An extremely quick Google search convinces me that lawyers are massively over-represented in the Canadian Parliament. I am quite sure that something similar is true in other countries too. Lawyers are far more powerful in setting government policy than are ordinary middle-class people like me.
So if we want to understand why monetary policy is so tight, we really need to ask the question: why are lawyers opposed to higher inflation?
It might be false consciousness. Lawyers don't understand macro as well as the average macroeconomist like myself, and they don't realise that they too would gain from a looser monetary policy, which would cause an increased demand for lawyers, and so higher real incomes for lawyers. So they are acting against their own class interest, because they don't understand it.
No. That's too easy. Political economy is hard.
I need to drink more beer.
Aha! I think I have an answer! It's because lawyers' fees are stickier than other prices! So if central banks loosen monetary policy, lawyers' fees will rise more slowly than other prices, so lawyers' fees will fall in real terms!
[Update: actually, as any good New Keynesian economist should be able to figure out, even if you grant my assumption about lawyers' fees being stickier than other prices, my above paragraph is wrong. Lawyers' real incomes and utility will rise even if their real fees per hours fall, for small increases in AD. But I hear similar sorts of rubbish from people all the time.]
Do you have a better theory to explain why monetary policy is too tight?
[More studies in applied orthogonality. Or maybe another foray into Macroeconomics and the Celestial Emporium of Benevolent Knowledge. There are sensible ways to divide up the world, and silly ways to divide up the world. And which way is sensible and which way is silly depends on the question we are asking. And a fanatic is someone who can only divide up the world one way, and tries to apply it to everything. Marxists are a classic example. I once had two friends who were Communist Party members. One supported Glasgow Rangers; the other supported Glasgow Celtic. And they would argue about whether a Rangers win or a Celtic win would be better for the Revolution.]
[And this satire is aimed at a helluva lotta people, not just Paul Krugman. I'm probably guilty of this sin too, sometimes.]
P.S. Now I'm getting worried. This theory is starting to look almost sensible to me. After all, lawyers (and ex-lawyers and soon-to-be-lawyers-again, and those trained as lawyers even if they've never practised) really are massively over-represented in the seats of power and as advisors to those who occupy those seats. And didn't I read somewhere recently that German economic policy is even more dominated by lawyers? So my theory explains why Germans are even more paranoid about inflation!
Worthwhile Canadian Initiative 
“Clinton, for example, repealed the Glass-Steagall Act”
Maybe leave the legal analysis to the lawyers? ; )
I see people blaming Clinton for this all the time, but how can anyone really believe that the post-Depression separation of commercial and investment banking survived until the late 90s?!?!? Citibank didn’t need any reforms to complete its acquisition of Salomon — the Clinton repeal was to allow the takeover of an insurer, Travelers, which it sold a few years later (though the red frown in Citi’s logo is a living reminder of it).
And none of this had anything to do with the Fed’s monetary blunders that led to the financial crisis (or the Great Depression). It was economists, plain and simple, who did that.
As for lawyers running the world… it’s not at all surprising to me that lawmakers are often lawyers. Duh…
If you were a billionaire with an axe to grind, who would you hire to advocate on your behalf?
“Do you have a better theory to explain why monetary policy is too tight?”
You need to look at the possibility that it is not too tight. Maybe government deficit spending is getting to dangerous levels and we are headed to high inflation. I have a model that shows how this could happen:
http://howfiatdies.blogspot.com/2014/09/krugmans-missing-model.html
@Vince:
“I see people blaming Clinton for this all the time, but how can anyone really believe that the post-Depression separation of commercial and investment banking survived until the late 90s?!?!?”
The reason the separation was put in place was to avoid an obvious moral hazard. In order to stop bank panics (that wreaked periodic havoc up into the early 1930s) bank accounts needed to be insured. In order to prevent commercial banks from excessive risk taking, which taxpayers were on the hook for, commercial banks needed to be regulated.
