The great globalisation slowdown mystery

Here’s something I only noticed while writing a short piece for INTHEBLACK magazine: the rise of globalisation is not only slowing down almost to a halt, but in some places (like the Netherlands) may have been slowing down since around the turn of the century. That’s well before the global financial crisis and indeed before the global economic boom of the early 2000s.

It’s obviously very hard to measure globalisation; we don’t even have a clearly accepted definition of the phenomenon. The best measure may come from the KOF Swiss Economics Institute, which tries to incorporate social, economic and political data. The figures in the graph below come from there.

What’s going on here? I really don’t know, and expert commentary seems to be thin on the ground. A few observers have suggested a post-GFC increase in trade protection, but that doesn’t fit the timing shown in the KOF data – and anyway, the post-GFC protectionist surge hasn’t really happened.

Feel free to read the more detailed piece at, and make suggestions (and/or point to relevant research) in the comments section below.

Globalisation slowdown graph

The globalisation slowdown began as early as the start of this century

Magna Carta and ‘vox pop’ democracy

Intriguingly there are two substantial permanent monuments to Magna Carta at Runnymede. Both are American. This one was erected by the US Bar Association in 1957.

I was recently asked to participate in a panel discussion on Magna Carta and our democracy by the Australian Archives. The discussion will be replayed on Big Ideas on Radio National this coming Monday 20th July (now here), but you can watch the proceedings here if you’re especially keen. In the meantime, mostly over the fold below here’s a blog post I did in preparation for the event. It’s on the NAA website here. I have also drafted an additional one with some specific suggestions above and beyond a People’s Chamber, which I’ll post in the not to distant future.

It was an enjoyable process (though I was half inside a cupboard so lavishly spaced are the hotels of leafy London.) The panel was dominated by lawyers, the most eloquent of which I thought was Gillian Triggs, but over the course of the discussion, it dawned on me how much they were gravitating towards solutions that would be imposed by lawyers – all very well paid for their time I hasten to add, though that’s not the main point which is that they are an elite – indeed an elite elite. I think we need to do better than that. You can hear two different approaches to doing a bit better than that. More participatory approaches – championed by Pia Waugh particularly, and more deliberative ones championed by me.

(Apropos of nothing much, Magna Carta had standards in it – weights and measures for wine and other things – just as Hammurabi’s code did. You just can’t keep those emergent public goods from emerging and then attaching themselves to governments to improve their situation.)

If we compare our own system of government to King John’s government – either before or after Magna Carta – there is no comparison. We have a robust democracy rather than a tyranny at the very beginning of a centuries long process by which the West came to impose the rule of law on its rulers. In contrast to the barons of thirteenth century England, if we’re unhappy with our government, we vote them out.

Yet all is not well in our democracy. Continue reading

Confidence fairies and confidence tricks

When I hear very serious people talk about confidence I often smell a rat. It’s such an amorphous thing and impossible to observe directly. Clearly there are times when it matters a lot, but I suspect it matters most at points of extremity, not most of the time. We’ve had the RBA talking a lot about the need for confidence to return to stimulate investment. But an awful lot of businesses invest more when they see demand outstripping supply and not before.

Anyway, here’s an abstract that’s worth noting in that regard, though it looks at confidence in another area. Often you hear pundits claiming that confidence is affected by punters’ opinions of how the government is going. Unless the effect is pretty strong – ie you might be spooked by really bad government – I find this dubious. And the evidence – or at least this evidence – suggests likewise.

Government Economic Policy, Sentiments, and Consumption
by Atif Mian, Amir Sufi, Nasim Khoshkhou – #21316 (EFG ME PE POL)

We examine how consumption responds to changes in sentiment regarding
government economic policy using cross-sectional variation across
counties in the ideological predisposition of constituents. When the
incumbent party loses a presidential election, individuals in
counties more ideologically predisposed toward the losing party
experience a dramatic and discontinuous relative decrease in optimism
on government economic policy. Using the interaction of constituent
ideology in a county with election timing as an instrument, we
estimate the impact of government policy sentiment shocks on consumer
spending, and we find a very small effect that cannot be
statistically distinguished from zero. The small magnitude of the
effect is estimated precisely. For example, we can reject the
hypothesis that pessimism regarding government economic policy
effectiveness during the Great Recession had as large an effect on
consumption as the negative shock to household net worth coming from
the collapse in house prices.

Doing over the creditors, Greek style

As Greece’s situation has gone in recent days from bad to worse to worser to even-worserer-than-that, I’ve seen a lot of claims that the European authorities treated Greece’s private creditors too generously back in 2010-2012. My natural tendency was to accept those claims, partly because I wasn’t paying close attention to Greece back then, and partly because creditors have a long history of getting off lightly in these situations.

