2009 02
Blogging will be light at best in coming weeks. New member registrations will be queued and comments temporarily disabled.
I will be busy attending a special meeting of the Mont Pelerin Society along with a Liberty Fund conference in New York. Readers who will be at either event, feel free to get in touch.
The Mont Pelerin Society had a less well known precursor that met in Paris in August 1938, discussed in a recent article by Jeremy Jennings. Many people have traced the origins of so-called ‘neo-liberalism’ to this meeting, but Jennings (a leading scholar of socialist thought) notes that the Colloque Lippmann could just as easily be viewed as contributing to the idea of a ‘social market economy’ in post-war Germany (something you won’t hear from Kevin Rudd).
New York 2009 hopefully won’t be quite as scary as Paris 1938. But it’s a close call.
posted on 27 February 2009 by skirchner in Economics
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The FT’s David Pilling on the proposed increase in Chinalco’s stake in Rio:
But to say there is state involvement is not the same as imagining a monolithic apparatus planning world domination. In any case, the west, whose banks, carmakers and god-knows-what else are underwritten by the state, is not in an ideal position to lecture others. If China wants to use its trade surplus to secure mineral resources, one response might be: so what? But Chinese companies, even state-owned ones, are as likely to be engaged in cut-throat competition as in cosy cartels or state-sponsored carve-ups.
That undermines the idea that Chinalco, an aluminium maker with no need of iron ore, would seek to persuade Rio to sell cheaply to China Inc. Even if Chinalco were in a position to influence price negotiations – and with just two board members that seems doubtful – it is more likely to try to maximise prices for its own sake than to minimise them for China’s good.
Evidence that China’s forays abroad have been led by companies, and not orchestrated by an all-knowing state, is plentiful. Chinese companies often compete for the same asset. Both Shanghai Automotive and Nanjing Auto bid for Rover when the UK carmaker went chassis-up. Fears that Beijing is making a huge asset grab while the world reels from financial crisis also ignore the fact that foreign adventures are out of vogue in China. State institutions that invested in sinking foreign banks have faced public outrage for squandering national resources.
Pilling quotes NLP Senator Barnaby Joyce as saying:
“If they own the resources, they will just dig them up and cart them away.”
Yes, Barnaby - that’s how mining works.
posted on 26 February 2009 by skirchner in Economics, Financial Markets, Foreign Investment
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Alex Pollock on what to do with the Congressionally-mandated GSEs, Freddie and Fannie:
It’s a perfect time to think about the fundamental restructuring of the world famous, now broke, Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.
Last summer, as we could all observe, the giant GSE risk turkey, weighing in at $5 trillion, came to roost in the dome of the U.S. Capitol. Like Edgar Allan Poe’s celebrated raven, it won’t go away. It roosts there, so the elected representatives of the people can’t forget the mistakes they made in fattening it up.
But while Poe’s raven croaked “Nevermore,” does the GSE risk turkey gobble “Evermore”? Is this risk a permanent burden on the public finances? Should it be? My answer is No.
posted on 24 February 2009 by skirchner in Economics, Financial Markets
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PIMCO’s Bill Gross, bail-out profiteer:
in 2008 Gross shifted from Treasuries and corporate bonds into mortgage debt backed by Fannie and Freddie because he believed that the government would ultimately keep those government-sponsored enterprises (GSEs) afloat. By May, Gross had moved 60% of Total Return into GSE-backed bonds, up from 20% the year before. “In a way, we’ve partnered with the government,” says El-Erian. “We looked for assets that we felt the government would eventually have to own or support.”
Pimco also made a bet on GMAC, the struggling finance arm of General Motors, reasoning that Washington would not let the lender fail for fear of crippling the U.S. auto industry. “We tried to move ahead of the government,” says Gross, “to purchase assets before we believe they will have to.”
