Sardanapale

My previous post called development aid a reward for failure.

To stay on the subject, I’ll write now about plans to bail out Detroit.

General Motors, Ford and Chrysler insist they urgently need $50bn in taxpayer support to stave off bankruptcy. The Democrats are prepared to meet them half way.

The Big Three and their congressional friends say more than two million jobs would go if they went under: surely a mere $25bn in loans is not a price worth paying to see an essential industry through a rough patch.

Those who want to rescue Detroit’s mismanagement are recalling the bailout of Chrysler in 1979, widely seen as a model of enlightened industrial policy.

The parallels are indeed worth dwelling on. Then as, now, the administration and Congress came under intense pressure.

Chrysler’s boss, the legendary Lee Iacocca, used exactly the same arguments being put forward by Detroit as a whole: hundreds of thousands of jobs at stake, the company had turned a corner, bankruptcy would doom it, it was only asking for a loan.

The Congress agreed to guarantee $1.5bn in loans made by other institutions to the carmaker.

The result: the automaker recovered, the loans were repaid early, and in the end the taxpayer didn’t pay a cent (indeed the Treasury ended up with a profit because it got Chrysler shares as part of the deal!)

A triumph then! Not so fast.

The outcome I’ve just mentioned is only what is seen. There is also “what is not seen”, as Frédéric Bastiat put it.

William Graham Sumner had a collective name for all the neglected victims of such government action: the “forgotten man” (Sumner is himself a “forgotten man”, but that’s another story.)

No one knows which businesses and individuals failed to get a loan because Chrysler was allowed to jump the credit cue. Indeed they don’t know themselves who they are.

But they necessarily exist, since the loan guarantees did not increase the total amount of capital available to the economy.

In short the government, not the markets, decided how best to use the $1.5bn. And government does not have a great track record of picking winners.

As for the argument that Chrysler’s jobs, at least, were saved, it is equally dubious.

Suppose the carmaker had gone into bankruptcy and its machines and plant would have continued to operate under court-appointed administrators.

If the company was viable (as Iacocca argued, correctly it turned out), a recovery would have been likely.

In fact bankruptcy protection was specifically designed to with such a case, and allow a sound business to pick itself up.

But even if the company was not viable and had gone under, its machinery and workforce would not have just disappeared into thin air.

Assuming that they were worth something, they would have found managers to make better use of them.

The shareholders would have been wiped out – that’s the risk you take when you own shares.

But Chrysler’s liquidation would not have affected total demand for cars in the US and therefore the potential quantity of jobs in the automobile industry.

The bail-out had no redeeming features.

Its most eloquent critic of the bailout was David Stockman, who fought it in vain as a congressman.

When he became Reagan’s Budget Director a year later, Stockman was still burning with outrage:

“We have to be pragmatic. Fix it up now and worry about the consequences later. Don’t bother yourself with elegant theories about whether it’s sound public policy.

Don’t trouble yourself with the economic effects of catapulting Chrysler from the back of the credit line to the front.

Somebody else is going to be squeezed out of the credit market - small manufacturers, construction firms, auto dealers, farmers - with reduced protection and employment elsewhere as a result.

These latter firms and workers are not speculative. They are just politically invisible.

No one on the globe with real money to invest is willing to come forward to Chrysler’s rescue: not the banks, insurance companies, or the bond markets… unless Uncle Sam promises to underwrite the risks.

Well, P.T. Barnum once said: ‘There’s one born every minute – you can count on it.’ Apparently the US Congress is the only one left.”

Stockman’s objections to the Detroit bailout of three decades ago are just as relevant now.

If anything they’re more relevant, because the proposed bailout is even more outrageous than the previous one.

For one thing the sums are much larger, and the government is being asked for cash, not just loan guarantees.

If it falls for it, it’s an even bigger sucker than it was 30 years ago. And it will amount to another triumph for special interest against the swelling ranks of “forgotten men”.

BBC historian Laurence Rees asks the right question in an online article:

“He had the blood of millions on his hands, yet Joseph Stalin has escaped Hitler-style demonisation, and even become a trendy pin-up. Why has history been so kind to this murderous leader?

A few months ago, when I was visiting one of our leading universities, I happened to see a poster prominently displayed in one of the students’ halls of residence. It was of Joseph Stalin.

Perhaps it was meant as a kind of ironic reference to something. Perhaps it was simply covering a damp patch on the wall. But, in any event, no one seemed to take much notice of it.