So neoliberal ideologues messing with a tried-and-true system that produced over 50 years of stable banking first created the Savings & Loans crisis in the 1980s which required a $160 billion bailout. This turned out to be a precursor to the 2008 financial market meltdown which cost taxpayers $700 billion, plus all the money wasted on Fed QE toxic asset purchases.
The point is not about blaming Clinton, but to point out he was carrying on Reagan’s neo-liberal agenda (instead of opposing it which partisan liberals are still oblivious to today.)
Clinton was also responsible for promoting the Washington Consensus that worsened currency crises in Latin America and Asia during the 1990s, absurdly forcing pro-cyclical fiscal and monetary policy upon developing countries whose economies were in freefall — which was the opposite medicine America prescribed for itself after its various asset bubble crises, especially the 2008 meltdown (i.e. countercyclical monetary and fiscal measures.)
BTW, I am not a “leftie”. I am in the political center where America was during the post-war Keynesian era (1945-1980; back when the economy functioned.)
“And none of this had anything to do with the Fed’s monetary blunders that led to the financial crisis (or the Great Depression). It was economists, plain and simple, who did that.”
For one, Greenspan was a neo-liberal’s wet dream of a central banker. He was heralded a hero until the 2008 meltdown. He promoted deregulation. Resisted regulation of the shadow banking sector and various financial innovation schemes, which he also promoted. He believed religiously in the infallibility of free markets. He took a hands off approach to the economy. And in Friedmanian style, brought in helicopter money when asset bubbles burst. (According to free market ideology, one cannot know an asset bubble exists until the correction.)
As for the helicopter money dropped in after the dot com bust and 9/11 terrorist attacks, Stiglitz brings up an interesting point about banks and businesses that tried to shift the blame years later after the 2008 meltdown. Complaining about cheap money is the same as an automaker complaining about cheap inputs like a low price for steel and labor. These are big pluses, not burdens.
The real problem was that the money was not invested in the real economy but wasted in the free market casino created by the financial innovation schemes. These created synthetic assets that bet on the value of real assets, which were junk mortgages whose worthlessness was hidden by information asymmetries inherent in the financial innovation products themselves.
Instead of a bank being responsible for a mortgage and being on the hook for a default, mortgages were bundled up and sold as securities which were given AAA ratings. The investors had no way of knowing they were predatory mortgages and “liar loans” which were creating a housing bubble and were doomed to default. (Of course, some insiders like hedge fund manager John Paulson knew. He literally made billions of dollars shorting these investments including a billion-dollar junk mortgage fund he designed for Goldman Sachs.)
Investors trusted the bond rating agencies who used the flaky Gaussian Copula formula to calculate the risk (which basically stated the likelihood of widespread defaults was a 1-in-a-thousand year storm.) Savvy investors (i.e. not the “muppets”) knew the entire system was a fraud: a gargantuan mass market manipulation scam. They played musical chairs with the housing bubble, waiting for the right moment to grab a seat (making a huge profit) before the system came crashing down around their ears.
In short, deregulation and financial innovation products: a) amplified the risk instead of spreading it out; b) wasted capital on synthetic assets instead of pumping money into the real economy which would’ve created long-lasting wealth and jobs through business expansion and innovation; and c) wasted capital fueling a housing bubble that resulted in enormous financial and social costs across the globe we are still paying for 6 years later.
“It was economists, plain and simple, who did that.”
Yes, free-market ideologues: from Milton Friedman to Larry Summers (who’s still around mucking up the American economy. Hopefully someone will drive a stake into Uncle Milty, ensuring he stays dead and buried.)
@ Ron Waller
Not sure history is on your side. Glass-Steagall didn’t fix the problems that led to the Great Depression. We were wrong to believe that banks were the source of the contraction, as Bernanke acknowledged 10 years ago when he said: “We did it.” He meant that the Fed’s monetary policy caused the Depression (ie, neither lawyers nor bankers, but an independent board composed entirely of economists).
