Archive for October, 2010

Aumann’s political insight

October 27, 2010

Robert Aumann, the great Israeli mathematician, is known politically as a deep reactionary.

He’s a member of Professors for a Strong Israel, used his 2005 Nobel Prize lecture to argue that “the swords must continue to be there – they cannot be beaten into ploughshares”

He has, in interviews and articles, presented negotiations betweens Israel and “the Arabs” like this:

Someone offers Reuven and Shimon NIS 1,000 together, if they can manage to agree on the question of how to split the money between them. Reuven says to Shimon: ‘Great, let’s split it half and half.’ Shimon says: ‘No. I am not leaving here with less than NIS 900. You will get 100. Take it or leave it.’ Reuven says to him: ‘Be rational. What is the difference between us? Why should you get more?’ Shimon says: ‘Rational or not, do what you want. Either I leave here with 900 or with nothing. You decide.’

Reuven thinks and says: ‘Okay, NIS 100 is money nevertheless. What am I going to do with this irrational mule? I myself am rational and I will take the 100. I need to advance my goal of getting as much money as possible, and my choice is between zero and 100. One hundred is still something.’

What is the paradox? That the irrational person gets more than the rational person.

[…]

The Arabs present rigid and unreasonable opening positions at every negotiation. They convey confidence and assurance in their demands, and make certain to make absolutely clear to Israel that they will never give up on any of these requirements. Absent an alternative, Israel is forced to yield to blackmail due to the perception that it will leave the negotiating room with nothing if it is inflexible.

[…]

There isn’t anything that we can convince the other side is sacred to us, that we’re willing to ‘be killed for it, rather than transgress.’ If there were something like that, then we wouldn’t be in the situation we are in today.

[…]

When did we get a lot of respect? When we bombed the reactor in Iraq, in Operation Entebbe, in the Six-Day War. Gestures don’t bring respect, but rather scorn, not just here but everywhere in the world because that’s human nature. Anyone who remembers the expulsion from Gush Katif relates to it with a shrug: ‘You expelled your own people.’ We didn’t get points because of the expulsion.

Nonetheless it often happens that the far right-wing observer is willing to admit truths that the centrist or left-liberal cannot stomach.

In volume 2 of Aumann’s Collected Papers, I recently came across “Power and Taxes”, an Econometrica paper from 1977, co-authored with Mordecai Kurz. The authors analyse “the actions of the government… as an endogenous consequence of the political forces that enable it to maintain power.”

This leads them to the following point:

[We] will make an assumption that we consider a basic ingredient of a democratic society, namely that

every agent can, if he wishes, destroy part or all of his endowment.

It goes without saying that the part that is destroyed cannot be taxed. If one thinks of one’s endowment as labour, then the above means that there is no forced labour: an individual may, if he wishes, “destroy” his labour, by simply working less (or not at all).

It may not be immediately clear why this assumption changes anything  after all, who would want to destroy his endowment – what good would it do anybody? The answer is that it gives the minority considerable threat power  power that is vital in determining taxes…

[A] strike involves the destruction of endowment (in the form of labour services) in the face of what are considered unfavourable terms of trade or excessive taxation.

While Aumann and Kurz focus on labour strikes, in real economies the level of private investment spending varies much more than labour supply.

The level of private, taxable economic activity (and thus the level of government revenue) is far more sensitive to the willingness of asset-holders to invest.

Private property ensures that owners have the right to withhold their “endowment”  – i.e. not invest in productive activity – if they don’t expect an adequate rate of return, due to high tax rates or low confidence in the “business climate”.

Governments are thus vulnerable to capital strikes, as explained by Fred Block in his article (also from 1977) on the class character of the state:

[Those] who manage the state apparatus  regardless of their own political ideology  are dependent on the maintenance of some reasonable level of economic activity. This is true for two reasons. First, the capacity of the state to finance itself through taxation or borrowing depends on the state of the economy. If economic activity is in decline, the state will have difficulty maintaining its revenues at an appropriate level. Second, public support for a regime will decline sharply if the regime presides over a serious drop in the level of economic activity, with a parallel rise is unemployment and shortages of key goods. Such a drop in support increases the likelihood that the state managers will be removed from power one way or another. And even if the drop is not that dramatic, it will increase the challenges to the regime and decrease the regime’s ability to take effective actions.

