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Don't spite the God of economic reform

by Jerome a Paris Tue Dec 25th, 2007 at 05:15:04 PM EST

The Economist has kindly published an article which provides a neat summary of what "reform" is all about. Entitled The beguiling path of non-reform The economy is likely to slow sharply next year, but that may not be enough to revive the cause of reform, it once again explicitly endorses (as the sub-title shows) Naomi Klein's theory of Disaster Capitalism whereby more pain is needed for "reform" to finally happen.

Let me take you through a full deconstruction of the main paragraphs. The theme is, appropriately for today, religious: the God of reform shall not be spited. They don't want to give us everything? We'll have to ruin them, then.

GERMANY had no property bubble. Its workers have long settled for modest pay rises. Its businesses and its consumers have been prudent about debt. Recent governments have endured political pain to enact growth-boosting reforms. Yet none of these things will spare Europe's largest economy from the turbulence beyond its borders. In a global slowdown, Germany's three-year-old economic recovery is likely to continue, but at a slower pace. In a way this is a pity, for only the prospect of more serious meltdown could goad Germany's political leaders to make further reforms.

There are so many things in this paragraph, in the way of assumptions, implicit commentary and explicit preferences, that it's worth listing them all in separate items:

  • first, the contents of "reform" is, once again, explicited. The goal of "reform" is to boost growth. Growth should have scare quotes as well these days, because it is a concept that has been perverted in recent years. As it is an average number, it does not matter who profits from it, it's supposed to be good for all, even if it takes place in the form of revenue increases benefitting only a very small majority. This is the famous "W" economy:

    And of course that does not even take into account the more substantial criticism about what growth really means when wasting scarce resources in ways that generate monetary payments appears to create such wealth. Endless, accelerating growth (with jobs, another word in dire need of scare quotes itself) is the only thing that matters;
  • second, "reform" is never done. From that paragraph, it is also obvious that there is never enough reform. Growth can always be boosted a little bit more. When weak, it should be increased, when strong, it should not be compromised... Germany is a case in point: it has done plenty of "reform", as the paragraph happily notes: as per the requirements long stated in the Wall Street Journal ( The recipe isn't complicated: Reduce taxes to reduce wage costs, tighten rules on government benefits, loosen up employment protection laws), it kept wages down (flat for most of the past 15 years), lowered labor regulation, and let corporate profits soar. Political pain came from the fact that many people were nhappy with the result, as is usually the case with reform, which has many losers and a small numbers of winners - but those are the only ones that matter of course, and the growth of their wealth can always be improved;
  • a third trend seems to be haha, you losers: schadenfreude at the hapless Germans, who avoided debt and needless risk, and are still going to be forced to pay for the less prudent speculators elsewhere. There is almost glee at having been able to game the system and get away with it: the worst offenders in the asset bubble now expect to be bailed out by the not-so-reckless, and are even taunting them. Not only is "privatize the profits, socialize the losses" is back in fashion, but it is in an unprecedented in-your-face way: it's profitable, and one can get away with it, so what's not to like.

    This links to a debate held previously about bailing out or not the borrowers in the subprime debacle: should those that were smart enough and prudent enough not to get into such loans, and understood that if it's too good to be true, it probably ain't true, be forced to pay to now help out those that, more or less knowingly, took loans that they'd never be able to repay (unless house prices kept on going up)? There is enough to blame to pass around, starting with the banks that totally gave up any pretense of having any lending standards, the rating agencies that validated the financial sleight-of-hand embedded in the alphabet soup of financial products back by these mortgages, and the investors that bought these without looking closely enough at what they were buying, but many of the underlying home buyers do share the blame as well, for joining the ever-higher party.

    But now we are told that it is appropriate to mock the good Germans who were prudent enough (or stupid enough) to not join the wild ride, and to expect them to pay for the others' mess too...

That may sound like a lot of stuff for one tiny paragraph, but that's the strength of great orthodoxies: a lot goes unsaid, known explicitly or implicitly by all participants, taken for granted, for obvious and no longer needing justification. The rich getting richer translates into higher GDP, and that's Good and Proper and, in fact, Inevitable.

