Author Archives: Alex Harrowell

About Alex Harrowell

Alex Harrowell is a research analyst for a really large consulting firm on AI and semiconductors. His age is immaterial, especially as he can't be bothered to update this bio regularly. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

AF447 Economics

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For Ed everything is always about demographics. For Kevin Drum and others everything is always about energy. Other people have decided that productivity is so high that unemployment is inevitable, or that all consumption is now welfare reducing. Still others that the Chinese are our rightful masters – submit! although poor old Europe runs a trade surplus. And of course these aren’t the only discoveries.

Other people still will tell you that millions of Americans who were gainfully employed up to 2008-2009 are suddenly of literally zero productivity – well, they surely are as long as they’re on the dole, but that’s not what they mean – or just that everyone went mysteriously lazy in a sort of spontaneous mass conversion event. Or that the United States has a serious deficiency of fast trains, which only became apparent all at once in 2008. It has been an era of enormous creativity in the analytical function of economics, which has been more than matched by the united consensus among practitioners in its policy-advising function.

Behold the power of Leszek Kolakowski’s Principle of the Infinite Cornucopia. This holds that there is an infinite cornucopia of arguments in favour of whatever course of action or inaction you happen to have decided on for whatever reason. All these fancy intellectual theories, and none of them consider the possibility that there’s a recession on. If that was accepted, of course, it would suggest that things really are this bad, Alan Greenspan really was this incompetent, maldistribution works like it did in the 20s, this is as bad as it looks, and simply taking your hands off the stick and leaving it to George was relatively the best policy, just because it wasn’t actively harmful.

Actually, the aviation analogy worries me; I keep thinking of the pilots of Air France 447, who flew an entirely airworthy aeroplane from 35,000 feet into the sea in a fully developed stall without seriously trying to recover because (as far as anyone knows) the immediate effects were counterintuitive.

I’m sympathetic to the energy explanation, but I do think the idea that there’s a recession on might still be worth a crack, and we might try pushing down the nose and increasing the air speed.

It’s the geography, stupid

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Central and Eastern European economies aren’t doing well. German IFO business confidence tanks, on expectations of poor export orders. These two facts are related.

It’s been said before that the central core of economics failed to predict the great recession (or damn, can’t we call it a depression already? It’s been four years and it’s depressing enough) and that only a few key groups of people noticed anything unusual. Followers of Hyman Minsky and Charles Kindleberger saw the classic pattern of confidence, mania, panic, and crash unfolding. People who understood the economy as a system of accounts saw a number of huge imbalances in the flow of funds. Marxists considered that the source of the imbalances was the super-exploitation of Chinese workers and the maldistribution of the proceeds of growth in the West.

But I’m not sure if economic geography has been given enough credit. One economic geographer who predicted the crisis is of course Paul Krugman. From a geographical perspective, the CEE economies are part of a huge automotive engineering cluster rather like the US rustbelt or the West Midlands in the UK, reaching over from the Cologne area to Slovakia. (Actually, they always have been since the Industrial Revolution – here’s a beautiful 1938 Tatra and a much less beautiful 1914 Skoda 305mm mortar and caterpillar tractor.) From an industrial economics perspective, they are part of the German motor industry’s global supply chain, whether as upstream suppliers of parts and sub-assemblies or as downstream final assembly contractors. You can argue whether geography or functional specialisation determines this, but that’s not really relevant right now.

To put it another way, they aren’t exporters to “the German locomotive” but rather to the German economy’s customers, at one remove. The determining factor of their order books is how well the final products sell, and in the German economy’s historical default state as an industrial exporter, that depends on somebody somewhere buying more German goods than they sell goods to Germany.

A deflationary adjustment of the eurozone trade balances will be deflationary all the way along the supply chains. This is broadly what I was worrying about in May, 2010. The problem is not quite the same as it was for Keynes in the original Economic Consequences, a book which contains a lot of economic geography – back then, if the Germans were ever going to pay off their debts, Keynes pointed out, the rest of Europe had to let them export enough stuff. Now the boot is on the other foot. If the Greeks are ever going to get out of their debt crisis, the Germans have to let them export enough stuff. And if the Czechs and Hungarians and Baltics are not going to slide back into the mud, the Germans have to import enough stuff from them. Nobody imagines that the Greeks will be importing as many BMWs as they used to, so what can the answer be?

