Politics, Economics and Social Science

You all have heard about the "international credit squeeze" of 2008. The local effects include the bankrupting of several large profile companies like ABC Learing, Allco and Centro. These were hugely leveraged, meaning they built up their assets using enormous debt. That cunning device is called "leveraging", and the magical loans are called "margin loans". When share prices are going up and interest rates are low, leveraging gives its "investors" (eh? maybe more accurately, gamblers?) gigantic profits. However when the share values of their companies plunge, or the interest rates rise, the reverse happens -- they rack up huge losses. Essentially this is what caused the credit squeeze. A simple, succinct explanation of it is given by the NYT journalist David Leonhardt. As you can see, it boils down to classic greed, mendacity, and short-sighted recklessness -- the great motivators of the economic rationalist utopia. Sadly, in the titanic disasters that follow, the victims are often people like you and me whose retirement funds have shares in these companies, chosen by some external smartie to whom our funds have outsourced the management of their investments. The top guns of the bankrupted companies have been paying themselves huge bonuses for years and will not be asked to refund them.

Private Equity Bids? These are the old Leveraged Buyouts which have such a stinky name now that a new name was found for the same kind of theiving scheme. The gist of the scheme is like this. Look for a good company that does not have much debt but good cash flow. Qantas in 2005 was one such company. Then you gather a few rich "investors", hedge funds, banks, etc. and make a bid for the company. This collection of raiders is called a Private Equity Consortium. Say it succeeds. Then what? First it will look at the company's cash and see how much it can immediately pocket. Next, it will increase the debt by huge borrowings -- all the interest is tax deductible -- and pocket the new found capital. Yoo-hoo, cash, cash in their pockets! Now, to service the much bigger interest bill they have to increase revenue. How? Easy first step -- rationalise operations; let me decode that for you: "sack workers, make those who remain work harder for the same pay". Then they strip the company of assets (pocket more cash!), maybe split it into parts to sell off, and in a few years they sell everything off. Then they look for another company to raid. Gordon Gecko lives, and has many multimillionaire devotees.

What is the chance of a Private Equity Bid succeeding? Very high. Why? See this article for an explanation. See how the bid to steal Qantas was in fact supported by its Board which was supposed to defend shareholder interest, because the Bidder essentially promised the Board and Qantas executives huge bribes to sell the bid to shareholders instead. Why should you be concerned? Because even if you did not own Qantas shares your sperannnuation fund does.

"And most of us do believe in the old saw that a reporter's job is to comfort the afflicted and to afflict the comfortable, though we do so not by political action, but by writing stories." -- Robert G. Kaiser, reporter for the Washington Post.

Cannot say the same for the Murdoch Press journalists, I am afraid.

So-called Conservative governments are no longer conservative in the sense we used to understand. These days the "conservative" Howard government of Australia is all about policies, particularly tax policies, designed to transfer wealth from the poor and middle classes to the (already filthy) rich. Here is an incisive analysis What this Radical Right Government has been up to.

When she was Prime Minister of Britain, Margaret Thatcher once replied to the criticism that she was ruining the social fabric of Britain by saying, "There is no such thing as Society". Before you read further, you may want to peruse the article in the Guardian of 17 March 2005 by Laura Spinney.
Now do you see what the new right-wing agenda of privatising everything, inducing everyone to only care for themselves and their immediate relatives -- i.e., only those who share a lot of DNA with them! -- entails? The end effect is to take us below the social levels of many of the animals which have any significant cognition! Margaret Thatcher is in one sense prescient. If she and her ilk have their way, there will be NO society left. Then only the most ruthless, cruel, sadistic, greedy, violent and selfish will flourish. This is real social Darwinism in prospect, and what the Right eagerly looks forward to. The weak, the meek, the altruistic, the charitable and suchlike snivelling namby-pambies shall perish within a couple of generations. The signs are already here for all to see.

If you want to know the future of the United States, and why it will be racked by a catastrophic breakdown in social structure, read Bill Moyer's speech. He is one of the most astute American journalists I have ever heard, and I heard a lot of journalists when I was a graduate student in Michigan in the early to mid 70's. I was emotionally deflated after reading this. I had hoped that what has been happening to the U.S. is a temporary aberration. I am not confident about that now. Facism is defined as government by Corporations. Well?

Read what Ross Gittings, economics editor of the Sydney Morning Herald, has to say about the "Free Trade" agreement with the United States.

Rationalists run for cover in free-trade debate
by Ross Gittins
Sydney Morning Herald
July 5, 2004

Have you noticed how little the usually noisy economic rationalists are having to say about the pros and cons of the free-trade agreement with the United States? It's not a good look. With the notable exception of Professor Ross Garnaut of the Australian National University and a few ex-Productivity Commission econocrats, the rationalists are missing in action.

They're not backing up Professor Garnaut in his untiring opposition to the deal but, by the same token, they're not coming out in support of it, either. No, they're all terribly busy staring at the ceiling and whistling Dixie. Their silence raises doubts about whether the rationalists are all they claim to be. They claim to be objective and disinterested. They claim the economic prescriptions they espouse are based on science and are quite apolitical. Their support is not for business interests, but for the role of markets, which have proved so remarkably good at delivering prosperity to all of us. And when it's necessary to take sides, their sympathies are always with the consumer, never the producer.

That's what they claim. The alternative explanation is that, for the most part, the economic rationalists are just a bunch of right-wingers, who instinctively sympathise with capital over labour, are big on individual freedom and hate paying taxes. They love the neo-classical model of economics because they find it fits so easily with their political prejudices, seemingly elevating them to the level of scientific truth. And that, you see, is why the case of the free-trade agreement is so significant. Here we have a deal that's hard to reconcile with the tenets of economic rationalism but which is being pushed by a conservative Government with its back to the wall and joyously received by virtually the entire business community.

