Opinion

Edward Hadas

Both sides losing austerity fight

Edward Hadas
Jun 27, 2012 12:01 UTC

In one corner of the intellectual boxing ring is Stimulo. His fighting words: more economic stimulus. History and theory, he declaims, teach that governments should run much larger fiscal deficits in a downturn. In the other corner is the Cutback Kid, who delivers the opposite message: more austerity. He asserts that history and theory teach that governments should reduce their deficits. The two contestants for the Economic Policy Prize are in the midst of a long fight. Amazingly, they are both losing.

Stimulo has the open-hearted enthusiasm often associated with residents of the United States, for three decades known as the land of big fiscal deficits and small worries. His favourite example is the 1930s Great Depression, which only government spending could end. Now, almost four years after the collapse of Lehman Brothers, GDP growth remains slow and the unemployment rate high. The government deficit, he says, should be increased by as much as necessary to push the economy out of its current stagnation.

The Cutback Kid has a more restrained charm, the sort sometimes associated with suave European intellectuals. He praises the virtue of balanced government budgets: sound finances keep inflation far away, support the value of the currency and promote a strong economy by not stealing savings from the private sector, the source of durable growth. After four years of extraordinarily high government deficits, he says, it’s time to cut back.

There have been no knock-out blows. Neither stimulus nor austerity seems to work as predicted. The United States has tried stimulus and the UK austerity, but the results in both countries have been disappointing. The euro zone, which has tried less stimulus and more promises of austerity than either, has not done any better. Japan has been stimulating for years, without either recovery or inflationary disaster.

Here is a summary of the most recent round: Cutback Kid opens with a one-two punch – first Latvia, where punitive austerity is turning the suffering economy around, and then history, which shows that fiscal contractions often help restore economic growth, while large fiscal deficits usually have bad consequences. Stimulo is not deterred. He ducks Latvia – austerity isn’t really working there – and he punches back with examples of successful borrow-and-grow polices. Then he strikes hard with Greece, where austerity is crushing the economy.

Ethical economy: Of morals and markets

Edward Hadas
Jun 20, 2012 14:26 UTC

“Where all good things are bought and sold,” says Michael Sandel, “having money makes all the difference in the world”. And judging by the success of the book he has written based on the premise, the assertion is seductive.

In “What Money Can’t Buy: the Moral Limits of Markets”, the Harvard philosophy professor rails against “market reasoning” and its impact on modern societies. He says that justice suffers because money has become the predominant measure of social as well as economic value. He provides examples such as corporate life insurance policies on employees, advertising in bathrooms and payments for children’s academic success.

Sandel’s reading of contemporary society is wrong, and the examples he deploys are atypical. Overall, morals have been displacing markets, not the other way around. Considerations such as justice and the common good increasingly shape economic arrangements. Even where market reasoning does flourish, for example in the production of cars or food, the standards of social responsibility have steadily risen. Whether or not they are profitable, companies are expected to be good employers and good corporate citizens.

The euro crisis as family drama

Edward Hadas
Jun 13, 2012 15:09 UTC

Sometimes big news stories seem unbearably dull. The euro crisis is often presented as an apparently endless stream of technical titbits that only a financial geek could love: alchemical recapitalisations of possibly insolvent banks, and the subtle differences between the European Financial Stability Facility and the European Stability Mechanism. But the mind-numbing details hide an exciting drama about the dysfunctional European family of nations.

Think of Greece as the wayward uncle who never seems to settle down and who keeps asking for a little money to tide him over. Spain is a younger sibling, finally interested in school but still reluctant to admit that she needs to change her ways. Italy is a voluble middle child, talented but with a taste for mischief. Germany is the slightly priggish older brother, who has trouble sympathising with his relatives’ weaknesses – although he usually relents in the end.

As in some tribes, the European family has appointed various councils of elders to guide group decisions. For the most part, the central authorities have worked well, but they have to be careful not to anger big brother Germany. Then there is the European Central Bank. When it was set up, most family members thought it would be just another elder-group, but the monetary authority is increasingly behaving like a sort of powerful Godfather to the whole clan.

Depressions can be avoided

Edward Hadas
Jun 6, 2012 13:26 UTC

Stability has been one of the most elusive economic goods. Despite more than a century of effort, economies remain prone to downturns, which often come after booms that proved unsustainable. Rich countries are currently stuck in one of the down periods, a seemingly endless Lesser Depression.

Economists argue about the details of what went wrong, but they often miss something basic: persistent instability is surprising. Surely, societies which summon enough economic ingenuity and organisation to develop smart phones, manage global supply chains and pay for a dozen years of universal education can manage to maintain a steady pace of overall economic activity? All that is required is the identification and early correction of imbalances, in both the real economy and the financial system.