Once the financial crisis hit, Gross was not shy about calling for a bailout - and he is an especially effective advocate for his causes. Where many big money managers try to keep a low profile, Gross has always maintained a forceful public persona, making regular television appearances to promote his views.
posted on 21 February 2009 by skirchner in Economics, Financial Markets
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The government has hailed the latest data on retail trade volumes as evidence of the success of its fiscal stimulus packages. As we have argued previously, much of this retail spending will leak into imports, which is one of the reasons stimulus is even less effective in a small open economy like Australia compared to a large and relatively closed economy like the US. But the boost to retail spending is feeble relative to gains in household disposable income. Westpac does the numbers:
the Q4 retail figures suggest a muted initial response from consumers to what has been a significant policy injection to disposable incomes. We estimate that the Govt’s $8.7bn in fiscal payments to households and the substantial easing in interest rates (275bps in Q4) effectively added over $10bn to household disposable incomes in the last quarter of 2008. The Q4 increase in nominal retail sales amounted to just $974mn. While this is only a portion of total consumer spending, the result suggests households saved about 80% of the cash injection. Clearly some of the stimulus cash will be spent in the months ahead – many recipients will no doubt have held off spending just to take advantage of post-Xmas sales. However, the general indication so far is of a decidedly underwhelming spending response.
Households are clearly trying to rebuild their net worth in response to declining asset prices through increased saving. Public sector dissaving through unfunded fiscal stimulus packages simply adds to this saving task by increasing the future tax burden on households. Fiscal stimulus is at war with itself.
So what should households do with an $8 witholding tax credit? Ask 16 economists and you will get 16 different answers. I like Adam Posen’s suggestion of investing in your own human capital, although possibly for different reasons. My reasons: human capital is mobile, hard for governments to directly tax and you only have yourself to blame if the investment goes south.
posted on 20 February 2009 by skirchner in Economics, Fiscal Policy
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Harry Clarke offers a ‘market power’-based defense of restrictions on Chinese ownership of equity capital in the Australian mining industry. Harry prefers a Rio-BHP merger over selling assets to Chinalco, saying that ‘BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consumate [sic] a marriage with Rio.’ However, this was not the conclusion the ACCC reached when it approved the proposed merger between BHP and Rio:
“The merged firm would be a significant global supplier of a range of commodities, including iron ore, coal, bauxite, alumina, copper and uranium. In particular, the proposed acquisition would combine two of the three major global suppliers of iron ore,” Mr Samuel said. “While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market.”…
“The proposed acquisition would combine two of the three major global seaborne suppliers of iron ore lump and iron ore fines. While barriers to market entry are high, involving significant sunk costs, market inquiries indicated there has recently been significant new entry and expansion in response to high demand for iron ore,” Mr Samuel said. “This increase in supply, which has included new large scale Australian operations with associated infrastructure, has frequently been supported by commitments or investments by steel makers.
“The ACCC considered whether the availability of alternative suppliers and the ability of steel makers to facilitate capacity expansions would be likely to undermine any incentive the merged firm may have to seek to influence the global supply and demand balance of iron ore in the future.
“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers.
“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing. The ACCC found that alternative suppliers are likely to be available to Australian steel makers, including alternative suppliers with established rail and port infrastructure in Australia.”
Based on the ACCC’s analysis, Chinese interest in Australian commodity assets can be viewed as pro- rather than anti-competitive, not just in terms of the market for ownership and control of equity capital, which is important in itself, but also in terms of the relevant commodity markets.
But Harry argues this is a bad thing, because it undermines whatever market power Australian producers might have. The logic of Harry’s argument is that Australia should use foreign investment controls to further the cartelisation of commodity markets to extract higher rents from Australian commodity output. OPEC tried to do the same in the oil market, but only succeeded in demonstrating how difficult it is to effectively corner commodity markets.
