Arnold Kling  

John Quiggin's new book

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It is called Zombie Economics. It is a polemic against conservative and libertarian economics. I agree with some of it, which might be considered a rave review. But really, I am still waiting for a book that attacks us without engaging in caricature and without dodging our most important arguments.

Consider two theories that Quiggin associates with us. First (p. 36)


The Efficient Markets Hypothesis justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows, and a massive expansion of the financial sector.

Second (p. 179)

the rise of the "public choice" theory of politics popularized the idea of "government failure." It was argued that, because of the systematic distortion of the policy process by interest groups, the costs of government intervention were greater than the cost of the market imperfections that government policies were supposed to remedy.

Quiggin connects the Efficient Markets Hypothesis to the financial crisis, but not Public Choice Theory. I see it the other way around.

If regulators believed in efficient markets, then they would have looked to market instruments, like subordinated debt, to promote bank soundness. Instead, they used--and continue to use--the notion of risk-based capital, which is a quota system that ultimately resembles the central-planning model that failed in the Soviet Union. The Shadow Financial Regulatory Committee, which is much more market-oriented than the bank regulators, was clear on the problems with risk-based capital twenty years before the crisis hit.

On the other hand, the Public Choice story is quite compelling. I can explain the growth of mortgage securitization in terms of the capture of bank regulators by Wall Street. In fact, it is hard to explain mortgage securitization any other way.

More below the fold.

On p. 16, Quiggin writes,


The "one size fits all" systems of single-payer health care and retirement income provision introduced in the aftermath of the Great Depression and World War II were attacked as bloated bureaucracies that crippled individual choice. Instead, it was argued, ordinary households should make their own provision for health insurance and retirement. The public sector "safety net" was reserved for the indigent and improvident, and soon began to fray.

Quiggin is an Australian, and although he seems quite familiar with American politics and such (much more familiar than I am with Australia, certainly), he makes generalizations like the one just quoted that I find unsupported. He is talking about the period known as the "Great Moderation," and he is making a case the market liberalism took undeserved credit for what turned out to be a temporary period of macroeconomic strength.

I agree that market liberalism deserves little or not credit, but that is because I see little or no market liberalism. Off the top of my head, the liberalizing policies were decontrol of oil in 1981 and tax reform in 1986 (under Reagan), deregulation of airlines and trucking (under Carter), and welfare reform (under Clinton). However, I can also recall major anti-liberalizing policies, such as Sarbanes-Oxley (under Bush).

As far as health care and retirement are concerned, the facts run counter to Quiggin's story. The share of health care spending paid by individuals declined over the period, fairly dramatically. Medicare was expanded (prescription drugs, for example), and so was Medicaid.

It would have been useful for Quiggin to make a list of major policy changes in various countries and classified these as liberalizing or anti-liberalizing. Instead of offering and then attacking the bedtime story that we liberalized and lived happily ever after (until 2008), tell a more nuanced tale. Which of the liberalizing policies turned out well, and which turned out badly? Which of the anti-liberalizing policies turned out well, and turned out badly?

The next chapter is on the Efficient Markets Hypothesis. I think that Quiggin and I agree on the hypothesis itself. That is, in its weak form it is probably right, and any individual should approach trying to beat the market with great doubt and humility. However, the view that markets are always locked in on fundamentals is probably wrong.

Implicitly, though, he is saying that government officials can reliably tell when financial markets are wrong. But it's not so easy. Look at Ken Rogoff, who seems to me inclined to believe that gold is in a bubble right now, but who nonetheless cannot rule out the possibility that the speculators are correct. I myself am convinced that gold is a bubble, but you don't see my putting any money on that view.

Next, Quiggin has a chapter on Dynamic Stochastic General Equilibrium, otherwise known as Dark Age macroeconomics. I probably agree with 90 percent of this chapter.

The next chapter is "trickle-down economics." I agree with Quiggin that tax cuts do not pay for themselves. However, the point of view that the distribution of income is something that government should or can manage is one that I do not share. If you have something against poverty, that is fine. Suggest ways to alleviate it, and I'll be happy to listen to what you have to say. But whenever I see the word "inequality," that usually means that you have something against rich people. I don't have that issue. My resentment is against politically powerful people.

