While most of you were off on your summer holidays the world’s top economic policymakers were up to something else. Although they enjoyed more salubrious surroundings than many they kept busy doing what they do best: blaming others for the economic mess they have played a key part in creating.
The summer’s top gig was the annual do for top financial types in at therustic resort of Jackson Hole in Wyoming. Its use as the event’s venue dates back to 1982 when it was evidently chosen to entice Paul Volcker, then chairman of America’s Federal Reserve, with its excellent fly fishing.
This year it was the turn of an Italian, Mario Draghi, to star. The president of the European Central Bank told the select audience that: “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy”. In other words an area of policy outside his own remit should be used more actively.
He also emphasised the need for structural reforms. In particular he focused on labour markets, product markets and the business environment.
His call came shortly after Eurostat, the EU’s statistical agency, released miserableflash estimates for economic growth in the second quarter of 2014. It showed GDP in the eurozone was flat compared with the previous quarter. The poor performance comes several years after the emergence of the eurozone crisis in 2009.
It is striking that technocrats such as Draghi seldom accept any responsibility for the region’s morass. The fundamental structural weakness of the eurozone itself – that is its attempt to tie highly disparate economies into a monetary union – is not addressed. If anything the solution is seen as further integration – under the leadership of elite technocrats of course – rather than the dissolution of the currency bloc.
As I argued in a Fund Strategy cover story back in 2010 the eurozone is a bit like a layer cake. Its members exist on three levels: national, regional and global. Whereas all countries are subject to global problems, and all have national weaknesses to a degree, the design of the eurozone poses formidable additional challenges.
The structure of the eurozone inevitably leads to imbalances between the relatively strong economies, most notably Germany, and weaker ones, such as Greece and Portugal. Until 2009 these helped create a bubble in the region’s periphery, as cheap capital flowed into southern Europe, followed by savage austerity when the bubble burst.
A unified economy, such as the US, can deal with these problems by shifting resources from one area to another. However, this is a difficult process in Europe as it still consists of distinct nation states.
To be sure this design weakness is not all the fault of Draghi. The region’s politicians should take most of the blame. Rather than take responsibility for tackling economic problems they preferred instead to abdicate responsibility to central bankers and other unelected technocrats.
Meanwhile, in Lindau, a Bavarian town on the banks of Lake Constance, the fifth annual meeting of Nobel laureates in economics also took place in August. Although several were critical of the eurozone their perspective was not that different from Draghi’s. Joseph Stiglitz, for example, called for further moves towards in integrated Europe and a more active fiscal policy.
Both the policymakers and the supposed critics seem to share the same deadening technocratic consensus on the challenges facing the eurozone. It is high time that a new approach is tried.
This blog post was first published today on Fundweb
I discuss the Gaza conflict alongside Tara McCormack in the latest spiked podcast (although for some inexplicable reason I say “Kuwait” towards the end when I mean “Qatar”!).
When a blatant error is repeated frequently it is worth thinking about why. In this case the example is not directly related to investment or economics but there is an important parallel.
Some readers might have seen the recent report apparently showed six-year-olds outstripping adults in their understanding of information technology. Since it was reported widely in the media and the source given was Ofcom, the official communications regulator, the claim appeared unimpeachable. The coverage gave the impression that even young children are leaving adults behind in this brave new digital age.
But look carefully at the Ofcom website and a different pattern emerges: “The study, among nearly 2,000 adults and 800 children, finds that six year olds claim to have the same understanding of communications technology as 45 year olds” (added emphasis). The key phrase here is “claim to”. Just because a six-year-old believes something is true it does not mean it should be taken at face value.
Do Ofcom’s online digital aptitude test and things start to become clearer. Many of the questions ask respondents to rate how much they know about technologies such as Google Glass or smart watches. No doubt the typical adult is likely to be reluctant to claim they know a great deal about a subject unless they do. In contrast, young children are likely to have fewer inhibitions about exuding confidence.
What is really being measured here, contrary to what much of the media claimed, is confidence in the use of digital technologies. Young children are more confident because they do not appreciate the world’s complexity. They are unlikely to express doubts because they do not know any better. Adults, in contrast, tend to be more equivocal simply because they have a better appreciation of the vastness of human knowledge.
This confusion of confusion and knowledge is where the economic parallel comes in. It is often claimed that confidence is the key factor driving markets and economies. Consequently analysts often pay great attention to confidence surveys of consumers, investors and companies. Buoyant markets are also often associated with high levels of confidence.