In the longer run German growth prospects will depend more on politicians' progress with reforms than on the whims of consumers. Since 2003 political leaders have helped (...)

Lately, however, Germany's leaders seem to have lost their nerve. Reforms have met popular hostility not applause; voters seem to crave economic justice more than growth. Fewer people now describe their situation as "good" or "very good" than did five years ago, when the economy was in worse shape, according to a survey by Allensbach, a pollster. More than half the population thinks that economic conditions are "unjust".

That paragraph comes after a description of the German economy, which, as any continental European economy, is always threatened by doom and gloom, being continental (ie socialist), but has had a good stretch thanks to excellent export prospects (fancy that, actually making products that people want to buy, even if they are expensive) and strong consumer demand (fuelled, unfortunately and dismissively, by recent wage increases, and not by debt, and thus threatening inflation).

No, it was not increases in Germans' purchasing power that mattered, but reform (even though aid increases came despite the best efforts fo the reformers), of course.

Strangely enough, German voters seem to understand what reform is about - and they don't like too much that growth seems to profit only a select few. The Economist's apparent surprise at these facts does not lead them to question their model - of course not. Democracy is only good for Iraqis or Russian chess players, but not for ungrateful Germans who don't understand economics and "growth" properly.

And so the coalition has started to whittle away at Germany's growth prospects.

Any measure to share the fruits of growth threatens growth. There is NEVER a good time to share growth. Do it when there is growth, and you might kill it; do it when it's not there and you sentence the country to more stagnation; do it when it's building uo, and you might kill off recovery. There is NEVER a good time to share, it's bad. Bad. Evil. Socialist, even.

Alfred Boss of the Kiel Institute worries that "steps in the wrong direction will multiply" in the next few months. There is talk of extending the minimum wage and of tightening the regulation of temporary work, which accounts for much recent job creation. The upswing has increased the government's revenues and so the temptation to spend.

The horror. Government spending money it has! The nerve! The gall! Don't they understand that they are wasting valuable opportunities to cut taxes?! And minimum wages? People actually having money to spend and support consumption? Not being forced into shitty jobs with nasty timetables, poor pay and no benefits. Why, they might have time to thin kabout what's going on, and worse, complain! Don't they understand that they can just go in debt? Stupid uptight Germans.

So far, the reversals championed by the Social Democrats seem to be aimed at gaining big political payoffs at low economic costs. Still, driving in reverse makes it harder to bring in further reforms of health care, labour markets or the welfare state. There is little prospect of daring moves until after the 2009 election. And even then, it may take another bout of economic pain to make anything happen.

Ugh. Politicians scoring easy points that move the debate left?! That's just wrong! Shit, we'll just have to engineer a bigger crisis so that the damn buggers understand that reform shall not be spited. They don't want to give us everything? We'll have to ruin them, then.

It's all in black and white in the bible of global capitalism if you want to read it carefully.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Dec 25th, 2007 at 05:22:48 PM EST
<expletive deleted>

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Dec 25th, 2007 at 06:02:49 PM EST
A recent chronicle of 'reform' in the headlines:

  • In Japan, the government wants to 'reform' finance -- again a deregulation, towards the US model that just suffers the credit crunch...

  • In Hungary, government majority (against public opinion majority) voted for a healthcare 'reform', meaning partial privatisation, that will only achieve a lot of bureaucracy.

  • In the Czech Republic, people are said to be wary of 'reforms', after the new government announced plans of sweeping Slovakian-style 'reforms', including healthcare privatisation, flat tax and other idiocies. I wonder how they failed to consider a fate similar to the Slovakian reformist government (being replaced by leftist demagogues and far-right extremists).

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Dec 25th, 2007 at 06:26:36 PM EST
Japan fights back with 60-point master plan
Japan has launched its biggest financial shake-up in a decade to regain lost business from London and meet the fast-rising challenge of Shanghai.

A sweeping package of 60 measures will give special tax exemptions to hedge funds, and allow companies to make simplified disclosures in English rather than Japanese.

