28/02/2013 § Leave a comment
By now, it is old news that Italians expressed their collective displeasure with economic experts telling them how to run their country. Monti, you will recall, was appointed Prime Minister in a true ‘call in the experts’ move. Now, his party has made a poor showing in the election, and no wonder:
Battered by 13 months of the technocrat government’s austerity measures, many voters had grown to loathe Monti for – as they saw it – turning the screw on them with tax hikes when they were already struggling in a recession.
The adjective commonly applied to Mario Monti was ‘technocratic’. It’s such a bloodless word. For it to have any meaning, one must make massive assumptions about the objectivity of knowledge and the possibilities for even-handedness. It’s an entire worldview hiding in a single word.
Economies are, of course, for the benefit of people. If people decide that things aren’t working out for them, they have options. Sometimes, it means changing jobs, or cutting back on spending, or moving cities. Those are all individual actions made within the bounds of existing conditions. Sometimes, though, people decide that the conditions need to change. That’s what the Italian election signals, as Krugman explains:
The fundamental fact is that a policy of austerity for all — incredibly harsh austerity in debtor nations, but some austerity in the European core too, and not a hint of expansionary policy anywhere — is a complete failure. None of the nations under Brussels/Berlin-imposed austerity has shown even a hint of economic recovery; unemployment is at society-destroying levels.
In a crass way, this is clearly a consultancy failure: the expert didn’t understand the client. He pushed the client too hard on challenging issues and didn’t understand the complexities of the environment in which he was operating. It’s no wonder his contract was terminated.
I’m sure he will be appointed to some other job, though. Unlike many of his compatriots.
27/02/2013 § 2 Comments
It’s a nice place, New Zealand. Got a lot going for it. Sure, we have our troubles like everybody else, but on balance it’s sweet.
Eric Crampton added another to his many posts on why libertarians should move here from North America. He pointed to a letter by Alex Tabarrok in which he decries the ‘security theater’ in production at his kid’s high school. As it happens, I grew up in the area in question, Northern Virginia. It has changed a lot in the 25 years since I moved away, but the authoritarian drive was there back then. I remember visiting a friend’s high school in Seattle and being amazed at the relaxed atmosphere and the respect with which pupils were treated.
Eric’s paean to New Zealand reminded me of another, one that was circulating on social media last month. At Crooks and Liars, a blogger called nonny mouse — an American ex-pat formerly in New Zealand and now in Australia? — set about schooling her compatriots:
We Americans like to think, and in fact have been indoctrinated for decades to believe, that we are the greatest country in the world, the best at just about everything. Sadly, that hasn’t been true for quite some time. Words patriots once gave their lives for, like ‘freedom’… and ‘patriots’… have become almost meaningless.
So if you’re curious about who’s taken our crown, you might be surprised. The latest international index of 123 countries released by the Fraser Institute, Canada’s leading public policy think-tank, and Germany’s Liberales Institut, ranked New Zealand number one for offering the highest level of freedom worldwide….
I was reminded of all of this last night. I did something I have taken to doing from time to time, mostly because I can. Something I would never do in the US.
I went into the grocery store barefoot.
Stores here don’t have the ‘shoes and shirts must be worn’ signs that you see everywhere in the States. Sure, grocery store are slightly hazardous — heavy tins could fall on your toes or there could be glass on the floor. But in the grand scheme of daily risks, those things rank fairly low. And so, reasonable New Zealand doesn’t make a big deal of them.
Personal freedom is a lot of things. Some days, it’s just bare feet.
25/02/2013 § 2 Comments
And the snapshot makes for grim reading: More than half (54.1 per cent) say New Zealand was a better place to live in 2003 than now. Almost 12 per cent were undecided or could not say.
The article then throws some numbers around, but without much structure or context to give them meaning. For example:
Back then, the average wage was $34,600 – 40.2 per cent less than today’s $48,500.
Averages are less meaningful in this context than medians and some information about income distribution. A look at the Stats NZ Table Builder, though, shows that weekly median income for the working-age population has increased 40% ($401 to $560) while average income has increased only 34% ($539 to $721), which indicates a decrease in income inequality.