I believe that we’ll eventually come to exactly the same conclusion about the current depression — the Fed did it. And they did it for exactly the same reason: because they were paranoid about an asset bubble (ie, they were “against higher inflation”) and thought they knew how to fix it. They were wrong. Both times.
And here we are blaming lawyers. Will we ever learn?
A mix-and-match of comments I have made in other threads.
The view from the Antipodes–where “neoliberalism” was primarily implemented by centre-left governments–makes many of the generalisations being bandied around in the comments seem somewhat inadequate.
Globalisation (competition from low wage countries), migration (especially of low-skill folk) and rising female labour force participation were always going to make rising real wages a big ask. It would require significant productivity increases: difficult when labour substitution is easier.
Alternatively, one could engage in careful “social wage” policies (tax the winners and transfer benefits further down). That would be Antipodean “neoliberalism”.
Either way, it is not a coincidence that the policy turn to “neoliberalism” occurred after productivity growth dropped dramatically.
I also get impatient with the “financial deregulation meant X” as, in the Antipodes, it did nothing of the kind. We managed our bank bargain better than the US. As did Canada. But Canada have been managing their bank bargain better than the US for well over a century. Hard to blame that continuing pattern on “neoliberalism”. At best, “neoliberalism” provided the Yanks with a new way of screwing up their bank bargain, as per their long term historical pattern.
Also, the irony is that Friedman’s mistake was not to take his expectations critique of the Philips Curve as an instrument of policy far enough.
http://skepticlawyer.com.au/2013/04/15/check-your-expectations-3-milton-friedman-not-going-far-enough/
Oblivia:
The liquidationists at the Fed turned a slump from the 1929 stock market crash into a depression and bank meltdown because they believed no action was the best action. The Glass-Steagall Act was an attempt to end bank panics, which worked perfectly.
The Fed has taken the opposite approach to the 2008 financial meltdown, which was likely a bigger shock than the 1929 stock market meltdown. They provided ultra loose monetary policy short of raising the 2% inflation target: near-zero interest rates for 5 years and QE money printing.
The Fed didn’t cause the crisis. But they obviously didn’t fix it either. Significant fiscal stimulus is needed now, just like it was in the 1930s. Of course, back then governments didn’t provide it until they converted to war-time economies: first Germany, then the US.
Of course, one doesn’t need to spend money blowing things up to stimulate the economy. Spending on infrastructure and reversing spending cutbacks will do the job just as well.
“The view from the Antipodes–where “neoliberalism” was primarily implemented by centre-left governments–makes many of the generalisations being bandied around in the comments seem somewhat inadequate.”
This is an obvious contradiction. First the left-right economic spectrum is defined with communism on the far left (100% government control over the economy) and free-market libertarianism on the far right (no government involvement in the economy.) The mixed-market system, created by Keynes and employed during the post-war era, is in the center.
So a center-left government would be socialist-leaning Keynesian on economic issues. If they are neoliberal, they are, by definition, to the right of center.
If a party is called the “Leftie” party and it’s agenda is to implement anti-Keynesian free-market reforms, it is no longer a left-leaning party. The name says nothing about its position on the left-right economic spectrum.
“I also get impatient with the “financial deregulation meant X” as, in the Antipodes, it did nothing of the kind. We managed our bank bargain better than the US. As did Canada. But Canada have been managing their bank bargain better than the US for well over a century.”
Managing and deregulating are obviously different policy directions.
In Canada we had a right-of-center “centrist” government that rejected bank deregulation. That prevented a financial market meltdown here. (In 2006, a more right-leaning government imported some US practices through mortgage deregulation: no-money-down, 35-year mortgages with federal insurance [of course]. But our housing bubble has yet to burst.)
But just because a neoliberal-leaning country or party takes a Keynesian position on banking, doesn’t mean it has a different version of neoliberalism.