It's crunch time for the rationalists. Do they stick up for their principles and oppose a government they sympathise with? Do they risk giving uncomprehending offence to their business employers, sponsors and mates? Do they risk being accused of anti-Americanism? Do they get into the same bed as a bunch of protectionist unions and paranoid actors? Or do they simply button their lips for the duration?

I repeat the challenge. Where are all the right-wing think tanks when we need their contribution? Where's the Centre for Independent Studies? Where's the Melbourne-based Institute of Public Affairs? Where's the fearless Des Moore and his Institute for Private Enterprise? Where are the rationalists patiently explaining to the punters that the so-called free-trade agreement isn't actually about free trade but, rather, a preferential trade deal between two countries? To the business community, we've been invited to enjoy special entree to the biggest and most advanced economy in the world. How could there possibly be any objection?

Where are the rationalists explaining to their business mates that it's a lot more complicated than that? Where are the rationalists explaining that the trouble with preferential deals is that, as well as creating additional trade between the two countries giving preferential treatment to each other, the deals also divert trade from third countries?

And that the cost of this diversion has to be counted against the benefits of the extra bilateral trade. Preferential trade deals generate a lot of wasteful administrative cost because of the "rules of origin" that go with them. These are needed to ensure goods from third countries - or goods with too many imported components - don't gain preferential access to the other country. A lot of time and money is wasted checking that goods comply with the rules of origin. And the incentive to change a good's components to make it comply involves not just trade diversion but a form of hidden protection. Where are the economic rationalists explaining these grubby facts of life to their starry-eyed business mates?

Professor Garnaut's great concern is that the move to bilateral trade deals will come at the expense of genuine free trade via further rounds of multilateral trade negotiations under the auspices of the World Trade Organisation. In the bad old days Australia used to be part of an "Imperial preference" trade system centred on Britain. If the Yanks keep on making bilateral deals, we'll end up with an imperial preference set-up centred on the US. So where are the rationalists patiently explaining to the misguided Professor Garnaut and his Productivity Commission supporters that their fears are unfounded, that bilateralism is just a ploy to advance multilateralism and that the Americans can be trusted to act in the interests of the world, not just themselves? T he business community's grasp on the basics of trade economics is so tenuous that many business people would probably be quite put off to learn that, according even to the econometric study paid for by the Government, the deal is expected to worsen significantly our bilateral trade deficit with the US. Our imports from them are expected to grow twice as much as our exports to them, adding about $3 billion a year to the deficit. So where are the rationalists explaining that this isn't the bad thing it seems to be? Where's the Adam Smith Society explaining, yet again, the error of mercantilism?

And then there's the stack of interventionist queries that arise over the proposed accommodation of American drug companies' interests in the Pharmaceutical Benefits Scheme, the potential inhibition on the marketing of generic drugs and the seemingly crazy proposal to retrospectively extend copyright protection from 50 to 70 years after the author's death. When you remember that intellectual property law constitutes the imposition of a legislated monopoly on the free market - with all the inherent potential for "government failure" and capture by vested interests - you'd think this the perfect opportunity for the self-proclaimed independent rationalist think tanks to make a contribution.

So why the deafening silence? Lost the courage of your convictions?

Our Really Rational Immigration Minister, May 2004

About 2 weeks ago I happened to pass our TV set which my wife Yokelin had tuned to the ABC to watch Andrew Denton interview the amazing Amanda Flintstone, Minister of Children Detention. Ooops, I mean Vanstone, Minister of Immigration. She was patiently explaining why we had to detain the children of assylum seekers -- you know, the brown skinned bearded Muslim "terrorists" who ran away from Taliban persecution and Saddam's torture machines. (Imagine what we would do with fair- skinned Anglos nominal Christians running away from Mugabe?) I paraphrase this wretched woman. "Well, being in government is not easy you know. If we go easy on the children, before long the people smugglers will be kidnapping children and putting them on boats bound for Australia just to get the adults in." I thought I had heard wrong, bugger my aging eardrums, she could not have said that! But alas, Yokelin confirmed that the Flintstone had said it. In case you do not know, Human Rights bodies have condemned the conditions under which these children are detained, some for more than 2 years, as intolerably inhumane. Shame, Howard; shame Ruddock; shame Vanstone! And shame on all of us who do not care. And now we have a Minister who is so morally decrepit that she has to resort to a pedophlilic fantasy of child-kidnappers servicing the needs of desperate asylum seekers? Surely not?!! Ah, but I too can be a rationalist. That which is absurd is only so if one does not look deeper. Here is the explanation!. There is this smoke-filled backroom where the poll analysts of the Liberal Party came up with a brilliant strategy to marshall yet another niche of voters for the coming election: "Oh wow, with this one subliminal image, we will get the votes of the people who hate unshaven Muslims, as well as those who enjoy the fantasy of abducting kids and subjecting them to unspeakable crimes!"