It will tear down the archaic barrier between banking and broking, which is widely blamed for relegating Japan to backwater status, without the system of universal banking now prevalent in the US and Europe.

Japan's Financial Services Authority said the "entire government" would be harnessed to push through the master plan, aimed at turning Tokyo into the financial hub of Asia and broadening the country's economic base away from manufacturing. Officials have openly stated that the model is London. They plan their own "Canary Wharf" of shimmering towers in an enclave of Tokyo.

Japan remains the world's biggest creditor nation with some $2.5 trillion (£1.3 trillion) in net foreign assets and a massive $19 trillion pool of domestic savings and household assets, the world's biggest stash of private wealth. Yet it has almost completely lost its footing as a major money centre.

With still a handful aspires for a "major money center", the global Ponzi opera might go on for another year. Check out the Dutch:

Dutch fund manager Corne van Zeijl may be out of a job within a decade because there won't be enough local companies in which to invest.

[More] than half of Dutch citizens are concerned about the acquisitions, the news service ANP reported last month, citing a poll. To fight back, firms including insurers ING Groep NV and Aegon NV formed the Holland Financial Centre to lobby for changes that will strengthen the financial-services industry.

[The] Dutch were the second-biggest foreign investors in the U.S. at the end of the 1990s, following takeovers such as Aegon NV's purchase of insurer Transamerica Corp. In 2006, they were fourth, according to U.S. Bureau of Economic Analysis estimates.

[Dutch] banks and pension funds started the Holland Financial Centre to bolster the financial-services industry, which accounts for about 13 percent of the nation's economy. The group wants to advertise abroad to establish the Netherlands as a center for pension administration.

Will there be enough companies in the world for every investor?! (A Dutch strategy speech, in English despite the title, is available here.) Recently I also read a Russian financial newspaper, where articles stressing financial relevance (and "diminishing" importance of natural resourses!) are well visible.

Japanese corporate structure has a frustrating reputation for free traders and hedge investors, but apparently they still caught the reform virus this late...  

by das monde on Wed Dec 26th, 2007 at 03:50:39 AM EST
[ Parent ]
Well, there's the phrase simply splayed, isn't it...

"tear down the archaic barrier between banking and broking,"  (We assume they mean brokering.)

Jeez, i'm not sure if there were any hiccups in letting Bank of America and 1st Local Sparkasse of Düsseldorf and Des Moines compete with Goldman Sachs and eTrade.  Guess it doesn't matter since they're all getting bailed out by the Feds of the world.  (The preceeding comment has been ruled simplistic, as it ignores the relative sanity of the ECB.)

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Wed Dec 26th, 2007 at 11:17:19 AM EST
[ Parent ]
The "archaic" Glass-Steagall Act is so 20th century...

Does the society has to be that much dependent on those electronic shuffle games with big numbers?

by das monde on Thu Dec 27th, 2007 at 04:36:43 AM EST
[ Parent ]
Par for the course, the politics of the situation is completely ignored.  The finance ministry decides this, and it is done.  Bull.  The Japanese government is still torn over the last election, which brought about a divided government with one party controlling the upper house, and another the lower house and thus the government.  Given the one-party-state nature of recent Japanese political history, this has not been a very cozy situation.

While it's possible that some sort of agreement between the two parties has been reached for this, it doesn't seem too likely.  I haven't been paying too much attention over the past few weeks, though, so I could be wrong.

by Zwackus on Thu Dec 27th, 2007 at 12:14:00 PM EST
[ Parent ]
voters seem to crave economic justice more than growth

Well, that's good news!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Dec 25th, 2007 at 06:27:48 PM EST
I may need another brandy now . . .
by Colman (colman at eurotrib.com) on Tue Dec 25th, 2007 at 06:57:00 PM EST
A very good deconstruction of the "reform" ideology, Jerome.  Your focus on the method and content of growth and on its distribution is subversive and not to be tolerated.  Good grief! What do you expect?  An Economics magazine actually focusing on Economics rather than on an ideological diatribe prescribing a failed system for a relatively successful one?  Now if they had done things our way those Germans could be joining us in the cesspit of asset bubbles and credit crises, of deregulation, inflation,  and corporate bankruptcies.  We need them to share our pain.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 25th, 2007 at 07:55:56 PM EST
have you read klein's book in full? if you haven't, it's well worth doing, and far more compelling and detailed than the online snippets i was able to find.
by wu ming on Tue Dec 25th, 2007 at 09:58:03 PM EST
Kleins book is supposedly retarded, full of utter claptrap, faked quotes and general fact errors (famously calling the Cato institute "neoconservative").