Harry’s concern is with who captures whatever rents are associated with Australian mining output. Chinese interests might sell Australian mining output to related entities at below market prices, but this would simply be a transfer of profits between these entities. Australia might capture these rents more fully by nationalising domestic commodity production, a strategy followed by oil producing socialist states like Venezuela. I’m pretty sure this is not what Harry wants, but that is where the logic of his position leads. The globalisation of investment necessarily entails the globalisation of profits. Using foreign investment controls for the purposes of cartelisation and rent extraction is beggar-thy-neighbour protectionism.
Harry is not alone in thinking that the sale of assets to Chinalco is a bad deal for Rio shareholders. But it is not the role of government to protect businesses from making bad decisions.
posted on 19 February 2009 by skirchner in Economics, Foreign Investment
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In an op-ed for the SMH, Liberal backbencher Peter Costello wears his most disgraceful decision as a badge of pride:
I cannot remember Treasury ever recommending that I block or disallow the acquisition of an Australian company by foreign interests. There were specific rules for media, real estate and the like, but in the general economy Treasury always supported foreign investment. In 2001 I rejected the Treasury view that Shell’s application for the oil and gas producer Woodside should be allowed. It caused a great deal of agitation in the department.
Bad economic decisions tend to do that to Treasury. Costello also takes pride in frustrating the attempts of Australian businesses to become global companies:
I was determined to ensure that BHP’s corporate presence did not disappear from Australia in the same way as CRA, so I put conditions on its dual-listed company structure that required the global headquarters to remain in Australia, that this be specified in all public documents, that the majority of board meetings be in Australia, and most importantly, that the chief executive and chief financial officer have their principal residences in Australia. This last condition was opposed by the company.
Several times the company sought to have these conditions eased but they remain in place, and to its credit, the company has scrupulously complied with them. The world’s largest diversified mining company is still Australian…
Costello gives the game away when he says:
The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.
In other words, the real rationale for FDI controls is good old-fashioned protectionism. Needless to say, Peter Costello now also thinks he knows better than Rio Tinto how it should structure its business, a position he shares with Greens leader Bob Brown and the national secretary of the CFMEU. Costello remains an unreconstructed economic nationalist.
posted on 18 February 2009 by skirchner in Economics
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Brink Lindsey debunks Paul Krugman’s nostalgianomics:
the caricature of postwar history put forward by Krugman and other purveyors of nostalgianomics won’t lead us anywhere. Reactionary fantasies about the good old days never do.
Krugman’s caricature is similar to Kevin Rudd’s attempt to elevate the pre-1978 period to a mythical Golden Age before the ‘triumph of neo-liberalism.’
posted on 17 February 2009 by skirchner in Economics
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The Anglo-American economies are outperforming in the current global economic downturn, as Chris Dillow observes:
The “Anglo Saxon” model - lightly-regulated financial markets and high debt - makes their economies unusually vulnerable to boom and bust…
This has become conventional wisdom. Today’s figures, though, seem to contradict it. They show that euro zone fell 1.5% in Q4 (6% annualized!), as much as it did in the UK and more than in the US. With next week’s figures likely to show a huge fall in Japanese GDP, this means that the major “non-Anglo” economies are doing at least as bad as the US and UK.
As Chris notes, this is partly due to the exposure of the non-Anglo-American economies to highly cyclical manufacturing industries. However, the importance of manufacturing to these economies is itself a function of the mistaken strategic industry and trade policies pursued by these countries.
The cyclical outperformance of the Anglo-American economies reflects their structural outperformance, which affords them higher trend growth rates around which their economies cycle. Japan’s trend growth rate of around 1.5%-2% is so low that it takes only a modest downturn to throw its economy into recession, which is why Japan experiences so many of them.
Fiscal stimulus packages and other interventionist policy responses in the Anglo-American economies will undoubtedly hurt their structural performance. However, these polices are no worse than those being pursued elsewhere, so the Anglo-American economies and asset markets still have scope to outperform in the context of the current downturn.