In the pre-industrial age, good macroeconomic management was all but impossible. As long as agricultural activity was the economic mainstay, a poor harvest led not only to less food but to less spending by farmers. Their purchases of ploughs and shoe leather declined, even though a temporary spell of bad weather had no effect on production capacity.

What to do about debt

Edward Hadas
May 30, 2012 15:11 UTC

Debt, a little like sex, is a two-sided relationship which, when used appropriately, pleases the partners and is good for society. But both are also intoxicating and can easily become excessive and anti-social.

The financial bubble of the 2000s was the financial equivalent of the 1960s enthusiasm for “free love”. The delights of nearly free debt set pulses racing. Since the financial collapse, the dangers of uncontrolled borrowing have been recognised, but the bad habits have hardly changed.

When debt is used as it should be, lenders receive a just return on their assets and borrowers pay a just price for the use of the fruits of other people’s labour. Loans finance helpful investments and assist governments and individuals to manage periods of adverse fortune. But debt can also be used for promiscuous pleasure-seeking, unaffordable consumption, unjustified corporate investments and excessive government spending.

For growth, focus first on jobs

Edward Hadas
May 23, 2012 14:48 UTC

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Bad ideas spawn Lesser Depression

Edward Hadas
May 16, 2012 14:18 UTC

On September 15, 2008 Lehman Brothers collapsed in a heap, a bankruptcy that was followed by a recession in most rich countries. As time goes on, the severity of the disruption becomes both more apparent and more puzzling.

When Lehman failed, it was reasonable to expect the pain to be brief and concentrated. While too many houses had been built in the United States, most of the world’s real economy (comprising factories, offices, retail outlets, construction projects) was doing well. The global financial sector was more distorted, even before investors took fright at the decision to let Lehman go under. But by the middle of 2009, governments and central bankers had agreed to provide bankers and brokers with anything needed to keep them healthy.

Optimism was not justified. Although the countermeasures stopped the deterioration, the rich world now seems stuck in a Lesser Depression – many years of poor economic results and a series of financial crises. In the United States, the euro zone, Japan and the UK, real GDP per person is still lower now than it was four years ago. In all of them, GDP growth is currently either slow or non-existent.

What price beauty?

Edward Hadas
May 9, 2012 14:39 UTC

From a narrow economic perspective, the art world is working brilliantly. But the success shows just how narrow that perspective really is.  

Start at the very top end of the art market: last week’s sale of Edvard Munch’s “The Scream” for $120 million, a record for any artwork sold at auction. It may seem bizarre for an icon of cultural despair to become a token of financial exuberance, but the transaction reinforced the social meaning of art among the elite.  

Sociologists talk of positional goods: possessions and activities which express social standing. A normal skiing holiday is like a sign saying, “I’m solidly middle class”. A mansion states, “I’m rich.” A multi-million dollar painting tells the story of money to burn. And a $120 million pastel screams out, “I’m at the top of the heap, and cultured besides.”  

What companies are good for

Edward Hadas
May 2, 2012 13:13 UTC

The debate on executive pay is often just a shouting match, in part because there’s no agreement on what bosses are actually paid to do. The “shareholder value” approach provides a simple answer, but one that it is both practically and morally wrong. Aristotle had better ideas.

Citigroup’s shareholders recently voted against the pay package of Vikram Pandit, the bank’s chief executive. In Europe, the boards of Barclays, Credit Suisse, Aviva, Man Group and Xstrata are in similarly hot water. Many think the key is to link rewards to success. But what exactly does corporate success mean? What is Pandit being paid to do?

In the standard view of the modern company, Pandit ultimately serves only the shareholders who voted against his remuneration. Companies’ legal owners choose a board of directors to represent their interests. The board hires a chief executive to create “shareholder value” – that is, dividends and a higher share price. Shareholders have every right to be angry if managers serve themselves rather than their ultimate bosses.

Prosperity need not kill religion

Edward Hadas
Apr 25, 2012 13:57 UTC

Thomas Carlyle’s fulminations against the spiritual damage wrought by factories are almost two centuries old, but the sentiment is current wherever industrialisation is rampant. “The huge demon of Mechanism,” he wrote, “smokes and thunders, panting at his great task, oversetting whole multitudes of workmen … so that the wisest no longer knows his whereabout.”

In China, today, government leaders and dissidents alike worry that, as one commentator put it, “frenzied competition for a better life [has] lobotomized the people of inherent values like common decency, compassion and feelings of fellowship”.

A century ago, Max Weber described the process as “disenchantment”. The German sociologist thought the transition from a culture of faith and farming to the narrow-minded and bureaucratic “iron cage” of modern civilisation required the destruction of a spiritual worldview. He saw a modern society made up of “specialists without spirit, sensualists without heart”.

  •