Opinion

Anatole Kaletsky

Trying to fix broken economics

Anatole Kaletsky
Apr 4, 2013 15:01 UTC

Here is a list of economic questions that have something in common. In a recession, should governments reduce budget deficits or increase them? Do 0 percent interest rates stimulate economic recovery or suppress it? Should welfare benefits be maintained or cut in response to high unemployment? Should depositors in failed banks be protected or suffer big losses? Does income inequality damage or encourage economic growth? Will market forces create environmental disasters or avert them? Is government support necessary for technological progress or stifling to innovation?

What these important questions have in common is that professional economists can’t answer them. To be more precise, economists can offer plenty of answers about government deficits, printing money, inequality, environmental issues and so on, but none of these answers is authoritative enough any longer to persuade other economists, and never the world at large.

Take two examples. On whether government borrowing aggravates recessions or promotes recoveries, the world’s most eminent economists fall into one of two violently conflicting schools. The world’s most important central banks, the U.S. Federal Reserve and the European Central Bank, hold diametrically opposing views about the effects of quantitative easing. If economics were a genuinely scientific discipline, such disputes over fundamental issues would have been settled decades ago. They are equivalent to astronomers still arguing about whether the sun revolves around the earth or earth around the sun.

How should politicians and voters who look to economists for guidance respond to this cacophony? Writing this week from Hong Kong, which is hosting a galaxy of economic superstars at the annual conference of the Institute for New Economic Thinking (INET), I can offer a partial answer.

INET is a $150 million foundation created four years ago to support academic research and teaching in economics that break with the assumptions of natural equilibrium, market efficiency and statistical predictability that were largely responsible for the policy mistakes that produced the 2008 financial crisis. Economics is ultimately a study of politics, psychology and social behavior. It is therefore as close to philosophy or even theology, as to physics, biology or engineering. Just as philosophers and theologians still argue about the same issues that preoccupied Plato, Kant and Descartes, economists see no shame in continuing the debates over budget deficits, monetary policy and full employment launched by Keynes, Wicksell or Walras.

Will Putin attempt a last-minute Cyprus rescue?

Anatole Kaletsky
Mar 25, 2013 01:59 UTC

Vladimir Putin could restore Russia’s great power status and maybe go down in history as the country’s most visionary leader since Peter the Great. He could win respect from Beijing and Washington for averting a second global financial crisis and he could prove that Russia understands market economics better than the EU. His miraculous opportunity to do all this started with the Mafia-style “offer you can’t refuse”  presented by the EU to Cyprus on Sunday. It will end on Tuesday morning, if Cyprus banks then re-open under the conditions imposed by the European Troika, as currently planned.

One of the mysteries of the Cyprus crisis has been the lack of response from Russia, despite the obvious strategic opportunities, not just to protect its offshore deposits, but also to exploit the island’s strategic location and its military and energy potential. A possible explanation is that Europe’s indecision also paralyzed Russia -  until last night.

As long as Europe’s policy on Cyprus kept shifting, it was impossible for Russia to intervene, since any help it offered could be rejected or outbid by the EU. As a chess player, Putin probably understood that his best strategy was to wait for Cyprus to get weaker and more desperate, while the EU, and especially Germany, became more impatient and obstinate. The moment to make his move would be when Europe presented an ultimatum too painful or humiliating for Cyprus to accept. That moment arrived last night.

Even Britain has now abandoned austerity

Anatole Kaletsky
Mar 21, 2013 16:09 UTC

The Age of Austerity is over. This is not a prediction, but a simple statement of fact. No serious policymaker anywhere in the world is trying to reduce deficits or debt any longer, and all major central banks are happy to finance more government borrowing with printed money. After Japan’s election of Prime Minister Shinzo Abe and the undeclared budgetary ceasefire in Washington that followed President Obama’s victory last year, there were just two significant hold-outs against this trend: Britain and the euro-zone. Now, the fiscal “Austerians” and “sado-monetarists” in both these economies have surrendered, albeit for very different reasons.