Neoliberal doctrine is opposed to regulations. Neo-liberals were opposed to the regulation of the financial innovation products that caused financial meltdowns in many countries around the world.
What is the neoliberal position on government bailouts of failed investment banks? Is crybaby capitalism neoliberal?
OK, if one uses the Humpty Dumpty version where words mean whatever I say they do whenever I want them to, then you can “defend” anything.
The Hawke-Keating Governments and the Lange-Douglas Governments were centre-Left Labour Governments. They privatised, corporatised and de-regulated. Really, they did. Including financial de-regulation. They did so in order to create more sustainable welfare states. Which worked–better in Australia, because things had to be more carefully negotiated within the wider society. But that is a point that goes way beyond just “neoliberalism”.
As for bank bargains: read Fragile by Design. As the authors make clear, any banking system worth the name is a “bank bargain”. The problem in the US was not Glass-Steagall (repealed or not), it was unbalanced regulation–too big to fail and guaranteed GSE’s without balancing prudential regulation.
Also, the Fed’s response to the GFC was not “ultra-loose monetary policy”. It (passively) tightened monetary policy by failing to respond to the massive increase in demands to hold $US.
Low interest rates are a sign that money has been tight, not loose. There is a difference between direction (cutting or raising interest rates) and level. You really should read Friedman’s 1967 AEA Presidential address (published in 1968). It is quite clear on this point.
“OK, if one uses the Humpty Dumpty version where words mean whatever I say they do whenever I want them to, then you can “defend” anything.”
I explained the LITERAL meaning of the left-right economic spectrum. The economic spectrum doesn’t change just because a political party moves left or right. You are using the “Humpty Dumpty” version of words, trying to “defend anything” — i.e., trying to defending right-wing neoliberal policies by moving them around the economic spectrum. It’s nonsense.
“The Hawke-Keating Governments and the Lange-Douglas Governments were centre-Left Labour Governments. They privatised, corporatised and de-regulated. Really, they did. Including financial de-regulation. They did so in order to create more sustainable welfare states.”
Spare me the crocodile tears.
Neoliberal policies don’t create wealth. They create inequality. One doesn’t create inequality to reduce inequality.
The fact is Australia has one of the worst levels of inequality (Gini Coefficient) among developed countries.
It has one of the lowest tax revenues as a percentage of GDP.
It spends less on public social spending than the US according to the OECD social spending database.
So all the RIGHT-WING neoliberal policies Australia engaged in (I did not create the left-right economic spectrum, BTW), typically — deregulation, big tax cuts that primarily benefit the wealthy, cuts to social spending, reduction of public benefits like unemployment insurance, free trade which exports wealth and jobs causing an unsustainable current account deficit (Australia’s is just as bad as America’s), rent-seeking privatization schemes that make taxpayers pay more for less, etc. — have created inequality and made the social welfare state “more sustainable” by destroying it.
“As for bank bargains: read Fragile by Design. As the authors make clear, any banking system worth the name is a “bank bargain”. The problem in the US was not Glass-Steagall (repealed or not), it was unbalanced regulation–too big to fail and guaranteed GSE’s without balancing prudential regulation.”
Actually many commercial banks had to be bailed out in the US as well because of deregulation. If the regulators had been looking out for taxpayer money on federally insured bank accounts, they would’ve kept a better eye on the books.
But let’s call a spade a bloody shovel. The neoliberal doctrine of deregulation was applied to the US financial sector and exported to many other countries that also suffered a meltdown. The neoliberal bent in policy direction also resisted the regulation of the emerging shadow banking sector and the flaky financial innovation products that hid the actual risk — one could call this pre-deregulation.
The neoliberal philosophy is also based on the concept that the markets are self-regulating. Therefore there is no such thing as a too-big-to-fail institution. (No doubt understanding this concept requires employing the process of doublethink.) But this is why neoliberals are fiercely opposed to breaking up (not)-too-big-to-fail institutions.