But imagine if instead of a picture of Stalin, there had been a picture of that other horrendous tyrant of the 20th Century, Adolf Hitler, hanging there? Think of the outcry.”

The immunity enjoyed by communism and Stalin is rooted in World War II propaganda.

Rees reminds us that Life magazine in March 1943 painted the Soviet Union as a quasi America, and the Soviets as “one hell of a people… [who] to a remarkable degree… look like Americans, dress like Americans and think like Americans.”

Rees also mentions the fact that the publisher who had initially accepted Orwell’s brilliant satire Animal Farm, turned it down after an official at the British Ministry of Information warned him off.

In the US, Time magazine put Stalin on the cover as “man of the year” for 1942. “The man whose name means steel in Russian, whose few words of English include the American expression ‘tough guy’ was the man of 1942,” Time wrote. “Stalin’s methods were tough, but they paid off.”

And in an even more positive article in Life magazine in March 1943, the Soviet Union was painted as a quasi America, with the Soviets as “one hell of a people… [who] look like Americans, dress like Americans and think like Americans.”

The NKVD (predecessor of the KGB) is described as “a national police similar to the FBI.”

Of course, Rees writes, during the war such lies could be justified in the name of the struggle against the Nazis.

The problem is that they continue to circulate 65 years later. Rees sets the record straight not just in the online article, but in a docudrama on Stalin and the West broadcast on Monday by the BBC. It can be watched for a week on this site.

The (London) Times has a great article by Oliver Kamm about the ban on short selling. Highlights:

“Politicians and columnists know who is to blame for the turmoil in financial markets. Short-sellers are to blame; and they must be anathematised….

This is not politics: it is pathology. The seismic financial events of the past week have comprehensible but complex causes.

Instead of inquiring into them, how much more satisfying it is to inveigh against the destructive powers of a cabal manipulating world markets…

Regulators have the task of ensuring orderly markets. In exceptional market conditions, there is a case for throwing sand in the wheels of speculation. But short-sellers are not the cause of market instability; at worst, they exaggerate existing trends. The FSA’s ban is far too sweeping and will have economic costs.

Heaven knows, there is much wrong with the financial system. But there is blame aplenty to go round.

The fundamental problem is too much debt. Politicians and central banks on both sides of the Atlantic failed to constrain the credit bubble of the early years of the decade.

Banks exploited their opportunity through reckless lending. Ratings agencies, whose job is to assess credit quality, misvalued some highly dubious financial instruments.

Yet, of all the people to hold to account for this wealth-destroying debacle, regulators and politicians are targeting the messengers of bad news. Short-sellers ensure that bad news is more quickly reflected in market prices. Capital is thereby allocated to more productive uses.

If there had been more short-selling of Northern Rock during its ferociously irresponsible expansion based on borrowing money in the wholesale markets and lending it out as mortgages, much public money might have been saved later on

The banks that engineered the credit mess, and shareholders who made bad investment decisions, understandably seek - literally - to pass the buck to short-sellers. It is foolish populism for politicians to take the banks’ side.”

The New Republic has just published an eloquent defense of the pro-market orthodoxy in economics.

That defense is all the more remarkable as the man who wrote it is an avowed opponent of classical liberalism.

Alan Wolfe starts his article by explaining why he has always loathed neoclassical economists:

“Their relentless advocacy of market-based public policies was finally ideological - and, by my lights, ideologically wrong. Also the jargon grew impenetrable, and the mathematics ostentatious and obnoxious.

When Chicago-style economists started to apply their methods to other social science disciplines, and then to virtually all the perplexities of human life, the charge of academic imperialism could be added.

Friedrich August von Hayek and Milton Friedman had always seemed to me to be marginal and somewhat bizarre thinkers, especially when compared to such intellectual titans as John Maynard Keynes and Joseph Schumpeter.”

At that stage I almost threw away out the (hefty) printout – I had better things to with my time that read a 10,000-word anti-market diatribe. But for some reason I stuck with it, and I’m glad I did.

Wolfe declares his hostility to the neoclassical orthodoxy to state at the outset that he felt well disposed towards the two books he’s reviewing – which both attack central tenets of economic liberalism.

The first Happiness: A Revolution in Economics by the Swiss economist Bruno Frey, aims to rewrite the textbooks on the issue of utility.

Most economists believe that it is pointless to try to fathom the inner desires of market participants.

