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Are the US and the UK political systems converging?

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[The ideas in this post are tentative, so please correct me on any errors regarding the UK political system.]

As an outsider, the parliamentary system in the UK always seemed quite different from the US system, mostly due to the different roles of the president of the US and the prime minister of the UK. In the UK, voters elect a party, or a coalition of parties, and the party elects a leader. The leader would sometimes be changed in midstream if things were not going well.

In the US, maverick politicians such as Goldwater and McGovern could almost “hijack” their parties, and take control against the wishes of the party establishment. Trump and Sanders are more recent examples of maverick politicians.

In the UK, ordinary party members (i.e. voters) have recently been given increasing clout in the selection of leadership. Corbyn staged a sort of internal coup with grassroots support, taking control of the Labour Party against the wishes of many Labour MPs. Boris Johnson is somewhat more mainstream, but did oppose party leadership on Brexit. Increasingly, the Conservatives seem to be being reshaped to reflect their leadership, rather than vice versa. UK voters increasingly are choosing between people like Corbyn and Johnson, rather than Labour vs. Conservatives.

In contrast, US voters are much more attached to their party in presidential votes than when I was young. But in both countries, blue-collar voters in smaller cities are moving right, and highly educated voters in bigger cities are moving left.

Many Americans prefer our three-branch system of government, with all its “checks and balances.” One often hears the suggestion that the UK government is little more than an “elected dictatorship”. But based on what I’ve read, the UK government is gradually becoming a bit less of an elected dictatorship, as the British courts are increasingly likely to push back against a government initiative.

Meanwhile, the US president is increasingly becoming an “elected dictator”:

When the Pentagon announced this month that it would divert billions more dollars in military funding to the construction of President Donald Trump’s border wall, bipartisan outrage ricocheted across Capitol Hill.

Republicans and Democrats alike issued fiery statements in defense of both their congressional districts, some of which stand to lose valuable work making military equipment, and their constitutionally enshrined power of the purse. But the howls of protest are unlikely to amount to much in a Congress where lawmakers — many of whom once prized their spending prerogatives almost above all else — acknowledge their power to steer federal dollars has been severely eroded.

The dysfunction has taken hold in large part because of decisions that members of Congress themselves have made. But it has become particularly pronounced under Trump, who has moved aggressively to divert government money when it suits his agenda.

“Congress’ appropriation power, which is pretty much the last unchallenged power that Congress has, has very significantly eroded,” said Sean Kelly, a professor of political science at California State University Channel Islands.

The root of the problem predates Trump.

That final sentence is important.  Although I am strongly opposed to certain authoritarian tendencies in the Trump administration, it’s important to note that this has been going on for years, and recent events are merely an acceleration of trends that began at least as far back as WWI.

Here’s a tentative hypothesis.  In a globalized world, countries like the US and UK are buffeted by similar forces, involving changes in everything from technology to cultural norms.  Over time, they gradually evolve in the same way.  If the US Constitution seems to prevent our system from resembling another, then those constitutional restraints will be sort of brushed away.  Don’t count on our Constitution to protect us from an elected dictatorship:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

That train’s already left the station.  The US Constitution says Congress declares war, Congress sets tariff rates, Congress votes on spending money for a wall.  There is no taking of land except for public purposes. Those traditions have all been brushed aside.

PS.  This also fits in with the famous “end of history” hypothesis.  Increasingly, it seems that all over the world the debate over fundamental questions has ended, and it’s now a question of which elected dictator will be chosen.  You have Putin, Erdogan, Modi, Abe, Orban, Duterte, etc.  If China ever became a democracy, I wonder if they’d elect a dictator like Xi Jinping?  Is China really that different from India?  A 1984-style surveillance state is being created almost everywhere.

No one knew it at the time, but Silvio Berlusconi and his farcical party entitled “Forza Italia” was the canary in the coal mine for global democracy.  Berlusconi took control of Italian media, and then the entire country.

