Situation vacant: global hegemon

Serendipitously, I started reading this week a book that has been sitting in my office for a while, [amazon_link id=”069115743X” target=”_blank” ]The Leaderless Economy: Why the world economic system fell apart and how to fix it[/amazon_link] by Peter Temin and David Vines. Serendipitously because this follows on from just having read Jonathan Fenby’s excellent overview of China, [amazon_link id=”1847394116″ target=”_blank” ]Tiger Head, Snake Tails[/amazon_link], which has a big chunk on China’s global position, and also the forthcoming [amazon_link id=”1907994130″ target=”_blank” ]The BRIC Road to Growth[/amazon_link] by Jim O’Neill.

[amazon_image id=”069115743X” link=”true” target=”_blank” size=”medium” ]The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It[/amazon_image]

All three raise the question of global economic governance. The word is unappealing, but it’s a vital issue. And Temin and Vines, a distinguished combo of economic historian and international economist, do a very interesting compare and contrast exercise between the 1930s and the present global economic crisis (I’m one of those who thinks it isn’t nearly over yet, despite signs of recovering growth). Others have of course drawn parallels with the 30s, but the focus here is on international governance – and also on the political consequences of an ailing global order. I knew I was going to like the book when the introductory chapter kicked off with David Hume’s price-specie flow mechanism. They write: “The price-specie flow model connects internal and external balances.” The two need to be considered together to find a solution to global disorder, they argue (Michael Pettis, in his excellent [amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing[/amazon_link] would agree.) One thing that has changed since Hume’s time is the development of an asymmetric response between prices/wages and output/employment, but even so deflationary pressures are still evident in some countries.

The book characterises the current state of affairs as an ‘end of regime’ crisis, and argues that the resolution will depend on the emergence of a hegemonic country in the global economy, just as the 1930s crisis was not fully resolved until the US took that role. The ‘how to fix it’ of the subtitle is to have some leadership. “Continued neglect of international imbalances will lead to conditions reminiscent of the 1930s and possibly even to military conflicts like those of the 1940s,” they write. Scary thought. They note that it took decades for the switch from Britain to America to occur – from 1918 until the late 1940s really.

I suppose it is true that a single hegemon is necessary to orchestrate the co-operation needed to resolve the interaction of internal and external balances around the world. However, this is a depressing conclusion because my sense from my China reading (and I’m not at all an expert) is that the only candidate is far from ready to step into that role, while America’s decline is increasingly apparent with every news story about its bizarre, internally-obsessive politics – it can’t co-operate with itself, never mind other nations. Like Pettis, Temin and Vines see the economic solution as obvious – an expansion of domestic demand in China and Germany.

“The world …needs both co-operation and a way to make durable bargains among nations. … The absence of an obvious hegemonic leader makes it easy to be pessimistic that such co-operation will not be forthcoming.” Maybe, they suggest, the G20 could get its act together. Jim O’Neill’s [amazon_link id=”1907994130″ target=”_blank” ]The BRIC Road to Growth[/amazon_link] is a bit more optimistic about the scope for leadership to come from the fast-growing large emerging economies but also forsees governance change as likely to be too slow. Temin and Vines are pessimists: “Alas, politics in America and Europe seems to be aimed at repeating the mistakes of the 20th century in the first global crisis of the 21st.” A sobering thought as the 100th anniversary of World War I hoves into view.

I would make all political leaders read this book over the holidays – whether in December or a bit later for Chinese New Year – and hope that it prompts them to make a New Year resolution to show true leadership. A globalized world without global leadership is a pretty terrifying prospect.

Austerity and the barbarian horde

Here’s a book that does what it says on the cover: [amazon_link id=”019982830X” target=”_blank” ]Austerity: The History of A Dangerous Idea[/amazon_link] by Mark Blyth.

[amazon_image id=”019982830X” link=”true” target=”_blank” size=”medium” ]Austerity: The History of a Dangerous Idea[/amazon_image]

Actually, the first few chapters start with the ‘dangerous idea’ part, with the author’s arguments about why austerity (ie. cutting the government’s budget deficits to reduce the level of its debt) is a bad thing in general, and a particularly bad thing when everyone tries to do so at the same time. This part will be somewhat familiar to readers of Paul Krugman’s blog, or Jonathan Portes on this side of the Atlantic. It overlooks some points I think are important – for example, glossing over the way tax increases and spending cuts will have different distributional implications; or ignoring the effects of inflation on real wages for low earners to focus on the redistribution from savers to borrowers. I also don’t agree with his argument about the specific causes of the financial crisis, which he pins on the securitised mortgages and the US repo market, but that’s not the heart of the book. Besides, Blyth is surely right to say morality tales about lazy Greeks and virtuous Germans, and other similar tropes of public debate about the crisis, do not amount to an economic analysis.