In a capitalist economy the level of economic activity is largely determined by the private investment decisions of capitalists. This means that capitalists, in their collective role as investors, have a veto over state policies in that their failure to invest at adequate levels can create major political problems for the state managers. This discourages state managers from taking actions that might seriously decrease the rate of investment. It also means that state managers have a direct interest in using their power to facilitate investment, since their own continued power rests on a healthy economy. There will be a tendency for state agencies to orient their various programs toward the goal of facilitating and encouraging private investment. In doing so, the state managers address the problem of investment from a broader perspective than that of the individual capitalist. This increases the likelihood that such policies will be in the general interest of capital.

Block took this to mean that there are structural mechanisms, beyond the conscious identification of state managers with capitalist interests, that discipline them to act in certain ways.

Whether they are bureaucrats or elected politicians, whether their goals are to expand military capacity or implement social reforms, state managers are reliant for income on firms making productive investments, and rentiers giving credit.

They (state managers) thus face constraints that reduce their feasible set of actions: they can’t for long implement policies that harm the confidence of owners of capital.

The nature of this dependence was also conceded in a recent speech by the Australian Prime Minister.

After listing her “values” “the things I still believe in; the things that drive me on” (stale banalities like “respect”, education and “hard work”)  Julia Gillard explained her government’s “policies and plans”, and “why my government is doing it”:

Because we know that we can’t deliver on any of those values without a strong economy and because we know that we can’t deliver on a strong economy without economic reform: significant fiscal consolidation; leveraging new investment in human capital; restructuring markets untouched by earlier waves of reform; right through to economic reforms in areas as diverse as carbon, water, and skills.

This says much about the limits of reformism and the trajectory of parties such as the ALP and the Greens.

Even those state managers with sincere reformist objectives must maintain the level of economic activity (especially when government expenditure is the means by which they hope to achieve progressive development). This means support for policies benefiting the national capitalist sector.

And the latter inevitably leads, especially in times of downturn, to support for welfare cuts, austerity budgets, attacks on the labour movement, military expeditions to Afghanistan or East Timor, etc.

For those who want better, neither keeping the bastards honest, nor “replacing the bastards” (the Greens’ declared aim) will do.

A worthy successor

October 26, 2010

Here’s Gillard, in last night’s speech to the Australian Industry Group, presenting the ALP as the defender of liberalism, and herself as Grover Cleveland to (Joe Hockey‘s!) William Jennings Bryan. Stirring stuff! I await Hockey’s retaliatory Cross of Gold address, surely to be included by future ABC Radio National listeners in their lists of most unforgettable speeches. But perhaps the Prime Minister, having perfected Keating’s sour drone, is more to their liking:

Reform is a seamless robe, which cannot be divided to suit sectional interest.

[…]

I said recently that minority Government is no excuse to walk away from reform. I mean that.

This country has had a reform agenda for a generation.

At our best…there has been a historic reform project which spans the political divide. A shared understanding between Governments of both persuasions and industry that modernising our economy creates opportunities for all Australians.

That shared understanding should ensure that minority Government does not mean an end to reform.

But I believe the reform consensus is now under serious threat.

[…]

In our country we are hearing rising voices against reform.

Not just in the community as a whole, but in major party politics as well.

And strikingly, in the Parliament, in the once reform-advocating Liberal Party.

If a strain of economic Hansonism takes hold on the conservative side of politics in a Parliament which is so finely balanced, our long-term prosperity is at real risk.

Without the legacy of reform, our economy could never have resisted recession through two decades and three global shocks.

And at this time, with global uncertainty over growth and domestic uncertainty over carbon pricing, the reform consensus is as important as ever before.

Everyone who is committed to economic reform now has a job to do.

Simplistic solutions abound.

The risk of a return to economic populism is real.

The reform conversation needs many voices.

Leaders must lead, and my voice will be loudly heard.

Industry has a stake in the reform project – in opportunity, in prosperity, in growth – so you must have a strong voice in the reform conversation too.

My Government has an ambitious reform agenda: financial [sic?] consolidation; building capacity on the supply side with tax, superannuation, infrastructure and skills; extending market-based reforms to health and education, carbon and water. We will pursue it with discipline and rigour.