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Economy

With smart policy, a temporary collapse in GDP doesn’t have to cause great human suffering

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The “social distancing” measures needed to slow the spread of the coronavirus clearly reduce economic activity. A growing meme in recent days argues that this reduction might be so damaging that it would be a societal benefit to end the social distancing measures shortly and try to return to normal economic activity.

This is extraordinarily risky from a public health perspective—the potential deaths caused by a premature end to social distancing measures—without exaggeration—could reach the millions.

Further, a scenario that saw this many deaths would also see tens of millions of workers falling so ill they would be unable to work for extended periods. This would cause an economic shock of its own.

Finally, and most fundamentally, this view that terrible (but generally unspecified) economic damage will inevitably occur due to the recent public health measures undertaken represents a profound misunderstanding of how the economy works, and how smart policy measures can neutralize this type of trade-off.

To see why, consider a quick thought experiment.

Recently there have been sensible calls made by people on social media for those households lucky enough to retain income during the crisis to continue paying service-workers like house cleaners, even if their work cannot be done for public health reasons.

Let’s imagine we extended the same (compassionate) logic to all services that couldn’t be consumed during the downturn due to social distancing. So those who would have gone to restaurants in the next 3 months still send their money to those restaurants, and those who would have flown across the country and stayed in a hotel still sent the money they would have spent to airlines and lodging companies. Say further that in exchange for sending these payments even without services being provided, the businesses receiving them agreed to pay their workers the exact same amount they were paying them before.

In this scenario, the wages of workers in shut down sectors would be held harmless and they would have the resources they needed to keep living. They could also maintain consumption spending in those sectors outside the shutdown parts of the economy and hence keep the coronavirus shock from propagating outside of the sectors directly affected by social distancing.

If we could somehow pull off this coordinated scheme of social solidarity, would the economic shock be completely avoided? Not at all. Gross domestic product (GDP) would still absolutely crater.

Why? GDP measures the amount of final goods and services produced and sold. In our scenario, households continue to transfer money to the workers and businesses in the shutdown sectors of the economy, but they don’t receive any goods or services in exchange because none are being produced.

But the economic damage would be just this: paying money for restaurant meals and hotels and flights without actually getting to enjoy them. This is unpleasant, for sure—as I said, eating in restaurants and traveling are fun things to do.

But this clearly doesn’t sound near-dramatic enough to bolster arguments that the economic damage done by shutting down sectors of the economy to stop the spread of coronavirus is so large it justifies quickly reopening and flirting with the death of literally millions, right?

Obviously the strategy of holding workers in shut down sectors harmless in the face of this shock would be impossible to undertake if we just relied on private altruism.

Thankfully, we don’t have to rely on private altruism. We already have a system in place to transfer money to families facing economic distress from families doing okay—taxes and transfer programs (unemployment insurance, most notably). Granted, our current welfare state is too-stingy and too-patchy generally, but it can be changed, and lots of these changes can happen on the fly. The CARES Act, for example, makes a number of excellent changes to the UI system that will make it far more useful in implementing just the kind of “hold workers harmless” strategy we’re discussing here.

And it turns out that we can do even better than this. In the thought experiment where still-employed workers continued sending money to businesses and workers in shut-down sectors without receiving goods and services in return, there was no way for the still-employed to boost their private savings and stockpile pent-up demand that could supercharge a recovery once the public health all-clear was sounded. But if we use public debt to finance the income flows to laid-off workers and their families, this means that all the money not being spent by still-employed workers in the shutdown sectors is just building up their private savings, and they will have extra resources to spend once the economy fully opens back up for business.

Even in the most-staid textbook presentations of public debt, this kind of consumption-smoothing across time is exactly why debt exists and is useful. In the macroeconomic environment that existed even before the coronavirus shock—when private savings were far in excess of firms’ desires to expand their production capacity and hence interest rates and inflationary pressures were already historically low—this extra public debt taken on to buffer the coronavirus shock is either free or actually just increases societal income and production.

Are there complications to this super stylized analysis? Of course. The effects of the coronavirus on trading partners is affecting supply chains and imposing a supply-shock on the economy. But supply shocks are much less damaging than demand shocks now. And won’t the huge stock market declines of recent weeks put negative pressure on spending through “wealth effects”? Sure, but smart policy that addresses the problems noted above will help the stock market bounce back that much faster.