Is a pound of raspberries more or less satisfying that a copy of The Bonfire of the Vanities or a two-way ticket from London Paddington to Ealing Broadway?

According to the pro-market orthodoxy, the only way to measure the utility of those things is just to look at the price a person is willing to pay for them.

Value is subjective to individuals, and has no reality outside exchange.

But Frey disputes that idea. He believes the utility of alternative things can be objectively measured.
Frey draws on economic psychology or behavioral economics to plumb the depths of the human psyche and zero in on “happiness”.

But as Wolfe notes, these newfangled fields hark back to old-fashioned utilitarianism – the old Banthamite doctrine that said that happiness, both at an individual and at a collective level, could be quantified and optimised.

If Frey is correct, then economics has been on the wrong track since the marginalist revolution of the late 19th century.

The second book is just as ambitious in its aim to undermine neoclassical economics. It attacks the key concept of rational agents.

The textbooks tell you men tend to be rational in their economic choice – this is why markets are efficient.

Not so, says Dan Ariely. In Predictably Irrational, he shows how the quirks of the human mind lead us astray.

For example, we set too high a price on the things we already own and undervalue those we do not own. As a result, we refuse many exchanges that would benefit us.

This “endowment effect” may have served us well in the ancient savannah, where trading things with strangers was risky.

But nowadays this trait makes us poorer.

Arielly, citing his own experiments and research by behavioral economists and evolutionary psychologists, argues that many similar mental reflexes make a mockery of the idea of the rational agent.

In other words, a system based on blatant self-interest will be inefficient.

Both authors’ conclusions are congenial to Wolfe – yet he ultimately rejects them. Why? Simply because he is not convinced with the way they reach them.

Much as he would like for pro-market textbooks to be rewritten, Wolfe believes Frey and Ariely fail to do so.

Judging an argument not by where it leads you but how it gets there is a remarkable example of intellectual probity – I’m not sure I could ever be that honest myself.

For details of Wolfe’s critique, read his article. His main conclusion deserves to be quoted at length:

“One has to wonder why the revolution in economics failed so badly even before it really got off the ground… (I)f these two books are any indication, supply and demand, marginal utility, rational choice, and cost-benefit analysis are not going away.

At best, economists will tweak their models a bit to account for some of our odder calculations. More likely, they will simply reiterate their belief that we need not examine the internal mechanisms of utility satisfaction because the price someone is willing to pay for something is really all we need to know.

Since they fail so conspicuously to live up to what they promise, these books reveal more about the sociology of the academy than they do about the behavior of ordinary people…

It is all-important to be at the cutting edge. You have to a write a dissertation showing that someone else was wrong. The bigger the apple cart you overturn, the better your chances for success. Like Newton, academics stand on the shoulders of giants - but they stand upon them to bury them….

Reading the insistence of Ariely and others who maintain that everyone who studied human beings before behavioral economics came along was wrong, I conclude that we should once and for all stop calling for revolutions in our understanding of ourselves, and end this remarkable presumption.”

Répliques, the best talk show on French radio, was recently disrupted by a posse of protesters.

They read out statements in favor of various oppressed individuals and groups, before being chucked out.

The incident was in keeping with both the topic of the program - the legacy of May 1968 – and the venue - the Théâtre de l’Odéon which was at that time occupied by students and transformed into a freewheeling forum.

I wondered whether the invasion of the Répliques set might have been staged - it would have been a fit tribute to a generation that wanted “imagination in power”.

But Finkielkraut’s incandescent reaction - his natural eloquence magnified by anger - convinced me otherwise.

The whole incident is worth listening to.

But for me, the high point of the broadcast came at the beginning.

After introducing his guests, Finkielkraut offered this profound assessment of de Gaulle - the bête noire of the 1968 students:

“You can say that General de Gaulle is the twentieth-century French politician who, for better and perhaps also for worse, put imagination in power.

He led France to believe that it had an epic destiny. He gave epic overtones to a policy that was in fact confronted with very mundane issues.”

This week I’m lifting a few noteworthy articles about 1968 from the British press.

The second one is this gem by Lucy Kellaway of the Financial Times:

“It took business about 20 years to work out that the 1960s had happened at all…

1968 happened in offices around about 1988, and in 2008 the ideas of the 1960s are still affecting the ways we behave and think at work.

In the early 1960s a group of radical American students got together and drew up a blueprint for what they thought the world ought to look like.