American Secretaries of Defense

It is the privilege of Americans to be ignorant about the rest of the world because their economy is so large that it is almost self-sufficient. This would be fine, except that the United States is also the only super-power and likes to project that power. Unfortunately for the rest of the world, the quality of their leaders tends to reflect the prejudices, ignorance and whims of their electorate. And given that right-wing politicians are particularly prone to scorn "elitism", "book-learning", and other assorted sins of reflective scholarship, it is not surprising that Republican Defense Secretaries are almost parodies of themselves. Here is a recent example.
Rumsfeld baffles press with 'unknown unknowns'. Date: 7 June 2002.
The United States Defence Secretary, Donald Rumsfeld, has baffled journalists in Brussels by explaining the greatest threat to Western civilisation may lurk in what he has termed "unknown unknowns".
Mr Rumsfeld says he told a meeting of North Atlantic Treaty Organisation (NATO) defence ministers that even US intelligence agencies can often only see the tip of the iceberg when looking for terrorist threats. But this is how he explained it at a media conference.
"There are no knowns. There are things we know that we know. There are known unknowns - that is to say, there are things that we now know we don't know but there are also unknown unknowns. There are things we do not know we don't know," Mr Rumsfeld said. "So when we do the best we can and we pull all this information together, and we then say well that's basically what we see as the situation, that is really only the known knowns and the known unknowns. And each year we discover a few more of those unknown unknowns."

Now You Know Why Your PM is an Embarrassment

Many Australians are mortified that their Prime Minister is John Howard. Here is why.

The Level Playing Field

How often do you hear these days that society should not oblige the rich to look after the poor (one mechanism to effect this obligation in civilised societies is progressive taxation, wherein higher marginal taxes are levied as income increases) because there should be a "level playing field"? Well, here is the great Anatole France's characterisation of level playing fields, and it needs no elaboration: They have to labor in the face of the majestic equalilty of the law, which forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

CEO Salaries and Perks

In case you do not already know what a share option is, here is a quick explanation. Say BigCorp issues its CEO a million options to purchase BigCorp shares at $1 per share. BigCorp shares are currently worth $0.75 per share. If in a year's time they rise to $1.25, the CEO can buy a million shares at the promised price of $1, and immediately make a paper profit of a half-million dollars. It's supposed to be a performance incentive. Now read on!

In a recent 1999 New Yorker, John Case makes interesting observations about how CEOs of corporations are ripping off shareholders and taxpayers by the big rort of "share options". He said "In theory, at least these [exhorbitant (my summary adjective)] remuneration schemes can perform useful functions: they encourage CEOs to act in the interests of shareholders ...; they allow small companies to recruit talented executives (witness the Inrernet sector); and they can reward outstanding performance. In practice, however, the options movement has degenerated into a boondoggle that robs shareholders and taxpayers while rewarding cronynism and mediocrity. Graef Crystal, an independent pay consultant ... has unearthed a number of egregious examples. One is Linda Wachner, the chairman and CEO of Warnaco, which makes Calvin Klein jeans and Fruit of the Loom bras. Warnaco ... lost $32 million last year, after taxes, and delivered a total return to its shareholders of minus 18.6 percent. Nonetheless, Wachner received a salary of $2.7 million, a bonus of $6 million, a restricted stock grant worth $6.5 million, and a package of options that Crystal valued at $58.2 million -- for a grand total of $73.4 million." After citing another case, he continues, "Greed on this scale is often written off as the inevitable, if unsightly, by-product of a vibrant economic system. But as the Fed chairman Alan Greenspan, and the second-richest man in America, Warren Buffett, and others have pointed out, a number of things could be done to restrain the swinish tendencies of CEOs while maintaining an effective incentive structure. The first step would be to force companies to account properly for the money they bestow on their leaders. Under the current practice, the costs of options packages are not fully reflected in firms' profit-and-loss accounts. If Disney's profits had been reduced by several hundred million dollars when it granted Eisner his options, the company's board of directors might have thought twice about approving those options. Reducing the tax deductibility of exectutive options is another idea that makes sense ... at the moment taxpayers are indierctly subsidising corporate largese. The most urgent reform doesn't need legislation, just old fashioned moral suasion. The key point about most current options packages is that they grant their owners the right to buy vast numbers of shares at fixed prices. As long as the stock market continues to go up, CEOs are lavishly rewarded for drawing breath. A more rational system (... recommended by Greenspan ...) would be to index the prices at which the options kick in to industry-wide averages, or to the S&P.500, so taht an overall market rise of, say twenty percent would raise the gift stock's purchase price by that amount when the options are exercised. If this happened, CEOs would be like schoolchildren and everybody else. Only if they outperformed their peers would they receive special prizes."
You may also wish to read the funny "Free-Marketeers No. 4" below where related remarks are made.

IMF big enough to admit a capital offence
by Ross Gittins, economics editor, Sydney Morning Herald, March 29 2003

The International Monetary Fund is a humbled institution. It's just published a report on the effects of financial globalisation on developing countries that's the biggest climbdown by an international body in ages.

The IMF came under considerable criticism for its mishandling of the Asian financial crisis in 1997-98. It fumbled the rescue of several economies, particularly Indonesia, and imposed onerous conditions that made things worse rather than better.

A separate criticism, however, was that right up until the crisis, it had been pressuring the developing countries to open up their economies to the flows of foreign capital whose sudden reversal caused all the trouble.

This latest report, by the IMF's chief economist, Kenneth Rogoff, re-examines the wisdom of that policy prescription and finds it wanting.

It's important to realise that "financial" globalisation refers not to increased trade between the developed and developing countries but to increased flows of financial capital. It's about opening up the capital account of the country's balance of payments, not the current account.

According to conventional economic theory, opening up to foreign capital inflow should lead to higher economic growth. It adds foreigners' savings to domestic saving, and it lowers the cost of capital by spreading the risks. It should lead to the inward transfer of new technology and it should help develop the country's financial sector.

Indirectly, it should make it easier for the country to specialise in what it's best at and should put pressure on its government to manage the economy better.

All these theoretical advantages, no doubt, were what prompted the IMF to be such an insistent urger of opening up to capital flows.

