Friday, April 17, 2009

crisis for capitalism = renaissance for left?

I have not written much on the financial crisis since I have been on the road and still am (currently in Chile). But I have a few moments today...

I do suspect there will be a serious revisiting of the idea of freedom of contract. But I do not think that it will be the leftist critique that cuts much ice. The left has often opposed freedom of contract on the grounds that contracting power is not equal. Unions, for example, may operate just like cartels in that they try to act as a monopoly supplier for their good or service (in this case, labour), but anti-competitive behaviour is OK if the victim is a corporate producer instead of an individual consumer (I could note the fact that, at the end of the day, it is still individual consumers who pay for the dead weight loss but that's another column). But at the root of the current crisis is credit being extended to poor individuals on terms that no one can say was too favourable to the corporate creditor. In fact, the terms were not favourable enough to those corporate creditors. Government policy that encouraged this flow of credit (including, but not limited to, mortgage deductibility) for no other discernible reason than creating more home owners (something that has no necessary relation with raising living standards) exacerbated the problem.

People can, and are, wagging the finger at the bankers. But the leftist critique has a hard time explaining how the bankers are to blame when it is the banks that are taking the hit and the borrowers who are washing their hands of unpaid debts. Sure, some banking executives made out like bandits, perversely, but in all of these cases it is not the borrower that was left holding the big but other capitalists, like the high rollers who put money into exposed hedge funds. The borrower is really only suffering because of the grief of the capitalists has "trickled down".

One can speak of "regulation", which is popularly conceived of as opposed to freedom of contract and therefore something on the "left" agenda, but in fact regulation is not necessarily left but anti-libertarian. Conservativism, as distinct from libertarianism, has always been suspicious of free wheeling capitalism. What conservatives approve of is competitiveness, something the left generally opposes (see my observations about labour supply cartels). A competitive character is a strong character. It is something in the blood. Freedom of contract, on the other hand, is an abstraction. And make no mistake, excessive abstraction is the root cause of the current crisis, when viewing from the most philosophical level.

A lot of regulations serve the leftist agenda of protecting favoured groups from competition. We do not need any more of that. But we could use more regulation that protects people from themselves. People have an inordinate capacity to create layers of abstraction that while theoretically designed to raise one's perspective from the concrete and immediate, often end up looping back to themselves in obscure ways such that one's perception is clouded by a false confidence. I have often preferred literature to formal philosophy because the former is more rooted (as an aside, I do not think the fact the Anglosphere is fertile ground to both analytical philosophy and exotic financial derivatives a coincidence). As novelist Joseph Conrad, very much a cultural conservative in temperament, wrote

Hang ideas! They are tramps, vagabonds, knocking at the back-door of your mind, each taking a little of your substance, each carrying away some crumb of that belief in a few simple notions you must cling to if you want to live decently and would like to die easy!

But it took two to tango here. Whereas the financiers blinded themselves via too much modeling and too little sense, the borrowers freely contracted with the bankers in order to satisfy their own consumption interests.

If I am getting too metaphysical here, it is because the continual search for an economic (or "abstract") explanation and/or solution is itself not going to be very satisfying if abstract models are themselves part of the problem. Economics does have a model for freedom of contract problems, namely, externalities (and externalities call for anti-libertarian policies). But this was not really a problem like a consumer and a producer freely contracting to dump the pollution associated with production on a third party. The categories are not so rigid. To a large degree, the third party here was the financiers themselves. It was the layers of abstraction that facilitated the inability (or unwillingness) to see that the music could stop and that it was themselves who could be left without a chair.

Tuesday, April 14, 2009

the power of perception

Nate Silver cites an interesting Gallup poll re perceptions of Fed chief Ben Bernanke.

What is interesting is that a very significant number of people seem to have changed their views of Bernanke from 2008 to 2009. What´s different between 2008 and 2009 for those who self-identify as Democrats or Republicans? The White House. Ergo, now "we" are in charge, for Dems, and "they" are in charge, for GOP voters. If there has been a substantial change of policy views on the part of Bernanke, I have not heard of it.

This holds an important lesson for why the Alberta Tories are so hard to unseat in Alberta. For a serious threat to materialize, many Albertans would have to conclude that "they" are in charge, and "we" are not. I don't see that happening soon... Stelmach will often take a rhetorical jab at "Ottawa" but never the "Harper Conservatives". Never mind that these two terms refer to the same thing: federal policy. "Ottawa" is THEM whereas the "Harper Conservatives" (to many Albertans) is US. Stelmach won't even go so far as to object to equalization, because many Albertans see equalization as a "Canadian" program and "Canadian" is US.

Over the last decade, there has nary been a union demand or a spending request that the Alberta P"C" has not accomodated with no less enthusiasm that the most explicitly "socialist" of social democratic parties. Yet this has not stopped Stelmach from warning of "socialism" and condemning it. After all, "socialists" are THEM.

NDP criticism of Alberta budget best

"Secret taxes", an NDP critic suggests.

Well said.  The royalty money ought to be described as a secret tax because it is not seen by the Alberta electorate as a tax.  Imagine if every penny of royalty income was saved, and all government services paid for by other sources of income.  This is the sort of trade-off between taxes and services most of the world´s citizens has to make.

It is not coincidence that Alberta has no consumption tax and collects such a large proportion of its revenue from royalties: the former is one of the most obvious taxes to the electorate, the latter one of the least.

Tuesday, April 7, 2009

Alberta posts $4.7 billion deficit (with years more to come)

Not much to say here that I haven´t said before. It may be useful to note Rick Bell´s observations, however: after voting themselves a big compensation increase, running up enormous expense bills, a 110% reversal on royalties, and deficit spending, the Tories are polling HIGHER than the level that landed them an overwhelming majority some 13 months ago.

Jack Mintz makes an observation I very unsuccessfully tried to communicate in the last election campaign: "the province has often resorted to pro-cyclical fiscal policy". Professor Mintz goes on to hope that "the government introduces an innovative fiscal plan that deals with inherent weaknesses that arise from a province reliant on volatile resource revenues. All Canadians should hope Alberta gets it right." Sorry, Jack, but the Tories not only failed to decrease the discretion with which they can fritter away resource revenue, they increased it, removing "the $5.3-billion cap on resource revenues that can be used for budget spending".

Wednesday, April 1, 2009

Nunavut turns 10

The territory of Nunavut was created on April 1, 1999.

Ten years on, Canada's youngest territory remains plagued by woeful levels of educational achievement, substance abuse, and dysfunctional families, despite federal transfers that average to more than $32 000 per head.

Is another jurisdiction in the world that better proves that the size of government is not positively correlated with development?

I'm being harsh. But that's precisely why this is a very Canadian problem: Canadians find it very difficult to be harsh. The culture in Nunavut is in dire need of a shakeup, and that doesn't go over well with the cultural relativists. Many Canadians graduated from the Rick Wagoner school of management: sound reasonable, look reasonable, compromise, look for the solution that satisfies all stake holders (which special sensitivity to the less advantaged), try to get along with everyone. In other words, stick one's hand in the sand until the world overwhelms.