Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

Econ 210a: Apr 30: WWII and the thirty glorious years [DeLong]

Apr 30: WWII and the thirty glorious years [DeLong]

Audio

• Peter Temin (2002), "The Golden Age of European Growth Reconsidered," European Review of Economic History 6, pp. 33-22. http://www.international.ucla.edu/cms/files/Temin.pdf
• Mancur Olson (1996), "The Varieties of Eurosclerosis: The Rise and Decline of Nations Since 1982," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945, Cambridge, Cambridge University Press, pp.73-94 http://books.google.com/books?hl=en&lr=&id=wiTtnUn5qGsC&oi=fnd&pg=PA73&dq=%22OLSON%22+%223+The+varieties+of+Eurosclerosis:+the+rise+and+decline+...%22+&ots=s86KlJoXe7&sig=wabLIsaAIsicZhoppgt-vDhRxcE#PPA69,M1
• Barry Eichengreen, "Institutions and Economic Growth in Postwar Europe: Evidence and Conjectures" (with Pablo Vazquez), http://www.econ.berkeley.edu/~eichengr/research/vanark.pdf
• Richard Ericson, "The Classical Soviet-Type Economy: Nature of the System and Implications for Reform," Journal of Economic Perspectives 5 (Fall 1991), pp. 11-28 http://www.jstor.org/stable/pdfplus/1942862.pdf

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Let us sit in 1945 and look at western Europe. What do we see?

• A truly genocidal subcontinent--devastated over the past four centuries by wars of religion, ideology, and nationalism.
• A not-that-rich subcontinent--levels of output per worker averaging perhaps half those of what appears possible given technology elsewhere, in America, Canada, and Australia.
• A Eurosclerotic subcontinent--lobbies and entrenched interests playing negative-sum games, whether unions, aristocracies, small craft producers, or mini-nations.
• A politically-disordered subcontinent--Nazis, fascists, communists, shaky democracies, coups, street riots, large-scale political street violence.

You would have had to have been a brave person to predict the post-WWII western European renaissance...

• Conversely, you might have been "optimistic" about the Soviet Union: cruel, barbarous, murderous, but also--effective in accomplishing its tasks.

Why the reversals of fortune of the 30 glorious years?

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What Barry Eichengtreen and I wrote back in 1991:

The 1930’s in Europe had seen not chronic bottlenecks but chronic deficiencies of aggregate demand. Production had fallen far below normal for the entire decade; market forces had failed to restore demand to normal levels. Circumstances during the Great Depression had been exceptional, but circumstances in the aftermath of World War II were exceptional as well. Many feared the return of the Depression.

In fact (aside from the possibility that fear of a renewed Great Depression would act as a self-fulfilling prophecy) the return of the Great Depression was a less likely possibility in the 1940’s than was generally feared. The memory of the Depression, and the greater strength and incorporation of social democratic political movements in government kept right-wing governments from adopting policies of out-and-out national deflation. The availability of the large United States market to European exports--especially with the coming of the Korean War Boom and NATO in the early 1950’s--prevented any large world aggregate demand shortfall as in the Great Depression. With the American locomotive under full steam, Western European economies were unlikely to suffer from prolonged Keynesian demand-shortfall depressions.

Nevertheless, a live possibility in the absence of the Marshall Plan was that governments would not stand aside and allow the market system to do its job. In the wake of the Great Depression, many still recalled the disastrous outcome of the laissez-faire policies then in effect. Politicians were predisposed toward intervention and regulation: no matter how damaging “government failure” might be to the economy, it had to be better than the “market failure” of the Depression. Had European political economy taken a different turn, post-World War II European recovery might have been stagnant. Governments might have been slow to dismantle wartime allocation controls, and so have severely constrained the market mechanism. In fact the Marshall Plan era saw a rapid dismantling of controls over product and factor markets in Western Europe, and the restoration of price and exchange rate stability. An alternative scenario would have seen the maintenance and expansion of wartime controls in order to guard against substantial shifts in income distribution. The late 1940’s and early 1950’s might have seen the creation in Western Europe of allocative bureaucracies to ration scarce foreign exchange, and the imposition of price controls on exportables in order to protect the living standards of urban working classes.

The likely consequences of such alternative policies for post-World war II Europe can be seen in the Argentine mirror....