These are also nominal dollars, not inflation-adjusted, so the gains aren’t that great. The article tries to cover itself by saying
However, the gain at face value has been quashed, with the cost of living rising considerably over the decade
and then it goes on to quote some price changes for individual products. What we really need is a generalised basket of consumer goods for comparison. Oh wait, Stats already collects that data for us. The CPI is up 26% in that time (2003Q4 = 924; 2012Q4 = 1169). So, the median income gain in that time has been about 11%, or 1% per year.
Of course, these numbers are medians and averages. Polls ask questions of individual people, whose experiences will be across the distribution. Some of them will be worse off, and some will be much better off than 1% per year. Housing is one of those areas:
In 2003, the median house price was five times annual earnings. Now it is almost eight times the average salary.
If you have been owning a house during this period, you are relatively richer. If you haven’t, your relative house-buying power has declined, probably enough to offset any income gains.
My guess, though, is that the poll is less about 2003 than about what happened afterward. Borrowing from Shamubeel Eaqub (NZIER) and a report, ‘Lessons from the Recession’, that he did for MYOB (available here):
We are better off than we were in 2003, but nowhere near where we thought we would be. It’s no wonder that respondents were grim.
20/02/2013 § Leave a comment
Yesterday, I was singing along to One Direction with my daughter (hey, girl gotta have a boy band). From the sound of the album, they are avid users of Auto-Tune, the software for ‘adjusting’ vocal performances. The software is generally used to adjust singing to the ‘correct’ pitch; in the process, it changes the quality of the sound. Heavily used, it comes close to the synth voice sounds of the 1970s.
This morning, it was Joe Cocker and ‘Hitchcock Railway’. The album was in 1969, but I don’t know when the version I heard on the radio was done. There’s a massive blues-based rock piano that introduces the song and carries through. The part being blues-based, the piano is purposely out of tune. The old blues players had to work with whatever was available, pianos being notoriously hard to carry on one’s back. The pianos in the bars and honky-tonks where they played would be out of tune. That became part of the blues sound and continued into music like Cocker’s.
The thing about ‘Hitchcock Railway’ is that the piano is worse than anything I’ve heard on any blues recording. It’s particularly noticeable on the sevenths but you can hear it all the way through.
And so I wonder — has this out-of-tune tuning been chosen, been manufactured? Have they purposely fiddled with the piano strings to get the sound they want?
And then, given that the recording might have been from 1969, one wonders what might happen today. Would Cocker use Auto-Tune to do some post-production out-of-tuning to get the sound he wants?
Regardless of the method (analog or digital), this un-tuning is producing a simulation of a sound, a sound based in the poverty of the Mississippi Delta. But in ‘Hitchcock Railway’, this staged authenticity is different — quantitatively more — than the original.
Niall and the guys use Auto-Tuning for a ‘correct’ pitch, but simulating the wrong pitch seems exactly the same.
18/02/2013 § 2 Comments
Selon cette théorie de la “stupidité fonctionnelle”, le monde de la finance serait dicté par le “fais d’abord, réfléchis après”. Une attitude qui tend à écarter les questions gênantes, et les longues réflexions sur les actions des salariés – alors même qu’on attend d’eux de grandes compétences.
(According to this theory of ‘functional stupidity, the financial world is ruled by ‘act first, think later’. This attitude tends to avoid difficult questions or considered reflection on behaviour by employees — even while they are expected to be extremely capable.)
The journal article in question is Alvesson and Spicer (2012), ‘A Stupidity-Based Theory of Organizations’ (here). I liked this comment from the conclusion:
Furthermore, we think the consensus in this broad field needs to be challenged – perhaps key developments and contemporary conditions also mean that modern economies and organizations become more ‘stupidity-intensive’?
Can I add ‘stupidity’ as a factor of production in our CGE model?
The central idea is not far from Simon’s bounded rationality (which they discuss briefly). Cognitive power is limited, we can’t take everything in, so we use shortcuts. One problem is feedback loops. When things are going well, the positive feedback reinforces the mental shortcuts. If ‘go along to get along’ keeps producing results, you do more of it.