As Prime Minister and Leader of the Labor Party I can guarantee we will not unilaterally withdraw from the post-1983 reform consensus.

Others must speak for themselves.

[…]

Update: Some clues to the  substance of this “reform” agenda can be found in advice to incoming ministers by the departments of Treasury and Finance.

Some plots of recent changes in birth rates

October 25, 2010

Below I’ve presented some time-series plots of recent changes in fertility rates in Australia. The age-specific rate for a single year gives the number of live births per 1000 females in the specified age bracket. The total fertility rate provides an estimate of lifetime births per woman, based on the sum of age-specific birth rates. I’ve thrown in recent changes in the crude marriage rate for good measure.

Since exponential growth in real capital values depends on a corresponding expansion of either the workforce or labour productivity (with the latter historically dependent on access to high-EROI fuels), these plots tell us something about the likely fate of industrial capitalism.

NY Times gets the story

October 23, 2010

The newspaper of record of the US elite’s “liberal” wing presents the Iraq War Logs story in its own now-practised style.

Leaked Reports Detail Iran’s Aid for Iraqi Militias“:

Scores of documents made public by WikiLeaks, which has disclosed classified information about the wars in Iraq and Afghanistan, provide a ground-level look — at least as seen by American units in the field and the United States’ military intelligence — at the shadow war between the United States and Iraqi militias backed by Iran’s Revolutionary Guards.

During the administration of President George W. Bush, critics charged that the White House had exaggerated Iran’s role to deflect criticism of its handling of the war and build support for a tough policy toward Iran, including the possibility of military action.

But the field reports disclosed by WikiLeaks, which were never intended to be made public, underscore the seriousness with which Iran’s role has been seen by the American military. The political struggle between the United States and Iran to influence events in Iraq still continues as Prime Minister Nuri Kamal al-Maliki has sought to assemble a coalition — that would include the anti-American cleric Moktada al-Sadr — that will allow him to remain in power. But much of the American’s military concern has revolved around Iran’s role in arming and assisting Shiite militias

[…]

The reports make it clear that the lethal contest between Iranian-backed militias and American forces continued after President Obama sought to open a diplomatic dialogue with Iran’s leaders and reaffirmed the agreement between the United States and Iraq to withdraw American troops from Iraq by the end of 2011.

Suppose, though, that the paper had instead concentrated on the revelations of war crimes. I suspect the political consequences would be zilch.

So long as crimes against peace are deemed okay and indeed necessary, reactions of disgust and horror (I haven’t seen any yet) at news of ~70 000 verifiably dead civilians are merely so much eyewash.

The New York Times‘s use of this occasion to vilify Iran – just as it responded to the Afghan War Logs by highlighting the “Pakistan connection” – is at least honest.

According to the Justice Department, “the very determination of whether and in what circumstances the United States’ armed conflict with al-Qaeda might extend beyond the borders of Iraq and Afghanistan is itself a non-justiciable political question”. Within the political branch, Congress, having “authorized the President to use necessary and appropriate force against Al-Qaeda, the Taliban and associated forces”, now leaves to the Executive the responsibility of determining what counts “as an organization within the scope of this authorization.”

Princeps legibus solutus est.

Operations of CENTCOM, the steel in the US ship of state according to Obama, could conceivably be extended from the Red Sea to the Taklamakan Desert.

This gets univocal support from all branches of the US elite, from the beast’s beating heart to distal tricksters in the media.

The changing household consumption bundle

October 21, 2010

In any given time period, an average member of Australia’s employed population buys such-and-such amount of food, clothing, shelter, TVs, Hollywood movies, football matches, medical care etc.

Has this consumption vector changed much over recent decades?

The figures below show the proportion of household expenditure accounted for by various categories of goods and services, and how these proportions changed between 1984 and 2004.

What we see is contrary to the popular, media-fuelled view of affluenza and luxury fever.

The largest relative growth came in categories of spending like household services and operation (phone calls, childcare, housekeeping, cleaning, gardening), housing costs (rent, interest repayments, rates, etc.) and miscellaneous (mostly education fees).

Most new spending was not on items like household furnishings, recreation or personal care (toiletries and cosmetics).