But when Dr Rogoff checked to see what empirical evidence there was to support the theory, the discovery he made was "sobering".

"An objective reading of the vast research effort to date suggests that there is no strong, robust and uniform support for the theoretical argument that financial globalisation per se delivers a higher rate of economic growth," the report admits sadly.

Now, be clear on what this means. It's not saying that the developing countries that have become more financially open over the past 20 years haven't enjoyed faster economic growth. They have. (As everyone living in our region of the world should be in no doubt about.)

It's saying there's no proof that financial openness contributed to that faster growth (whereas there is evidence that increased trade causes faster growth).

Another qualification worth noting is that foreign capital inflow comes in various forms. One is "foreign direct investment" - multinational companies investing in factories and such like - whereas others include purchases of shares on the local stock exchange and short-term loans from foreign banks.

The point is, once FDI comes in it can't easily go back out, whereas the rest is highly volatile "hot money". And there is evidence that FDI promotes economic growth.

Economic theory also suggests that greater financial integration (between your financial markets and everyone else's) should reduce an economy's volatility. (This, for instance, is why so many economists said we benefited from having a floating exchange rate during the Asian crisis. The dollar fell right on cue, lowering the cost of our exports to foreigners just as we were having to find new buyers, thus acting as a kind of shock-absorber for the domestic economy.)

But Dr Rogoff couldn't find it for the developing economies. In fact, he found the opposite. "The evidence suggests that, instead, countries that are in the early stages of financial integration have been exposed to significant risks in terms of higher volatility of both output and consumption," the report admits.

Acknowledging "the proliferation of financial and currency crises among developing economies", the report further concedes that there is empirical evidence to support a host of common criticisms of the global financial markets.

"First, international investors have a tendency to engage in momentum trading and herding, which can be destabilising for developing countries.

"Second, international investors may (together with domestic residents) engage in speculative attacks on developing countries' currencies, thereby causing instability that is not warranted based on the economic and policy fundamentals of these countries.

"Third, the risk of contagion [being tarred with the same brush as a neighbouring country] presents a major threat to otherwise healthy countries since international investors could withdraw capital from these countries for reasons unrelated to domestic factors," the report belatedly admits. When countries encounter external crises, the standard diagnosis of the IMF types is that they obviously brought it on themselves by their own macro-economic mismanagement.

In the case of the Asian countries, this wasn't true or fair. So then people added the charge of "crony capitalism" - which was true enough, but shouldn't have come as a surprise to any foreign investor with half a brain.

No, it soon became apparent to the less ideologically blinkered that the Asian economies' real trouble was their absolute lack of the well-developed, robust institutional arrangements in their financial markets that the developed countries have long had and which allow the rich economies to weather the volatility of global hot money flows without falling over.

It was a typical failing of economists mesmerised by the narrow neo-classical model to be oblivious to the key role played by institutions when urging developing economies to do dangerous things for which they were woefully under-equipped.

Guess what? The IMF has just discovered the importance of institutions. "The analysis suggests that financial globalisation should be approached cautiously and with good institutions and macro-economic frameworks viewed as preconditions," we're told.

"A growing body of evidence suggests that [the quality of domestic institutions] has a quantitatively important impact on a country's ability to attract foreign direct investment, and on its vulnerability to crises.

"There is accumulating evidence of the benefits of robust legal and [prudential] supervisory frameworks, low levels of corruption, high degree of transparency and good corporate governance."

Unfortunately, however, the evidence doesn't provide a clear road map for the "optimal pace and sequencing" of integration.

"For instance, there is an unresolved tension between having good institutions in place before capital market liberalisation and the notion that such liberalisation in itself can help import best practices and provide an impetus to improved institutions.

"Furthermore, neither theory nor empirical evidence has provided clear-cut general answers to related issues such as the desirability and efficacy of selective capital controls.

"Ultimately, these questions can be addressed only in the context of country-specific circumstances and institutional features," the report concludes.

Well blow me down. The IMF has just abandoned its fatwa against the unmitigated evil of capital controls.

Institutional confessions of error don't come much bigger than this one. But while the IMF's many critics are rubbing it in, they shouldn't forget that such a burst of intellectual honesty takes a lot of guts.
Ross Gittins is the Herald's economics editor. This story was found at: http://www.smh.com.au/articles/2003/03/28/1048653861037.html

Anti-choice Ideologues

People who are militantly anti-abortion are usually also: (i) against birth-control, or (ii) against the free and public dissemination of information about birth control, or (iii) against the easy availability of contraceptive devices or medicines, or (iv) all of the preceding. However, they are often also for (i) compulsory military service, or (ii) for the use of military force in resolving political problems, or (iii) both of the preceding. They are all for safeguarding the rights of fetuses, but once these become babies at birth, these moral guardians are usually against providing public support to feed, clothe and educate these babies as they become children, especially when their mothers are unmarried. Foetuses are sacred, babies are dispensable, children should suffer for the perceived sins of their mothers, and eighteen year olds -- why, they are ripe to be sent into battle to either kill or be killed. I guess this proves that souls fatigue with age, and by the time they are twenty most souls are worthless. I am almost tempted to go buy the bumper sticker that says "Life Begins at Conception and Ends at Birth".