Great diary though.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 26th, 2007 at 09:43:51 AM EST
[ Parent ]
Kleins book is supposedly retarded

I guess you haven't read it. :-)

Might you have links to reviews or articles that bring out the 'claptrap' you mention? I'd be interested to know how the claims are backed up.

by Loefing on Wed Dec 26th, 2007 at 11:00:29 AM EST
[ Parent ]
Only in Swedish, and done by neoliberals and libertarians. The main point was that Klein was lumping them together with Bush, war, big government, corporatism and dragging in Milton Friedman.

Klein distorted quotes and worked in a fundamentally intellectually dishonest way.

Some slides (in Swedish but quotes in English): http://www.timbro.se/pdf/Johan-Norberg-Recension-av-Klein-071217.pdf

There is also video and audio from the seminar held by Timbro (the main Swedish neoliberal think tank), which is both good and entertaining.

Just because the neolibs are wrong about many (or actually most) things, we shouldn't allow dishonest fashionable populist leftism stand unquestioned.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 26th, 2007 at 11:27:44 AM EST
[ Parent ]

Kleins book is supposedly retarded, full of utter claptrap, faked quotes and general fact errors (famously calling the Cato institute "neoconservative").

The omnivorous President of the United States is supposedly retarded, full of utter claptrap, faked quotes and general fact errors (famously calling Iran's nuclear program "dangerous.")

One of these statements is supposedly true.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Wed Dec 26th, 2007 at 11:30:32 AM EST
[ Parent ]
I'd say they both are.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 26th, 2007 at 11:32:02 AM EST
[ Parent ]
But you haven't read the book.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Dec 26th, 2007 at 03:10:22 PM EST
[ Parent ]
Nope. Only watched the one hour video review.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Dec 27th, 2007 at 03:09:27 AM EST
[ Parent ]
I have no knowledge of the details of Klein's book, but I still have to ask you:

You have of course, rigorously researched and documented the track record of misinformation, statistical manipulation and general lack of respect for honest inquiry that Timbro (and particularly Norberg) is renowned for?

by Metatone (metatone [a|t] gmail (dot) com) on Thu Dec 27th, 2007 at 11:19:33 AM EST
[ Parent ]
I am quite aware of Norbergs mishandling of statistics in his book In defence of world capitalism, but mostly this seemed to be not due to dishonesty but due to a mix of ineptitude and being based on data which later was revised. (Reading that book, and Nozicks Anarchy, State, Utopia made me a neoliberal, until I got to my senses a few years later)

Still, the things brought forth in that review shows that Klein is at least ten times worse than Timbro/Norberg.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Dec 28th, 2007 at 03:37:52 AM EST
[ Parent ]
brilliant deconstruction, as usual.

in fact, they get better all the time...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Dec 26th, 2007 at 03:52:54 AM EST
Jerome, thank you.
by In Wales (inwales aaat eurotrib.com) on Wed Dec 26th, 2007 at 04:36:24 AM EST
Truly your best yet: "never a good time to share growth" is a great criticism, worthy of a fusillade of LTE's on its own....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Dec 26th, 2007 at 06:33:59 AM EST
Perhaps some one would like to comment on this item from the NY Times is the context of this thread:

Denmark Feels the Pinch as Young Workers Flee to Lands of Lower Taxes

Young Danes, often educated abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent.

"Our young people are by nature international," said Poul Arne Jensen, chief executive of Dantherm, a maker of climate-control technology. "They are used to traveling and have studied abroad."

"They are no longer Danes in that sense -- they are global people who have possibilities around the world," he said.