But this is a bit deceptive. It says more about changes in relative prices than the physical volume of items purchased.

The relative price of “goods” to “services” (a crude distinction, it’s true) has fallen over the past 30 years.

Medical practitioners’ fees, for example, increased far more during the period under consideration than did most durable goods. The per-unit cost of components found in electronic equipment (TVs, mobile phones, personal computers) declined due to technical advances.

And of course the average Australian household did not buy fewer shirts, dresses or shoes than it had twenty years earlier. But prices in the textiles and clothing industry barely increased in this time.

Hence the grain of truth in the otherwise fantastic claims of Clive Hamilton, prominent “public intellectual” and one-time Greens candidate:

Average households today are filled with big-screen TVs and DVDs… [We] see backyards dotted with swimming pools. It is nothing for an average parent to spend $1000 on a present for a child or to buy them a personal mobile phone. Ordinary families happily shell out $40,000 for a four-wheel drive play-thing and gamble away a few thousand dollars each year merely for entertainment.

But this is not because, as Hamilton claims, “modern consumers no longer consume the ‘utility’ of goods and services: they consume their symbolic meanings.”

Instead it’s simple technological innovation, working through the substitution effect, that increases demand for certain goods, transforming them “from luxuries to necessities“.

Productivity gains reduce the number of labour hours required to produce many items, lowering their unit price. They can thus be bought at higher volumes and in larger sizes. (Service products are, arguably, less susceptible to technical advances, which may help to explain the recent movement in relative prices.)

Consider some of the major consumer goods (CD, CD-ROM, DVD, MiniDisk, Blu-ray) developed over the past 35 years. These are some of Hamilton’s prime examples of “items that have been transformed from luxuries to necessities in most Australian homes.”

But such products were not developed in response to consumer demand, let alone “ever-rising aspirations in pursuit of lifestyles that would give us an identity.” Consumers didn’t grow tired of the gramophone record and demand something new.

On the contrary, consumer demand was created by Philips, Sony, Pioneer and MCA to meet a technology – Laserdisc – that had been developed in the late 1970s for another purpose: home video. Of course, VHS cassettes proved more successful. To recoup their investment in Laserdisc, these companies created another mass market for the technology: “compact disc”.

This meant placing long-term orders for disc-pressing machinery, laser diodes, and all the intermediate inputs necessary for different stages of production; agreements with record companies to ensure that audio recordings would be released in the right format; and finally the advertising and distribution networks to ensure the product would be bought once it had been launched.

From this beginning followed successive innovations in the production of optical-disc products, similar to those in computing, which increased storage capacity to the extent that a single disc can now hold more than a terabyte of data.

This tendency for technical innovation to allow more efficient delivery of basic needs is a  200-year old feature of industrial capitalism. If the product contributes to the employed population’s consumption bundle, it makes labour cheaper to employ (after nineteenth-century cotton mills made workers’ clothing cheaper, the same real wage, in all industries, could henceforth be met with less money).

It also generates, as Hamilton isn’t the first to point out, the profusion of “non-basic needs”, a “failure to distinguish between what we want and what we need”. (Even though, last anyone heard, Hamilton had declared that the Great Recession meant “the era of affluenza is over”, aggregate demand is in fact sustained more than ever by growth in household debt).

The cause of this cornucopia isn’t the spiritually empty “materialism” of the working population,  and its solution isn’t “downshifting” (“rejecting the values of consumer society”).

The culprit is both mundane and more formidable. It is an invariant structural feature of capitalism: improvements in labour productivity, driven by competition and the search for innovator profit.

As Hamilton makes clear, “growth fetishism”, and its consequent effect on the consumption bundle of the working population, has us on a path to biospheric disaster. But the solution to this social problem isn’t the taking of thought, any more than a remedy for capitalism’s ecocidal, grow-or-die dynamic is the election of Greens members to parliament, or Australia’s “easing back the immigration tap“.

Step up to the plate

October 14, 2010

Ten years ago this week, Al Gore and G.W. Bush met in the second debate of the 2000 U.S. presidential campaign.

Numbing as it was back then, it’s rather entertaining now to read over the transcript.

Recent history of this kind gets covered over too quickly by the sediment of subsequent events, especially given the landslide of the 2001 WTC/Pentagon attacks.