The main section is far more interesting, an account of the history of the idea that austerity is a good policy, that reducing the debt burden only requires reduced borrowing and less government. He traces the idea back to the late 17th century and ranges over the continent as well as the US and UK. Although there’s no mistaking this author’s political perspective, there is plenty of interesting material in this section. The book ends by asking whether or not current austerity policies will work. When the IMF has now said not, and a great majority of economists advocate bringing forward necessary infrastructure investment, Blyth’s answer will come as no surprise, albeit expressed more colourfully: “The deployment of austerity as an economic policy has been as effective in bringing us peace, prosperity and crucially a sustained reduction of debt as the Mongol Horde has been in furthering the development of dressage.”

The book will give opponents of the austerity strategy more ammunition, if they want it. I’m not sure it will change the mind of any proponents of the policy, however, given how obvious the conclusion is from page one. But then, as Blyth argues, this is not a rational economic debate. Austerity has a different kind of hold on its advocates.


Capitalism, democracy and pessimism?

On Wednesday evening I attended Professor Raghuram Rajan’s Wincott Lecture, which had the provocative title Are Capitalism and Democracy Failing Us? (He’s also written a couple of columns outlining the themes, in the FT and Project syndicate.) Professor Rajan is the author of [amazon_link id=”0691152632″ target=”_blank” ]Fault Lines[/amazon_link], a terrific and thought-provoking book about the political economy origins of the sub-prime crisis – a crisis he was one of the economists to predict publicly, in 2005.  So clearly it’s worth paying careful attention to what he has to say.

[amazon_image id=”0691152632″ link=”true” target=”_blank” size=”medium” ]Fault Lines: How Hidden Fractures Still Threaten the World Economy (New in Paper)[/amazon_image]

The argument in the lecture was that there is an interaction between capitalism and democracy. In good times this is positive, the beneficial economic and political structures are mutually reinforcing. But the crisis is giving us technocracy in some countries, oligarchy  in others, and these political structures are depleting the sense of fairness and trust on which democracy has to rest. There is an urgent need to restore to the middle classes a sense of opportunity, he argued.

The lecture covered the hollowing out of jobs in the middle of the labour market, the division of people into those who tell computers what to do, and those who are told what to do by the computers. Prof Rajan cited Claudia Goldin and Lawrence Katz’s book on skills, [amazon_link id=”0674035305″ target=”_blank” ]The Race Between Education and Technology[/amazon_link], and Charles Murray’s [amazon_link id=”0307453421″ target=”_blank” ]Coming Apart[/amazon_link]. He tied the problem of the squeezed middle into his own book, Fault Lines, arguing that politicians had responded to the hollowing out of the income distribution by means of credit – affordable housing, loans for consumption. In Fault Lines, this was presented as the political mechanism that paved the way for the subprime crisis. Consumption inequality did not increase as much as income inequality.

The question now is whether the technocratic policy responses we are seeing, from structural reforms in Eurozone countries to all the waves of QE, will end up only violating the quasi-property rights of those on low and middle incomes? It seems so – bondholders have been more or less entirely protected, and default avoided at almost any cost, and bank bonuses are as yet barely affected, whereas the rest of us can be sure we will get some mix of higher taxes and inflation. This mix, Prof Rajan argued, would undermine the legitimacy of capitalism and democracy.

An obvious question raised by Roger Bootle in his comment on the lecture – and in his own book ([amazon_link id=”1857885589″ target=”_blank” ]The Trouble With Markets: Saving Capitalism From Itself[/amazon_link]) which distinguishes between creative and merely distributive varieties of capitalism – is whether there is an alternative path. He agreed with much of the lecture, saying financial capitalism had become baleful in its influence. The answer, he agreed, appears to be education, although, as Professor Rajan pointed out, this is an inevitably slow response. But only an increased supply of highly skilled people can tackle the soaring skill premium and the elite society that has been shaped by the shortage of people who can tell the computers what to do.

Personally, I would add institutional and governance reform to the list – it is imperative to find policies that will have a visible impact much faster. (I talked about this in my Joseph Rowntree Foundation lecture earlier this year.) But yes, certainly education. Very few young people emerge from education systems equipped with the cognitive and non-cognitive skills they need now; indeed, a shocking number do not even have the basic skills to fill ‘low-skill’ jobs, according to employers. And its hard to be optimistic that any country has figured out for sure yet how to deliver better education. When we do, it will still take 15 or 20 years for it to affect the labour market.

So, a stimulating, but pretty depressing evening.