It should not be surprising then that those who followed the asset allocation advice of some of the leading permabears are now seeing their portfolios underperform.
posted on 14 February 2009 by skirchner in Economics, Financial Markets
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Alan Greenspan on the counter-factual to the Fed’s 2001-2004 easing cycle:
“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”
Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.
“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”
posted on 13 February 2009 by skirchner in Economics, Monetary Policy
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The top seven attention-hungry doomsayers:
The Running of the Bears only happens every ten years or so, so you’ve got to give the likes of Roubini, Whitney, Schiff, and Taleb a break for seeking to monopolize our attention while they’ve got it. After all, nobody likes a pessimist, and we’ll tune them out as soon as we’re brave enough to do so. That said, the depth of the current crisis suggests this bear market may last a little longer than the last few, so get used to hearing their names. Taleb’s got at least one more book in him about how smart he is.
Of course, even a stopped clock tells the correct time twice a day. If the likes of Whitney or Roubini want to truly cement their place in the history of financial prognostication, they will show the foresight to call a turn in the other direction, back to bullish conditions. Elaine Garzarelli made herself famous calling the 1987 crash. She never made another big one again.
posted on 12 February 2009 by skirchner in Economics, Financial Markets
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A taste of PJ.
posted on 11 February 2009 by skirchner in CIS
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State pension funds with politicised investment mandates.
posted on 10 February 2009 by skirchner in Economics, Financial Markets
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From Henry Ergas:
the expectation of future deficits may have immediate, adverse consequences for confidence and output. However, the Government’s announcement merely sets a vague commitment to return to surplus through future reductions in spending growth. It does not say how great the cuts in spending will need to be or where those cuts will be made, and it ignores the obvious point that if there is wasteful spending that can be cut tomorrow, it ought to be cut today.
While fiscal stimulus is assumed to be popular, opinion polling is remarkably divided on the issue:
According to the Newspoll survey, 57 per cent of voters believe the economic stimulus package, which includes $12 billion in short-term cash giveaways to boost retail spending, will be good for the economy. Almost half those surveyed, 48 per cent, believe they would be personally better off as a result of the package.
posted on 09 February 2009 by skirchner in Economics, Fiscal Policy
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Robert Barro interviewed in The Atlantic.
On Obama’s fiscal stimulus bill:
This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.
On Paul Krugman:
He just says whatever is convenient for his political argument. He doesn’t behave like an economist.
On war as stimulus:
I think the best evidence for expanding GDP comes from the temporary military spending that usually accompanies wars—wars that don’t destroy a lot of stuff, at least in the US experience. Even there I don’t think it’s one for one, so if you don’t value the war itself it’s not a good idea. You know, attacking Iran is a shovel-ready project. But I wouldn’t recommend it.
posted on 06 February 2009 by skirchner in Economics, Fiscal Policy
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Prime Minister Kevin Rudd proudly declared himself to be a Keynesian in his essay for The Monthly and now has a massive fiscal stimulus package to prove it. John Cochrane, Professor of Finance at the University of Chicago Booth School of Business, highlights the extent to which Keynesianism has been thoroughly discredited within modern macroeconomics:
Am I some sort of radical? No, in fact economics, as written in professional journals, taught to graduate students and summarized in their textbooks, abandoned fiscal stimulus long ago.
Keynesians gave up by the 1970s. They saw that fiscal programs took too long to implement. They especially disparaged temporary measures, which would not stimulate the consumption that classic Keynesians thought was important to stimulus. Every undergraduate text has repeated these conclusions for at least 40 years. I learned this view from Dornbusch and Fisher’s undergraduate text, taught by Bob Solow, in the 1970s…
The equilibrium tradition which took over professional academic economics in the mid-1970s has even less room for fiscal stimulus. Some “equilibrium” analyses do say fiscal stimulus can increase output – but by making us feel poorer, work harder at lower wages, and consume less. That’s not what advocates have in mind! A large fiscal program can affect prices, wages, and interest rates with all sorts of interesting general-equilibrium implications, but these analyses haven’t really converged on anything solid, much less the large “multipliers” necessary to make traditional fiscal stimulus attractive.