In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. But by 1960 Argentina was poorer than Italy and had less than two-thirds of the GDP per capita of France or West Germany. One way to think about post-World War II Argentina is that its mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage.

In post-World War II Western Europe, by contrast, market forces allocated resources--even, to a large extent, for nationalized industries--the government redistributed income, and the outcome was much more favorable....

In Díaz Alejandro's estimation, four factors set the stage for Argentina’s relative decline: a politically-active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity.

From the perspective of 1947, the political economy of Western Europe would lead one to think that it was at least as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation.

Yet post-World War II western Europe avoided this trap. After World War II Western Europe’s mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations of goods and factors. Just as post-World War II Western Europe saw the avoidance of the political-economic “wars of attrition” that had put a brake on post-World War I European recovery, so post-World War II Western Europe avoided the tight web of controls that kept post-World War II Argentina from being able to adjust and grow...

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• Peter Temin (2002), "The Golden Age of European Growth Reconsidered," European Review of Economic History 6, pp. 33-22. http://www.international.ucla.edu/cms/files/Temin.pdf
• Mancur Olson (1996), "The Varieties of Eurosclerosis: The Rise and Decline of Nations Since 1982," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945, Cambridge, Cambridge University Press, pp.73-94 http://books.google.com/books?hl=en&lr=&id=wiTtnUn5qGsC&oi=fnd&pg=PA73&dq=%22OLSON%22+%223+The+varieties+of+Eurosclerosis:+the+rise+and+decline+...%22+&ots=s86KlJoXe7&sig=wabLIsaAIsicZhoppgt-vDhRxcE#PPA69,M1
• Barry Eichengreen, "Institutions and Economic Growth in Postwar Europe: Evidence and Conjectures" (with Pablo Vazquez), http://www.econ.berkeley.edu/~eichengr/research/vanark.pdf
• Richard Ericson, "The Classical Soviet-Type Economy: Nature of the System and Implications for Reform," Journal of Economic Perspectives 5 (Fall 1991), pp. 11-28 http://www.jstor.org/stable/pdfplus/1942862.pdf

DeLong and Eichengreen: Post-WWII Europe in the Argentine Mirror

What Barry Eichengtreen and I wrote back in 1991:

The 1930’s in Europe had seen not chronic bottlenecks but chronic deficiencies of aggregate demand. Production had fallen far below normal for the entire decade; market forces had failed to restore demand to normal levels. Circumstances during the Great Depression had been exceptional, but circumstances in the aftermath of World War II were exceptional as well. Many feared the return of the Depression.

In fact (aside from the possibility that fear of a renewed Great Depression would act as a self-fulfilling prophecy) the return of the Great Depression was a less likely possibility in the 1940’s than was generally feared. The memory of the Depression, and the greater strength and incorporation of social democratic political movements in government kept right-wing governments from adopting policies of out-and-out national deflation. The availability of the large United States market to European exports--especially with the coming of the Korean War Boom and NATO in the early 1950’s--prevented any large world aggregate demand shortfall as in the Great Depression. With the American locomotive under full steam, Western European economies were unlikely to suffer from prolonged Keynesian demand-shortfall depressions.

Nevertheless, a live possibility in the absence of the Marshall Plan was that governments would not stand aside and allow the market system to do its job. In the wake of the Great Depression, many still recalled the disastrous outcome of the laissez-faire policies then in effect. Politicians were predisposed toward intervention and regulation: no matter how damaging “government failure” might be to the economy, it had to be better than the “market failure” of the Depression. Had European political economy taken a different turn, post-World War II European recovery might have been stagnant. Governments might have been slow to dismantle wartime allocation controls, and so have severely constrained the market mechanism. In fact the Marshall Plan era saw a rapid dismantling of controls over product and factor markets in Western Europe, and the restoration of price and exchange rate stability. An alternative scenario would have seen the maintenance and expansion of wartime controls in order to guard against substantial shifts in income distribution. The late 1940’s and early 1950’s might have seen the creation in Western Europe of allocative bureaucracies to ration scarce foreign exchange, and the imposition of price controls on exportables in order to protect the living standards of urban working classes.