Capital Punishment Advocates

One of their most pasionate arguments in favor of executing those found guilty of capital crimes is that this form of punishment is a great deterrent. OK, let's grant that this is so. Then, for maximal effect, we must televise all exectutions in detail at prime-time for the widest public exposure. Perhaps it would even be better to kill these criminals slowly and excruciatingly to get the message across. Surely we must not shrink from the rational consequences of our beliefs? Too gruesome? OK, let's take the next argument, that it is more expensive to keep them alive for years on end than to end it all quickly. So, let's use them as slave labor. That is unjust, making them earn their keep? There's no satisfying these advocates. One argument that is probably old-testament in style and has the merit of complete honesty is simply Revenge. I can understand that, especially if one is the relative of a victim, but all else is hypocrisy.

Pro-Censorship Advocates

Don't get me wrong, I too worry about the level of violence shown in movies and TV. I am however not so sure that my worries are well-founded as some have argued that this violence is cathartic, so it may well be an alternative outlet to the real thing. Nevertheless, it seems to me that in the absence of evidence one way or the other, we should not widely expose people to gratuitous violence that has no socially redeeming value.

No, what I am about are the prudes, the neo-Victorian moralists, the puritans. A good definition of this lot is that they live in the fear that somewhere, someone is happy (or enjoying him/herself). Their classic obsession is sex. Someone like a powerful Senator, in our august Parliament, is an example. He hates even the most tastfully done erotica from Sweden. Now, may I know why the most natural act of love between male and female is the evil thing to be feared? Here is an explanation that is at least rational. You see, most of us serious scientists are obsessed by other things, like good experimental designs, elegant theories, beautiful proofs, efficient algorithms. That leaves a little bit of time for minor entertainments like sex, a low priority which is to be celebrated. So, our waking lives are not consumed by sex, nor are we much bothered by what other people do with it in their spare time. But not the Senator's ilk! I think (no, I cannot prove this, but it's as good an abduction as any) that their problem is that they think about sex most of their waking hours -- that's their dirty little secret! That's why they project their personal weakness onto the rest of us. That's why erotica worries them so much -- by watching it, they themselves may be pushed off the edge, so precarious is their balance, and so weak is their self-control. Next time you meet prudes, pity them rather than hate them, for in the words of my friend Abhaya Nayak, they have been "hijacked by their hormones".

Free-marketeers_No1

The unrestrained lassez-faire enthusiasts believe that efficiency is king. A grave impediment to efficiency is worker complacency. Now, even the most un-reconstructed social democrat must agree that there is some truth in this. But have you noticed that these gung-ho free marketeers are usually also against death-duties? Surely nothing could be more conducive to laziness than inheriting enormous unearned wealth from one's parents? No scheme could be better calculated to sap enterprise from the spirits of the children of the rich than the abolition of death duties. Indeed, I think this abolition is a diabolical socialist plot to weaken the moral fibre of free-enterprise that should be loudly exposed.

Reagan was a Keynesian Fanatic

Here is an interesting fact that you don't see much publicised. President Carter left office with the US being the largest creditor nation in the world -- i.e., it had lent other nations a record amount of money. You might recall that Carter was known as the Velcro President, as every thing that went wrong in the US and elsewhere was attributed to him. He was succeeded by the Great Communicator President Reagan, also known as the Teflon President, as nothing that went wrong in the US or its foreign policy was ever attributed to him. Such luck, we should all have!

President Reagan's economic policy was simple, and can be described as "borrow, borrow, spend, spend", so when he left office the US had been converted to the biggest debtor nation in the world -- i.e., it owed other nations a record amount of money. How was this achieved? Well, the Teflon effect was a consequence of classical Keynesian "pump priming" taken to bizarre extreme -- debt financing of huge tax breaks for the rich justified by the "trickle-down" theory (you know, when you have too much to eat and drink, the stuff you let dribble, the peasants can fight over), huge increases in military spending (nothing like expensive tanks to stimulate production), etc.. It sure worked to make the economy boil over, like Keynes said it would. The amazing thing is that Margaret Thatcher thinks Reagan was a supply-sider!

Are Corporations Persons?

John Saul, the American novelist and historian, delivered the Don Dunstan Memorial Lecture recently (August 1999). I watched his captivating performance on TV, and it was stunning. His depth of scholarship was intimidating, and his English hypnotic and poetic. And his wit!! I just have to share with you his acerbic comment on how modern corporations use the law to silence and crush critics. I learned from him that the modern legal determination that a coporation is a "person" derived from the desire at the turn of the century to protect the individuals that ran the corporation. It was a good law, for it freed the inventiveness, risk-taking, etc. necessary for capitalism when it was new and weak. But today, this very law is often abused by the corporations. An example Saul cited was this apocryphal one. Apparently, a condom manufacturer decided to market a brand called "Stealth" with the slogan "You'll never see it coming". The coporation that built the dreaded Stealth fighters decided to sue this condom manufacturer for defamation and breach of trademark! One does not know whether to laugh or cry at this -- perhaps both is the appropriate response.

A much in vogue wisdom with the current Australian Government is that all public enterprise is BAD and all private enterprise is GOOD. In the interest of reducing verbal redundancy therefore, I propose to replace "public" with "bad", and "private" with "good". I shall begin by telling you that my sons attended bad schools. I was happy when individuals were protected by the Goodacy Act, less happy when the Government decided to goodatise Telstra. I am amused by people upset by the Mardi Gras just because some floats made fun of good parts. Did you know that many "golden seats" for the 2000 Olympics are still to be sold despite the extensive badicity campaign about them?

Free-marketeers_No3

CEOs and executives reward themselves with huge pay increases when their companies make huge profits, the justification being that they deserve the reward for having so intelligently led the companies. Has anyone noticed that when the same companies make losses, these CEOs and executives do one of two things: (i) they reward themselves with huge pay increases, because the desperate state of the companies need to provide "incentives" (!!) for brilliant managers to dig them out of the rut; (ii) they sack lowly workers to econmize, rationalize, return to core operations -- you name the excuse. Have you seen CEOs and executives sack themselves or take paycuts? Remember the phrase, "Heads I win, Tails you lose"? Maybe it is time to bring back a very honorable practice of the Roman generals who failed in their duties -- you know, they fell on their swords.