More deeply, macroeconomics was revolutionized starting in the 1950s, by the realization that what people think about the future is crucial to understanding how policies work today. Milton Friedman started this, pointing out that consumption does not depend statically on today’s income, but on what people expect of the future. People who learn that their jobs are on the line will consume less and save more, even though today’s income may still be good. As I have emphasized, the effects fiscal stimulus will have now depends crucially on whether people expect the new spending to be paid back by future taxes or whether they expect it to be quickly monetized. Classic Keynesian analysis analyzed policies and each time point in isolation. We do not have to agree if expectations are formed “rationally,” all we have to agree is that expectations of the future matter crucially for how people behave today, and the classic Keynesian analysis of fiscal stimulus falls apart.
In textbooks and graduate curriculums across the country, stimulus is presented at best as quaint “history of thought” with no coherent defense that one should believe it in the context of modern economics. (For example, David Romer’s classic graduate text Advanced Macroeconomics) At worst, it is presented as a classic fallacy. (My view of the treatment in Tom Sargent’s Dynamic Macroeconomic Theory and Sargent and Ljungqvist’s Recursive Macroeconomic Theory).
“New-Keynesian” thought is devoted to defending the importance of monetary policy, and incorporating specific frictions in the equilibrium tradition, not to rescuing the ancient view that fiscal stimulus is important and abandoning that tradition. Mike Woodford’s magisterial New-Keynesian opus, Interest and Prices, has no mention at all of fiscal stimulus. More deeply, new-Keynesian economics is completely devoted to the proposition that expectations of the future matter centrally for how the economy behaves today. Its central thesis is that central bankers must manage expectations, not manage “demand.” It has no room at all for the sort of analysis in which one adds up “consumption” “investment” and “government” demands, without considering alternatives for those demands or expectations of the future, to determine output.
These ideas changed because Keynesian economics was a failure in practice, and not just in theory. Keynes left Britain 30 years of miserable growth. Richard Nixon said “we’re all Keynesians now” just as Keynesian policy led to the inflation and economic dislocation of the 1970s, unexpected by Keynesians but dramatically foretold by Milton Friedman’s 1968 AEA address. Keynes disdained investment, where we now all realize that saving and investment are vital to long run growth. Keynes did not think at all about the incentives effects of taxes. He favored planning, and wrote before Hayek reminded us how modern economies cannot function without price signals. Fiscal stimulus advocates are hanging on to a last little timber from a sunken boat of ideas, ideas that everyone including they abandoned, and from hard experience.
posted on 05 February 2009 by skirchner in Economics, Fiscal Policy
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Australian Office of Financial Management head Neil Hyden gives the game away on the government’s expanded bond issuance program:
“The bonds we’re issuing, the proceeds are all going to be needed for government expenditures…”
posted on 05 February 2009 by skirchner in Economics, Fiscal Policy
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Treasury Secretary Ken Henry, addressing Australian Business Economists in May this year:
activist counter-cyclical fiscal policy might be frustrated by lags of recognition, implementation and transmission. And its effectiveness might be compromised by Ricardian equivalence, the permanent income hypothesis or import leakages. I noted that these lags and questions of effectiveness pose real challenges for the use of counter-cyclical fiscal policy. But I also noted that they do not rule out such use.
On the issue of import leakages, much is being made of the alleged contribution of the government’s previous stimulus package to December retail trade:
Greg Smith, the managing director of household goods store Clive Peeters, said wide-screen televisions, DVD players, digital cameras and laptop computers had begun walking out of the company’s stores from the day the Government’s first economic package reached the public.
Since all of the mentioned items are imported, this expenditure is a subtraction from Australian gross domestic product. One of the problems with activist fiscal policy is that, to the extent that there is any boost to domestic demand, much of it will spillover into imports, which might stimulate the Chinese and other economies, but will do very little for economic growth in Australia. Retail sales are inappropriate as a gauge of the effectiveness of fiscal policy in stimulating domestic production.
