Tuesday, June 24, 2008

Economics a catch-all stew

I suggested on a recent post - Economics of the pendulum swing – that I would be trying to get a handle on the Rudd government’s attempt at creating an economic concept -Market Democracy. Well what I did, while economics writer Ross Gittins was busy looking at the Aussie creation I went off looking at some comparative economics.

Gittins first, with his summary – “So Dr Emerson’s [Craig Emerson - the Minister for Small Business] ideal world fits John Kenneth Galbraith's ironic summation of the conservatives' position: the rich need more money as an incentive and the poor need less money as an incentive.

In a nutshell, the new political philosophy of "market democracy" he proposes is that "the role of policymakers is to allow the market to create prosperity and out of that prosperity to expand opportunity, not the welfare state".

Meanwhile I was looking at the Canadian and US economic dynamic where Conservatism still rules, albeit with a Rudd like change likely in the US. What I am seeing, across the board, is that blanket isms simply distract us from a far more complex reality.

George W and Stephen Harper, for example, believe John McCain is far too soft for their liking. In Harper’s case he even seems more willing to support Obama instead of his ‘natural’ ally. Yet George and Stephen both insist on maintaining powerful socialist sectors in their economies. Very selective socialist policies mind you, focused mainly on corporate welfare and agricultural subsidies.

Obama, during the primaries, was all in favour of dismantling NAFTA – “I didn't just start criticizing unfair trade deals like NAFTA because I started running for office - I'm doing it because I've seen what happens to a community when the factory closes down and the jobs move overseas.” Obama

It seems, with the primaries over and the need to win the labor movement diminished, Obama has decided that NAFTA is not such a bad thing after all. To be fair to both Rudd and Obama, rushing in with wholesale structural change would simply cause economic chaos. However it is difficult to see where either of them would seriously contemplate straying too far from the current agenda.

At least the Keynesian economic model was honest, from top to bottom. It was predicated on the notion of an interventionist, hands-on approach by government. If the requirement for one sector was socialist and for another market forces so be it. These current models seem to simply pander with words and deliver the same old market based solutions.


lindsaylobe said...

In fact to day possibly the best solution is a combination of both Keynesian style economics and Monetarism as unfortunately there is no reliable grand unifying theory on offer. If we could get better data we could swing more to the Keynesian model. But a lot also depends upon ethical behaviors, as the market makes no such distinction about the morality of economic outcomes. Indeed whilst European company heads have tended to form ethical values within their charters restricting operations to sustainable developments and providing minimum labour conditions (independent of country requirements) worldwide, sadly I see far less generally coming from North American companies. The NAFTA agreement tried to tackle this problem but does not seems to have been too successful.
An active fiscal policy (Keynesian in nature) requires us to have accurate data to make reliable predictions. To day in our modern day economics we have this maze of conflicting data upon which we rely for economic forecasting, yet you have no room for errors or inaccuracy in economic forecasting.

Up to the 1970’s Keynesian economics worked reasonably well, since you were able to determine the state of the economy as there was far less hidden liabilities and undisclosed debt instruments in off Balance Sheet type vehicles which now make a mockery of the various statistical measures which are presented as factual to our finance jockeys. We are all merrily driving flat out in the rain, minus effective windscreen wipers. The whole system needs to be overhauled. We also need to have a move away from a short term focus of many financial institutions to the medium and longer term, particularly in renumeration and bonus schemes for upper levels in both private and public sectors.

So I believe in Monetarism to the extent the Reserve Bank or Federal Reserve needs to ensure monetary policy does not create too much easily available credit; to fuel reckless lending and the abandonment of prudential standards. Even more important is to ensure those prudential standards and adequate solvency level are being maintained and as laid down in the prudential standards by corporate. This is not rocket science.

We were fortunate to avoid much of the sub prime lending fiasco over her, more to do with our geographic distance away from it all rather than an active involvement by the regulators.

Leaving that aside Keynesian economics remains an important aspect , but we need to clean up the poorish data accumulations so that we are able to see where we going. No where is this more apparent that in the USA, I suggest the Federal Reserve is discovering it has been far to slack with monetary policy. But the worst culprit has been the continual high deficits being clocked up by the government itself, which restrict the availability of fiscal stimulus other than from further borrowings.

There is no substitute to good governance, common sense, understanding data and ensuring its accurately collected and corporate social responsibility which means you don’t spend money you don’t have on current consumption. Isn’t that what governing a country is supposed to be all about?

Best wishes

Cart said...

