Wimps Become Economists, Toughies Riot Police

In this day and age, let's just say economists have an image problem. Likely as a consequence of being cheap and selfish as a rule, economists are usually adjudged among the least attractive of academics. While their political perspectives vary, something that unites your Milton Friedman with your Paul Krugman is a certain wussiness that's difficult to transcend. That few economists predicted the global economic crisis--and indeed are culpable of to no small extent--does them no favours, either.

From a prototypically wussy profession, let's moved to a tougher one that actually requires brains as well as brawn. And, in keeping with the times, it's also become open to men and women. It is generally recognized that British police are the best in the world. But, an even more select cadre of British police are British riot police. While it too suffers from image problems, the main difference is that the ire directed towards them is usually the fallout from others' actions. The ironic thing that binds riot police to economists is that economic prescriptions protesters are displeased with are often the cause for riot police to be deployed. For instance, British students trashing parliament towards the end of last year--including quite a few LSE students, I know--had to be...calmed down. Ask the son of multimillionaire Pink Floyd frontman David Gilmour about becoming overexuberant.

While coming home from work the other day, I caught a very interesting article on the drills you must undertake to become a riot policeman in the Evening Standard. Let's say it doesn't involve inputting data into SAS or STATA or any such like. Rather, it involves reacting when folks start throwing stuff at you:

Every five weeks hundreds of police officers who have volunteered to join the Met's [Metropolitan Police] Territorial Support Group line up to face a barrage of petrol bombs, other missiles and verbal abuse from colleagues in order to prepare them for the real thing. Criticism of the Metropolitan Police's handling of recent demonstrations in the capital has been severe. But training for such duties is arduous and regular.

I joined officers in the group at the Met's public order training centre in Gravesend and, like them, donned riot gear weighing three and a half stone, grabbed a shield and prepared for action. The session began, as always, with the so-called shield run. Officers sprinted around a replica town centre in full riot gear and carrying a 5ft 6in shield. The 500-yard course had to be completed in under two minutes and 45 seconds.

Then training began in earnest. The men and women practised drills while facing a hail of flaming missiles. In tight formation the unit marched through the streets, clearing tight alleys and balconies like those of a typical London housing estate. Each officer had to stand firm as protesters hurled masonry, barriers and metal poles towards them.

Engulfed in flames and with bricks raining down on me, I could see nothing through the smoke. Glass shattered as petrol bombs hit my riot shield. I held my breath and closed my eyes, waiting for the choking fumes to disperse, eventually opening them to see a masked man sprinting towards me wielding another blazing bottle.

Someone behind bellowed the order: "Forward!" Reluctantly I raised my shield and headed towards the threat.

In an odd but real sense, the fates of economists and riot police are very much intertwined. In the larger scheme of things, though, the eggheads have far more potential to muck things up than the often reluctant enforcers. A petrol bomb for your thoughts, my dear?

G20 Protest: Battle in Seattle, Turmoil in Toronto

In case you missed it, the twin protests of the G8 and G20 summits recently held in Toronto, Canada were rather violent given the relatively quiet anti-globalization protests of the past few years. Even after spending massive sums on ensuring summit security, Toronto or "New York Run by the Swiss" as some of its adherents call it was hit hard:

The site of the weekend's Group of 20 leaders' meeting was rocked by some of the most violent protests to hit a global gathering in recent years, despite one of the most lavish security outlays in summit history. Bands of activists ran through the city's downtown Saturday, bashing windows and setting several police cars ablaze, halting public transit and prompting officials to lock down hospitals and a major shopping mall. Police responded with teargas and pepper spray, arresting nearly 600 people over the weekend, in addition to 32 detained before the summit began.

The violence had Canadian politicians and police wringing their hands after the country spent around $1 billion on security for the G-20 and a back-to-back Group of Eight summit in rural Huntsville, three hours to the north. Those precautions included a 20,000-strong security force in Toronto and a 2.4-mile-long chain-link fence surrounding a "Yellow Zone" that enclosed the area where the G-20 leaders met.

$1 billion spent on security? I am speechless. But, as the Canadian flag with the maple leaf replaced with a ganja leaf suggests in the clip above, these spontaneous outbreaks of anti-globalization sentiment are still as incoherent as before, diluting the movement (if there ever was one).