The likely consequences of such alternative policies for post-World war II Europe can be seen in the Argentine mirror. In response to the social and economic upheavals of the Depression, Argentina adopted demand stimulation and income redistribution. These policies were coupled with a distrust of foreign trade and capital, and an attraction to the use of controls instead of prices as allocative mechanisms. Argentina’s growth performance in the post-World War II period was very poor. Even in the 1950’s, and even relative relative to Britain, Argentine growth was slow.

Díaz Alejandro (1970) provides a standard analysis of Argentina’s post-World War II economic stagnation. According to his interpretation, the collapse of world trade in the Great Depression was a disaster of the first magnitude for an Argentina tightly integrated into the world division of labor. While Argentina continued to service its foreign debt, its trade partners took unilateral steps to shut it out of markets. The experience of the Depression justifiably undermined the nation’s commitment to free trade.

In this environment Juan Domingo Perón gained mass political support. Taxes were increased, agricultural marketing boards created, unions supported, urban real wages boosted, international trade regulated. Perón sought to generate rapid growth and to twist terms of trade against rural agriculture and redistribute wealth to urban workers who did not receive their fair share. The redistribution to urban workers and to firms that had to pay their newly increased wages required a redistribution away from exporters, agricultural oligarchs, foreigners, and entrepreneurs.

The Perónist program was not prima facie unreasonable given the memory of the Great Depression, and it produced almost half a decade of very rapid growth. Then exports fell sharply as a result of the international business cycle as the consequences of the enforced reduction in real prices of rural exportables made themselves felt. Agricultural production fell because of low prices offered by government marketing agencies. Domestic consumption rose. The rural sector found itself short of fertilizer and tractors. Squeezed between declining production and rising domestic consumption, Argentinian exports fell. By the first half of the 1950’s the real value of Argentine exports was only 60 percent of the depressed levels of the late 1930’s, and only 40 percent of 1920’s levels. Due to the twisting of terms of trade against agriculture and exportables, when the network of world trade was put back together, Argentina was by and large excluded.

The consequent foreign exchange shortage presented Perón with unattractive options. First, he could attempt to balance foreign payments by devaluing to bring imports and exports back into balance in the long run and in the short run by borrowing from abroad.29 But effective devaluation would have entailed raising the real price of imported goods and therefore cutting living standards of the urban workers who made up his political base. Foreign borrowing would have meant a betrayal of his strong nationalist position. Second, he could contract the economy, raising unemployment and reducing consumption, and expand incentives to produce for export by decontrolling agricultural prices.30 But once again this would have required a reversal of the distributional shifts that had been the central aim of his administration.

The remaining option was one of controlling and rationing imports. Not surprisingly, Perón and his advisors chose the second alternative, believing that a dash for growth and a reduction in dependence on the world economy was good for Argentina. Díaz Alejandro writes:

First priority was given to raw materials and intermediate goods imports needed to maintain existing capacity in operation. Machinery and equipment for new capacity could neither be imported nor produced domestically. A sharp decrease in the rate of real capital formation in new machinery and equipment followed. Hostility toward foreign capital, which could have provided a way out of this difficulty, aggravated the crisis...

Subsequent governments did not fully reverse these policies, for the political forces that Perón had mobilized still had to be appeased. Thus post-World War II Argentina saw foreign exchange allocated by the central government in order to, first, keep existing factories running and, second, keep home consumption high. Third and last priority under the controlled exchange régime went to imports of capital goods for investment and capacity expansion.

As a result, the early 1950’s saw a huge rise in the price of capital goods. Each percentage point of total product saved led to less than half a percentage point’s worth of investment. Díaz Alejandro found “[r]emarkably, the capital... in electricity and communications increased by a larger percentage during the depression years 1929-39 than… 1945- 55,” although the 1945–55 government boasted of encouraging industrialization. Given low and fixed agriculture prices, hence low exports, it was very expensive to sacrifice materials imports needed to keep industry running in order to import capital goods. Unable to invest, the Argentine economy stagnated.

In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. But by 1960 Argentina was poorer than Italy and had less than two-thirds of the GDP per capita of France or West Germany. One way to think about post-World War II Argentina is that its mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage: in Western Europe market forces allocated resources--even, to a large extent, for nationalized industries--the government redistributed income, and the outcome was much more favorable.

In the absence of the Marshall Plan, might have Western Europe followed a similar trajectory? In Díaz Alejandro's estimation, four factors set the stage for Argentina’s relative decline: a politically-active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity.