Quote of the Millennium

"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. ... corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed." -- U.S. President Abraham Lincoln, Nov. 21, 1864, in a letter to Col. William F. Elkins [Ref: "The Lincoln Encyclopedia", Archer H. Shaw (Macmillan, 1950, NY)]

Australian Conservatives

The Australian High Court in the Wik decision determined that pastoral leases and aboriginal land rights can co-exist. The conservative State governments are now urging the Federal Government to (i) enact legislation to overturn this decision so that aboriginal rights will be extinguished by pastoral leases, and (ii) fix the High Court by emasculating it (a bit difficult, since there are women in it) so that unpopular judges can be sacked if 30% of a referendum says so, etc. Conservatives got their name because they champion tradition, but Australian conservatives seem to have gotten their roles a bit mixed up as they are bent on destroying tradition. Suggesting that the High Court be tampered with because it made a decision that displeased them is a sign of petulance, not conservatism. Will somebody tell them not to soil the good name of Conservatives? Or at least, before they do things like that, can they call themselves Radicals instead? Oh, there also appears to be a basic misunderstanding of the word `lease', which I thought had the connotation of `loan'. If a pastoral lease extinguishes all else, it is a gift, not a loan.

The Australian New Right (The Hansonites)

For my North American and European friends unfamiliar with the New Right in Australia, all the failed Nazis, Facists, Racists, Gun Fetishists, etc of the last decade have now re-grouped under the "leadership" of Pauline Hanson, ex-MP for Oxley. Hanson believes, among other things, that Australia is headed for civil war because the Whites will not tolerate the submersion of the great Aryan culture by the Asian cultures. Never mind that at the current rate of immigration and profiles, the Asian-born will only be about 7% of the Australian population in year 2020. "What about the children of Asians already here?" she screeches. Well, I don't hear our politicians on either side of Parliament informing her that these are Australian children, for goodness sake! OK, never mind, it is too much to expect that rational arguemt and facts will change the Hansonites' opinions, so I offer some analyses of what is really going on in their hate-filled heads.

The Hypocrisy analysis: A letter to the Sydney Morning Herald provides this analysis better better than anyone else can. I paraphrase it. "Have you noticed that the very people who complain about Aborigines and Asians not assimilating are those who would shriek in horror if their childeren came home with these undesirables and say they want to marry them?" Well, Hanson, it's already too late. Visit the campuses of any of the metropolitan Universities and Tafes, and you will see miscegenation all around! Soon, no Asian family will be able to say they don't have a white relative, and Vice-Versa. Assimilation has already begun. We are on the way to becoming a mongrel nation, and we should be proud of it.
The Freudian analysis: "All these coloreds are gonna outbreed us, see? They are so fertile." Answer: of course, since sexual vigor is directly proportional to the darkness of complexion. Haven't you heard about the superior anatomical endowments of the Blacks? JUST KIDDING, folks! But for many Hansonites, this myth is probably truth. That's another of their unspoken horrors causing them much insomnia (heck, no European culture has produced anything like the Kama Sutra, so these darkies know tricks which make them irresitable to our men and women ...).
The Assembly-Line analysis: Hansonite complaint, "These Asians work all the time, so we cannot compete". Hmm. I rather like the Yiddish phrase, `I should be so lucky' in response to this since I am ethnically Asian. All one has to do is to visit Sydney and Melbourne and gawk at the idle young Asian rich who ride around in BMWs. Money corrupts, and enormous money corrupts absolutely, irrespective of complexion!

Free-marketeers_No4

Ho, ho! So the multi-nationals tell us they have to pay merely subsistence wages because the world economy is now globalised, so jobs go to where wages are lowest, safety standards are a joke, and job security not even heard of. Now, I happen to know of many very able executives in second and third world countries, multi-lingual to boot, multi-cultural and highly adaptable, who can replace the over-paid executives that grace the boardrooms of the multi-nationals and are content to discharge the same duties for a lot less pay. Why aren't they being hired instead? After all, globalization should not be confined to the low social orders. I'll tell you why this executive replacement program is not taking place. You see, economic rationalism is all very good when it applies to powerless workers, but when it comes to the privileged, well, its a different story. There is a good old English word that describes this kind of superb double-dealing. It is hypocrisy, but here it is coupled with three other traits -- greed, cruelty, and hedonism.

Unions and the Australian Govt 1998

The Liberal-National Parties Coalition Government of Australia (for the edification of my North American friends, `Liberal' with upper case L in Australia means Conservative, or Right Wing) have developed a severe linguistic allergy to the word union. Because of their hatred for trade unions, by some phenomenon akin to spreading activation networks, any phrase or description containing the word `union' sooner or later provokes their severe displeasure. The latest manifestation of this allergic reaction is this Government's decision to ban `compulsory student unionism'. Student Unions in Universities and Colleges in Australia are nothing like trade unions. They are associations that provide services like counselling, child-care, discount food and arcade games, clean toilets, safe-sex advice, etc., and the fees they collect at enrollment are for them. My younger son who just enrolled as a sophomore in Macquarie Uni (Feb 1999) told me that the Uni charged a `service fee' in place of the `union fee' for all enrolling students, but no student is required to join the Student Union -- if one is not a member, one forgoes all Union discounts. Some of my son's friends who belong to the Young Liberals have on principle refused to join the Union, but of course they are rich enough not to want discounts. Isn't this precious?!
This anti-Student Union law was passed over the summer break when most students were not around, and it was announced with great fanfare by the Liberal-National Parties Coalition Government as a triumph for `freedom of choice'. I guess when you do not have the guts to attack the real thing, the next best is to hit a dummy. Now, watch these obsessives, with their allergy. Before you know it, they will be seeking to ban marriages (matrimonial `unions'!), sex (congugal `unions'!), certain set-theory connectives (`unions' of sets! -- but at least we can then resort to complement and intersection), and even the United States of America (Abe Lincoln said the Civil War was fought to preserve the `Union'!).

