 1970s. As an organizing principle, faith in the bottom line provided the advantages of clarity and measurability in addition to the obvious outsized creation of wealth. Bain Capital, among many others, is the walking, talking, strutting embodiment of this thirty-year transition – the realization of a Platonic form dreamed up by William F. Buckley and other 1970s-era pro-business conservatives.
The Financial Crisis was a clear representation of the other end of the socioeconomic pendulum, and the excesses, arrogance, avarice and overall public destructiveness of finance was clearly analogous to that of organized labor and misguided government in the 70s. To blindly defend Bain now is to associate ourselves with the spluttering, enraged defenders of organized labor in the early 80s. In both cases, an intellectually-consistent orthodoxy not acclimated to criticism had ceased to function for wide segments of the population, in the current case the un- or under-employed.
John Cochrane deflates some of the media nonsense. Short excerpt:
(…) Yes, from an economic perspective, interest, dividends and capital gains are not “income.” Romney should pay taxes, and at least at the same rate as everyone else. He should pay taxes on hisconsumption, not the returns on his investments.
A central proposition in the economics of optimal taxation is that the tax rate on capital should be zero or close to it. Like anything else in economics, there is a huge literature of ifs ands and buts, yet the result seems fairly robust. (Google “optimal taxation of capital.” This is not a political statement, there are thousands of pages of equations behind it. There is a separate “optimal taxation” literature on “optimal redistribution,” with some equally surprising results that I’ll write about some other day.)
Intuitively, this is related to the theorem that you shouldn’t tax intermediate goods, or have tariffs for moving goods around the country. Romney’s income was taxed once, when he made it. It’s not efficient to tax it again, because he chose to save it rather than spend it immediately on an orgy of houses, private jets, and a big vacation for his extended family.
If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say “you made 20 cents of income, we’ll tax it.” It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don’t save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.
Megan McArdle posted a lengthy analysis:
So the story-of-the-week seems to be Mitt Romney’s off-shore investments. I am deeply confused by the reporting. Either that, or the reporters are.
It isn’t Megan that is confused. Read the whole thing »
Yikes! from the Atlantic Wire!
(…) The French government is currently in negotiation with unions to keep hospitals open and in the midst of economic downturn French society is debating the merits of the 35-hour work week, now in its 12th year. But that isn’t stopping President Nicolas Sarkozy, who campaigned on too much vacation time in 2007, from attacking it. “I tell you this because it is a pure fact: lowering the retirement age to 60 and the 35-hour work week were serious mistakes that we are still paying heavily for.”
In her moderation role at the Cato conference Ending the Global War on Drugs Mary Anastasia O’Grady captured in one sentence the central issue. I will paraphrase Mary:
“What policy will do the least harm?”
The Global Commission on Drug Policy summarized their mission similarly:
The purpose of The Global Commission on Drug Policy is to bring to the international level an informed, science-based discussion about humane and effective ways to reduce the harm caused by drugs to people and societies.
he Global Commission on Drug Policy will build on the successful experience of the Latin American Commission on Drugs and Democracy convened by former presidents Cardoso of Brazil, Gaviria of Colombia and Zedillo of Mexico. Persuaded that the association between drug trade, violence and corruption was a threat to democracy in Latin America, the Commission reviewed the current ‘war on drugs’ policies and opened a public debate about an issue that tends to be surrounded by fear and misinformation.
The Commission’s June 2011 report [PDF] is a must read, as are the Commission’s background papers.
Scott Adams is a brain food chef, and most of his concoctions are good eating. At the moment Scott is writing pieces about his campaign for US president. His campaign goal is to spread a few ideas.
(…)
In this context, I see myself as a collector, combiner, and broadcaster of ideas, both good and bad. I spray ideas into the universe and let the ideas fight for their own survival. With the help of their human hosts, the best ideas will evolve and reproduce, and the worst ideas will go to their resting places on the Internet.