From the perspective of 1947, the political economy of Western Europe would lead one to think that it was at least as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation.

Yet post-World War II western Europe avoided this trap. After World War II Western Europe’s mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations of goods and factors. Just as post-World War II Western Europe saw the avoidance of the political-economic “wars of attrition” that had put a brake on post-World War I European recovery, so post-World War II Western Europe avoided the tight web of controls that kept post-World War II Argentina from being able to adjust and grow...

Why Did Post-WWII Western Europe Do So Well?

April 10, 2008 guest lecture for PE 101

Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080410_111402.mp3

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Robert J. Gordon Reviews the History of World War II

Hoisted from Comments: Robert J. Gordon:

Grasping Reality with Both Hands: Economist Brad DeLong's Fair, Balanced, and Reality-Based Semi-Daily Journal: I am currently writing a book review of the impressive Tooze book "Wages of Destruction". Contra Brad's description, this is not military history but rather economic history. My initial criterion to assess the value of the book is to ask "what is new" as compared to the Abelshauser chapter in the Mark Harrison edited (1998) volume on the Economics of World War II.

I learned two big new ideas from the Tooze book as contrasted to the huge existing literature on Nazi society and economy 1933-45. First, the push to rearmament 1933-39 was consistently forced to face a severe foreign exchange constraint. An oddity of the Nazi economy was its refusal to devalue its currency. Instead, it placed extreme constraints on imports of consumer goods. This was in addition to what everyone already knew, that the Nazi economy held down wages in order to boost profits and stimulate production and hiring.

The second big new idea in the Tooze book, which maybe everyone already knew about but has gotten lost in the focus on the Holocaust, was General Plan Ost. This was a mind-boggling plan to deport (to some unknown destination, mainly death) most of the inhabitants of non-Jewish Poland, Belorussia, and the Ukraine in order to provide "lebensraum" for German settlers. Tooze documents plans to deport as many as 40 million inhabitants. Fortunately, the reverses suffered by the German army starting with the Moscow campaign in Nov-Dec 41 postponed the General Plan Ost. According to Tooze, they tried it out on a part of Poland, and the inhabitants ran away into the forests rather than being subjected to deportation.

Brad talked about his top three WWII military histories of the last half-decade. One of the best new books is Ian Kershaw's (2007) "Fateful Choices" about strategic choices in the major capitals (London, Berlin, Moscow, Tokyo, Washington) in 1940 and 1941. This is deep and wonderful writing about the big issues of WWII -- why didn't the British negotiate with Hitler, why did Hitler decide so early (July 1940) to invade Russia, what was Roosevelt thinking in 1940-41, and the biggest puzzle of all, why did the Japanese decide to attack Pearl Harbor. A related book on strategic planning, but mainly about the U.S., is Michael Beschloss (2002) "The Conquerors" about FDR and Truman. This book's major figure is Morgenthau, and many will be interested in M's efforts to get FDR to take the ongoing holocaust seriously.

Tyler Cowen Recommends "Luck and the Irish: A Brief History of Change"

Recommended by Tyler Cowen:

R. F. Foster (2008), "Luck and the Irish: A Brief History of Change from 1970"Books (New York: Oxford University Press: 0195179528).

December 3 Economic History Seminar: The Sustainable Debts of Philip II

Mauricio Drelichman and Hans-Joachim Voth, The Sustainable Debts of Philip II: A Reconstruction of Spain's Fiscal Position, 1560-1598:

The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. The king failed to honor his debts four times during his reign. In this paper, we reassess the fiscal position of Habsburg Spain. New archival evidence allows us to derive comprehensive estimates of debt and revenue. These show that primary surpluses were sufficient to make the king's debt sustainable for most of his reign. Spain's debt burden was manageable up to the 1580s, and its fiscal position only deteriorated for good after the defeat of the 'Invincible Armada.' We also estimate fiscal policy reaction functions, and show that Spain under the Habsburgs was at least as responsible as the US in the 20th century or as Britain in the 18th century. Our results suggest that the outcome of uncertain events such as wars may have more influence on a history of default than strict adherence to fiscal rules.