Westpac note that the increase in retail sales was disappointing given gains in disposable income:
More importantly the December retail sales figure points to an even sharper run-up in household savings than previously anticipated. Indeed, it points to a spike in the savings rate to over 8% in Q4 from basically zero in the final quarter of 2007. This would mark the sharpest rise in saving on history back to 1960 by a very long way – effectively double any surge in household saving ever seen before.
posted on 05 February 2009 by skirchner in Economics, Fiscal Policy
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Professors John Huizinga, Robert Lucas and Kevin Murphy speak at an Initiative on Global Markets Forum at the University of Chicago Booth School of Business on Obama’s fiscal stimulus package. All of their arguments translate directly into the Australian context.
posted on 04 February 2009 by skirchner in Economics, Fiscal Policy
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I have an op-ed in The Australian, arguing that the government has just announced a $42 billion future tax increase. In reality, it’s worse than that because of the interest bill on the $42 billion in unfunded spending, plus the future welfare costs associated with an increased tax burden and the government’s diversion of resources away from potentially more highly valued uses. The package will immiserate rather than stimulate.
In the statement accompanying yesterday’s 100 basis point cut in the official cash rate, the Reserve Bank said that ‘the Board took into account the package of measures announced by the Government earlier today.’ If the RBA shares the Treasury’s Keynesian assumptions about the implications of the package for short-term economic growth, then it is entirely possible that yesterday’s rate cut was smaller than it might have been in the absence of the latest fiscal stimulus package. While fiscal policy has been irrelevant to monetary policy in recent years due to a steady fiscal impulse, it is less likely the RBA will ignore the massive turnaround in the budget balance we have seen since May last year. Those ‘free’ pink batts are likely to have come at the cost of a higher mortgage interest rate.
posted on 04 February 2009 by skirchner in Economics, Fiscal Policy, Monetary Policy
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Michael Stutchbury writes from Davos on that essay:
There’s so many straw men in there, it’s a fire hazard.
At the same time, the WSJ writes on ‘neo-socialism Down Under’:
he’s manufacturing a philosophy to justify his actions.
posted on 03 February 2009 by skirchner in Economics, Politics
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David Burchell attempts to deconstruct Rudd’s bizarre work of political speculative fiction:
It’s hard to accept that the flesh and blood Kevin Rudd who lives in the Lodge really believes any of these things. While it’s true that governments around the world have been more inclined to expose national economies to international competition, and to facilitate the flow of capital across national borders, there’s no clear evidence of a general shrinkage of the size or role of governments over the past 30 years, regardless of the ideological presuppositions of specific administrations. The neo-liberal ghoul is just that, a ghoul. And the fantasy that sets states and markets on a path of mortal combat resembles the imaginations of those medieval mystics who saw Christ and the devil locked in struggle across this vale of tears.
This is where the several other authorial Rudds come in. One of them - we’ll call him Rudd 2 - is the dutiful policy technocrat, eager to reassure us about the practical measures necessary to stabilise world finance. But since few of these measures are disputed by orthodox economists, it’s not clear how they toll the death-knell of neo-liberalism. Rudd 3, in turn, is that familiar figure in ministers’ offices, the instinctual party loyalist who wants to spin the fable of neo-liberalism into a partisan account of Labor governments (good) and conservatives (bad). Yet this third Rudd seems equally discordant with the first, given that - as the Old Testament critics of economic rationalism have been instructing us tirelessly since the early 1990s - the Hawke-Keating governments were our neo-liberal pioneers, the unleashers of the locust plague, the vandals of our nation-building state.
What I have seen of Rudd’s essay reads almost like a cyber-punk novel, with the action set in a speculative ‘neo-liberal’ dystopia (Brutopia?), and where the social democratic hero (guess who?) saves the day.
posted on 02 February 2009 by skirchner in Economics, Politics
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