Let me explain for a moment. The fate of creditors is important in financial disasters, and usually under-examined. People talk about the bailouts of banks and insurers in the 2008 crisis, but it was typically their creditors rather than the institutions and their shareholders that got most of the benefit of those US interventions. Goldman Sachs and Societe Generale, for instance, seem to have won most from the huge AIG bailout, due to regulators’ fears that they would collapse and take the entire world financial system with them. By the time the rescue was done, Goldman Sachs and Societe Generale and their shareholders and management escaped with remarkably little penalty, and Goldman Sachs today is not a charred, smoking corpse but a live colossus of world finance.

That’s a problem. If you really want to avoid moral hazard, you want to make sure in these situations that the creditors get royally ****ed over, in a way that will forever remind the next generation of creditors not to be so ****ing stupid as to lend to organisations like AIG that are taking a bunch of dumb ****ing risks. That will make it more expensive for dumb ****s to borrow money, which is a good thing. But in the process of trying to prevent collapses from taking the whole financial system with them, the regulators often end up saving the creditors.

My view, for what it’s worth, is that regulators save the private creditors far too often. But it’s easy to say this from my comfortable viewpoint. When you have a weekend to make a decision that might end up destroying a piece of the world financial system and ruining a lot of ordinary people’s lives, there is a certain pressure to err on the side of caution.

So when I heard the likes of Steve Randy Waldman saying Greece’s private creditors had gotten off lightly, I assumed he was right.

But it turns out, maybe not.

So far I’ve found only one study of the 2010-2012 Greek bailout’s effects on private creditors whose authors seem really powerfully qualified to make judgements. That study is the 2013 paper “The Greek Debt Restructuring: An Autopsy“, by Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati. Trebesch, who wrote an AEJ paper called, irresistably, “The Price of Haircuts”, also maintains a terrific Haircut Dataset of 187 government debt restructurings. 

And this study says Greece’s private creditors got done over pretty good. Indeed, the authors calculate that the 2010-2012 Greek bailout established a new world record for creditor losses.

Continue reading

Against decentralisation: why crowded is good

From time to time you hear the argument that Australia would be a much better place if only we could actively “decentralise” population. The argument is we should encourage people out of our big cities – notably Sydney and Melbourne – and into smaller cities, like Wollongong and Ballarat. In pursuit of this, various governments over the years have tried to move departments out to regional cities. The Victorian government under John Brumby even ran an advertising campaign in Melbourne encouraging people to move out and resettle in regional Victoria.

This sort of argument has often been based on the idea that these regional areas have lots of existing infrastructure that we can exploit at little cost. It has been encouraged by talk of the “Death of Distance” and “The Flat World” – the idea that globalisation and modern telecommunications are making location obsolete, so you might as well live in the countryside. It’s particularly popular wherever there are plenty of marginal regional electorates.

And this argument seem to be spreading. So here’s the case against spending government resources to actively encourage decentralisation.

Continue reading

Syriza: the latest disaster for the left

I don’t have much time to offer anything very considered but want to just say how bemused I am at the carryings on of Syriza. The whole sorry business has been horrible to watch with creditors showing no interest in their own self-interest let alone a little enlightenment in their self-interest. But the Syriza Government? I was and remain a huge fan of how coherent and compelling Varoufakis was in articulating his case – of Syriza’s arrival as some kind of circuit breaker that might rescue Europe from itself as it rescued Greece from Europe.

But to negotiate properly, to negotiate as a broke borrower, you have to be able to show how you’re going to make your loan the creditor’s problem – not just your own. That requires a Plan A – in which the creditors and the borrower negotiate some mutually satisfactory settlement and this needs to be done with a Plan B clearly in view in which the creditors lose their shirts – and the borrower recovers.

I’ve always been kind of surprised at Syriza’s commitment to the Euro. Not that it wouldn’t be saying that it would strongly prefer an outcome in which the Euro remains its sole currency, but that that is all contingent on satisfactory negotiation. And to negotiate credibly in that situation one needs a clear Plan B. Perhaps it might make sense to conceal the plan for a while. But here we are at the end game and there’s no Plan B.

The referendum is a bizarre plebiscite on . . . well no-one really knows what it’s about. The Greek people get to vote on whether they will agree to the Troika’s terms. Those terms are not current. They’ve been withdrawn. Now they’ll probably be back on the table if they Greek’s vote ‘Yes’. But if they vote that way – presumably Syriza’s days are numbered – if it doesn’t resign immediately. And if they vote “No”. Well it’s completely unclear what that means other than that the Greek populace are where they were when they elected Syriza which is to say that they don’t want to pay their government’s debts. Well so what? The German populace want them to pay those debts. So where does that get us?

If BHP Billiton owes NAB a billion dollars, it’s not a very compelling result if a plebiscite of its shareholders say they’d rather not repay the loan. So we have Plan A which is that the Europeans offer Greece a deal that they won’t offer them, and Plan A with a tantrum, which is to say that the Greeks come back to the negotiating table saying “you know how we said we really don’t want to repay the loans. Well we really really don’t want to repay the loans. What do you say now?”