Lindsay, you are singing a melody there I find very easy to follow. Starting from “If we could get better data…” Hand passing responsibility to non-elected bodies and ensuring data is not easily assessable seems to be the hallmark of what was termed ‘rational economics’.
Paul Keating achieved what Howard couldn’t in advancing this lily livered approach to government responsibility. Ok, the Reserve Bank has done reasonably well by us on the monetarist side, probably more efficacious than Keating, Howard et al might have been. But that is only one of many responsibilities our highly paid reps duck now.
On the data side, we have previously discussed those dodgy full employment claims – anyone who worked an hour this week or is likely to work an hour next week is employed. How on earth do you make reasonable judgments on employment and training needs when the figures arte only intended to convey false good news?
Housing is another sore point when it comes to poor or even skewed data. So much of the data we rely on emanates not from government sources but from the industry – Real Estate institutes and building construction industry groups.
Finding key data in the US is even more difficult than it is here or in Canada. Partly, I expect, because ‘the market’ has become synonymous with economics there. I recall talking with an ‘economics’ speaker at a seminar there. The speaker had never heard of Keynes of Galbraith.
Those I’ve met who do know of this pair tend to believe they are full blown socialist. I expect it suits US lawmakers to encourage ignorance; both their own and the publics. I’m not sure how we get over the first hurdle of acceptable data on which to base good decision making.
Thanks Lindsay

lindsaylobe said...

Hi Cart
I don’t want to sound condescending but I am constantly amazed at the lack of any sound economic debate in the USA, particularly in electioneering where no costing or likely outcomes for policy measures receive any other than very superficial analysis e.g. Obama may use a similar model to Clintons. Never mind we are now in 2008 with a completely different situation than what existed then. There seems to be a deep rooted fear that any form of Government taking responsibility for future planning, by first getting a handle as to what is the current state of play, (e.g. Improving information sources) must be socialistic and likely to destroy what is touted as one of the world’s great free markets. The idea then is to press for smaller governments, reduced taxes and to allow the free market to expand and bring forth prosperity.

My experience however of the USA economy is it is one of the most heavily regulated in the western world. A mindfield of individual state legislatures making any new entrant in certain industries register separately in each state who want to operate nationally.

Its almost impossible unless you have bucket loads of money, register in every state separately, and are happy enough to pay exorbitant legal costs getting everything sorted out.

When something blows up precriptive legislature is rammed through without firstly figuring out how it could have been avoided, possibly if the activity was better regulated in the first place. Now we have 200 arrests by the FBI on sub prime fraud!! I note the likely the full cost in bad loans will reach about 1 trillion.

How much could have sensibly been avoided?

Even the election results are subcontracted out to the parties themselves. It boils down to a philosophy of …….if it doesn’t make money it doesn’t count, so whatever you do don’t allow a regulator to collect sensible information to help plan the future, to sensibly best allocate resources and to regulate sector activities within the national economy.

So it seems to me that Governamnts can duck the reponsibility. The Regulators call in the Industry chiefs for cozy chats, what should we do with the drunken sailor? Why on earth do we remain partially wedded to such nonsense!!
Best wishes

lindsaylobe said...

And just to add insult to injury in Australia it has been announced to day that the ABS jobs vacancy publication will be discontinued (following the release of theses stats to day to confirm no more will be published) owing to budget constraints, (the savings imposed on government departments under the recent Budget, the so called productivity targets) together with other sizeable reduction in sample size of some other key surveys/reports about the labour force and retails sales. Its reassuring to know when we have surplus of $22 Billion, we can’t even afford to collect critical data and are already reducing rubbery data into even smaller sample packages.
These are clearly very unwelcome developments in Australia, further eroding transparency as these indicators are critical in determining tipping points of economic activity. With the current monetary policy so critically dependant upon sensitivity to demand changes, and with ever conflicting signals in the labour market, eliminating the ABS job vacancy report makes no sense whatsoever. Ask your local member to have the survey reinstated!!
Best wishes

Cart said...

Lindsay, the injury is that Rudd is willing to go further than Keating/Howard. But then I’m also dealing with the final death of the Dems, so many years after I fell for Chippies dream – well my version of it…
Just now I’m preoccupied trying to put together a directory for a Mid-North Coast community legal centre. Now being into NGAs, and also being erudite, you might be able to help me get this submission close to the mark. Email: ‘Cartledge at gmail.com’ with obvious fixes,
I have been going through the existing models, and various working papers, and really wonder where they are coming from. Accepting that funding is going to reduce we really need to look to more effective vehicles. I would appreciate your help, but understand any reticence. More than that I appreciate your general view.