If the extremely widespread social distancing measures of recent weeks are temporary, any failure to see a rapid recovery in economic activity will be entirely because of an inadequate policy response. The stingier we are with providing aid to workers laid-off due to social distancing measures, the more this initial coronavirus shock will spread to other sectors of the economy, and the more help in the future will be needed to reboot the economy. But, a very large temporary fall in GDP does not have to translate into human carnage, and a very quick bounceback from this type of fall is possible if policymakers don’t fumble this economic recovery from the coronavirus shock as badly as they have so far fumbled the public health response.



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Economy

Some misconceptions about wage stickiness

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When macroeconomists talk about wage stickiness, they are generally referring to nominal stickiness. Because nominal wages are slow to adjust, a sudden and unexpected change in NGDP will usually impact employment, often in a sub-optimal fashion.

It’s possible to construct a variable called “real wages”, but I don’t view that as a useful concept. This is partly because (like Keynes) I don’t view inflation as being a particular useful concept, except perhaps when trying to come up with ballpark figures for long run changes in living standards. The problem is not so much that inflation figures are wrong; it’s not even clear what inflation is supposed to measure.

Here’s Tyler Cowen:

The restaurant used to pay you $13 an hour, now they pay you “$13 an hour plus p = ?? of Covid-19.” That new wage is a lower real wage.

That’s a defensible claim, if you define “inflation” in a certain way. But it’s also an example where the nominal wage is “sticky”, and hence this example has no bearing on “sticky wage models of the business cycle”. Again, it’s nominal wages and nominal GDP that matter, ignore real wages.

Tyler’s post is entitled “Real wages are flexible now”.  But the post does not contain any supporting evidence for that claim.  A change in the real wage is not evidence of increased flexibility.

For example, real wages rose sharply in 1930.  Does the big change in real wages in 1930 show that real wages were increasingly flexible?  No, they rose because prices fell while nominal wages were fairly stable.  A flexible real wage is one that moves toward equilibrium, not one that randomly moves around due to some price level shock even as nominal wages are fixed.  As an analogy, if The Soviet Union had raised the official price of bread from one ruble to two rubles, it doesn’t mean that bread prices are becoming more flexible, just that they are fixed at a different level.

I expect unemployment levels to rise to new and scary heights, and yes I do think the government should do something about that. But if you are analyzing the status quo with “a sticky wage model,” that assumption is probably wrong. Even though it is usually correct.

It’s true that sticky wages are not the reason why unemployment is about to surge much higher.  We are facing an unusually large “real shock.”  Nonetheless, nominal wage stickiness remains very relevant, as it is quite likely that 12 months from today we will have an elevated unemployment rate due to sticky nominal wages and lower than trend NGDP.  I hope I’m wrong, but the financial markets seem to view it as a very real threat.

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The New Euro Stimulus Won't Save the Greek Economy

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With fear of the coronavirus continuing to wreak havoc on every country in the West, almost all governments have taken radical measures for containment of the virus: mandatory quarantines for many, the closing of businesses, and the prohibition of many economic and social activities. I am not going to pretend that I am a medical expert and share my thoughts about how serious the virus really is. I will, however, focus on its economic consequences.

(Two very informative articles on healthcare policies for the virus are “Government Is No Match for the Coronavirus” and “The ‘Bootleggers and Baptists’ of the Coronavirus Crisis.”)

The New Stimulus and QE for the Greek Economy

On Thursday, the European Central Bank (ECB) announced massive new stimulus programs, saying that it could buy up to €750 billion ($820 billion) in state and corporate bonds. This news comes just a week after it announced the last stimulus package. The aim is clearly to keep borrowing costs low and to provide money for European countries to deal with the current crisis. This is the first time that Greece has been included in an ECB QE program in a long time.