This economic government is neither economic nor government

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I don’t know why the FT Brussels blog thinks it’s surprising that the Portuguese economy is showing signs of life, or at least non-catastrophe, while the “German growth engine” is slowing down. This shouldn’t be complicated – a current account surplus increases GDP, a deficit reduces it, and globally, current accounts must sum to zero. If the Portuguese – or southern Europe in general – reduce their trade deficit, as the large majority of their trade is within the Eurozone, Germany has to reduce its surplus or else redirect it to extra-European trade. Because the EU is the wealthiest trading bloc on earth, such redirection implies that Euro-exporters need to cut prices. Whether they lose some aggregate demand by cutting volume or by cutting prices is a secondary question.

What is true, however, is that if the trade-deficit states in the Eurozone try to solve their problems by reducing their current accounts, their living standards will fall and so will the trade-surplus states’ GDP. This appears to be precisely what is happening.

So what about that “economic government”, eh? Even the title doesn’t fill me with confidence. It amounts to a cliché of European politics, an old tune favoured by the French foreign ministry (because it rivals the Bretton Woods institutions) and the EU Commission’s ECFIN and internal market directorates (because it offers them more power). This is, at least, the first time I’ve seen any detail about what it is and what it’s meant to do. And all it seems to have to offer is yet more deflation.

Let’s go through this one. The original Stability Pact demanded restrictions on government budgets. The Eurozone states did try hard to implement this and therefore got less of the late 90s boom than other countries did. In the early 2000s recession, France and Germany ran substantial budget deficits and eventually breached the pact. Some other countries, like Ireland, were enjoying a massive property boom and ran budget surpluses. The IMF, ECB, DG ECFIN, etc, couldn’t have been happier.

So, how’s that working out for you? It’s almost as if those eurosclerotic ol’ social democratic finance ministers from the early Bush age had had a point all along!

And the answer is apparently another Stability Pact, just bigger, badder, and more, with balanced budget clauses and a ban on wage settlements being indexed to inflation. To put it another way, you personally are being asked to trust the ECB to put you out of work if prices look like going up. That’s the only way to deal with inflation!

Things the economic government does not cover include – anything about intra-eurozone trade, anything about macro-prudential bank regulation, anything about unemployment, anything about growth. You might think these are some pretty big issues. But the Merkel-Sarkozy paper doesn’t even mention any of the problems that actually happened. There was a massive housing bubble (nothing) fuelled by spectacularly dodgy banking (nothing) recycling a massive trade surplus (nothing) that led to a huge recession (nothing).

Finally, it’s not actually true that southern Europeans don’t work as hard as Germans. Greeks actually put in more hours. It seems fair to say that the differences are not due to Germany’s vast resource wealth. If it’s not land or labour, it must be either capital – the Germans have more and better tools to work with – or entrepreneurship – German companies are better organised. (Look, this isn’t a controversial statement, is it?) It’s rare that you have to bring your own computer, tractor, machine-tool, or whatever to work. It’s rarer that anyone asks you how you think your workplace should be organised.

But for some reason, the only answer anyone is prepared to offer to the failure of half Europe’s management class is that everyone else should take a pay cut.

Shut up about “welfare”

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I have a lot of time for Eric Alterman, but this piece on THE TWILIGHT OF SOCIAL DEMOCRACY misses the point. Alterman’s been to some sort of intellectual shindig in Paris to discuss the nature and causes of said twilight. Perhaps it wasn’t quite the grinding arse-paralyser that sounds. There’s a reason someone called a band Future of the Left – it loves having meetings about its future. But this one included Thomas Piketty of Piketty-Saiz fame and Ronald Dworkin and various other impressive crania.

Unfortunately, I can’t get past this.