The problem with this approach is that confidence is a poor indicator of economic strength. At best the two may be correlated. But it is more likely that any economic uptick is driving higher confidence than the other way round.
More likely the confidence numbers are simply a response to short-term buoyancy in the economy or markets. For instance, easy credit can give the economy a temporary boost that in turn boosts confidence. But in such circumstances the underlying fundamentals can remain weak. Key indicators such as productivity levels or the strength of corporate investment are not reflected in the confidence figures.
All the talk of confidence can also give a misleading impression of the challenges facing the economy. Mainstream economic debate often suggests that recovery is simply an act of will: if consumers and companies would only become braver an upturn will not be far behind. It sees little need to find ways to rejuvenate the real economy.
Confusing confidence with knowledge inevitably leads in the wrong direction.
This blog post was first published today on Fundweb
I will be introducing a discussion of America’s technocratic elite at the Institute of Ideas Economy Forum on 16 September in London.
Much coverage of recent innovations in the financial markets seems to have a simple message: “beware of the dark side”. Like some bizarre offshoot from the Star Wars franchise it evokes a dimly lit world inhabited by a new, dangerous species.
First, there are the “dark pools”. These are private trading venues, typically housed inside big investment banks, which match buyers and sellers anonymously. Only after trades are made is the identity of institutional investors who use these entities revealed. For such investors the advantage is they can trade large blocks of shares without moving the market.
Clearly the term “dark pools” can itself, whether rightly or wrongly, be taken to imply something underhand is going on. There are certainly suspicions on the part of the authorities. For instance, in June New York state’s attorney general filed a complaint against Barclays for alleged fraud and deceit in its dark pool. In response Barclays has asked a court to dismiss the complaint arguing in a memorandum that it “fails to identify any fraud” or establish any “actual harm”.
This brings us to the new alien species in the franchise: the high frequency traders. These are individuals who use computer algorithms to make markets. Such players often attempt to “trade ahead” of the market by buying available shares before investors. A tiny fraction of a second later they then sell the shares at a slightly higher price.
Michael Lewis, one of America’s leading financial writers, claimed in his book Flash Boys that such traders have in effect rigged the market against the interests of ordinary investors. High frequency traders counter that they are reducing trading costs by using computers rather than overpriced humans. Such traders contend that it is the mainstream asset management firms that charge excessively for their services.
Finally, there are shadow banks. These are institutions that act like banks, in that they play a role in the provision of credit, but are technically not banks. For example, money market mutual funds can act in this way. Yet shadow banks are not subject to the tight rules that regulate the banking industry.
Concern about the dangers of shadow banking is widespread. For example, Mark Carney, the governor of the Bank of England, has argued in the Financial Times that they played a central role in the financial crisis. Many others have claimed that the burgeoning shadow banking sector in China threatens global financial stability.
What all the critics have in common is that they look to what they see as the dark side of finance as a key source of instability bedeviling markets and the economy beyond. They fail to understand that if companies fail to use capital for productive investment it tends to flood the financial markets.
The kneejerk demands for ever-more rules provide no solution. Indeed the tighter regulation of banks helped supply the impetus for the rise of shadow banking. As long as high levels of surplus liquidity are circulating around the economy it will find its way into the markets.
The solution is not to shine light on the supposed ”dark side”. Instead it is to find ways to encourage firms to harness capital productively in the real economy.
This blog post was first published today on Fundweb.
Debate concentrates the mind. It is easy to dismiss opinions you disagree with from the privacy of your own living room. Debating articulate exponents of contrary views is another matter – even more so when the discussion takes place in front of a large audience.
I found myself in the position of having to sharpen up my arguments for a recent debate on behavioural finance at the City of London festival (plugged at the end of my last blog post). An edited version of the debate was broadcast in the Radio 3 Free Thinking slot and is available to listen to online here.
Instinctively I was suspicious of behavioural finance beforehand. I was familiar with respected pundits, such as Dan Ariely and Richard Thaler, who were all too ready to dismiss human beings as scarred by irrationality or condemned by frailty.
Such contentions did not accord with my experience or understanding of humanity. We may not be perfect but it seemed to me that from the long-term perspective of human history we have achieved a huge amount over the years. We have literally moved from living in caves to, at least relatively speaking, hugely more prosperous, technologically advanced and even humane societies. Such progress would not have been possible without the operation of considerable powers of human reason.