You’d be surprised who reads this blog, either directly or indirectly. In the new biography of Steve Jobs, there’s a story about Jobs forwarding one of my posts about his brilliant handling of the iPhone antennae issue. I assume Jobs wasn’t normally a reader of this blog, but the ideas in my post that day hopped from host to host until they found him. Each of my posts finds a different path from host to host, depending on the topic and the quality of the writing.
I’m explaining all of this because of a comment that user Unlost made about my post yesterday. After reading my ideas for how I would run my presidency, Unlost said, “Priceless, yet this will all go unheeded.” I understand the pessimism, but I see it differently. The ideas I unleashed yesterday are already waging a guerrilla war with the status quo. The ideas are hopping from host to host, and if any are worthy, they will evolve and survive. Change doesn’t happen quickly, but I guarantee that any good ideas generated by this blog – if there are any – will find their way. The weak ideas will fade to backup storage, as they should.
I see life as a process, not a goal. If my goal had been to create world-changing ideas that worked right away, I would be a complete failure. But I don’t have that goal. Instead, I have a process that involves seeding the universe with ideas and waiting for the strongest to evolve and make a difference. The worst case scenario is that my ideas cause the eventual best ideas to compete harder and evolve to even better forms. When you use a process that makes sense, even the unanticipated outcomes are good.
Don’t miss this AEI piece on public employee unions, which is why everyone should help Scott Walker defeat the union recall campaign. Here’s a key excerpt:
Electing your own boss
As political scientist Daniel DiSalvo notes in a recent issue of National Affairs, “public-sector unions have significant advantages over traditional unions. For one thing, using the political process, they can exert far greater influence over their members’ employers — that is, government — than private-sector unions can. Through their extensive political activity, these government-workers’ unions help elect the very politicians who will act as ‘management’ in their contract negotiations — in effect handpicking those who will sit across the bargaining table from them … Such power led Victor Gotbaum, the leader of District Council 37 of the AFSCME in New York City, to brag in 1975: ‘We have the ability, in a sense, to elect our own boss.’ ” Collective bargaining reform is also needed to enable genuine education reform. The collective bargaining privilege gives teacher unions political power that is used to block reform efforts and shield K-12 education from entrepreneurial disruptions that threaten established ways of doing things.
A friend read our earlier post on the California budget crisis, responding with these comments:
I got all worried just reading your synopses.
Understood — California has nearly run out of rope. However, as I understand the situation, the train wreck happens first at the local level, like Vallejo, San Jose. I wonder how Los Altos, Palo Alto are doing? If your local community budget is in balance (to keep fire, police, libraries, schools going) how much are you personally impacted when California defaults? I really don’t know. The default of San Jose might turn out to have more local impact.
So, what can an individual do about it?
Try to educate all the people in your influence circle. This might not be true in your neighborhood, but it is obvious that the majority of California voters prefer ‘magical thinking’ to critical thinking.
Personally I do not believe any of the US state/local governments can be gracefully reformed. Especially California because the voters have supported a political redesign that is seriously dysfunctional. E.g., voting for an initiative with big costs BUT for which there is no attached funding legislation.
If I’m correct then serious reform is only likely to grow out of the ashes. When TV coverage every night is focused upon where all the money went (into union pockets) people will eventually figure out a better way forward.
Should we cash in and simply run away to sea?
Very interesting question! I wonder – would Warren Buffett say “get liquid because there are going to be best-of-lifetime deals to buy”? Fortunes were made by investing on the backside of a crash.
If you’ve not yet seen Bill Gates TED Talk on the state budget crisis, it is a terrific talk, highly recommended.
FWIW, there is one California candidate that we would support, Silicon Valley entrepreneur Steve Poizner (Steve lost the Rep primary race to Meg Whitman). Listen to his two talks at the California Commonwealth Club (first podcast, Oct 2010 Event, second podcast)
And there is this Poizner/Whitman May 2010 Republican primary debate on CSPAN (have not watched this video)
For more analysis on California, this book has been recommended (we haven’t read it yet): California Crackup: How Reform Broke the Golden State and How We Can Fix It.
Whatever happens, I’ll speculate that California taxes will have to go up, maybe via a EU-size 20% VAT (less dead weight than higher income taxes)?
