Adonis Diaries

Posts Tagged ‘Mark Blyth

 

 

Austerity, Democracy, left and right wing parties, Greece (Syriza) and Spain (Podemos, we can)

In extended time of austerity due to after war conditions or financial default problems, people feelings swing to extremes: either the people opt for a left-leaning social reforms or they retract to their cocoon of right wing tendencies that lead to authoritarian political systems.

It may be odd to use a Roman metaphor to describe a Greek political event, but in this case, it’s apt.

Just as Julius Caesar crossed the Rubicon river because he could, in spite of the warnings of the Roman Senate not to, so Alex Tsipras, leader of the anti-austerity party, Syriza, has decided to try to end austerity in Greece, in spite of Europe’s leaders saying he shouldn’t.

Whether Tsipras will succeed is still unclear, but whatever happens, his victory represents a crucial turning point for Europe—a signal that time has run out on austerity policies.

Spain is following suit as Europe is facing an extended period of deflation and social unrest.

Give people jobs and they quiet down. How to reform a capitalist system so that worthy and honourable jobs can be created and sustained?

Austerity vs. Democracy in Greece

A “Tsipras” had to happen somewhere eventually, because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives.

If voting for impoverishment brings only more impoverishment, eventually people will stop voting for it—and the timing of “eventually” will depend on when people’s assets run out.

In the Greek case, backers of the incumbent New Democracy party and its austerity policies constitute that quarter of the electorate who still have assets (pensions, paper, and portfolios) after 5 years of depression and who want to preserve what they have.

The 36% that voted for Syriza were the young, the asset-less, and the unemployed—people who either lost what they once had or never had much to begin with.

Greece’s 1.9 percent of growth last year means essentially nothing to a society that has lost nearly 30 percent of GDP in a little over half a decade.

On the current course, it would take, by latest estimates, two generations for the country to get back above water.

Syriza’s victory presents two lessons for the rest of Europe.

First, no one votes for a 15-year-long recession.

Second, you can’t run a gold standard in a democracy. Either the gold standard goes, or democracy goes, and that is the choice Europe may face sooner than it thinks. (Why? Is the USA system truly a democracy after they flaunted the gold standard in 1968?)

The Euro is the gold standard that pretends that it’s not one—and therein lies the rub. While Europe has a plethora of national parliaments and free and fair elections, as well as a European parliament and multiple institutions with delegated power to represent the interests of citizens, once a country is a member of the eurozone, certain things happen that bypass any possible democratic checks.

On the upside, its credit history gets rewritten. Greece and Italy get to borrow like Germany (with predictable results). On the downside, when a eurozone country is hit with an economic shock, it cannot respond to it through the exchange rate (devaluation) or by using the printing press (inflation).  (Only Germany has the monopoly of printing the Euro money)

It must choose between default, which is not allowed, and balancing its books through internal devaluation (austerity).

And if that means a couple of constitutional coups d’état have to happen in the heart of democracy to get the policies through, as happened in Italy and Greece in 2011, then so be it.

So austerity becomes the only game in town. Although it may be rational for any one country to be austere, when multiple countries that share the same currency with no common fiscal policy do so, the result can only be a massive contraction of GDP and a corresponding increase in debt—which is exactly what has happened in Europe in recent years.

The boost in consumer and investor confidence that austerity was supposed to provide never materialized, and the eurozone as a whole slid into recession, and then, in the periphery, into depression and deflation. Now that all of this has occurred, however, the politics of sustaining the euro have changed, and changed utterly.

Until now, Eurozone policymakers’ obsession with fighting inflation has given them a one-sided understanding of politics. (Why Europe has to fight deflation too? It is good for the common people to survive their daily expenses)

In fact, Europe has not had an inflation problem of any magnitude since the 1970s. What it now faces is deflation—and since the politics of inflation and deflation are very different, the wrong policy choices produce Syrizas.

Inflation, after all, is not a general malaise that hurts all members of society equally, but a class-specific tax.

Those with assets, particularly paper assets, lose harder and faster than other groups that can pressure the state to accommodate them, which is why under inflation creditors suffer and debtors prosper. (Not in the USA)

Consequently, periods of inflation produce a type of politics where creditor interests come to the fore and the state is forced to retreat. The 1920s were one such period and the 1970s another—which is when Europe, and the euro, began to take their current form.

Deflation is different. Rather than creditors losing and debtors benefitting, in a deflation almost everyone loses, regardless of asset class.

Consider the choice of whether to work. A worker who decides to take a pay cut to price herself into a job is individually rational. But collectively, if all workers try this, the result is a collapse in consumption. (If the price of commodities drop commensurate to the pay cut, there is no problem. Common people will refrain from taking vacations abroad and patronize their own sceneries).