But, if the behaviour is increasing the risk of low-probability events, there isn’t a feedback loop to tell you that. The negative feedback doesn’t kick in until something happens. Alvesson and Spicer suggest that this becomes a time for reflection and reassessment. The stupidity is no longer functional, so people have the opportunity to find new behaviours.
Reassessment is only one possibility. Zizek noted (in First as tragedy?) that in times of crisis people tend to return to safe ways of thinking, return to the old ways, even return to an imagined past. If functional stupidity is that past, then there is the possibility of more of the same only worse. In a paper I’ve discussed here before, ’What can psychoanalysis offer organization studies today?‘, Costas and Taheri describe two possible directions that ‘authentic management’ leads: greater authoritarianism or more reflective behaviour inside organisations. It’s the same with functionally stupid organisations in crisis. They could hold fast to what worked in the past or reconsider how to adapt to new conditions.
Of course, the argument presupposes that the financial sector actually has to bear any consequences of its myopia. If it just gets rewarded regardless — which is what happened in the crisis — the herd behaviour described by Alvesson and Spicer will continue unabated.
15/02/2013 § 10 Comments
Reading through the post-mortems of the financial crisis, I’ve been struck by something. The behaviour of the finance sector doesn’t fit the standard economics model, the Samuelson textbook depiction, or the Heckscher–Ohlin model of trade, or the Solow model, or any of the other bog-standard depictions of the economic system that we like to teach.
A key idea is that capital is a factor of production, like labour, land, and maybe entrepreneurship, management, natural resources, human capital, or any of the other factors people like to add. Two things about this capital:
- capital gets a return for its use, which accrues to the owner of said capital, and
- owners (capitalists, entrepreneurs, whatever) receive a return commensurate with the risk they take: higher returns are required to entice people to take greater risks (and thereby promote innovation).
But, but, but…that’s not what’s happened.
If you read the accounts of the financial crisis, two things are clear:
1. The people administering the mortgage-backed securities (MBSs) are having a hard time proving they own the mortgaged they say they do. To quote Adam Levitin:
The mortgage foreclosure process is beset by a variety of problems. These range from procedural defects (including, but not limited to robosigning) to outright counterfeiting of documents to questions about the validity of private-label mortgage securitizations that could mean that these mortgage-backed securities are not actually backed by any mortgages whatsoever. While the extent of these problems is unknown at present, the evidence is mounting that it is not limited to one-off cases, but that there may be pervasive defects throughout the foreclosure and securitization processes.
That is, these folks aren’t sure of what they own, and yet they are selling derivatives based on what they think they might have. More frighteningly, banks are taking or selling houses they don’t own.
2. Risk and reward are now de-coupled. Companies in the finance sector took gambles on the housing market, and things didn’t go their way. That happens. An evolutionary account of the market economy is that success should be rewarded and failure should lead to extinction. AIG, just to name one company, took massive risk onto its books by insuring the value of MBSs. Their clients claimed against the policies, which was going to drive AIG into bankruptcy. AIG got bailed out, as did a number of other financial firms. So, for finance firms, success is rewarded but so was failure.
In the months leading up to early November 2008, AIG had been actively engaged in efforts to negotiate tear-ups of its CDS contracts with its counterparties. AIG was completely unsuccessful. The need for the tear-ups was real; AIG was effectively hemorrhaging cash.
But what happened? Wall Street posted record profits in 2009 and had its fourth-most-profitable year in 2010, after it ‘benefited from a series of federal bailouts as well as low interest rates’.
Why aren’t more economists having a crisis of faith? The story and the models that we use to talk about the economy appear flawed in a fundamental way. It isn’t about innovation and efficiency, the supply side responding to signals from the demand side. Instead, fraud, crime, and collusion seem to be the path to riches.
14/02/2013 § Leave a comment
I’ve been writing a paper for today’s conference, ‘Lacan and the Discourse of Capitalism’. I’ll post an abstract or paper later, but I wanted to point to a few resources about the financial crisis for your viewing pleasure.