Of course, the debate is interesting not for anything it tells us (nothing) about Bush and the Republicans.

Its historical value lies in the counterfactual: the rhetorical and conceptual armoury (such as it was) of Gore’s “humanitarian intervention” was perfectly capable of serving as the official mood music of the coming Drang nach Osten (aka the War on Terror).

Once the noise about Republican “isolationism” and Democrat “liberal internationalism” is filtered out, the adherence of both candidates to a common project is clear. The Clinton administration had inherited, and then faithfully executed, the grand strategy outlined in the Pentagon’s Defence Planning Guidance of 1992.

The key goals of post-Cold-War US foreign policy, according to this document, were

  1. “precluding the emergence of any potential future global competitor”; and
  2. “preventing the domination of key regions by a hostile power”.

Given the decline in the relative weight of US productive power, this would require coercive, “extra-economic” means: in short, aggressive war as an instrument of state policy.

Advancing this prerogative then became the primary concern for all wings of the US elite: core state executives, as well as the periphery of policy intellectuals, business-linked thinktanks and journalists. In this they were assisted by external allies, especially in Australia, Canada, and western Europe.

Thus Gore goads Bush over the latter’s putative reluctance to “intervene” overseas:

I did want to pick up on one of the statements earlier, and maybe I have heard, maybe I have heard the previous statements wrong, Governor. 

In some of the discussions we’ve had about when it’s appropriate for the U.S. to use force around the world, at times the standards that you’ve laid down have given me the impression that if it’s something like a genocide taking place or what they called ethnic cleansing in Bosnia, that that alone would not be, that that wouldn’t be the kind of situation that would cause you to think that the U.S. ought to get involved with troops. 

Now, there have to be other factors involved for me to want to be involved. But by itself, that to me can bring into play a fundamental American strategic interest because I think it’s based on our values. 

Now, have I got that wrong?

Bush fends: “I’m worried about overcommitting our military around the world. I want to be judicious in its use.” 

Gore continues:

The way I see it, the world is getting much closer together. Like it or not, we are now — the United States is now the natural leader of the world. All these other countries are looking to us. 

Now, just because we cannot be involved everywhere, and shouldn’t be, doesn’t mean that we should shy away from going in anywhere… 

I just think, Jim, that this is an absolutely unique period in world history. The world has come together, as I said, they’re looking to us. 

And we have a fundamental choice to make. Are we going to step up to the plate as a nation the way we did after World War II, the way that generation of heroes said okay, the United States is going to be the leader. And the world benefited tremendously from the courage that they showed in those post-war years. 

I think that in the aftermath of the Cold War, it’s time for us to do something very similar, to step up to the plate, to provide the leadership on the environment, leadership to make sure the world economy keeps moving in the right direction.

Bush responds:

I’m not so sure the role of the United States is to go around the world and say this is the way it’s got to be. We can help… 

I just don’t think it’s the role of the United States to walk into a country and say, we do it this way, so should you… 

So I’m not exactly sure where the vice president is coming from, but I think one way for us to end up being viewed as the ugly American is for us to go around the world saying, we do it this way, so should you.

And note this exchange, earlier in the same debate:

BUSH: The coalition against Saddam has fallen apart or it’s unraveling, let’s put it that way. The sanctions are being violated. We don’t know whether he’s developing weapons of mass destruction. He better not be or there’s going to be a consequence should I be the president… 

I think that, you know, I would hope to be able to convince people I could handle the Iraqi situation better.

MODERATOR: Saddam Hussein, you mean, get him out of there?

BUSH: I would like to, of course, and I presume this administration would as well. We don’t know — there are no inspectors now in Iraq, the coalition that was in place isn’t as strong as it used to be. He is a danger. We don’t want him fishing in troubled waters in the Middle East. And it’s going to be hard, it’s going to be important to rebuild that coalition to keep the pressure on him.

MODERATOR: You feel that is a failure of the Clinton administration?

BUSH: I do.