However, reading some of the more subtle material, and debating the likes of Greg Davies of Barclays and Frances Hudson of Standard Life Investments, made me realise that the more moderate proponents of behavioural finance have a point. It is not that we are irrational but we do have what could be called cognitive biases.
For example, most people, given the choice, would evidently opt for having £100 today rather than £102 tomorrow. This is despite the fact that – except in conditions of hyperinflation – £102 tomorrow would be worth more.
To my mind this is not irrational but it is significant. We may, for instance, prefer £100 today because we are sceptical about being given it tomorrow. Perhaps the donor will run away or simply forget. Or we may have an urgent spending priority. Preferring the £100 represents a bias on our part but it is overstating the case to condemn it as irrational.
This example may appear trivial but there are many others that could be given. For instance, the common human preference for avoiding losses over making equivalent gains; or our underestimation of the effect of compound interest on investments.
Nevertheless it still seems to me that what might be called the strong form of behavioural finance is fundamentally flawed. In our debate this perspective was represented by Adrian Wooldridge of the Economist. His approach was essentially to run through a catalogue of financial bubbles over the years as a way of demonstrating innate human irrationality.
To me this approach is deeply ahistorical and superficial. It ignores the specific factors driving each bout of volatility and simply asserts that human irrationality was to blame.
In any case the debate, or at least edited highlights, are available to listen to on the BBC website so you can judge for yourself.
This blog post was first published today on Fundweb.
I will be debating whether emotion or reason dictate the financial markets on the Free Thinking programme on BBC Radio 3 at 10pm this evening (subsequently available on the internet). The event was recorded at the recent City of London festival (see 7 July post).
This is the full text of my spiked review of Fred Siegel’s The Revolt Against the Masses.
Liberalism is one of a select band of troublesome political concepts that has multiple meanings. Indeed, ‘liberalism’ as used in one context can be the opposite of what it means in another.
The attitude of liberalism to freedom provides a prime example of these contradictory meanings. Classical liberalism, which was to the fore in the eighteenth and nineteenth centuries, typically placed a heavy emphasis on the importance of individual autonomy and liberty. In sharp contrast, contemporary liberalism tends to be deeply intolerant and elitist.
Fred Siegel, a senior fellow at the Manhattan Institute, a conservative think tank based in New York, has provided an enormous service with his innovative history of modern American liberalism, The Revolt Against the Masses. It helps put many of the most retrograde trends in the US into their proper context. It also helps shed light on parallel developments in other countries, including Britain, even though they are outside Siegel’s remit.
For Siegel, a defining feature of modern liberalism is its attachment to what he calls the clerisy – a technocratic elite which he identifies with academia, Hollywood, the prestige press, Silicon Valley and Wall Street. Despite its professed attachment to equality of opportunity, this elite holds the mass of the American public, what Siegel refers to as ‘the middle class’, in contempt. The clerisy sees itself as superior to the rest of the population on meritocratic grounds.
As the reach of the state has burgeoned, the clerisy has taken on an increasingly important social role. Over the years, American government has grown vastly, commanding more resources and employing more people, than ever before. As Joel Kotkin, one of the sharpest observers of contemporary American politics, has pointed out: ‘Since 1990, the number of government workers has expanded by some five million to some 20million. That’s four times the number who were employed by the government at the end of the Second World War, a growth rate roughly twice that of the population as a whole.’ Members of the technocratic elite present themselves as impartial experts, but their interests are closely tied to the fortunes of this vast state apparatus.
Siegel’s revisionist starting point is to argue that modern liberalism emerged in the pessimistic years following the immediate aftermath of the First World War. Its leading figures were writers and thinkers such as Randolph Bourne, Herbert Croly, Sinclair Lewis and HL Mencken. Their goal was to build a new American aristocracy that would distance itself from the perceived debasement of modern commercial society.
This early part of Siegel’s work often parallels John Carey’s 1992 study of Britain from 1880 to 1939, titled The Intellectuals and the Masses. Both works portray an intellectual elite that loathes the mass of the population. Indeed, HG Wells, better known today as a science-fiction writer, was a prominent political influence on both sides of the Atlantic in the early twentieth century. Siegel accurately describes American liberalism of the 1920s and onwards as a ‘cousin’ of British Fabianism.
Siegel’s identification of the 1920s as the time when modern liberalism emerged puts him at odds with conventional studies. Many authors argue that it was in the 1930s, with the New Deal of President Franklin Delano Roosevelt (FDR), that liberalism was born. Others point to the Progressive era, which reached its peak in the early years of the twentieth century, as the starting point of liberalism.