Much attention has been focused this week on the chaos in Cyprus. Coming after the Italian election and subsequent easing of Italy’s fiscal conditions, the overriding necessity to keep Cyprus within the euro — and its military bases and gas supplies outside Russian control — will almost surely mean another retreat by Germany and the European Central Bank from their excessive austerity demands. But an even more remarkable shift has occurred in Britain. The Cameron government, which embraced fiscal austerity as its main raison d’etre, was suddenly converted to the joys of debt and borrowing in this week’s budget.

Of course, the rhetoric of British Chancellor George Osborne’s budget speech gave no hint of his Damascene conversion. On the contrary, it ridiculed “people who seem to think that the way to borrow less is to borrow more.” But Osborne’s trademark sneers could not disguise the meaning of the policies and numbers he presented.

Don’t worry about a stock market drop

Anatole Kaletsky
Mar 14, 2013 15:50 UTC

A feeling of vertigo may seem natural as Wall Street approaches a record and stock markets around the world climb to their highest levels since 2007. With the Standard & Poor’s 500-stock index  now only 0.5 percent away from its 2007 high of 1565 and with the Dow Jones industrial average scaling new peaks almost daily, what will investors expect to see when they reach the mountaintop? The mountaineering analogy suggests, at best, a long descent and, at worst, a precipitous drop. But how literally should we take such metaphors?

Bearish analysts often claim that stock market peaks have always been followed by sharp falls, citing as evidence the record high of October 2007, which was quickly followed by a 57 percent collapse in 2008-09. They add that the previous peak, in March 2000, was followed by a 37 percent plunge and that last major high before that, in August 1987, preceded the biggest-ever market crash, in October 1987. These precedents, along with the even more vertiginous peaks of 1989 in Japan and 1929 on Wall Street, certainly sound scary, but they are meaningless.

It may be true that all major market peaks have been followed by big declines, but the reason is semantics, not finance or economics. A peak is, by definition, a high point followed by a decline. A new market high that is not followed by a fall in prices is simply not called a peak. A record of this kind, far from preceding a steep decline, tends to act as a staging post for higher prices. Looking back through history, it turns out that this benign type of record, paving the way for higher prices, is actually the norm.

Obama’s best strategy: Do nothing

Anatole Kaletsky
Mar 8, 2013 13:05 UTC

Ronald Reagan had a catchphrase when faced with a crisis, especially a synthetic “crisis” of the kind Washington loves to concoct. He would call in the officials and media advisers rushing manically around the West Wing and calmly tell them: “Don’t just do something – stand there.”  In this respect, as in several others, “No Drama Obama” seems to resemble the man he once admiringly described, despite their ideological animosity, as the last great “transformational” U.S. president.

With Wall Street hitting new records as Washington supposedly plunges into its latest fiscal crisis with the budget sequestration that began this week, Obama could do well to emulate Reagan’s laid-back style. In addition to doing nothing about the latest manufactured fiscal crisis, he could explain why nothing is the right thing to do.

To be more specific, Obama could negotiate a truce in the budget war. Instead of insisting that Republicans must “pay” for Democratic spending cuts by agreeing to higher taxes, the president could offer a much more attractive deal to both sides. If Republicans eased the sequester and demanded no new spending cuts, the Democrats could promise not to raise any taxes. Such a ceasefire would  be seen by both parties as an honorable draw. Republicans would have fulfilled their pledge to stop higher taxes; while Democrats would have thwarted efforts to gut government and the welfare state.

The age of austerity is ending

Anatole Kaletsky
Feb 28, 2013 15:35 UTC

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

The losers in Italy’s election are already clear

Anatole Kaletsky
Feb 21, 2013 18:00 UTC

We don’t yet know the winner of Sunday’s election in Italy, but the losers are already clear. And in this election, who loses may be much more important than who wins.

The obvious loser is Mario Monti, the charming and eloquent economics professor who is widely credited with saving Italy from a Greek-style debt crisis during his one-year term as Italy’s unelected prime minister. Monti could have gone down in history as the most effective and intelligent Italian leader of his generation, had he decided to opt out of this weekend’s election and instead sought appointment as Italy’s president. That is a mainly ceremonial role that can become very important in times of constitutional crisis (which in Italy occur all too often), and Monti could almost certainly have won strong endorsements  from Italian politicians on the left and right.