In fact, the neoliberal consensus that governed the “free market” bailouts, said that these (not)-too-big-to-fail investment banks were also (not)-too-big-to-restructure. So instead of forcing them into Chapter 11 — which would’ve been “socialist” — taxpayers bought up the toxic assets and took the hit investors should’ve took for their bad bets in the synthetic asset casino.
This is the painfully obvious contradiction in neoliberal deregulation doctrine: the profits are privatized and the risks are socialized. Costing externalities requires regulation. Regulation is “inefficient” (obviously more so than the odd trillion dollar bailout…), bad for innovation, bad for economic growth and worst of all: bad for jobs! And the best thing of all: the doctrine is entirely self-referential. As GDP growth, e.g., steadily declines to a trickle this is called “record prosperity.”
My pet theory is that neoliberals/”neo-cons” use the book “1984” as an instruction manual.
AIUI Bank (de)regulation in Canada, the entire entity and its subsidiaries are regulated under the Bank Act by the Office of the Superintendent of Financial Institutions. OSFI’s policy since the 1980’s has been that chartered banks may own investment banks and securities dealers, but the risks generated by these investments must never be so large as to be able to jeopardize the entire institution. It’s the same as when a conservative investor devotes 20% of his portfolio to riskier investments; the return is higher but the risk remains practically the same. A 50/50% split though is a no-no.
“Small” is a relative term, but Canadian banks are large enough to own most of the brokerages and investment banks and still have enough heft to cover the losses.
More importantly, banks in Canada are the classic “widows-and-orphans” stock, owned by pensions, institutional investors and retail investors across the country. These people expect bank executives to produce an adequate if not outstanding return, reliable dividends and avoid catastrophic risks that would cause large price hits. They are on the same page as the OSFI, though for different reasons. They do not pay executives to be gamblers.
Determinant: What prevented Canadian banks (chartered and investment) from getting burned by the toxic American Collateralized Debt Obligations, Credit Default Swaps and other financial innovation products that got high ratings from bond rating agencies?
If you look at the Gini data, you will see that (1) there has been a general trend towards higher Gini coefficients and (2) the after-tax-and-spending Gini coefficient for Australia is significantly lower (.336) than before such (.486). We do it with relatively low tax share of GDP because we have a strongly targeted welfare system.
We are also a high migration intake, culturally diverse country with an indigenous population (about 2%) who public policy has persistently failed. All of which make it hard to have low Gini coefficients. (Countries with low Gini coefficients tend to be largely monocultural–there is a reason for that: it tends to mean less income dispersion and, more importantly, much easier to have high rates of transfers without too much waste or social tension.)
We also have low public debt and low unemployment, without a technical recession since 1992 and much higher rates of per capita GDP growth than other OECD countries (due to not having a technical recession). We also have one of the highest Human Development Index ratings. So, “neoliberalism” in Australia has created a lot of wealth and shared it around. Which is why its key features are not particularly politically controversial in Australia. Yes, we did it better than the Yanks, hurray for us.
The Australian Labour Party is, and remains, a centre-left party affiliated with the trade union movement. Its policy was explicitly based on the notion of a “social wage”–that is, free up the economy so unemployment fell, economic growth picked up and rising tax revenues from a growing economy could be channelled into well-targeted social spending. It worked, and was very much a centre-left policy project.
Determinant’s picture of Canadian banking is very like Australian banking. Except it is the Australian Prudential Regulatory Authority which does the regulation. I presume Canadian banks avoided the toxic stuff the same way Australian banks did–the banks were not keen and the regulations did not let them. And yes, if you are going to hand out implicit or explicit guarantees, you have to have balancing prudential regulation otherwise you are just creating one-way bets. That way disaster lies. Governments can screw up de-regulating as they can screw up anything else. Playing the “game of bank bargains” is hard, which is why remarkably few countries have done it well.
