Tuesday, July 28, 2009

The PM takes a break

As we know when our Prime Minister takes a break we get an essay. His latest missive has again come under attack for its supposed gross generalisations of the cause of the current crisis. Given the extent of the criticism it is surprising how little the PM actually wrote about this.

Following a description of the three stage cause being burgeoning debt, an asset price bubble and huge capital flows from East to West, the PM has a short section on "the ideological hypocrisy of the right". Two paragraphs give the flavour of this;

This fundamentalist ideology of self-regulating markets has imploded comprehensively with the current crisis. We have seen spectacular market failure requiring equally spectacular government intervention in the economy to effectively save the system from itself.

Notwithstanding their support for the extreme free-market policies that have underpinned much of the crisis, the neo-liberals of the political right now refuse to accept any form of political responsibility for the fruits of their own ideological handiwork: the current global recession.

This is hardly dramatic stuff really. No one would actually dispute the Rudd description of the cause of the crisis, though one might like to go into a little more detail about how the process of burgeoning debt and asset price inflation fed off each other through a failure in the banking system to correctly analyse risk (or, more technically, by an incorrect belief that securtisation and derivatives had successfully diversified risk).

One might like to go a little more into how this failure reflects the weakness of the efficient market hypothesis and the fact that some of the information traders rely on is not fundamental information but the information they glean from the behaviour of other traders. (My favourite example is from the non-financial markets where the line that the capacity of the internet was doubling every hundred days was believed globally by telco execs even though the data on their own networks did not demonstrate it).

What the PM's thesis amounts to is that the crisis was generated by a belief in the efficiency of markts that was not supported in reality. What he is railing against is the group of economists (and politicians) who cannot release their belief in he market and hence believe that the market will "self correct".

Unfortunately Rudd does so by resorting to what Gerard Henderson identifies as tribal loyalty. While that may be a phrase offered by the sub-editor, Henederson states "his latest essay turns on far more partisanship than any that John Howard and Peter Costello engaged in". This though largely misses the point, Rudd is trying to bell-the-cat of the failings of the market as a reason to not accept the neoliberal prescriptions for the recovery.

Henderson chooses to criticise Rudd for labelling the neoliberal cause the "right", and from twin errors of not identifying that much of this "right" agenda was implemented by "progressive" governments - including those of Hawke, Keating and Clinton, and that much of what has been implemented here by the "right" has been of benefit. I think this criticism is poorly made in the current context. Rudd's intellectual battle now is only with neoliberals who reject the Keynesian response. Rudd is not proposing any fundamental leap back to a socialist nirvana of centrally planned economies - he is merely indicating that the "let the markets rip" school is inadequate.

If Gerard Henderson wants to see the ind of "right" that Rudd is combatting he should see the blog in the Oz that suggested "the Sydney Morning Herald and The Age morphed into something similar to the Pyongyang Post" by running the essay. The blog quotes from Sinclair Davidson arguing that Rudd got history "exactly wrong" in the description of the Australian response to the 1930s depression.

Let's just agree that the evidence on macro-responses to the Great Depressio is mixed at best. But Davidson's glittering nugget of wisdom is about who did better in a public service economics exam. Hmmm. How will we judge - the theorist whose book has been accomodated in some form into every classical theory or the bloke who beat him in his undergraduate exams?

A more measured blog also in the Oz is more focussed on whether Rudd's five pioints for recovery (regulation and competition reform, infrastructure, innovation, skills and tax) is sufficient and if he is turning his back on pro market reforms. This does seem odd since there is nothing other than the rhetorical attack on opponents of deficit spending at the trough of a recesson to suggest that Rudd is any different from his labour predecessors.

The biggest concern for market fans seems to be what is happening in the labour market. As far as I can see we are basically back to where we were in 1996 - reforms that fuelled the Howard decade. They look like the perfect kind of compromise between markets and regulation that Rudd is extolling for the whole economy.

The "right" should not over-react to the Rudd message. To do so will only create the incentive and opportunity to drive a far more centralist flavour in economic policy.

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