Have the young decided that cash now is more important to them than a secure social safety net? What happens when they need the services that that their taxes would have paid for?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Dec 26th, 2007 at 12:55:52 PM EST
Complete bollocks, IMHO.

Young Danes have been leaving Denmark; Kiwi's leaving NZ; Brits leaving the UK and so on in increasing numbers not because of taxes but simply because they can

It used to be that it was only the Aristo's could do the "Grand Tour". We're seeing a window of cheap travel and communications that are opening up society as never before.

NYT should be ashamed of themselves.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Dec 26th, 2007 at 01:23:36 PM EST
[ Parent ]
Well perhaps the NYT has a need to portray advanced social market economies like Denmark as somehow sclerotic and failing to inspire their young, but I see far less Irish people emigrating to the US now than they ever did before.

It is understandable that young people should want to extend their international experience and be more focused on cash now rather than pensions and social/health care benefits later, but I suspect most are moving within the EU.

The global economy is increasingly a reality for all.  The danger is that some countries will end up with a disproportionately aged population and the much greater social expenditures and taxes that flow from that - further accentuating the flow of young people from their tax nets.

The development of EU wide pensions, social welfare and health care system would seem a logical extension to avoid such "market distortions" but we are talking serious money here, and therefore serious room for political disagreements.

It is difficult to see huge changes in this area without agreement to some kind of European Government as opposed to a mere EU Commission.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Dec 26th, 2007 at 01:24:40 PM EST
[ Parent ]
Are there any stats given which show an increase in young Danes moving abroad, much less because of taxes?  Say compared to the nearly a thousand Danes who worked in california windpower in the 80's, or the 4,000 or so Danes who work around the world for Vestas now?

And if low unemployment indicators are actually an indicator, Denmark is not feeling any pinch.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Wed Dec 26th, 2007 at 01:46:23 PM EST
[ Parent ]
That's something we regularly hear. Personally, I think it's bollocks. We do have net emigration of people just after they finish their degrees, but it is worth noting that the net emigration is quite small compared to the size of a youth cohort - rhetoric suggesting massive migration notwithstanding.

It is also worth noting that Denmark is very much in the periphery of our civilisation when it comes to science and culture. Cities like Berlin and Paris and universities like MIT and Berkeley surely account for some of the pull.

Further, it is not helping matters that Danish immigration policy is harsh - often unduly so. While that may not make people flee Denmark (but then again, it might - I have at least one friend who's moving to Malmö because the Danish immigration rules prevent his girlfriend from immigrating) it certainly reduces the inflow, thus contributing to the net emigration.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 26th, 2007 at 02:36:11 PM EST
[ Parent ]
It's a study (sic) with n=1 and the usual "employers and economists" trotted out as supporting evidence.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Dec 26th, 2007 at 10:04:24 PM EST
[ Parent ]
I keep reading about how French people in London are proof that young Frenchmen are fleeing the French sclerosis and high taxes.

Well, my wife and I will be moving to London in the Autumn. May I make it clear that it is not for Economic opportunity. There will probably be even less growth in London than in France (despite Sarkozy's best efforts to copy all the stupid mistakes made elsewhere, while adding some of his own) next year, and we will pay more taxes.

But we had been wanting to try living abroad for 4 years and that's the first time that we could do it at the same time, also it's easier to do before you have several children in class. And I am very uncomfortable living in a country that has Sarkozy as its head of State.
Now, well, English is the only other language we both speak, London is quite convenient if you don't yet feel like going really far away from your families, and we are quite fond of quite a lot of the country. So DESPITE disapproval at much of the political climate there, we will go (and surely return after a few years). I have no doubt, though, that in articles we will read that departures like ours are a proof that France must change.

Still, despite not speaking the language, had Sweden had more light in the winter and been a bit warmer, we'd probably go there instead.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Jan 1st, 2008 at 04:58:47 AM EST
[ Parent ]
I just received a letter from the Economist trying to get me to become a subscriber.

I felt that was a shocking waste of precious paper.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Jan 1st, 2008 at 04:48:23 AM EST

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