The IMF and the Asian Economic Crisis

Isn't it curious that the IMF's "cure" for the bad loans in Indonesia, Thailand, etc., is to lend money to the governments so that the international banks that gave easy (but very short-term) loans to these countries can have their risky loans repaid ahead of everyone? Then, these governments are asked to repay the IMF by squeezing their workers and peasants and reduce them to starvation, while converting their new middle classes into new peasants. No wonder the Pope is having second thoughts about his role in delivering communist Poland into the hands of the capitalists! I hear he is completely disillusioned by the rapacious greed and materialism that has replaced the admittedly moribund centralised command economy there. Now, before anyone criticizes China for its human rights record, let me first say I abhor what it is doing in Tibet, but I think people should note that because it did not de-regulate currency movements and it disallowed short-term easy money to enter China, that country is probably now the hope of Asia's recovery after Japan. Why anyone should think currency de-regulation is a good idea for weak nations and economies is a mystery to me. It is fine for Citibank and Sumitomo, but nobody else. The accomplished currency speculator George Soros has a good idea -- tax currency transactions! (It takes a hacker to catch a hacker.) That way, the money cowboys will not treat smaller economies like casinos. Dr Mahathir was right about these speculators, but wrong about their motives. It has nothing to do with envy, nor ethnicity, nor immorality. It has everything to do with greed, recklessness and adrenalin. Today it is the Malaysian ringgit they attack, but they then turn on the Aussie dollar, the South African rand, the Russian rouble.

Sauce for the Goose is sauce for the Gander

A funny thing happened at the end of September 1998. The U.S. Federal Reserve had to organize a bail-out of the hedge fund Long Term Capital Management (heh, heh! very amusing name in the light of what happened) because it suffered enormous losses and was on the point of collapse. The Fed made major banks rescue LTCM because, paraphrasing the words of Alan Greenspan (he whose sneezes and frowns cause the Dow Jones to dip nervously), "If we did not intervene, LTCM's collapse would have led to a collapse of the world financial market". Now, either the Fed believes in free markets or it does not, especially since the U.S. has so vigorously attacked government intervention in the stock markets in Hongkong, China and Malaysia. I am now completely confused! I was almost sold on the idea that rampant capitalism is a wonderful thing, since it mimicked biolgical evolution in its ruthless elimination of the weak, no mercy for the slow and lame -- but now, what is this?!! Shouldn't LTCM be left to perish? So what if it took the world financial markets with it? Out of the ashes will come a new world order that is evolutionarily superior to the rampant capitalism we have seen until now! But no, the Fed and the U.S. have DECEIVED us all. By their action on LTCM, we now know that they secretly approved of government intervention, particularly when their rich buddies are in trouble. Aha, clandestine socialists, these Feds. Read more about LTCM next.

Economic Fundamentalists

I was at first amazed to discover that LTCM (read above) was able to generate so much investment in its hedging gambles because it had, among other things, two economics Nobel laureates as partners. These wunderkinds use abtruse math ("rocket science") to calculate decisions that LTCM should make in order to land BIG profits for their investors -- now get this -- whether the market is going up or down. Win, win. Why was I amazed? Well, if you open some of these econ books that have the math, what you will see when you strip away the jargon and symbols, you will see assumptions like:
Everybody has perfect information on everything that matters in the market;
New players can enter the market at any time;
In the long term, returns on liquid and illiquid investments will converge (Hey, never mind what this means, just note the 'long term' assumption -- hegde funds are all about SHORT term moves! Also, Keynes reminded people that "in the long run we are all dead".)
OK, hedge funds like LTCM bet on differentials across currencies and markets, and slosh money around as their rocket science dictates. No one without the clout of the big banks can enter the market, so the second assumption is cloud-cuckoo land. As for the first assumption, even the great Alan Greenspan himself admitted after the rescue of LTCM that he did not understand how the money movements worked because the new electronic technology was too confusing for all. What's more, nobody knew how many hedge funds like LTCM were in trouble -- because the U.S. Congress agreed sometime back that these creatures need only disclose as much as they liked, which not suprisingly, wasn't much. So much then for assumptions like the above. No matter how much fancy math one uses, if the assumptions are idiotic, the predictions will be too. GIGO -- garbage in, garbage out. One obvious observation that may do many hedge funds in is that in a panicking market, there may not be enough suckers to buy anything! There is no "lemming efect" axiom in their fancy math. So, next time some economist tries to BS you with math, ask about their assumptions. Then you won't be amazed when you discover that economics, except for some very broad qualitative but not terribly deep theory, is closer to a religion than a science. The part that works can be taught to freshmen and sophomores with not much more than elementary algebra and analytic geometry. Even more important, it is not hard to teach what are the limitations of the theory. If anyone tries to sell you the new epiphany called economic rationalism, you can bet it is just a rediscovery like what the "born agains" preach -- economic fundamentalism -- no different from age-old justifications by the powerful and rich on why the victims and poor deserved to be screwed.

