Club Troppo

Macroeconomic swimming

A thought bubble from when I was in the pool. It retreads some basic ground for clarity’s sake. [fn1].

Consider a typical cyclical recession driven by uncertain expectations by agents. Demand is insufficient to meet capacity as consumers and investors are unwilling to spend. Consumers fear lower income in future (due to job loss or lower shifts) and try to save just in case. Investors don’t borrow any funds saved because there’s little prospect of a return when no-one is spending. Which means there’s also less prospect of future employment. Which means that people reduce spending and save as a precaution….and so on.

But of course there’s the paradox of thrift. Not everyone can save at the same time since any savings come out of someone else’s spending – spending that is not forthcoming when everyone is trying to save. So there simply isn’t enough spending to reach the capacity of the economy and reduce fears about unemployment and returns. Uncertainty that was sparked by a crisis or elsewhat becomes self fulfilling and there’s not enough demand to sustain demand. Here typical macro policy works to end the guessing game by either sparking or directly providing enough demand to keep demand going.

But does this uncertainty need to be purely situational based on what everyone else is doing at a given time, or can it be structural? (Continued)

According to the logic of my last post on the political situation, when Andrew Wilkie declared his intention to support Labor, the other three independents should have followed suit after a dignified interval. I think the analysis was mostly right, except that, as Ken predicted, Bob Katter turned out not to share my premise that stability meant at least 77 votes in the event of a no-confidence motion. That put Windsor and Oakeshott in a position whereby stability could no longer be the main criterion. So they had to make their choice on other grounds. (Continued)

Nicholas Nassim Taleb of Black Swans fame calls it the narrative fallacy. In narrating the way something happens, one convinces oneself that it was inevitable, that it happened for good reasons.  A nice illustration of it is the way in which Tom Peters’ In search of excellence took the top financially performing firms and then explicated their strategy.  In the next period those firms that we’d been told had gone ‘in search of excellence’ performed unusually badly.  Their original out-performance was luck, not excellence.

One of the things I routinely find infuriating is when the future is predicted with great assurance by some know-all – journalists often fit this bill.  For instance all those calls by journalists that “It will take the Liberals at least two terms to get back”. Then something else would go wrong and they’d say sagely – “Now it’s at least three”.

A corollary of this tendency are these kinds of assurances.

The massive resistance Republicans posed to Clinton in 1993 is impossible to imagine today. The Republican coalition is utterly shattered, and the angry white Palin wing of the party, for all its visibility, is a minority even within a minority. What’s in it for a moderate Republican senator like Richard Lugar of Indiana (who tacitly endorsed Obama), Arlen Specter of Pennsylvania, or Olympia Snowe of Maine to resist Obama on health care or climate change?

Yes, folks that’s Mark Schmitt in Prospect Magazine just after the American election in 2008. Doesn’t look very good does it. I’m no sage, but I would never have bought that even at the time. As Krugman points out:

early on the administration had a political theory: it would win bipartisan legislative victories, and each success would make Republicans who voted no feel left out, so that they would vote for the next initiative, a (Continued)

Having encouraged Sustainability Victoria to blog, I discovered reading for a board meeting that they’d been doing just that for a few months. They didn’t get precious and needlessly delay action by insisting on having it within their own domain. They just went to Wordpress and set up a blog which is great to see. The blog focuses on evaluation and is part of a larger process within SV in which we’re looking at performance measures, something that we can and will improve but which is more easily said than done. The staff involved in the project are also documenting the ‘journey’ they’re on which I think is great.

So go and have a look at it, maybe subscribe to it if you’re interested in that kind of stuff, and watch this space.

This is something I was thinking of doing for a while, but since Possum has started a “What if?” over at his joint, this is as good a time as any to launch Australian Alternate History Week and hope it is taken up across a few more blogs.

In short, I want participants to create a brief alternate history scenario in Australian history. There need not be a single hinge event that creates a point of divergence, it can be as many different changes you want to support an on going speculation. It’s an exercise to think about what dynamics have made Australia he way it is and how they could have been different – so the fun is in trying to explore how historical dynamics shaped Australia rather than just asking “what if?” by itself.

For example;

What if the Blue Mountains had been crossed far earlier in the history of the NSW colony, allowing the expansion of the wool industry at an earlier date. This would provide an export to financially support NSW and pay for necessary food imports at an earlier time, as well as the emergence of a wool baron class whilst convict society was still paramount – that is to say whilst there was a form of forced labour with little mitigation.

Forced labour is inefficient, but the rents from wool make the colony viable without being efficient. There is no need for Governors such as Macquarie to embrace emancipist, meritocratic policy (or even decent treatment of those that remained convicts) out of necessity to make the colony survive. The institutions of our NSW never develop. Instead, the wool baron class begin to leverage their wealth in the same way the West Indian planters did, building influence in the Westminster parliament. They request, and receive a succession of pliant governors that help establish them as an aristocracy built on land ownership and convict labour, and their men in Westminster provide ongoing support for transportation. (Continued)

Well it kept me in suspense until the last few pages.  The speech is well worth reading and is here (pdf).

The world’s most inscrutable man?

I’m probably completely wrong about this, so please help me improve on the analysis.

1. Windsor, Oakeshott and Katter do not want another election. They mean to enjoy the leverage the election outcome has given them.

2. They have consistently invoked ‘stability’ as their main objective in deciding which side to support.

3. Stability means one side commanding at least 77 votes in the House of Representatives. A government with only 76 votes would be just a single by-election away from losing its majority, a state of affairs that most people would regard as too precarious.

4. Given that Labor now has the formal support of the the Greens member Adam Bandt, both sides currently have 73 votes.

5. Therefore, a stable arrangement requires that all four independents choose the same side. (Continued)