Shortly after the announcement, the Greek prime minister said that the Greek economy will receive a €10 billion stimulus package. This will be followed with other interventionist policies, the most notable of which provides an €800 subsidy to private workers, entrepreneurs affected by the current crisis, and every worker fired after March 1. But the madness doesn’t end there. There will also be new welfare benefits for almost every Greek, and a 40 percent discount on all rent payments has been enacted for the months of March, April, and May. The government has also made it illegal to fire employees during the crisis.

Why Will It Fail?

There is an old saying that you’ve got to save for a bad day. This means that you need to save some money so that you have the proper funds to get through a tough time. The problem that Greece and the EU face is that they don’t have any savings. Instead the Greek economy—and most European economies—are dependent on debt and on people spending money that they don’t have.

In a healthy economy people would be able to afford not working for a few weeks during such an emergency, because they would have savings, something that mainstream economists hate and have waged a huge war against. The Fed the ECB have artificially pushed down interest rates, prompting government, corporations, and consumers to borrow unsustainable amounts of money. Their response is more spending and “showering” the economy with money.

Bailing out one or two specific industries, although definitely bad economically, is at least feasible, because there are others to pay for it. But bailing out everyone is another matter. Where will the money come from for that? And where will it come from when the government decides to suspend tax payments because of the virus? There is no free lunch. If you cut taxes, you have to cut spending, and if you want to increase spending, you have to tax more. In the end, the deficit will have to be paid by future taxpayers. The money won’t come from lenders. After all, the bond market is crashing, since every country is facing the same crisis.

The only source for all this free money that remains is the ECB, which just like its American counterpart creates money “out of thin air.” But this won’t solve supply shortages in the market, which are sure to result from so few people working.

An Economy That Never Recovered

In Greece things are worse than in most of Europe. The country’s two biggest industries are tourism and sailing, which provide almost half of GDP. These have been hit hard as virus fears have mounted.

And Greece is facing this from an already weak position. According to the Heritage Foundation’s economic freedom index, government spending already amounts to 48 percent of GDP, layered over the still massive public debt, equivalent to 183 percent of  GDP. The economy never really recovered from the recession. Labor laws make hiring very expensive and risky. Public union cartels are the ones that really control the country, and they undermine production and entrepreneurship given any chance. The agricultural sector is heavily subsidized, and the the service industry is subjected to many price controls. Even during the years of the “austerity” government surpluses were minimal and were overtaken by deficits from future years. Indeed, the governments failed to cut spending and taxes, and in fact the massive debt has only increased.

Basically, the Greek economy is just a huge bubble of debt and spending. This was situation was sustained by endless bailouts from European taxpayers and low interest rates (even though they were some of the highest in the EU). If it had not been for that, Greece might have been more rational and less likely to be fooled by cheap credit, or it would have had to deal with consequences alone, becoming Europe’s Argentina. After all, if other Europeans were lending them money, the Greeks would have to print the money themselves. Or just stop spending. But the Greeks never saved or produced enough to justify their high standard of living compared to other countries. In other words, we are living beyond our means. Its not that Greeks are lazy; once again, it’s the state that is undermining production and fuels Greece’s famous anticapitalist mentality.

But the ECB’s repeated bouts of QE really do make things worse. It’s foolish to think that businesses that aren’t sustainable at 1.5 percent interest rate will suddenly become productive at 0 percent. If the economy runs on a 0 percent interest rate and doesn’t recover, what will happen when interest rates rise to 0.5 percent? Panic will ensue, making another European debt crisis likely. An economy in which business can’t pay for debts and expenses even with 0 percent interest is an economy ready to collapse.

Conclusion

The Greek state needs to stop its unsustainable policies involving ever growing handouts. Government spending always undermines the private sector’s production, which is made possible by saving. Instead, government policies should be encouraging saving. In order for Greece to survive the economic fallout of the coronavirus it needs to realize that it needs to let the bubble pop.

This means that there will be even harder years ahead for Greeks. But in the long term, it makes more sense. With unsustainable bubble businesses evicted from the market, resources and capital can be used less wastefully. Greece needs more production of goods and services. That’s what makes a nation and its citizens wealthy. Paper money isn’t wealth. If Greece doesn’t do this, then, yes, in the short term it will be less painful. But this means more pain in the long run.



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