“We also have low public debt and low unemployment, without a technical recession since 1992 and much higher rates of per capita GDP growth than other OECD countries (due to not having a technical recession). We also have one of the highest Human Development Index ratings. So, “neoliberalism” in Australia has created a lot of wealth and shared it around. Which is why its key features are not particularly politically controversial in Australia. Yes, we did it better than the Yanks, hurray for us.”
Australia is a resource-based economy. It was protected from the worst of the 2009 recession because of a resource boom and banking regulation (as was Canada.)
I haven’t heard much of Australia’s implementation of neoliberal policies. I do know that New Zealand had a terrible experience with neoliberal “Rogernomics” (implemented by their “Labor” party) that led to a proportional representation referendum in the 1990s. (Canada, like the UK, is not a real democracy. Parties get absolute power on 40% of the vote because of First-Past-the-Post voting.)
In Canada our “centrist” party (Liberal) continued on with the neoliberal reforms of the right-of-center party in the 1990s (which they were fiercely opposed to in opposition.) They effectively became the right-of-center party. They are not as far right as the US Democrat party. Our Conservative party is not as far right as the Republican party. Of course many Canadians still see the Liberal party as a centrist party and are largely unaware of its neoliberal agenda.
Back in the post-war era (1945-1980), Democrats, Republicans, Liberals and Conservatives were centrist Keyensians. (E.g., the highest income tax margin in both countries was 70%.)
In short, whatever mix of economic policies, a party’s position on the political scale is averaged out by how right-leaning (neoliberal/libertarian) they are, or centrist (mixed-market Keyensian) or left-wing (socialist.)
According to the Political Compass, during the 2013 election, Australia’s Labor party was rated 77% right on the left-right economic scale (50% is center.)
Australia is a resource-based economy. It was protected from the worst of the 2009 recession because of a resource boom and banking regulation (as was Canada.) But no recession since 1992, and we had a dramatic drop in our export income when commodity prices tanked. “Lucky because resources” does not cut it as an explanation. Much more important is that our monetary policy is anti-cyclical rather than pro-cyclical.
I do know that New Zealand had a terrible experience with neoliberal “Rogernomics” (implemented by their “Labor” party) that led to a proportional representation referendum in the 1990s. And before that Piggy Muldoon created what was (only half-jokingly) called the only command economy in the Western World. New Zealand used to be a unicameral unitary state with first-past-the-post two party system. It permitted wild swings in policy direction, which is less than optimal. Hence folk voting for a system that mitigated that.
Trying to get precise definitions of “left” and “right” seems a remarkable waste of time to me.
Yes, policy contexts differ. But a whole lot has changed since the 1950s and 1960s, and we really cannot go back there. For example, women entering the workforce means much greater dispersal in household income (as high-income women marry high-income men). The spread of manufacturing to China, India, etc also disperses income. Increased migration flows across the Tropics-Temperate barrier disperses income also. The collapse in productivity growth after 1973 fundamentally changed the policy context.
If you want the policy outcomes of the 1950s & 1960s you need the entire package, and that really is not going to happen. Hence the discovery process of trying to work out what works in the new context.
Given Australia did worse than the industrial world average in per capita economic growth in the 1950s & 1960s “golden age” and has done better than the industrial world average in per capita economic growth since the policy shift in the early 1980s, and given that we stopped having unemployment hit higher and higher plateaus each round of the business cycle (as happened from 1973 to 1992) and instead unemployment has trended steadily downward, clearly we have been doing something right.
Ron: “My pet theory is that neoliberals/”neo-cons” use the book “1984” as an instruction manual.”
That is a moronic statement. You are getting to be a tiresome troll. If you want to have a rant against what you call “neoliberalism”, go somewhere else. You are totally off-topic here. And no, the other post is not about “neo-liberalism” either.
Do not reply.