Employers get cheaper labor, to be sure, but also less demand for their products. Their logical individual responses are to cut prices to spur sales—but once again, the aggregate effect of such responses is to lower prices further. This increases real wages at a time when the economy is shrinking, which leads to more layoffs (Cannot comprehend this logic).

In such a world, with practically everyone losing, calls ring out for state intervention to stop the bleeding, and eventually, they are heard. It happened in the 1930s, and it is happening once again today.

This is what Tsipras and Syriza represent: the moment Europe drifted from ever-deeper and ever-wider open capital markets and institutionalized neoliberalism to a system in which the state comes back to reassert sovereignty over markets. (What if investors are reluctant to buy State properties as in Greece, on the assumption that the State will eventually lower its asking price?)

At that point, either democracy trumps markets, which need not be a progressive move, as Syriza’s immediate choice of coalition partners demonstrates, or markets undermine democracy to protect their asset values.

Which course European countries choose will be determined in the next few years, but a glance around the continent suggests that such a choice is indeed coming.

Greece may have crossed the Rubicon first, but due to its size in the European economy, Spain may be the game changer.

In Spain, Podemos is likely to form a winning left-wing coalition after that country’s general elections this fall, especially after the demonstration effect of Syriza.

In Ireland, Sinn Fein is cut from the same anti-austerity cloth and has risen substantially in the polls.

Although such parties are often called extreme, it is important to stress that their support bases, regardless of their leader’s dodgy connections, are democratic political forces whose core claims—­an end to self-defeating austerity and impoverishing wage policies—echo mainstream social democracy and the recommendations of many prominent economists on both sides of the Atlantic.

With regard to debt relief, these parties are merely restating the standard economic case that their countries’ debt overhangs are too big for investment to be resuscitated to levels that would permit high growth.  (The time of big countries waging wars against defaulting countries as during the colonial period is a tenuous alternative. Actually, big countries foment civil wars to buy very cheap State properties in exchange of the default debt)

Maturities can be extended indefinitely, but unless growth is restored, the game is over, and not just for Greece.

For those who fear Syriza and its left-wing counterparts, it is worth looking at the alternatives on the radical right.

From Britain to Hungary, political parties—whose ideology spans the spectrum from the explicitly Nazi (the Golden Dawn in Greece) to the nationalist–populist (the United Kingdom Independence Party and the French National Front)—are busy working to channel public anger in a different direction.

Harkening back to Europe’s darkest days, they translate negotiable conflicts over economic policy into non-negotiable conflicts over ethnic identity. They attack European integration even more than the left-wing parties, question the democratic rights of existing citizens, and fan the flames of xenophobia toward ethnic minorities and immigrants.

If Europe’s ruling elites want to save the European project, and the Euro at the heart of it, they need to start actively engaging with democratic left-wing parties such as Syriza and Podemos rather than shunning them.

If they don’t, they will drive some of these parties into volatile left–right alliances, or, if they fail in their mandates, leave the stage open to political forces whose goals will be far more radical than mere debt restructuring and opposition to austerity.

What is at stake now is not simply Syriza’s next moves or even a possible “Grexit.” These are symptoms, not causes.

The problem is that European authorities, driven by Germany, are enforcing a politics of deflation under a pseudo-gold standard, expecting citizens to vote indefinitely for their own impoverishment in order to save the asset values of creditors.

In such a world, both radical left- and right-wing forces can only stand to gain ground across many supposedly stable countries, and quicker than we think. To avoid that fate, the continent’s powerbrokers should make some sort of deal with Syriza now—because what may follow it may be far worse.

Black Swan model: Can rare catastrophic events in complex man-made systems be controlled?

Note:  The application of the Black Swan model to the “Arab” Spring revolts and in southern Europe, and the financial crisis will be explained in the follow-up article.

Warning! Pay closer attention to the “predictable” but unexpected rare calamitous events!

Black Swan is a term coined after discovering a black swan a couple of years ago.  People firmly believed that all swans were white:  A few might have observed a black swan but refused to identify it as a swan; or black swans are common sight in particular regions and people had no idea that black swans are considered rarity all over the world and might be purchased for their weight in gold to be raised in zoos!

You know the adage: “If an event can occur, it will happen“, meaning, it does not matter how low the predicted probability of occurrence of the rare events, it will strike “unexpectedly”.  If there is a chance in a million for an asteroid to smash onto earth, an asteroid will fall on our head: Asteroid did fall and transform earth several times in the last four billion years.

Just think on the even lower probability of “being who we are, as an individual”.  You could naturally have been an inanimate object, a plant, another animal species, born somewhere else, lived after birth, survived to be 5 year-old…

The Black Swan theory states: “In complex systems, especially man-made complex systems, it is not feasible to comprehend all the interactions among the hundred of variables affecting outcomes. In man-made systems, we have to allow natural fluctuations that are at work.  The rare predicted calamitous events  will strike unexpectedly, and we will fail to react accordingly and adequately if we consciously avoid to consistently take them into consideration in our analysis and reports.”