People, it turns out, do not generally appreciate the opportunity to be forced to subsidize, through tax and transfer policies, the lifestyles of those they deem to be different from themselves. The French historian Pierre Rosanvallon noted that “it is here that the anti-immigration argument gets its force. On the left the view is one of nostalgia. An extremely weak response to a strong attack and it’s hard to see how it can survive the argument ‘the immigrants are stealing the welfare state.’”

Two things. For a start, perhaps this has something to do with the fact that the transfers seem to get less every time the matter is discussed. It is not in fact true that US or Western European workers have repeatedly turned down a big increase in the social wage because of the Muslims. Rather, it hasn’t been offered.

Secondly, surely the key to the problem is accepting the whole dogma of “welfare”. It may indeed be hard to persuade, yadda, yadda. But then it’s always hard to persuade someone of anything if there is nothing in it for them. New Labour ran its blood to water trying to come up with ever more cynical arguments to get people to be grateful for marginal improvements to the NHS, while never really noticing that UK workers experienced zero real wage growth from 2003-2010 at best.

Social democracy is more than just schools’n’hospitals politics. To be fair, Alterman nearly gets to this at the end of his piece but it doesn’t really add up to the sort of frontal, neo-brutalist self assertion that the advocates of wage-led growth set as a minimum standard.

Simple and repellent: update

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Does anyone else think the simple and repellent plan is getting a little traction? Certainly, more and more mentions of the idea of buying back tons of distressed Greek debt and therefore both reducing the total and converting it into a liability between Eurozone official institutions seem to be out there.

They better be: here’s a study into the effects of the crisis on European suicide rates.

Ladies and gentlemen, we are floating in the Mediterranean

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Now we know that between them, the British and French air forces have flown 2,500 sorties over Libya, compared to 2,000 for the US, can we perhaps have a little less of this stuff? As the Dougs say:

I haven’t seen a single one saying “France is short of precision munitions because they switched contractors last year, and the new guys are having production line issues.” Or “France decided to dramatically cut procurement of these systems because it didn’t fit their five-year strategic vision plan for 2010-15, which didn’t envision this kind of campaign.” Or “France has enough precision munitions, but honestly? Libya’s not actually that high a priority right now — the bombing is kinda half-hearted, because France thinks Qaddafi is going to cave soon anyway.” Or even “France has plenty of precision munitions, but they’re all with forces that got deployed to French Guyana last year as part of a diplomatic-strategic initiative to play carrot-and-stick with Hugo Chavez; they’re on a boat now and will arrive next week.”

No, it’s France lacks precision munitions because /they spend too much money on day care/.

The Guardian’s count up also tells us something about how the war has changed in the last few weeks. It’s also criticised by David Cenciotti on some details. The most interesting point is that the focus has moved to Misrata in a big way – almost as many air missions have been flown against targets around it as have been around Tripoli, and far more than between Benghazi and Sirte.

One of the consequences of this is laid out in this classic report from C.J. Chivers – since the mines were swept up from the port of Misrata, the siege has effectively been lifted and the rebels can use the sea. So can NATO – British and French ships have been firing on shore targets in support of the rebels around the port area, trying to keep it open and gradually expand the rebel zone. (Jean-Dominique Merchet’s blog reports that French observers were on the ground, adjusting the fire.) The latest news is the deployment of attack helicopters aboard the ships Ocean and Tonnerre.

The real problem, though, is that all this is tactics, or at the very best, operational art. It’s still very far from clear what happens if and when the rebels get to Tripoli, or if Gadhafi eventually gives up, or indeed if none of these look like happening within more months.

NATO is quite capable of providing a operational-level response to a military problem. Like the EU, it has a wider sense in which it is possible to use the infrastructure, operating procedures, and habits of cooperation without formally activating all the committees. (Gadhafi declared “Committees Everywhere!” as a principle in his Green Book. Surely no institution can have followed him more faithfully…) That worked, too. In comparison, the EU seems to be struggling to come up with more than day by day tactical responses to its economic problem. Of course, playing for time can help.