Instead, Monti surprised everyone by founding a political party and running for Parliament at the head of a center-right grouping. This now looks like a big mistake. According to the last pre-election polls, Monti’s group is running a humiliating fourth, after the Italian Socialist Party, Silvio Berlusconi’s resurrected personal party and stand-up comedian Beppe Grillo’s anarchic Five Star Movement. Worse still for Monti, he seems to have helped his archenemy Berlusconi by splitting the opposition to the scandal-ridden former prime minister. If Monti’s party performs as badly as expected, it will be all too easy for his opponents to present the election as a clear rejection of the painful economic reforms he imposed on his long-suffering countrymen at the behest of the German government and the European Central Bank.

Britain’s strength is its weakness

Anatole Kaletsky
Feb 14, 2013 16:19 UTC

Mirror, mirror on the wall, who’s the weakest of them all? As G20 finance ministers warn of the threat of a “global currency war” at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.

The first is that every country’s objective in this war is to “lose” by making its currency weaker. This is because a weak currency tends to support exports, employment and economic growth (if all other things are equal, which they never quite are). The second oddity is that the clear winner in this global currency war has not been Japan, Switzerland, China or any of the other usual suspects, but a country rarely accused of financial aggression: Britain.

Since the global financial crisis started in mid-2007, the pound sterling has been, by a wide margin, the weakest major currency. The Bank of England’s trade-weighted sterling index fell by a record 30 percent in early 2009 and, despite a modest rebound in 2010-12, it remains 24 percent below its level of mid-2007. Japan, by contrast, has endured a rise in its trade-weighted exchange rate of 60 percent from July 2007 to late last year, when Prime Minister Shinzo Abe committed his new government to a more competitive rate. Japan is therefore fully entitled to resent other countries’ accusations of currency warfare, when it has in fact been a long-suffering pacifist, exposing its export companies to the full burden of other countries’ post-crisis currency adjustments.

A breakthrough speech on monetary policy

Anatole Kaletsky
Feb 7, 2013 16:01 UTC

Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that doesn’t have to be humored. That delusion today is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.

That such economic fatalism is nonsensical is the key message of a truly historic speech delivered on Wednesday by Adair Turner, chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers in the world. Turner argues that a virtually surefire method of stimulating economic activity exists today and that politicians and central bankers can no longer treat it as taboo: Newly created money should be handed out to the citizens or governments of countries that are mired in stagnation and such monetary financing of tax cuts or government spending should continue until economic activity revives.

The idea of distributing free money to end deep recessions has been promoted theoretically by serious economists since the 1930s, when it was one of the few practical policies that Keynesians and monetarists agreed on. John Maynard Keynes proposed burying money in disused coal mines to be dug up by unemployed workers, while Milton Friedman suggested dropping money out of helicopters for citizens to pick up. Friedman also argued in a 1948 paper that governments should rely solely on printed money to finance their regular cyclical deficits. More recently, as conventional policies to revive growth have faltered, with widespread disappointment about the impact of zero interest rates and quantitative easing, proposals for distributing money directly to citizens have been quietly gaining traction among critics of orthodox central banks. I discussed this trend, sometimes described as “quantitative easing for the people,” in several columns last year.

Is the current market optimism justified?

Anatole Kaletsky
Jan 31, 2013 18:39 UTC

The U.S. economy has just suffered its first contraction since 2009, consumer confidence has plunged since November’s election and Americans’ paychecks are only just starting to reflect an increase in payroll taxes averaging $70 per month. Across the Atlantic, the euro zone and Britain seem to be sinking back into recession. And conditions in Japan have become so desperate that newly elected prime minister Shinzo Abe is openly devaluing the currency and threatening to take direct control of the central bank.

At the same time, stock markets around the world are approaching or exceeding records. Money is flowing into equity mutual funds at the fastest rate since the end of the last bull market in 2000. And business sentiment, as reported from Davos, seems to be more optimistic than at any time since the global financial crisis of 2008.

Is there a rational way to explain these contradictions? Will the business and market optimism be sustainable? Or is this sudden euphoria just another financial bubble, sure to be punctured if the grim message from recent economic indicators sinks in? The likely answer to all these questions is yes.

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