The unexpected events cannot be analyzed as odds in card games or casino games:  Human behavior with thousands of variability in moods, emotions, conventions, conviction, personal experiences… cannot be predicted as games are.

Natural sciences such as engineering, physics, chemistry, architecture, astronomy, planet explorations…are within the linear domain of thinking life and the universe.  Social and human sciences, epidemics, economics… are within far more complex domains, and the linear methods that mankind was trained to resolving problems and fluctuations are not adequate to be transposed to complex systems.

We are better equipped to predicting lunar eclipses, but not stock evolution, or foreign political upheavals.  It is NOT the “last grain of sand that crashed the structure or the bridge…”  The last grain was the catalyst for the failure but not the cause.  The fault is in the designed system, and not in its components.

For example, the “subprime” was not the cause of the financial crisis in 2008: It was just the latest among the catalysts of hazardous financial tools.  The cause was a faulty financial system that the political decision-makers failed to redesign in due time, requiring courageous and determined positions to ironing-out the serious problems growing out of proportions in risky behaviors, in an unregulated system, and in instantaneous pouring of massive liquidity to “stabilizing” a fragile outmoded designed and faulty system.

There is this trend of confusing catalysts with causes:  The designers of a system do not necessarily have this confusion, but the political decision-makers and owners of the systems that purposely confuse the general public as catastrophes strike.  Two psychological biases are at the sources of confusing catalysts with causes:

The first bias is our illusion in our capacity to control volatility in man-made complex systems. For example, we focus on the “normal working” of a system and we delete from our analysis and reports the minor fluctuations or rare events that are occasionally occurring.  In a sense, if there are no variations, there are no information worth controlling.  This tendency of feeling very comfortable dealing with only a “stable” system leads to forgetting the consequences of calamitous rare events.

The second psychological bias is the illusion that acting on a factor is better than doing nothing and letting the system work-out its fluctuations.  For example, authorities think or are pressured to think that they were elected or appointed to act and react on any variations, instead of doing nothing when fluctuations are within the norm.  Consequently, it is these actions that usually exacerbate a system going bad and out of proportion.  For example, Alan Greenspan and later Ben Bernanke lowering the central bank interest rates to almost negative rates in order to “stabilize” a fragile faulty financial system that needed major redesign.

The Fukushima disaster of the melting down of three nuclear reactors is a typical example.  It is NOT the earthquake and the tsunami that are the causes of the meltdown:  They were the catalysts.  The cause is a faulty designed system for generating electricity that is highly dangerous and built in a region frequently exposed to high levels of earthquakes and tsunami.  The economic risk trade-off was meant for normal functioning of a nuclear plant, and the consequences of  a serious event striking was swept under the carpet for three decades.

The owner of the power nuclear plant and the government blamed natural phenomena as the causes and toned down the lethal exposure to radiation for over a month.  Why?  It is better not scare the people! What?  It is better to let people die peacefully than give them the proper information to decide on their own plan of actions?

It is normal for mankind to be wary of the volatile aspects in life.  In the past, mankind managed to block-out drastic fluctuations from their consciousness in order to survive:  Mankind figured out the major trends in hazard in order to foresee and adopt simple models they could control for administering and managing their lives and the survival of the community.

The behavioral model should allow normal fluctuations in behavior to react within normal realities.

Simple models have been replaced by complex models, but within the past linear mentality and comprehension.  You may understand a few interactions among three main variables, but when man-made design inserted hundreds of volatile factors in a system, we should no longer expect to have total control on the complex system.

If we are not ready to design reasonable fluctuations in a system, and be ready to take seriously the problems of rare occurrences, and be trained to react to calamitous rare events, then it is wise to stick to simple systems that individual operators can understand and can control.

A man-made system should not be designed to eliminate all the faults, ill-behavior, and limitations of mankind, but to factor them in, and be trained to react adequately to these variations:  The operator has to be constantly motivated to learn and be vigilant to minor fluctuations and comprehend the main interactions.

Note 1: Nassim Taleb, a mathematician, was a trader and worked for 20 years as consultant to large investment banks in New York and London. He created Empirica LLC for trading.  He is engineering professor at the polytechnic institute at the University of New York.  Taleb published “Savage hazard” and “The Black Swan:  The power of the unpredictable.”

Note 2: Mark Blyth is a Scottish professor of international political economy at the university of Brown (Rhode Island).  He published “Great Transformation: Economic ideas and institutional change in the 20th century”.  A new book is to be released “Austerity: The history of a dangerous idea


adonis49

adonis49

adonis49

June 2020
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