But neither of them have anything you could call a strategy. One of the things not having a strategy helps you avoid is thinking about the structural consequences of your tactics. Whatever the next plan-of-the-nanosecond to come out of the ECB, ECOFIN, the Eurogroup, or whatever will be, it’s fair to say that it will be deflationary and it will suit the interests of major exporters in the eurozone. Whatever NATO’s next move in Libya will be, it’s fair to say it will be violent, and it will probably also suit the interests of major exporters in the eurozone. Among others. After all, it appears we’re still training the Saudi National Guard, a force which exists only to repress the internal enemies of the House of Saud, although these days they lend it out.

An unholy alliance

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Sonia Le Gouriellec at Alliance Géostrategique quotes Bernard Badie on the Ivory Coast and the fact that democracy is a lot more than just elections.

Prenons-la [la démocratie] comme un idéal, c’est-à-dire faisons-en une valeur partagée par tous, c’est-à-dire reconstruite par ceux-là même auxquels elle est censée s’adresser. Sa faiblesse se trouve dans sa dérive procédurale, dans son universalisme naïf, dans son formalisme, dans la volonté de plaquer et d’imposer de l’extérieur des modèles tout faits auxquels on ne cherche même pas à faire adhérer ceux auxquels on veut l’adresser. Peut-être que le fond du problème est là ; nous avons oublié chez nous que la démocratie était un idéal, nous n’en retenons plus que l’aspect facile de technique de gouvernement : on l’exporte telle quelle et on veut en faire en plus une technique d’action diplomatique ; on a alors tout faux.

This is, arguably, something the EU got right but the UN usually doesn’t. It’s never enough to put on an election, as you put on a play. In fact, it’s often the worst thing that could happen.

But at least it’s not the newly invigorated and enlarged Gulf Cooperation Council. Marc Lynch (he’s a serious these days so we can’t call him Abu Aardvark any more) covers this in some detail. Basically, what is emerging is a new reactionary international institution – a sort of NATO for dictators. In fact, it’s something like all the most radical criticisms of NATO, if they were all true, rolled into one. It doesn’t have nukes but it does want a nuclear industry.

Instead, it seems to be evolving into a club for Sunni Arab monarchs — the institutional home of the counter-revolution, directed against not only Iran but also against the forces for change in the region. Where the United States fits in that new conception remains distinctly unclear.

You bet, as they say. As it seems to be evolving into a police-military alliance, perhaps the closest parallel would be one of the reactionary alliances Europe tried out in the 19th century.

How I was wrong about the euro

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This Transitions Online piece is fascinating – as south-eastern Europe has changed, the location of “Europe” or “the West” has swung around all over the place. Once upon a time, Bulgarians and Romanians looked at Yugoslavia as the future, a better version of their own society, and both a reasonable substitute for Germany or Italy and a transit route on the way there. People watched Yugoslav TV illegally. Then, the earthquake, the nightmare. Nobody wanted to be anything like it. People in what had been Yugoslavia looked east, both because there was peace, because that was where the smuggled fuel came from, and also for political support.

Meanwhile, people in the rest of the Balkans looked north at Hungary or south at Greece. Of course, that was because the European Union came to them. Now, well, not so much. If there was ever a time to be eurosceptic, this is the moment. Greeks are quite possibly looking north and wishing they weren’t in the eurozone.

I remember that in the mid-1990s, I was quite sceptical about the single currency for the usual reasons from the left – basically, Keynesian concerns. Having grown up in a succession of recessions, the prospect of joining the Stability & Growth Pact and signing up to the monetarist second pillar of what wasn’t then the ECB didn’t seem great. However, I was (still am) very pro-European on all other issues and eventually I came round to it for not much of a better reason than that it offended the right people. Also, this was the early 2000s and economic policy based on rules seemed to be a pretty good idea. As it happened, of course, when a dose of stimulus was wanted this didn’t keep anyone’s hands out of the medicine chest. Neither did the austerity hold back anyone who was determined to have a monster property boom.