IMF's Strauss-Kahn Buries Washington Consensus

There must be something in the water in Cambridge. I'm certain you remember the Bush in Iraq-inspired shoe throwing incident when Chinese Premier Wen Jiabao visited that world-famous university. Now, the photo above is from an event held there commemorating the launch of George Soros' Institute for New Economic Thinking, where IMF Managing Director Dominique Strauss-Kahn was one of the keynote speakers. There's even footage of this fairly bourgeois hooliganism if you're interested.

The more important point, however, is that Dominique Strauss-Kahn is also keen on distancing himself from Washington Consensus-style strictures. From the text of his Cambridge speech, here is his "that was then" part:

Let me begin with a brief description of the pre-crisis [read: Washington in plain language] consensus as it relates to monetary policy, fiscal policy, and financial regulation.

First, monetary policy. Low and stable inflation was considered the primary, if not exclusive, mandate of central banks. After the high-inflation experience of the 1970s, central bankers were keen to establish their reputation as being “tough on inflation”. This position was given intellectual rigor by the New Keynesian model, which held that constant inflation is the optimal policy choice for keeping economic growth at the potential rate. So, keeping inflation low and stable was the best way to secure optimal economic performance.

Second, fiscal policy. In the decades preceding the crisis, fiscal policy had taken a back seat to monetary policy, for various reasons: skepticism about the effects of fiscal policy, based largely on Ricardian equivalence arguments; concerns about lags and political influences in the design and implementation of fiscal policy; and the need to stabilize and reduce typically high debt levels. In addition, automatic stabilizers were considered sufficient to allow fiscal policy to respond to changes in the economic cycle.

Third, financial regulation and supervision. Here, the focus was on the soundness of individual institutions and markets, and aimed at correcting market failures stemming from asymmetric information or limited liability. Broader macroeconomic implications of financial sector risks were largely ignored. Given the enthusiasm for financial deregulation, the use of prudential rules for cyclical purposes was generally considered an improper interference in the functioning of credit markets.

And now here are the "lessons" he perceives. First, there are limits to deregulation:

We have also learned that financial regulation can have a major macroeconomic impact. Regulatory weaknesses, including in the perimeter of regulation and supervision, allowed significant risks to build up, and enabled the bursting of the U.S. housing bubble to turn into a major global crisis. And, once the crisis started, rules aimed at guaranteeing the soundness of individual institutions worked against the stability of the system. For instance, mark-to-market rules, coupled with constant regulatory capital ratios, forced financial institutions into fire sales and deleveraging.

Next, with a nod to the Gordon Brown of old and his "golden rule," he now reserves praise for countercyclical spending--provided that countries accumulate enough during fat times to spend during lean times.

Let me turn now to the lessons for fiscal policy. The crisis has placed countercyclical fiscal policy back at center stage. With monetary policy having reached its limits, a fiscal response was essential to tackle the downturn. In addition, because it was evident that the recession would last a long time, fiscal stimulus could have a powerful impact, despite implementation lags. Here, I am proud to say that the Fund played a pivotal role in its early call for a sizeable global fiscal stimulus.

A key lesson from the crisis is therefore that building up fiscal space in good times is very important, to allow sufficient space for fiscal stimulus in crisis times. What does this mean for fiscal adjustment in the period ahead? Unfortunately, the required adjustment is formidable. Public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 percent of GDP in 2014. Reversing this increase will be a tremendous challenge—let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises.

All I can say is, "fat chance of that." Demographic trends really work against greatly improved fiscal trajectories for wealthy countries. I think it's more likely that these countries will invariably copy the US example and flood the world with IOUs in typical American fashion. Boycotting patronage of this riffraff is the real solution, but I'll save that story for later. As before [1, 2, 3], I am also disconcerted by the still-unexplained change of heart from a time when mostly poor countries were in trouble alike during the Asian financial crisis to when developed ones are. Was Washington Consensus-style "fiscal austerity" and "belt-tightening" good enough for everybody else...except Washington itself? Bob Marley had this double talk sorted out long ago: See de 'ypocrites, them a-galang deh! It almost makes you mad enough to smoke ganja and grow dreadlocks.

One thing that I, the protesters, and the IMF can ultimately agree on is this: the best thing is for countries to manage their finances well enough to avoid the Washington-based lender--kindler, gentler version or not.