The celebrated Port Huron Statement called for work that was ‘educative, not stultifying; creative, not mechanical; self-directed, not manipulated, encouraging independence… a willingness to accept social responsibility.’

As Anthony Dworkin pointed out in the current issue of Prospect magazine, these ideas have now become enshrined in the workplace ideal that business schools preach.

Empowerment, creativity, team-work, lifelong learning, values and visions: all these ideas had their roots in the 1960s.

Students got over it. Business never has.

Some of these ideas have turned into a good thing in workplaces, others less so.

The business equivalent of free love is job hopping, which means that employees can get into bed with any old employer and if it doesn’t work out they can dump them and move on.

In moderation this is good; in excess it is expensive for employers and destabilising for employees.

The idea of instant, and constant, gratification was also a big thing in the 1960s, but is not so good when translated to work.

Jobs are often dull, and so if we expect the earth to move for us every time, we end up feeling cheated and disappointed when it doesn’t.

Above all what characterised the 1960s was people pretending to be cool when they were actually quite square.

‘Far out, man,’ and ‘be free,’ they used to say.

The same now applies to most corporate executives.

They speak a language infected with the spirit of the 1960s because they think it sounds good, not because they really mean it.

My favourite example was the JP Morgan manager who instructed investment bankers to “take the time today to call a client and tell them you love them”.

Peace and love proved a dodgy dictum even when applied to students. When applied to bankers it beggars belief…

“Let me take you down, ’cause I’m going to Strawberry Fields,” sang the Beatles. “Nothing is real, nothing to get hung about.”

But that is just the trouble and that is why the spirit of the 1960s jars at work. In business it is real, and there is much to get hung about.”

The press in Britain, just like in France, is awash with comments about the legacy of 1968.

Over the coming days I mention a few that have caught my attention.

The first is by the economist Paul Ormerod, and published in Prospect Magazine:

“I observed the events of May 1968 from my council estate in Rochdale. They seemed to have no relevance to us.

We saw on our television screens self-indulgent children of the bourgeoisie calling for the overthrow of the system.

This system had brought a modicum of prosperity and security to a population with memories of both the grim inter-war years and the pride and sacrifice of the war itself.

These feelings of bewilderment were enhanced when I arrived at Cambridge later that year.

Public schoolboys, with glittering careers awaiting in finance, the media and the law, occupied buildings and pontificated about revolution.

It was hard to treat it seriously, as anything other than some live street version of Footlights. These people were surely not for real. I was wrong.

The passage of the 1968 generation through the body politic has had devastating consequences not just for the working class but for society as a whole.

Not that I am invoking a mythical golden age. Things needed to change; that was why we supported Labour.

Class divisions were wide, complacency was rife, patriarchy and sexism deeply embedded.

But things were getting better, economically and socially, under the banner of the social democratic compromise all parties had embraced.

The distinguishing feature of the 68ers has continued to be their capacity for self-indulgence, and their blindness about the consequences of their actions for others.

The systematic denigration of western culture by the 68ers has impoverished the lives of millions.

The concept of a high culture had once been embraced without question by generations of working-class activists.

The generation that won the Second World War knew Shakespeare and Beethoven.

They aspired to an idea of progress that would allow their children to access high culture as readily as the bourgeoisie.

So too with the idea of history. The 68er interpretation of British history is a relentlessly negative one.

No country’s history is perfect, but we can be proud of much of our legacy, from defeating European dictators to abolishing slavery.

Children with no sense of history are deprived of their inheritance as citizens.

And the family? The proposition that the conventional nuclear family is on average the best structure in which to bring up children has one of the firmest empirical backings in the whole of social science.

Yet this has been blithely ignored. The result has been the virtual destruction of the conventional family among the poor, with resulting increases in their social and economic degradation.

Multiculturalism is in partial retreat, though the spirit of ‘68 is hard to eradicate.

During the past decade, Britain has experienced one of the greatest movements of population in Europe since the collapse of the Roman empire.

Yet we are invited to believe that this has no adverse effects on our sense of well-being and cohesion. Again, it is the poor who bear the brunt of the dislocations this policy creates.

Those middle-class students who took to the streets in 1968 sought to make common cause with the oppressed.

Yet the impact of their posturings has been to reduce social mobility and to trap people in lives devoid of cultural nourishment.”