GORE: Well, when I got to be a part of the current administration, it was right after — I was one of the few members of my political party to support former President Bush in the Persian Gulf War resolution, and at the end of that war, for whatever reason, it was not finished in a way that removed Saddam Hussein from power. I know there are all kinds of circumstances and explanations. But the fact is that that’s the situation that was left when I got there. And we have maintained the sanctions. Now I want to go further. I want to give robust support to the groups that are trying to overthrow Saddam Hussein, and I know there are allegations that they’re too weak to do it, but that’s what they said about the forces that were opposing Milosevic in Serbia…

Principles of economists

October 12, 2010

Mankiw has been bleating about high marginal tax rates for the rich:

I am regularly offered opportunities to earn extra money. It could be by talking to a business group, consulting on a legal case, giving a guest lecture, teaching summer school or writing an article. I turn down most but accept a few…

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000…

Here’s the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

[…]

Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives…As they face higher tax rates, their services will be in shorter supply.

What’s the marginal cost of reproducing another copy of Principles of Economics, Mankiw’s freshman textbook, which goes for ~$180 on Amazon? Google says it’s $0.

Come to think of it, what’s the marginal cost to Mankiw of his prime “money-making opportunity”, those endless new editions of his all-conquering textbook (for which he reportedly received a $1 million advance, and which he of course assigns to his own students)? Let’s ask Mankiw:

I am looking to hire a Harvard student to work with me as I revise my principles textbook (along with several other less time-consuming tasks). The part-time job requires strong writing/editing skills, the ability to proofread carefully, some facility with data, and an interest in pedagogy.  Work would start soon, and it would continue throughout the summer and into the fall term. Because most of the communication can be via email, there is no need to stay on campus during the summer.

If you are interested, please drop off a brief letter, resume, and transcript with my assistant Lauren La Rosa in Littauer 230.

You can see why nothing else seems quite worth the effort.

Some more on immigration

October 11, 2010

I’ve remarked before that higher immigration to a given country will — in the long run and holding all else constant — raise its firms’ average rate of return on investment.

The causal link may not be immediately apparent. To see that it nonetheless exists, take the following simple model of the trend or ‘equilibrium’ rate of profit in which labour supply is exogenous.

Without going into the derivation, suppose that the evolution of this profit rate (r) is governed by the interaction of  four terms: the growth rate of the workforce (n), the growth rate of labour productivity (g), the depreciation rate (d), and the share of profits that are productively re-invested in the capital stock (1-u).

So r = (n g + d)/(1 – u)

Plugging in the historical values for these four terms in Australia since the 1960s (and applying a three-year moving average) gives us the red line below, plotted against the actual profit rate. The fit is quite good.

The importance of demographic increase can then be shown by the following counter-factual scenario. Suppose Australia had, over recent decades, experienced no growth in the size of its labour force (zero natural population increase, zero net inward migration or no change to the participation rate).

To remove the effect of workforce growth, let n = 0. Plugging this value into our formula gives a new average profit rate: the green line below, plotted against the red line from above.

As we can see, the effect of zero workforce growth is to lower the economy’s average return on investment by around 2-3% annually. On the vertical axis above, the green line is below the red line by between 0.02-0.03 each year. This may not seem like much, but it’s roughly a 15% reduction in the annual mass of profit.

Remember also that we’re talking about the average profit rate: not some uniform return on investment that each Australian firm earns, but a central tendency around which the population of firm’s profit rates is distributed. Some firms will earn a higher return than this average; some firms will earn less.

Suppose the distribution of profit rates earned by business enterprises look something like a bell curve. If the entire distribution shifts leftward, then the profit rate of some firms in the lower, left tail of the distribution will be less than the commercial interest rate charged to borrow funds. These firms, who may have borrowed funds to operate or investment, will not be able to repay interest on their loans, and they’ll eventually go out of business.

Further, we may realistically presume that there is some conventional risk premium, between interest rates and industrial profit rates, that influences the willingness of firms to invest. Unless this difference between the anticipated return on real invested capital and the prevailing rate of interest reaches some positive threshold, then firms will not invest in new plant and equipment. Growth in the capital stock, as well as employment, will stagnate.

In reality, since 1970 inward migration has contributed just over 45% of Australia’s total population growth. Given that most immigrants are concentrated in the prime working-age age cohort 25-44, their relative contribution to labour-force growth is higher still. Australia’s fertility rate has revived somewhat since 2001, but it’s still at historically low levels.

