My First Daily Digest: 26 July 2015

I go through a lot of reading every day without ever actually processing my thoughts on it. This, unfortunately, means that I have gotten into a habit of having many incomplete thoughts which do not link up or lead to conclusions. To force myself to develop better habits of mind, I’m going to start summarising my reading.

Here’re my aims: summarise for an intelligent layman, offer complete thoughts, and illuminate connections that might not have been apparent at first.

Here’re three things I read today

Stiglitz 2012, The Price of Inequality

In chapter 6 of the book (the only portion which I skimmed today), Stiglitz argues that contra mainstream economics, which assumes that individuals are rational (complete and transitive preferences), perceptions can be manipulated—hence advertising. [Complete preferences means all the things someone could want are ranked—people either prefer one thing to another or are indifferent between them. Transitive preferences means, if someone prefers apples to oranges, and oranges to bananas, then we can infer that they prefer apples to bananas. It is not actually clear to me that rational preferences are the key problem in inequality perceptions, rather than incomplete information.] He then asserts that the economic elite have actively manipulated people’s preferences over economic distribution and the role of government in the market mechanism.

I do appreciate that he set out the material on irrationality/behavioural economics very clearly and concisely. He gave clear examples of experimental set-ups which showed that people’s perceptions are affected by framing (context)—for instance, the example of giving people a random number and then making them guess the answer to a very obscure question. But what I don’t believe he actually did was make the connection from that to the proposition that people’s preferences on wealth and inequality had been manipulated. That was largely papered over using anecdotal evidence. So there is certainly evidence that framing affects perceptions, but I’m not convinced that it is on point for the proposition that framing affects perceptions on the just distribution of incomes and wealth. And for the second part of the argument, we do know that Americans underestimate the amount of wealth and income that elites have amassed; Stiglitz just has not shown (or cited a study that shows) that these misperception of inequality has come about as a result of the elites’ efforts. For instance, he cites anecdotal evidence but not systematic opinion polls to show that “labelling anything as ‘socialism’ is the kiss of death.”

Chapter 6 contains a slippery argument that makes me reluctant to fully endorse The Price of Inequality. It certainly was a must-read on inequality when it came out in 2012; it just is not the rigorous riposte to free markets that we needed. Perhaps other books (Capital in the Twenty-First Century or Inequality: What Can Be Done?) are more worth reading—both by superstar economists whose focus is inequality.

Ukraine’s and Argentina’s debt defaults

It seems like one mutual fund, Franklin Templeton, is going to force Ukraine into default by refusing a debt relief plan that Ukraine is offering (a 40% cut in the principal owed). Of course, when a country goes into default, borrowing then becomes even harder, locking it into a downward spiral of ever tighter credit and worsening public finances. If this is true, Franklin Templeton’s actions are directly compromising the ability of Ukraine to pay back its debts.

I was reminded of the very recent drama over Greece’s sovereign debt, on which Germany and other Eurozone creditors have refused a similar “haircut” despite the IMF finding their debt unserviceable. A Guardian article I saw at the time reminded us of the predicament a heavily indebted post-war West Germany was in, and the repayment plan that its creditors agreed to. One clause in that agreement was that Germany would “only pay for debts out of its trade surplus, and any repayments were limited to 3% of export earnings every year.” It made the point that Germany was not doing Greece and itself any favours by making the Greek debt more onerous.

I was also reminded of a little factoid from a few years back: that when in 2001 Argentina offered its creditors a new repayment deal which cut into the principal that was owed, “holdouts” that refused to accept that deal forced Argentina into default, turning global financial markets upside down and wrecking the Argentine economy. One fund, Elliott Management, sued in a New York court and eventually (2012) forced Argentina to stop payments on the restructured debt, triggering a second default. Lots of ink has been spilt over this but fundamentally I consider the issue to be judges not knowing enough economics to understand the full consequences of empowering holdouts (usually “vulture capitalists”) and thereby (1) triggering a sovereign debt default, making repayment even more difficult/unlikely and (2) encouraging investors to finance risky debt issuances. Debtor economies cannot be treated like debtor firms or households. Basically, creditors also have a responsibility to make sure their loans do not encourage risky behaviour among their debtors; and if they haven’t fulfilled that responsibility, they can’t cry too much about having to accept punitive repayment schemes. There’s an interesting debate on the comments section of Anna Gelbern’s piece, in which she reminds people to stop moralising what is at heart a simple matter of breach of contract.

TIL, as well, that because of this risk of holdouts, “collective action clauses” have been written into sovereign debt issuances. CACs force creditors to accept renegotiated repayment terms if a certain supermajority approves of the proposed repayment plan, thus removing the power that holdouts have of forcing governments to pay them preferentially before or at the same time as other creditors.

Sale of FT to Nikkei

Fingelton’s piece argues that the handwringing over the sale of FT to the Japanese financial news group Nikkei reflects the fact that Anglophone media have underestimated the strength of the Japanese economy. They’ve done two main things. First, with statist/corporatist targeting of specific sectors to develop niches in, Japan has been able to develop a dominance in many specialised areas of advanced manufacturing. Second, Japan has systematically exaggerated the weakness of its economy—its true strength shows in several respects, such as the low unemployment rate and the current account surplus (despite the ageing-out of its workforce).

Fingelton also referred to the “Eugenic Protection Law” in force from 1948 – 1996, which gave Japanese doctors the power to sterilise people without their consent, if they had particular medical conditions which were at the time thought to be inherited. Fingelton thinks that the objective of the EPL was to reduce the Japanese population’s growth rate in order to reduce its vulnerability in food security. Without knowing more about it, I’m still sceptical (1) that the purpose of the law was to control the population growth rate, or (2) that it was applied widely enough to have the effect of controlling the growth rate (whatever the intention).

Nevertheless, all this is quite aside from my disbelief that for 48 years Japan thought it was okay to sterilise people who weren’t ‘fit’ enough to have babies. Nevertheless there are some questions that are raised by Fingelton’s arguments. The first, of course, is whether GDP is a good measure of economic or socioeconomic health and progress. After all, Japan’s GDP has been stagnant for two decades, yet its quality of life is still among the highest in the world. But this is old hat; everyone from Stiglitz to Sen has questioned GDP. Second, if Japan is a significant capital exporter, where’s the capital coming from? (Export earnings? Is the obvious answer correct?) And last, why’s the traffic in capital only one way—why don’t foreign buyers buy Japanese firms?

And of course, though it’s too much now, I really need to read the Varieties of Capitalism literature and figure out (1) what characterises the two strains of capitalism, as well as (2) Japan’s place in it.

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