The other big concern was the optimal currency-area problem – could the interest rate be right for the whole eurozone? This is about the most conventional critique of the euro there is. In the UK, it used to be quite a commonplace that the country itself wasn’t an optimal currency area, with the corollary that it therefore didn’t matter so much about the euro. I never quite grasped the logic here, although I admit I may have used the argument. Perhaps the underlying thinking was that there is really no such thing as an optimal currency area – a currency system that was sufficiently decentralised to offer an optimal credit environment in its whole territory would have such high transactions costs it wouldn’t be worthwhile, and therefore we would always have to tolerate some inefficiency due to this effect.

So I was very pro-euro and pro-European while it was a live issue in the UK (about 2003, IIRC – I wonder what happened then?).

What I don’t remember anyone discussing much was the Eurosystem as opposed to the Euro or the ECB – the transactional, flow-of-funds financial workings between the member central banks and the ECB. Nor do I remember anyone talking very much about the fact that the ECB doesn’t have an explicit lender-of-last-resort function. And even discussing whether member states should do anything to manage their trade balances with one another – that was so far out of fashion, of course, that even I didn’t give it any thought.

Of course, this was the bit that bit us.

To put it another way, we argued enormously about the fiscal aspects of the Euro, which turned out to be absurdly easy to fudge when it became necessary to do so. We argued quite a bit about interest rate policy. We hardly even mentioned banking or the issue of money. This is quite a cock-up when you remember we were talking about setting up a new central bank. No wonder west is north and east south.

Is this just my fault? Was there serious discussion of how the Eurosystem might work or not in a financial crisis back in the 90s? Working on my own private black swan theory – apparently unlikely events are both predictable and usually predicted, but they tend to be ones it was unrespectable to predict – somebody must have been.

Also, has anyone else in Britain changed their mind, or is it only me?

French political update: surveillance, sex, and surveys

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A quick look over the fall-out in French politics from DSK. Le Monde has a fascinating article on government surveillance of public figures’ sex lives. The most trivial point is that Strauss-Kahn had been allegedly caught frequenting prostitutes, but far more interestingly, this information had been swept up the police food-chain and delivered privately to the president’s desk and also to Nicolas Sarkozy’s presidential campaign, which leaked it to the press.

However, nobody thought it particularly newsworthy. Also, the surveillance continued, and various officials in the president’s office were in the habit of boasting about their access to intelligence on DSK’s sex life to journalists. But again, nobody seems to have found that newsworthy – and you do wonder what, exactly, they were sitting on. In a sense, this is another version of the conspiracy of silence. The people involved, a circle of police, spooks, and political operatives from the old days of the Balladur campaign, are exactly the same names who came up in the Woerth-Bettencourt affair. The point is made both that Nicolas Sarkozy made very sure to get the right people into key posts in the police-intelligence network and also that this is not new – the last three presidents have all been interior ministers.

(It may also be worth knowing that the poly/swinger scene is extensively monitored by the police, and various people are in the habit of passing lists of guests to the internal secret service.)

There’s more here, but you’d be a fool to assume that the damage will be confined to any one political party. For example, enter Georges Tron. Although he’s surely no DSK he is on the right, and his case also involves a complex score-settling with the FN over a real-estate scandal. (It’s not a proper scandal without property developers.) He’s gone, the fifth government minister to quit in 12 months.

So, what’s the upshot of all this at the macro level? Nouvel Observateur has a complex survey, laid out to illustrate the full set of cross-breaks. The upshot is that Sarkozy’s polls are still in the toilet – depending on who runs against him, he’s polling between 22 and 24.5%. The vote for the extreme Left has evaporated, while Marine Le Pen is running steadily a few points behind Sarkozy.

On the PS side, the volcanic eruption has had surprisingly little effect. The race is developing into a head-to-head between Hollande and Aubry, with Hollande holding the lead and also holding the best numbers in the head-to-heads with the other candidates. Either would beat Sarkozy, but Hollande would take the first round by 9 points and the second by twice that.

If all this doesn’t shift the polls, what will? Sarkozy might not stand for re-election. He’s suggested it before, but how willing to give up power is he really? Like a lot of politicians who enjoy being around entrepreneurs, he’s actually devoted his entire career to politics. That would have serious consequences – there is no obvious candidate and hardly even a plausible candidate, especially if Christine Lagarde moves to the IMF. And that now looks like the original racing certainty.