Next, comes the issue of privatization. On p. 187,


Internationally, a number of major privatizations have been reversed. The British government was forced to renationalize its rail network after the failure of the privately owned operator. In Australia, dissatisfaction with the privatized telecommunications monopoly has led the government to announce that it will get back into the telecommunications business by constructing a publicly owned national broadband network. New Zealand, where market liberalism was implemented in a radical form in the 1980's and 1990's, renationalized its national airline in 2001 and its railways a couple of years later.

This is what I would liked to see more of from Quiggin. Specific examples that support his thesis, rather than rhetorical assertions. I felt that I learned something from this paragraph, and I am curious to know even more about these examples.


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COMMENTS (19 to date)
ThomasL writes:

That last paragraph is very interesting. The phrasing offers a huge range of possibilities, all of them fascinating.

Is the, "[P]rivatized telecommunications monopoly," an accidental/natural monopoly, or a state-granted monopoly?

NZ, "[R]enationalized its national airline," but was the "national" airline ever really not national? The in between state where it was denationalized would be interesting time frame to examine.

My suspicion for both cases is that they were denationalized into quasi-governmental entities that became answerable to politicians as well as shareholders.

That is pure suspicion though. I'd love to find some more details. I bet AW&ST would have something on the NZ airline case.

fundamentalist writes:
I agree that market liberalism deserves little or not credit, but that is because I see little or no market liberalism.

Exactly! The Federal Register (publication of NEW federal regulations) has average 10,000 pages per year every year since 1970.

James writes:

In Australia, I don't see the National broadband network as a a result of unsatisfaction due to Telstra (the ex government monopoly). Instead the network is being sold as something we need to drive productivity in the future. That the 'standard business case' doesn't apply as the benefits will pay for itself in unknown ways.
A good critique of the idea is here

G.A.M.E. writes:

A strictly scholarly work on the topics in Professor Quiggin's book would require several volumes to fill a sizeable bookshelf and have a negligible readership. You might never get the time to write a review of such a work.

You ask for empirical examples to substantiate a theory. Interesting. One of the major problems with the efficient market hypothesis having gained influence was the abundance of empirical studies that did not reject the hypothesis but failed to check in the first instance whether the hypothesis is scientific in the sense of refutable by construction.

If you demand rigour, then, I suggest, you start with those to whom Professor Quiggin's book constitutes a reply.


Jim Rose writes:

Arnold,

You are correct about Reagan.

When anyone says Reagan is a neo-liberal, ask them to list what he deregulated, what did he privatise? Next to nothing! Did the size of federal government shrink or grow much as before under Reagan's watch?


Most criticisms of privatisation such as those by Quiggin are self-refuting.


A common criticism of privatisation is the asset is sold on the cheap. That is impossible if privatisation is a bad idea.


If the government is good at owning commercial assets, if should be able to sell them with the same competence that governments of whatever ruling party show when run them. You can’t have it both ways: competent owner but incompetent seller!


Selling an asset is easy: hire a consultant to run a tender process. Running a business is far more demanding on the time and talents of the owners than selling it, is subject to far less public scrutiny, and that is before the politicised status of public ownership is fully considered.


Of course, privatisations are often public floats at a discount to build a political constituency against re-nationalisation. That is to be expected because privatisations are just as politicised as the day-to-day running when the asset was in public hands.


Such arguments are unavailable to Quiggin because you cannot apply a public choice analysis to privatisation but not also use public choice theory to understand the merits and efficiency of continued public ownership, regulation, monetary policy and the risks of pressure group capture.

Jim Rose writes:

John Quiggin's mentioned in his book the Australian Labor Party Government's plans for a $A43 billion federal government owned national broadband network. It was put up as evidence of the failings of private ownership of Telcos.

Henry Erqas has done some calculations about the planned construction of this new National Broadband Network in Australia. He estimated that its costs exceed its benefits by somewhere between $A14 billion and $A20 billion dollars in present value terms.