UPDATE: Dominique Strauss-Kahn had this to say to the protesters:

His speech was interrupted by a handful of protestors, complaining that the IMF was exacerbating global economic problems. “That was the old IMF – haven’t you read the press,” Mr Strauss Kahn replied to the protestors before they were ushered out of the Great Hall at King’s College, referring to the Fund’s role in championing fiscal stimulus and expansionary policies during this crisis.

Precisely, this is where both sides get it wrong. First, these protesters not being a particularly informed group, they weren't clear on who was suffering from what. Second, Strauss-Kahn once more fails to address the criticism of double standards and indeed buttresses it: the "old IMF" of the Washington Consensus for poor countries, and the "new IMF" of kinder, gentler advocacy for rich ones. Sorry, DSK, but I'll stick with Bob Marley.

Questionable Socialist Stylings: Ecuador's Correa

On 27 October 2009, Ecuadorean President Rafael Correa came to speak at the LSE. Brandishing the classic repertoire of Latin American firebrands, he denounced American imperialism, the Washington Consensus, neoliberalism, neoclassical economics, free trade, "kicking away the ladder," and so forth. While I do not have particular issues with several of these denouncements--I've made some myself--it is worth comparing how rhetoric compares with reality. The text of his speech is available online, as are a podcast and video. Still, I kind of wonder why one needs a PhD in Economics from a fine institution like the University of Illinois at Urbana-Champaign to recycle this masters-level anti-globalization repertoire. Yet, what's passable for a master's-level essay is certainly not what one expects from somebody who should know better.

More importantly, Correa's bog-standard class warfare stylings seems--in classic populismo fashion--to have backfired on him. If you will remember, one of the first things Correa did upon assuming office was default on governments he deemed as not being legitimate debts. While I too would like to try this trick sometime if I had country of my own, the financial community is apparently none too impressed. As a consequence of this action, Ecuador has been locked out of international capital markets. Like in Venezuela, populismo has not only trumped economics--something Correa should know about--but common sense: he who burns his bridges had better be a good swimmer. Now, faced with a large revenue shortfall in light of declining oil prices--Ecuador is the second largest oil exporter in the region after Venezuela--the country has sought the comfort of, er, the Washington-based lender the Inter-American Development Bank whose principal funder is of course the United States:

Ecuador may cut government spending as it struggles to cover a $4.2 billion budget shortfall after a debt default shut it out of credit markets, Fitch Ratings said. President Rafael Correa could slash planned investments aimed at boosting oil production after halting payments in December 2008 on $510 million of bonds and in March on $2.7 billion of notes, Fitch analyst Theresa Paiz said yesterday in a telephone interview from New York. “There could be a sharper adjustment in the budget and cuts to capital expenditure,” Paiz said. “External borrowing is pretty much off the table.”

Correa defaulted on Ecuador’s 2012 and 2030 global bonds, saying the securities were “illegitimate” and “illegal.” Ecuador, which depends on oil exports for about a quarter of its revenue, may post economic growth of 1.5 percent this year after gross domestic product shrank 2.3 percent in 2009, according to Fitch. Ecuador may be able to narrow its budget shortfall if oil prices continue to rise and the country receives financing from multilateral lenders, Paiz said. Crude oil prices have almost doubled to $79.30 a barrel from a year ago as a global economic recovery boosts energy consumption.

Corporacion Andina de Fomento, a Caracas-based a multilateral lending institution, approved a $200 million loan for Ecuador last week, and the Andean nation may receive $350 million from the Inter-American Development Bank, Finance Minister Maria Elsa Viteri said Feb. 12 in a statement on the president’s Web site.

Correa has also tapped Ecuador’s state-run Social Security Institute to fund projects ranging from oil exploration in the Amazon to hospital building, according to statements on the president’s Web site.

The digital webpage of this government trumpeting Correa's "citizen's revolution" confirms these details--Ecuador's ambassador to Washington has [shhh] gone to the Yanqui capital with begging bowl in hand. Some were hopeful that Correa could be another Lula instead of another Hugo, but the latter scenario seems to have panned out. Correa has even raided Social Security funds to pay for pet projects, so Ecuadoreans pinning their hopes on future disbursements have further reason to worry as external sources of funding dry up.

You show those neoliberal Yanks, Rafael Correa...by borrowing from Washington? Like Chavez, Correa's revolucion is fuelled almost solely on high oil prices which he probably should be wishing are on the rise again. You certainly don't need a PhD in Economics to figure out that, after you kick your creditors in the balls, external funding won't be forthcoming. Colour me unimpressed.