“You cannot bring prosperity by discouraging thrift.
You cannot help small men by tearing down big men.
You cannot strengthen the weak by weakening the strong.
You cannot lift the wage earner by pulling down the wage payer.
You cannot help the poor man by destroying the rich.
You cannot keep out of trouble by spending more than your income.
You cannot further brotherhood of men by inciting class hatred.
You cannot establish security on borrowed money.
You cannot build character and courage by taking away man’s initiative and independence.
You cannot help men permanently by doing for them what they could and should do for themselves.”

Rev. William J. H. Boetcker, 1916

(PS: this quote is sometimes wrongly attributed to Abraham Lincoln.)

When it comes to economic policy, I am impressed by none of the candidates for the US presidency.

But on energy, their proposals are downright idiotic.

With gas prices rising all the time, John McCain is calling for a moratorium on the 18.4-cent federal gas tax.

This is a misguided solution to a non-existent problem.

The rise in US gas prices is relative: Europeans would love to pay only $4 a gallon. And then is it such a bad thing?

With everyone, from Bush to environmentalists, rightly complaining that America is “addicted to oil”, lower demand should be welcome.

And McCain wants to spur consumption through lower prices…

Barack Obama, for his part, wants a new tax on the ill-gotten profits of those nasty oil companies.

This idea is even sillier than McCain’s. As the Wall Street Journal wrote recently:

“You may… be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something, you get less of it, but Mr. Obama seems to think he can repeal the laws of economics.

We tried this windfall profits scheme in 1980. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6% and increased oil imports from OPEC by 8% to 16%.

Mr. Obama nonetheless pledges to lessen our dependence on foreign oil, which he says “costs America $800 million a day.” Someone should tell him that oil imports would soar if his tax plan becomes law.

The biggest beneficiaries would be OPEC oil ministers.”

The Walll Street Journal also notes that the energy industry’s earnings are not as outrageous as people think.

Profits from the oil and natural gas industry over the past year were 8.3% of investment, while the all-industry average is 7.8% - and this was a boom year for oil.

An analysis by the Cato Institute found that between 1970 and 2003, the oil and gas business was “less profitable than the rest of the U.S. economy.”

As the journal writes: “These are hardly robber barons.”

Desparing to make any sense of the frontrunners’ energy programs, I turned to Hillary Clinton – who claims executive experience a pragmatic approach.

And it turns out she wants both a McCain’s style gas-tax moratorium and and Obama-style windfall tax on companies.

Far from repudiating her rivals’ follies, she compounds them.

How can such smart people trained at the best schools in the world (well, for Clinton and Obama, at least) come up with such dumb ideas?

The answer, of course, is that they want to get elected.

The idiocy of their proposals betrays not so much their own as their constituents’ ignorance.

I see this as another vindication of Bryan Caplan’s theory of “voter irrationality”.

The Wall Street Journal piece quoted is here. I recommend Caplan’s brilliant website.

“Food is a vital issue that must not be left solely at the mercy of the laws of the market and of international speculation”.
Michel Barnier, French agriculture minister

_________________________________________

Enemies of economic liberalism are blaming the current food crisis on markets.

Mass hunger has been added to the evils that capitalism is loosing upon the world - on top of poverty, exploitation, inequality, health hazards, and climate change.

This, of course, is nonsense: high food prices have nothing to do with selfish speculators or free markets. The reason is rising demand, mostly from fast-developing countries like China and India.

Governments, from alleviating the problem, have so far made it worse.

In the rich world, they are still paying farmers not to grow crops, not an ideal way to boost supply.

The US and the EU are also blocking food imports and subsidizing exports, which is destroying farming in the developing world.

And as everyone except officials seem to realise these days, subsidizing biofuels is crazy.

In America, ethanol soaks up almost 20% of corn production, and encouraging ever more farmers to grow for fuel, not food.

The EU, which mostly castigates US policies when they make sense, is following suit.

In the developing world, governments have dealt with the crisis in equally idiotic ways.

They have fixed prices, punished “hoarding” (punishable by life imprisonment in the Philippines), and restricted exports.

All of this, of course, reduces incentives for farmers to grow more, making the problem worse.

Government could and should do something to alleviate shortages and stave off mass poverty, but interfering with price signals and castigating “speculators” is exactly the wrong way to go about it.

Here are a couple of good articles I’ve read on the subject recently – in the The Economist and The Wall Street Journal.

Let me know about any other I may have missed.