The growth project of this country (more correctly, the project of that coalition of property-owning classes at the helm of Australian politics, their preferences discernible in the outlook of the policy elite) is thus irreversibly tied to an input whose supply is constrained: imported labour from regions of the world where low-cost breeding of humans is still possible.

Anyone? Anyone?

October 8, 2010

Wouldn’t it be delicious if, as predicted by Martin Prince on The Simpsons, Jadgish Bhagwati finally wins the economics ‘Nobel’ prize next week?

In today’s United States, full-throated advocates of multilateral trade liberalization suddenly seem almost pitiful. They have quickly become marginalized figures, shouting into the gale.

Exigencies forced upon the national elite by competitive decline mean that even the ‘multilateralist’ wing of state managers — from the Treasury Secretary to the President and the ‘New Democrats’ in Congress — no longer likes the idea of the world’s low-cost producers competing with domestic firms.

Formerly favoured instruments like the WTO have (except where TRIPS are concerned) lost their appeal. The Doha round is abandoned. In the last week, the House of Representatives has shown its disdain for the WTO, and its growing taste for discriminatory measures against China. (In recent years, protectionist measures worldwide have targeted firms from China more than those of any other country.) This includes a string of spurious anti-dumping and countervailing-duty petitions.

Opinion makers have joined in. Paul Krugman has decided ‘there are worse things than trade conflict.’

Robert Samuelson says:

[Trade] war with China… seems to be where we’re headed and probably should be where we are headed…

Confronting China’s export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take…

As the old order’s main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system.

The first would be dangerous; the second, potentially disastrous.

Given this setting, it would be terribly funny and sporting for Bhagwati to be given the prize. The odds are long, though, on the academy anticipating the joke and delivering the punchline.

‘Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the — Great Depression.’

Huffing and puffing

October 6, 2010

The Australian newspaper continues to speak breathlessly of a Chinese Griff nach der Weltmacht. In the latest instalment, “China’s irresistible power surge“, Rowan Callick writes:

China has broken out. After countless “dragon rising” conferences and speeches…the past few weeks have seen something new: the most important shift so far in the 21st century. History in the making. China has made its move.    

Over recent months, it’s been impossible for readers to avoid such talk. First, in early August, the newspaper reported that a “resurgent China is baring its teeth at the once indomitable US Pacific fleet. The certainty of US hegemony over this vast ocean, which Australians have taken for granted since World War II, is being challenged…For a country such as Australia, which would rely heavily on the US Pacific fleet to protect it against a belligerent China, the prophecies of experts such as [historian Niall] Ferguson are disturbing.” Then on 5 August came a much-discussed visit to Sydney by John Mearsheimer, the US international-relations theorist. In a speech titled “The Gathering Storm: China’s Challenge to US Power in Asia”, Mearsheimer argued that “China’s rise…is likely to lead to intense security competition between China and the United States, with considerable potential for war”:

Chinese strategists are going to pay serious attention to Australia over the years ahead, mainly because of oil…They want to be able to protect their sea-lanes that run to and from the Middle East…Therefore, China has a powerful incentive to make sure its ships can move through the two main openings that run through Indonesia. This situation almost certainly means that China will maintain a significant military presence in the waters of the northern coast of Australia and maybe even on Indonesian territory. China will for sure be deeply concerned about Australia’s power projection capabilities, and will work to make sure that they cannot be used to shut down either the Lombok or Sunda Straits or threaten China shipping in the Indian Ocean…The steps that China takes to neutralize the threat that Australia poses…will surely push Canberra to work closely with Washington to contain China.

This merely restated, in more direct language, the viewpoint of Australia’s 2009 Defence White Paper, which suggested that “over the long period covered by this White Paper [i.e. before 2030], we might have to contend with major power adversaries operating in our approaches – in the most drastic circumstance, as a consequence of a wider conflict in the Asia-Pacific region.”

In such a circumstance, it is not a current defence planning assumption that Australia would be involved in such a conflict on its own…The Indian Ocean will have an increasingly strategic role to play within the ADF’s primary operational environment. This will include… growing strategic competition within the Indian Ocean, along its periphery, and through the straits leading to and from it. With these factors in mind, and with the centrality of the Indian Ocean’s maritime trade routes to the energy security of many Asian states, Defence planners will need to focus increasingly on the operating conditions and demands of this region. More than ever before, short of war, Australian defence planning will have to contemplate operational concepts for operating in the Indian Ocean region, including with regional partners with whom we share similar strategic interests. 