And the thing is that this seems of a piece with the left in so many instances – utterly lacking in the courage of what they claim are their convictions.

Wealth distribution in Australia

Net Wealth

Source: OECD. More here.

Wealth distribution is typically more unequal than income distribution – as inequality is cumulatively causative to some extent. I was alerted to the relatively equitable distribution of housing wealth by a recent Henry Ergas column which contains the amazing statement that there is ”very little difference in the housing wealth holdings of the bottom and middle-income quintiles for those aged 65 and over” which Henry defends in response to an email of mine to him seeking clarification that the words mean what I think they mean. They do. He says it’s true and I have no reason to doubt him. If so it’s an achievement we should celebrate and the way our cities are going it’s likely to be becoming less and less true with time. Be that as it may it corroborates the diagram above. Look at the US and Australia when comparing average and median wealth – chalk and cheese.

Sadly I would expect our better performance – close to or at best in world if you like your inequality in moderation – to fade, not just because of our cities but also because of our savings policies. Who was it that set up a flat tax on what is now $2 trillion of super savings? That would be the ALP and the union movement.

The HALE Index Q1 (Jan to Mar). 2015

Summary of the March Quarter

HALE Q1 2015

Above: NNI, GDP and HALE ($ bil) from Jun 2005 to the present (Q1 20015). The changes during the most recent quarter are contained inside the two vertical red lines at the right hand margin of the figure.

The HALE has recorded a reduction in wellbeing for the first part of 2015. In the March quarter it contracted by 0.4% which is against the long-term rising trend.[1] This is despite GDP recording above average growth this quarter. However, NNI was weaker than long-term trend as a result of continuing terms of trade declines.

The primary cause of the contraction in the HALE, despite the strong GDP performance, is the large reduction in human capital. This was driven by the significant skills atrophy produce by the rise in long-term unemployment. This quarter, long-term unemployment (LTU) experienced its largest ever jump, pushing it to its highest recorded level. The quarterly increase in LTU was so high; that it outweighed substantial increases in human capital from improving workforce qualifications that characterise most quarters.

  • GDP growth was above average (0.9%). Income (NNI) increased by significantly less, improving by just 0.2%, with the difference largely due to the continuing decline in the terms of trade.
  • Human Capital contracted this quarter by $1.3 bil (0.85%), reversing the continued growth it recorded in 2014. This was driven by increased skills atrophy.
  • Skills atrophy (the loss of skills from sustained unemployment) cost the HALE $3.9 bil more this quarter than last quarter. This is due to the substantial increase in the number of long term unemployed. This quarter, a record 51,000 additional people were considered unemployed for more than 52 weeks (an increase of 32%). This is significantly larger than quarterly changes over the last three years, where long-term unemployment tends to increase by just 2,400 people (which is equivalent to an average quarterly increase of just 2.4%).[2]
  • Adult Formal Education (AFE) continues to support Human capital as greater proportions of the adult population attain higher levels of education.[3] It is estimated that this quarter, an additional 63,000 people obtained post school qualifications. The value of AFE increased by $2.6 bil (3.4%) over the quarter, but this was not large enough to offset the decline in human capital caused by skills atrophy.
  • The weakness in the labour market, apparent in the rise in unemployment and underemployment, is also negatively impacting wellbeing through a reduction in Work Satisfaction.[4] This reduced wellbeing by a further $0.2 bill (2.1%) this quarter. The lion’s share of this is due to the rising unemployment level. The non-economic costs of unemployment experienced a significant deterioration this quarter, worsening by $0.26 bil (10.9%). This is due to a rise in unemployment which peaked in January at 6.8%, which constituted a decade long high. Recent improvements in unemployment however, are expected to at least partially reverse this in the next quarter. Although underemployment improved slightly this quarter, it remains high by historical standards and continues to detract from wellbeing.
  • The extent to which Health reduced non-economic wellbeing grew by $0.4 bil (3.8%). This is due to costs of mental illness and obesity growing by a greater amount than other indicators of health that continue to slowly improve.

[1] This quarter the HALE contracted by $1.29bil. This is $3.1bil below the quarterly trend for the HALE.

[2] The February figure from the ABS puts one person in 60 who is either in work or looking for work as someone who has been unemployed for 52 weeks or more. In February 2013 the ratio was one in 95 and in February 2009 the ratio was one in 124.

[3] In the HALE, the AFE contribution to human capital is measured by estimating the proportion of the population between 20 and 64 years of age who have attained a post-school qualification (Certificate III level or above). The recent growth in AFE is driven by both population increase and increased attainment of qualifications. We estimate that close to 60% of 20-64 year-olds will now have a cert III qualification or higher. This compares favourably to the results from a decade ago where only 47% of 20-64 year olds obtained post school qualifications.

[4] Work Satisfaction (previously referred to as “Job Satisfaction”) is an index in the HALE which examines the wellbeing impact of unemployment, underemployment and overwork over and above direct effects on earnings.