One is this great graphic from the IMF about the structure of MBSs and CDOs. The structure is kind of simple but kind of not, and the graphic captures that pretty well. It’s funny that they use water pipes to show the flow of funds — very MONIAC.
Trawling around looking for information on the problems with MBSs, I came across Professor Adam J. Levitin (Georgetown Law, Washington D.C.). He has been writing about the legal issues of MBSs and testifying to the US Congress (so they have no excuse not to understand the problems). For example, in ‘Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing’, he bluntly states
The chain of title problems are highly technical, but they pose a potential systemic risk to the US economy.
Unfortunately, I think there’s a tendency just to hope it sorts itself out.
And finally, just in case you’ve forgotten what happened and when, they are places to refresh your memory. The UK Guardian has a nice timeline. For more detail (much more detail), I found a paper by Robert E. Marks, ‘Learning Lessons? The Global Financial Crisis four years on’, helpful. It includes lovely gems like:
2005 August 25−27: Raghuram Rajan (MIT PhD ’91), Economic Counsellor and Director of Research, International Monetary Fund (IMF), presents a paper at a symposium to honour Alan Greenspan’s tenure at the Fed warning that the financial system is taking on potentially dangerous levels of risk. He is mocked.
Just a few reminders of the chaos of the last few years.
11/02/2013 § 2 Comments
I was more focused on my barbecuing than the TV1 newscast last night, but then something caught my attention:
Calls are growing for better legal protection for companies affected by other firms’ receiverships.
But in the wake of the Mainzeal Property and Construction collapse, the Government says there is no evidence new laws are needed.
The report also used the words ‘market failure’.
Mainzeal has gone into receivership, creating headaches for subcontractors. Some of their tools and equipment are locked up, and they are owed hundreds of thousands if not millions of dollars.
Clearly, it hasn’t gone right. It’s a failure, but what kind of failure?
The initial reports pinned the blame on two things, leaky buildings and supply chain problems.
- Leaky buildings – Mainzeal explained/complained that the architects and builders who contributed to the leaky building problems have all closed up shop, so Mainzeal was left as the ‘last man standing’. I have no sympathy for the company on this score. The building industry is organised as a lot of different companies contracting and subcontracting to each other. They could, if they wanted, organise into a few large vertically integrated companies that provide services from design through to completion, with all the chippies, sparkies, painters, scaffolding, etc. inside a single company. They find it better — presumably for risk minimisation purposes — not to do that. Mostly, it works. Sometimes — as in the case of leaky buildings — an expensive failure requires a fall guy.
- Supply chain problems – Mainzeal made business decisions about its supply chain. It chose to work with new suppliers, presumably to lower costs and increase its profits. That’s what the business is supposed to do. It didn’t work out — there were problems, it cost money, the profits didn’t eventuate. Yeah, well, that happens. Happens to chip shops, happens to large construction companies.
Mainzeal has some business problems. They tried a business model that, as it turned out, didn’t work under circumstances. They tried new supply chains that, as it turned out, didn’t deliver the goods. It looks like a simple case of trial and error. Error — failure — is part of the evolutionary process that a market economy allows.
One failure that is part of this episode is a regulatory failure. Leaky buildings are a complex problem and there is enough blame to go around. Building regulations contributed to that failure. First, new products and methods were permitted. Secondly, councils ‘signed off’ on the buildings, which buyers took to be warranties of fitness for purpose but councils now insist were not. Consumers — building buyers — were taking on more risk than they realised, because they did not understand the nature of the products or the council approval. Without the regulations — with a more ‘buyer beware’ approach — we might have seen either more conservative building techniques or more insistence on bonds or insurance.
The new regulations fostered innovation in the building industry, which is generally desirable. It also increased the risk without insuring against it. In the end, individual building owners have borne much of the costs. In addition, more established companies like Mainzeal have also taken a hit.