But Siegel argues that modern liberalism was fundamentally at odds with progressivism. The progressive movement was a bipartisan and largely middle-class Protestant movement that wanted to outlaw alcohol, gambling and prostitution. It also wanted to curb the power of big business and to create what it saw as a better life for the middle class. Siegel argues that liberalism represented a decisive cultural break from progressivism as it saw the American democratic ethos as a threat to freedom at home and abroad.
In the 1930s, many liberals admired the Soviet Union under the leadership of Joseph Stalin. At the same time, they took the view that the American middle class, stifled by smalltown conformity, was proto-fascist. It Can’t Happen Here, a novel by Sinclair Lewis on the dangers of homespun American fascism, was widely praised by liberal commentators.
Liberalism gained increasing political influence under FDR’s presidency, although he did not go as far as many liberals would have liked. In the early 1930s, Roosevelt established a Brain Trust, a group of academic advisers, to help develop his economic programme. Although this might seem an unremarkable move, in retrospect it was innovative for its time. It was an early example of technical experts playing a leading role in the formation and implementation of policy.
FDR also played a leading role in the popularisation of the idea of ‘economic rights’ – more accurately called entitlements. In his 1944 State of the Union address, he proposed a Second Bill of Rights that included such elements as the right to a useful and remunerative job, the right to adequate food, and the right to protection from unemployment. The president rightly contrasted these entitlements to classical political rights such as free speech, a free press and freedom of worship.
Although the idea of economic rights might sound positive, it in fact laid the basis for a system where different interest groups competed for access to resources from a rapidly growing state. For example, by the 1960s a framework of state-sponsored mobility gave a select number of African-Americans work in a profusion of anti-poverty, anti-discrimination, housing and social-services agencies. These bureaucracies provided jobs for a minority of educated black Americans and gave white radicals an outlet to rail against a wider society they condemned as irredeemably racist. Yet, at least in Siegel’s telling, this development angered most whites while at the same time undermining the prospects for most blacks.
There are many twists in Siegel’s tale, but an important turning point was the early 1970s and the emergence of what he calls gentry liberalism. This was a form of modern liberalism that was hostile to the ideas of progress and mass affluence. It stood in contrast to earlier generations of modern liberals who generally supported the idea of progress.
To be sure, there were green elements in the earlier years. HG Wells, for instance, was a proponent of population control and eugenics. But the primary target of gentry liberalism, as a new form of Malthusianism, was mass culture and mass consumption rather than the poor having numerous children.
Siegel presents Barack Obama as at the apex of the new liberalism. Obama himself is a graduate of the machine that has dominated Chicago politics for decades. His administration is predominantly staffed by a small number of credentialed experts who overwhelmingly hail from a few big cities. Despite all the talk of opportunity, this administration looks down with disdain on the mass of the population. Racial and political authenticity is held up as more important than policy accomplishments. It is also worth noting that this political grouping has substantial support from America’s most wealthy.
A final element of Siegel’s study of modern liberalism might surprise some British fans of John Stuart Mill. In an appendix, he points to Mill, the mid-nineteenth century British thinker, as a key inspiration for modern American liberalism. Mill is better known as an eloquent defender of individual autonomy, particularly in his essay ‘On Liberty’. But Siegel points out that Mill was an ambivalent figure who also held up the idea of a clerisy or ‘endowed class’ whose wisdom and intelligence put it above the average person. This idea of a superior intellectual elite later reappeared in numerous guises, including what HG Wells referred to as the new ‘Samurai’.
The main weakness of The Revolt Against the Masses is Siegel’s conflation of criticism of the American authorities with disdain for what he calls the middle class. For example, he does not clearly distinguish between criticism of authoritarian trends in American society and the view that the general public is proto-fascist. It is indeed true that these two trends are often fused in the minds of American liberals, but that need not necessarily be the case. It is quite possible to oppose on principle American authoritarianism while rejecting the notion that the mass of the population is inherently anti-democratic.
To make the distinction between the two liberalisms clear, it is necessary to breathe new life into two other key concepts from the political lexicon. First, upholding moral equality – the notion that no individual is intrinsically worth more than any other – provides a way of undermining the undemocratic claims of the technocratic elite and its supporters; and second, upholding the idea of freedom, in the classical liberal sense of individual autonomy, is essential to resisting the overwhelming authoritarian impulse of modern liberalism.
My latest spiked book review, on Fred Siegel’s Revolt Against the Masses, is available here. I will post the full text at a later date.
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