Recently deposed PM Kevin Rudd and his Communications Minister dreamt up this $A43 billion National Broadband Network plan while on two flights between Sydney and Canberra in April 2009. It is a short trip: 30 minutes.

The construction of the National Broadband Network appears to be starting in rural Australia for no other reason than because three rural independents hold the balance of power in the Australian federal House of Representatives. Rural users are also to pay no more than urban users.

Larks writes:

The reference to the UK rail system is mis-leading. While Rail was privatised in the '90s, the tracks were forced to be owned by a different company from the trains themselves, and then price controls were implemented. Finally, the Labour Government took steps that arguably forced RailTrack into bankruptcy. It's not clear that privatisation is ideal for the railways, but it's probably not the case that the UK experience was a good test.

Jim Rose writes:

on quiggin and "renationalized its national airline in 2001 and its railways a couple of years later."

Air new zealand was on the cusp of bankruptcy. the railways were losing money too.

the government of the day always had the option of letting bankruptcy law settle these matters.

KiwiRail was acquired for $NZ665 million. KiwiRail has been subsequently valued at $NZ369m. The government requires a real return of 8 percent on its transport assets, whereas KiwiRail delivers a negative return.

John Quiggin is a strong critic of governments almost always under-pricing privatised commercial assets. renationalisations do not seem to go any better as evidence of the commercial saavy of public ownership.

in the interests of full disclosure, a campaign billboard of the NZ Labour party in the 2008 general election was "Kiwibank, KiwiSaver, KiwiRail - keep it Kiwi, Vote Labour"

Mike Huben writes:

What a misleading review. Just look at the first paragraph:

It is a polemic against conservative and libertarian economics.
The word libertarian is used once in the whole book, to accurately describe Alan Greenspan. The word conservative is mostly used in reference to political parties, and never to describe economics. Quiggan's introduction targets market liberalism, also called neoliberalism.
[...] I am still waiting for a book that attacks us without engaging in caricature and without dodging our most important arguments.

Yet Kling NEVER specifically identifies anything Quiggan wrote as the caricature he's complaining about, and never identifies "important arguments".

It looks to me as if this is just another example of the continuous patter of the libertarian public relations campaign. Content doesn't have to make sense or be true, as long as the ideas get still more repetitions. It looks like the sort of propaganda the Koch brothers (who have funded GMU economics, Mercatus, CATO, etc.) have been buying for the past 30 years. I'd love to see Professor Kling explain this weak writing. Even more, I'd love to see him write better.

Paul writes:

"On the other hand, the Public Choice story is quite compelling. I can explain the growth of mortgage securitization in terms of the capture of bank regulators by Wall Street. In fact, it is hard to explain mortgage securitization any other way."

"But whenever I see the word "inequality," that usually means that you have something against rich people. I don't have that issue. My resentment is against politically powerful people."

Do these two quotes cause anyone else to wonder about the consistency of Kling's views? The problem with inequality is that inevitably the bribes offered by the wealthy cannot be matched by the offers of anyone else. When societies are too unequal, the premium for corruption and rent seeking are too large, and they crowd out honest behavior in government and business.

hhoran writes:

The transportation cases don't provide meaningful datapoints for or against Armold's "privatization" question, but thats the wrong question to be asking.
Air New Zealand became a legitimate "private sector company" but was renationalized after its disastrous acquisition of Ansett Australia. Remember that international aviation is incredibly rigged by artificial government imposed barriers (compared to domestic US or purely intra-EU aviation). The Australians had agreed to a common Aus-NZ aviation market to spur ANZ's purchase of the failing Ansett. But Ansett-ANZ didn't have the longhaul routes needed to compete with Qantas and others, and went bankrupt trying to quickly build one. Once ANZ failed the Australians reneged on the common aviation market to further protect Qantas. In international aviation private vs public sector shareholding isn't the central question. It is whether governments (plural) have facilitated liberal competitive rules with level playing fields and letting consumers/investors pick winners, or whether they are rigging markets to support "national champions". While the ANZ case is a bit unique, in most cases (Qantas, Air France, Lufthansa, the DOT's aggressive support of international megamergers)privatized companies have proved just as adept at getting markets rigged in their favor as the old-line government owned airlines did.
Rail privatization is a total joke in any situation where there is a large scale passenger network (especially urban commuter networks). These cannot possibly be run on anything remotely resembling a "private sector" basis. Never have been, never will be. Private investors can't deal with the magnitude and long-time horizon of capital investments and rail's network economics precludes anything resembling competition. Thus the British Rail "privatization" deals were totally contrived to meet ideological objectives, and everyone who knew anything about rail economics knew they would fail.
Obviously governments aren't good at optimizing the efficiency of international airlines or national rail passenger networks. But if these markets totally preclude anything resembling "dynamic private sector competition" then privatisation won't solve those market problems. In some cases privatisation creates new problems when governments favor the interests of the powerful private shareholders (of Qantas, Air France, United) over the interests of consumers or overall industry efficiency.

Yancey Ward writes:

Paul,

You have to answer just why rich people can/have to bribe government officials in the first place. This question is even more important in representative democracies like the US.

Tracy W writes:

Quiggin has some sort of bee in his bonnet about the Efficient Markets Hypothesis. I spent some time digging up quotes indicating that the people involved in the 1980s liberalisation weren't drawing on EMH as theoretical background, and Quiggin's response was to start saying that the EMH was an "unacknowledged" influence, and then to move onto attacking me personally.

He's also quite slippery with terms, talking about the EMH as if it's that financial markets always produce the best possible outcomes, as opposed to the best possible projections of the future, an important difference. This sort of equivocation fallacy shows up in the blurb on Amazon, see "that markets were always the best judge of value", I don't know of a single economist who believes that (for example, the value of a fishery depends a lot on whether access to said fishery can be restricted to sustainable levels, which is why the 1980s NZ Labour government brought in ITQs into fishing.) But if you don't know much about the EMH you wouldn't notice that Quiggin's doing it.

Greg Ransom writes:

Quiggin immediately started attacking me personally on his "Crooked Timber" blog -- using crude guilt by association to suggest that I had something against democracy.

Beware.

His response to solid argument and evidence it to kidney punch.

AlanDownunder writes:

James, quoting The Australian is like quoting Fox News. Can you find something non-partisan?

Never mind. I can:
Peter Martin and follow the links to his earlier posts.

Thomas Esmond Knox writes:

I was going to say ""The British government was forced to renationalize its rail network after the failure of the privately owned operator. In Australia, dissatisfaction with the privatized telecommunications monopoly has led the government to announce that it will get back into the telecommunications business by constructing a publicly owned national broadband network." does not mean what you think it means."

However, that comment is superseded by other comments.

Quiggan is Australia's answer to Krugman.

Telstra earnings are A$3.9bn, the 5th highest on the ASX after the world's largest mining company BHP-Billiton and three of the world's top 20 banks.

Australian Government investment in NBN=Bernie Ebbers i.e. total fabrication. They refuse to subject the proposal to a cost-benefit study.

mobile writes:

I am anxiously awaiting Quiggin's take down of physics. What sort of catastrophe is looming because so many right-wing scientists have models of the universe that include frictionless surfaces? Or those so-called ideal gases?

Jim Rose writes:

AlanDownunder ,

has a detailed cost benefit analysis of the NBN being performed?

joeedh writes:

Honestly, I've never understood this idea that there is a group of people called "the rich", who vote only in their own self-interest.

History is quite clear on this point. People act less in their self-interest the richer they become, proportional to the length of periods when they feel safe.

In the past 100-200 years, the poor have almost never revolted by themselves. Social revolutions almost always start in middle and upper class households, where people have become isolated from the realities of life, see that poor people exist, then throw a tantrum about it.

Honestly, will we never stop suffering from the meddling of privileged elites, who view their childist meddling as inherently efficient and correct action to help us lesser subhumans?

Ever wondered why so many poor people dislike leftism? Why do you think Reagan did so well?

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