Faulty regulation played a part in Mainzeal’s failure, but so did the company’s and the industry’s business decisions. What’s not obvious is any clear market failure. The saying goes that ‘failure is an orphan’; we should do a DNA test on this one to understand its parentage.
04/02/2013 § 1 Comment
Blogroll Amnesty Day extends over several days and doesn’t offer amnesty for anything (unless blogging is a crime, in which case only criminals will carry blogs). The backstory is over at skippy the bush kangaroo:
readers of this space know that b.a.d. is the holiday wherein we ask everyone in blogtopia (and yes, we coined that phrase) to link to 5 smaller blogs w/less traffic than theirs (no bad jokes about no blogs having less traffic than yours, please).
this way we all can introduce our readers to new voices in blogtopia (and yes, we coined that phrase)’ as well as giving greater exposure to blogs which may otherwise go unnoticed.
I’ll throw in a few links to other blogs, because it’s the connectedness that makes the Web work. It starts to make you think that Deleuze and Guattari were right, that we can all extend our bodies-without-organs into a developing, branching rhizome of liberating individualities. Until, of course, you remember that there is an architecture, an infrastructure, an — may I? – oberbau that makes it all possible but is not an emergent property of the blogosphere.
But an apology first. In general, I don’t know what other sites’ stats are, so I risk offending sites that are bigger than mine. So, I’m going for newer rather than smaller.
Other side of weight loss – a critical look at weight-loss, size-ism, and the weight-anxiety industry. I love that Andrew is using Lacanian theory to understand social, economic and cultural phenomena. The latest post on the demise of the fat capitalist (and the rise of stories like Paul Ryan’s PX90) has stuck with me.
Fair play and forward passes — a site about economics and sports. Absolutely brilliant if that’s your sort of thing, and Sam’s a nice guy, too.
The other side of business — sticking with the Massey University theme, here is a new-ish blog from the School of Management, which is working on new ways of communicating ideas with staff, students and the public.
Brennanmcdonald.com — Brennan used to blog on wellygnome, but has nabbed his own domain. He is blogging from a Gen-Y, trying-to-get-started-in-life perspective. It is a reminder to us comfortable, middle-aged types not to get too wrapped up in our own perspectives.
The off-work economist — James has been blogging longer than I have, and I have no idea what his traffic is like, but he gave us ‘Quantum theory and train passengers’. He also writes good R code, and for that alone should be shown some blog-love.
01/02/2013 § 5 Comments
I’m finding this monetary discussion interesting and useful. Matt Nolan and Eric Crampton have added a lot to it. Since the Reserve Bank decided yesterday to leave the OCR unchanged at 2.5%, I thought I’d offer an interpretation.
The Bank is balancing several different concerns. Some factors point toward looser policy: inflation below the target band, weak labour market, ‘fiscal consolidation’, and a high exchange rate. Other factors point toward tightening: house price inflation in Auckland, expectations for the Christchurch rebuild, positive business sentiment. They’ve split the difference and kept the OCR unchanged. Bernard Hickey explained this very well on Breakfast this morning.
Is it a good decision? We’ll only know that later in the year. But here are some thoughts on it.
First, the RBNZ has been consistently optimistic about the economy over the last several quarters, predicting increases in the OCR that didn’t eventuate. As part of that, the Christchurch rebuild has consistently underperformed. That suggests that if the Bank is wrong, they are likely to be on the high side.
Secondly, other people clearly have a more pessimistic view. Eric pointed to the iPredict website and the predictions for the economy. He noted:
That’s consistent with the Bank’s own forecasts in December 2012 (pdf).
The Bank had essentially two choices, with their own costs and benefits:
|OCR lower||Possibility of overshooting||Greater economic activity|
|OCR unchanged||Higher unemployment||Inflation below 2%|
Looked at this way, the OCR decision means that the Bank has chosen the certainty of higher unemployment rather than face the possibility of missing its inflation target, a possibility that should be considered against a backdrop of misplaced optimism. If I were being churlish, I would suggest that Auckland’s failure to deal with its planning issues is resulting in tens of thousands of people being purposely kept out of work. But I won’t — it wouldn’t be politic.