On 24 August came a speech by the Prime Minister of Timor-Leste, opening construction of new headquarters for Dili’s new defence ministry and armed forces. The building, like many other state offices, would be funded by the PRC, and Xanana Gusmão addressed the Chinese ambassador with pointed thanks:

Words cannot express how thankful we are for this work that your country gave us, in addition to all the others. After the Palace of the Presidency of the Republic, the Ministry of Foreign Affairs and the Military Residential Quarters in Metinaro, we are now privileged to be about to receive, in the name of the fraternal brotherhood that links our two Peoples, the building that will house the Ministry of Defence and the F-FDTL Headquarters. I also ask you to convey to your Government not only my personal thanks but also the appreciation of all the Timorese, who never forget who they true friends are. It was also in the name of this friendship that the People’s Republic of China has recently enabled the training of the crews of the Jaco patrol boats, which are now part of the Naval Component of our Armed Forces, in addition to having facilitated the purchase of these vessels. We are firmly committed to incrementing bilateral cooperation in the military area with friendly countries that provide us with uninterested support. Our Chinese brothers and sisters are clearly part of this group. We are aware that an eventual assistance in order to enrich the technical know-how of our military, to be generously provided by the People’s Republic of China, will not result in heavy burdens to the Timorese State. Consequently, there is nothing that would prevent us from requesting and accepting it, nor would it be legitimate for anyone to seek to constraint our options.

The digs at Canberra could hardly be missed. The next day, in “Military fears over Timor link to China”, The Australian stated that “China’s foray into what has been traditionally regarded as ‘Australia’s sphere of interest’ had set alarm bells ringing in Canberra”:

“Australia has always been edgy about great powers establishing strategic positions in the neighbourhood”, said Professor Hugh White, a former deputy secretary in the Defence Department who is now head of the Strategic and Defence Studies Centre at ANU. “It’s contrary to a very deep intuitive sense we have of our strategic interests. And I don’t doubt for a moment Australia will be very nervous about this,” Professor White said.

If a future US-China relationship became more competitive with the region divided into pro-US and pro-China blocs, Beijing’s strategic military presence in East Timor could pose a serious challenge for Australia, he said.

The nervous parties included the Greens leader, Bob Brown, who now entered the fray. On ABC radio, he expressed concern “that Australia has so much more to do in terms of economic relationships with places such like Fiji and Timor Leste again who are turning to look at what China has to offer.” In an opinion piece that described his party’s military and diplomatic priorities for another Murdoch paper, Brown said that “we are neglecting neighbours in need like Timor-Leste, which is, this week, exploring new defence ties with China! The Greens’ strategy is to have our defence forces personnel at home to secure our own arc of stability.”

Finally, after weeks of buildup, came an offering to Quarterly Essay by the aforementioned Professor White, “Power Shift: Australia’s Future between Washington and Beijing.” An extract duly appeared in The Australian, in which White claimed that:

the best outcome for Australia would be for the US to relinquish primacy and share power with China and the other major powers in a Concert of Asia…based on principles of the charter of the United Nations…We should try to persuade the US that it would be in everyone’s best interests for it to relinquish primacy in Asia, but remain engaged as a member of a collective leadership; staying in Asia to balance, not to dominate.”

Greg Sheridan, the paper’s editor, immediately described White’s essay as “insane”, “remarkable”, “astonishing”, “weird”, “screwball”, “bizarre”, “ridiculous” and “the single, stupidest strategic document ever prepared in Australian history by someone who once held a position of some responsibility in our system.” White offered a brief rejoinder, before the floor was turned over to Michael Danby, the Labor MP for Melbourne Ports, and academics Carl Ungerer and Peter Khalil, the latter Kevin Rudd’s former strategic advisor on foreign affairs and national security. These three suggested that “bowing to Beijing would be the modern equivalent of the Munich agreement”, though hastened to add that no “serious analyst equates China’s communist regime with Hitler”. (The unedited version of this piece is on Danby’s website.)

What lies behind this relentless firing of monitory flares? I’ll leave that to another post.