Alex Harrowell on Adam Tooze's The Wages of Destruction

Alex writes:

Review: The Wages of Destruction, Adam Tooze: The Wages of Destruction: The Making and Breaking of the Nazi Economy... is getting some very good reviews, and this one will be no different. Tooze’s thesis is that the Nazi German economy was a more powerful factor in many decisions taken by the leadership than hitherto assumed, that its structural weaknesses were determining in the failure of Nazism, and that Nazism itself can be understood as an effort to escape them by a combination of will and technology. The first is fairly original, and certainly controversial, the second is hardly controversial (although it is surprising that it still needs restating; the image of impregnable fascist might dies hard), and the third is both new and highly controversial.

Tooze begins with a discussion of Germany’s economic problems and relative place in the world whilst passing through the Depression. He provides an excellent account of Stresemann’s policy in terms of a special relationship with the United States.... America in German eyes is a main theme of the book, and a little-remembered sub-theme of Nazi discourse more generally. Not only were leading Nazis concerned about the potential power of the US, they both idealised what they took to be the unique efficiency of 1920s US industry, and demonised what they took to be the decadence and miscegenation of US society....

Stresemann and his fellow liberals, and the Social Democrats, thought the answer to America was to preserve the international political and trading structure; perhaps with a European community in the far future. The Nazi response was to shake the structure until it fell down....

What got Germany back to work was rearmament, and Tooze argues that much of what is thought of as civilian investment was actually more like disguised military investment, or investment in war-supplying industry. It is well worth pointing out here that Tooze is excellent on the corporate world of Nazi Germany, and especially the fast-growing influence and power of the top technical executives of big industry (especially chemicals and aeronautical engineering), who made up something like an independent technocratic lobby in their own right. J.K. Galbraith’s technostructure comes to mind; this may have been the most malevolent and evil manifestation of it ever....

The upshot was that the decision for war, and then the decision to take the offensive in the West, and finally the decision to take the offensive into Russia, were at each step driven by a logic of economic bootstrapping. War, and the consequent loss of world trade, had a serious initial impact on the German economy; inflation threatened to burst out of control, there was a constant struggle between interests over short-supply assets, and a key feature of the German economy caused deep discontent....

Peasants were a key Nazi constituency, as well as occupying an important place in ideology; unfortunately this image of virtue didn’t translate into grain all that well.... Here, the appalling figure of Herbert Backe, State Secretary and later Minister of Agriculture, stands out; Backe wrote a PhD thesis years before entering office on the Russian grain business, in which he explained that the superior people without space must get rid of the Russians in order to secure the Ukraine’s surplus and settle enough of their urban working class to overcome the unrooted, degenerate tendencies created by the modern nomads, that is to say the Jews....

[A]lthough the conquest of western Europe turned a very bad economic position into a tolerable one with considerable potential, Europe was far more globalised than the Nazi economists assumed. Oil is the canonical example, but Europe also imported a lot of animal feed, and also British coal. Problems with transport, and the planners’ inability to come up with a settlement of coal supply between the mighty interest groups concerned, exacerbated the feed problem. As agricultural productivity fell, so did productivity down the mines; it probably would have done anyway, French communists not being likely to bend their backs any harder for German fascists, but hunger is enough to explain the droop in coal output per hour.... The upshot was a European economy operating massively below capacity and a German economy running red hot, with a continent-wide shortage of key inputs. Soviet trade, under the Molotov-Ribbentrop pact, matched part of the difference, but the Soviet government demanded its price, especially in terms of technology transfer....

[W]ith the occupied territories only a marginal benefit, and much capital investment not yet producing, Germany was faced with the rapid spin-up of US production. Where to go for the next bootstrap, before US industrial power took effect? Russia, clearly. Tooze’s book may be a final slam-dunk demonstration for the “functionalist” view of Nazism, dominant since the 1980s, which argues that the regime’s internal politics, shared assumptions, and the incremental radicalisation caused by a succession of crises drove Germany into war and genocide, rather than a clear rationalist design. Independent decisions, taken for different reasons, mutually reinforced each other....

In nearly all British accounts of the second world war, the author takes sides regarding one or more of the morality, effectiveness, and wisdom of the RAF’s strategic bomber offensive against Germany; it’s an identity-creating decision for any British historian.... Tooze argues, against Galbraith, that the bombing was indeed effective....