Funny Math

An interesting thing happened in the 1998 Nobel Prize in Economics that makes one wonder if the Nobel Committee was trying to make amends for its mistakes in the past. It went to A. Sen, the mathematical economist whose forte is the analysis of situations and circumstances of great relevance to the third world. The difference between his kind of math and that of the economic fundamentalists is that he does not base his math on the mechanistic physics of the 19th century. Never mind if you have not heard of Hamiltonians or Lagrangians, but essentially the bulk of "modern" mathematical approaches to market and finance dynamics has the underlying assumption that these techniques, highly effective for calculating the motion of particles, can be applied to predict the directions of market indices. But, you will surely object, people are not particles! Ah, that's being "naive". If you have LOTS of people and FREE markets for instance, no individual will matter, and we'll all be like particles. (Sen, to his credit, does not make such assumptions.) See the next item for why your "naive" instincts are correct!

It gives me great pleasure to repeat what Ross Gittings, economics writer for the Sydney Morning Herald, revealed in November 1998. He reported that the hedge funds are so powerful and secretive now that (1) they make great bets in the markets by leveraging, and then -- this is where the "free market" idea gets really screwed -- (2) they manipulate the markets to make their bets come true! It's as if high-roller gamblers can load the dice as they like. Well, in two markets, these hedge funds lost heavily in 1998. Gittings reported that MacFarlane of the Australian Reserve Bank and Yam of the Hongkong Reserve Bank (HKRB) revealed how they outsmarted these funds. The Hongkong story is more dramatic, so let me recount it. Early in 1998, the hedge funds attacked the Hongkong dollar (which is pegged to the US$), betting on a devaluation. The HKRB defended it, but at the cost of pushing the overnight interest rate to 300%, and a side-effect was a collapse of the Hongkong stockmarket. Then things settled for a while, and the stockmarket recovered. The hedge funds lost a lot because they bet the wrong way. Then in a few months they tried another trick. Since the last time they failed because the HKRB came in to hold the peg, but the stockmarket plunged as a result, the hedge funds decided to do TWO things at once -- attack the HK$ and also bet on the rapid decline of the HK stockmarket. What they did not foresee was that Mr Yam would say in effect, "bugger this free-market fundamentalism, which is a stupid myth in the presence of these manipulators", and he poured 25 billion HK dollars to buy shares in the HK stock exchange to defend the stockmarket while he was defending the HK$ for the second time! The free-market fundamentalists in Wall Street and London cried foul, but Yam's defence worked. The hedge funds bled profusely, and have not yet tried again. The HK$ stood, and now the $25 billion of shares owned by the HK government is worth $30 billion. In the words of Gittings, "Not a bad way to `waste' taxpayers' money!".

(This section was written well before the dreadful events of September 11.) My feelings towards the United States are ambivalent. I think its earlier idealism, especially under its Founding Fathers (read the "Federalist Papers"!), is one of the noblest things to have happened to mankind since the Athens of Pericles. Yokelin (my spouse) and I spent very happy years in Ann Arbor in a time of great excitement (Vietnam war, McGovern candidature, SDS, etc), and the intellectual stimulation I received in the U of M was an experience I shall always treasure. Likewise the individual friendships we formed. So, I love Americans as individuals. Yet, strangely, the nation as a whole is severely myopic in its foreign policy. Sometimes even to the point of damaging its own long-term interests. One instance will typify my anguish over this. (It is an anguish because I want so badly for the U.S. to live up to the nobility of its Founding Fathers.)

In 1987 we spent a year in the U.S., and around that time it had begun to arm the Mujahidin in Afghanistan. This is because it wanted them to fight the Russians (the "Evil Empire"), and no limits on this generosity was contemplated. I understand that over $3 billion was spent doing this, including providing 1,000 stinger missiles to the Afghan Muslim warriors. I recall asking my American friends whether the policy makers had figured out what the Mujahidin warriors will do once (not if!) they kick the Russians out. Some were actually naive enough to believe that a democracy will be established. Yeah, in an ironical sense they turned out to be right. The eventual victors of the intra-Islamic fratricide in Afghanistan after the Russians left, the Taliban, have certainly established a "Peoples' Democracy" in the same mold as that of the old-style "Peoples' Democracies" in Eastern Europe, only this time it is not inspired by a devotion to Marxism by an equally implacable devotion to literal interpretations of the Koran. And now guess what has happened to the stinger missiles? Well, since the Taliban believes that the U.S. is the big Satan, it will pass these on to whoever wants to do bad and very naughty things to the Satan and its friends. Meanwhile, the big Satan is trying deperately to buy back the stingers at $100K a piece without much luck.

Now, don't get me wrong. Fundamentalism is not an Islamic phenomenon per se. You let the Baptist fundamentalists in the U.S. or the Hindu fundamentalists in the Indian BJP have that kind of power and they will do precisely the same thing. Chistian fundamentlists bomb abortion clinics and assassinate doctors who work there. The BJP burn mosques. The Jewish fundamentalists are behind Israel's land seizure in Palestine and the relentless oppression of the Arabs there --- all because Jahveh promised them in their holy scripts that land. It's sadly something in our human genes! The moral is very clear, and perhaps the U.S. will learn it in due course. It is not wise to ride a tiger in the hope that you can use it to fix your enemies -- for after it's done that, how the hell are you going to get off?

Mathematical Economics

This gem is from my esteemed colleague, the computational complexity theoretician Aleksandar Ignjatovic. It is his response to a posting I sent to our School's discussion forum on bad uses of high-powered mathematics. Very revealing! Much thanks Aleks!