Professor Rajan, at the Wincott Lecture

I really want to read this book

‘This book’ is Mark Mazower’s latest, [amazon_link id=”0713996838″ target=”_blank” ]Governing the World: The History of an Idea[/amazon_link]. There’s an extract in the current issue of The Nation that gives a good flavour of its themes in discussing the international (dis)order and what replacement for it might stagger out of the mists of the current crisis.

It will be interesting to compare it to Philip Bobbitt’s [amazon_link id=”0141007559″ target=”_blank” ]The Shield of Achilles[/amazon_link], which also looked at the clash between nation state-based organisation and globalized financial markets, but in far happier times. And to Tony Judt’s amazing [amazon_link id=”009954203X” target=”_blank” ]Postwar: A History of Europe since 1945[/amazon_link].

I loved Mazower’s book [amazon_link id=”0007120222″ target=”_blank” ]Salonica, City of Ghosts[/amazon_link], and his [amazon_link id=”0140241590″ target=”_blank” ]Dark Continent: Europe’s 20th Century[/amazon_link]. He also wrote an op-ed in the Financial Times recently, and the new book was reviewed positively by Paul Kennedy in the FT, and negatively in Standpoint.

[amazon_image id=”0713996838″ link=”true” target=”_blank” size=”medium” ]Governing the World: The History of an Idea (Allen Lane History)[/amazon_image]

A mess beyond fixing?

I’ve thoroughly enjoyed reading Robert Peston’s [amazon_link id=”1444757091″ target=”_blank” ]How Do We Fix This Mess?[/amazon_link] Its author is so famous, as the BBC’s Business Editor, that his photo is on the front cover. Yet he’s modest enough to start the book with: “I don’t know. But don’t stop reading now.” Indeed, the title is misleading because he sensibly does not try to dole out generalised policy prescriptions. (Oh and – note to publishers – that’s enough long and chatty subtitles, thank you. They’re becoming annoying.)

[amazon_image id=”1444757091″ link=”true” target=”_blank” size=”medium” ]How Do We Fix This Mess?: The Economic Price of Having it All, and the Route to Lasting Prosperity[/amazon_image]

The book draws on Robert’s long experience as a journalist covering the banking industry. (I should say that I’ve known him for years and followed, albeit far less successfully, in his footsteps at The Investors Chronicle and then a national newspaper, The Independent in my case, the FT and Sunday Telegraph in his.) As he says, it must seem to others to have been a boring reporting beat, but it has paid off handsomely in equipping him with the knowledge and the contacts to report superbly on the financial crisis to UK and worldwide audiences.

How Do We Fix This Mess combines chapters giving the context for the crisis, and – the heart of the book – chapters describing what happened in the course of the crucial events starting in late 2007. Scene-setting chapters describe the process of innovation and growth in financial markets and the creation of new kinds of derivatives; the inadequacy of the regulatory regime, and how it came to be so feeble; and the globalisation of the world economy and rise of China. These are all excellent overviews, although some readers will find this familiar territory.

I found the chapters on the early days of the unfolding crisis the most interesting, from the warning signs about Northern Rock through 2007 and the extraordinary run on the Rock in September that year. As Robert points out, the fact that Northern Rock’s business model involved online banking, with very few branches, meant that even a small proportion of depositors wanting to withdraw their money (my sister was one of them) translated into a big queue outside the branch. Some people accused him of causing the crisis, as if the drying up of credit markets and an unsustainable business model were somehow caused by the reporting of it. He is also very interesting on the part played by the Bank of England, much criticised for its handling. As Robert says, Mervyn King was right to say bailing out the banks would contribute to moral hazard – look at where we are now, still hostage to these titanic, toxic institutions – but the book criticises the Bank of England for not raising interest rates or taking other actions in the years before 2007 to puncture the evident bubble in asset markets. MPC minutes from 2005 and 2006 show little concern with its unsustainability or the need to raise interest rates: they were reduced once in 2005, and raised twice in 2006, but by just 0,25% points each time.

The book then turns to the Euro crisis and ends with the Libor scandal, and, rather than a list of things governments and regulators must do, Robert writes: “Perhaps the most important [cause of sluggish growth] is that there is a growing realisation that we have to take steps to live within our means, over the longer term….  The innocent pay a price for the national indebtedness that they did not cause or choose.” He professes himself optimistic:

“The clean up will take years. And there is no quick fix, so you need to brace yourself for perhaps a decade of economic stagnation. As it happens, I don’t think that is reason to weep. We are a very rich country. And we can be a very happy country if we learn how to make the most of what we have got.”

I must say, I’m far less optimistic about the way the economics and politics of the coming lost decade will play into each other. Let’s hope I’m wrong and the mess is fixable. Either way, this is a terrifically interesting and well-written book, which benefits greatly from its author’s detailed knowledge of the banking industry that is at the heart of this crisis.