In conclusion, what stands out is that the Third Reich was fascinated by the United States, perhaps even more than the Soviet Union; Hitler spoke of the Volga as Germany’s Mississippi, and various SS Schreibtischtäter of treating its inhabitants as “Red Indians”. The size of the proposed empire was frequently compared to Canada or Australia. It is clear that a major motivating factor for many leading Nazis was a wish to escape from an increasingly integrated world economy, and a matching desire to have a Grossraumwirtschaft to match the people seen as controlling the world economy; Tooze’s book leaves the disturbing sensation that this is us.

Norwegian Petroleum Directorate: The Norwegian Petroleum Tax System

The Norwegian Petroleum Tax System:

Norwegian Petroleum Directorate - The Norwegian Petroleum Tax System: An overview of the calculation of the tax base:

Operating income

• Operating expenses
  
  • Linear depreciation for investments (6 years)
  • Exploration costs
  • Royalty, CO2 tax, area fee
  • Net financial costs  (limited by the thin capitalisation rule; 20 % equity)
  • Losses from previous years

= Corporation tax base  (tax rate: 28 %)

• Uplift   (7,5 % of investment for 4 years)
  
  • Excess uplift from previous years

= Special tax base  (tax rate: 50 %)

France has Been Our Friend for 240 Years (Lafayette We Are Here Department)

Scott Horton:

"Beaumarchais’s Gift": Pierre-Augustin Caron de Beaumarchais, in a letter dated August 10, 1777 to unnamed American friends (S.H. transl.):

Sirs, I feel compelled to advise you that the vessel l’Amphitrite, with a displacement of 400 tonnes, will sail with the first good winds for the first port in the United States that it is able to reach. The cargo of this vessel, destined to you, consists of 4000 rifles, 80 barrels of gunpowder, 8000 pairs of shoes, 3000 wool blankets, as well as several engineering and artillery officers, not to mention a German baron, namely a certain aide de camp of Prince Heinrich of Prussia [Baron Friedrich Wilhelm von Steuben]; I think that you can make him a general, and I remain your humble and devoted servant...

George W. Bush took America to war with Iraq. When France, and most of the rest of Europe, said “do as you like, but we’re not going with you,” Bush and his political allies in the media (this means Fox News, the Wall Street Journal editorial page, the Weekly Standard and the usual talk radio suspects) launched a major campaign of vilification against the French. Bill O’Reilly and a troop of radio commentators—the same ones who beat the drums of war for an invasion of Iraq—urged a boycott of French goods. What impact did this happen? In the U.S., public opinion about France plummeted, and in France, public opinion about the U.S. plummeted. And how did it affect business? The British Centre for Economic Policy Research reports:

From February 2002 to March 2003, France’s favourability rating in US public opinion polls fell from 83 percent to 35 percent. Very negative attitudes towards France became common even among college educated Americans with high levels of income, so they were likely prevalent among managers. Using data from 1999-2005, we find that the worsening relations reduced US imports from France by about 15 percent and US exports to France by about 8 percent, compared to other Eurozone or OECD countries.

Of course, this behavior on the side of American opinion leaders was juvenile or worse-—it reflected primitive demagoguery. The French position was that U.S. intelligence did not sustain its case about WMDs in Iraq (which, by the way, is now established as the inescapable truth). But the French had also had their fill of colonial adventurism in the Middle East and had no interest in any more. Notwithstanding these considerations, however, France was actually very close to the U.S. position in the war on terror—-eager to cooperate with the U.S. and accepting of U.S. tactics employed. In fact, among the continental European powers, none has proved quite so close to Bush and his approach in waging a war on terror.

What was gained by the cries of “Freedom Fries” and the taunts of “cheese-eating surrender monkeys”? Nothing. And much was lost. America marks its revolution on July 4, and France does the same ten days later. This proximity on the calendar is important for many reasons, because these two revolutions and the messages they brought to the world were dependent, one upon the other. The Founding Fathers fully appreciated that America’s independence was won with the protection and support of France. And after it was won, the generation-long military struggle between France and Britain allowed America to consolidate its independence and make it not ephemeral but permanent.

So for this week, it’s time for Americans to forget O’Reilly and his friends and to remember Lafayette. And Beaumarchais, who took time out from working on Figaro to raise funds, guns and recruits for his friends, the American insurgents (see Quote for the Day). For as the barber of Seville says, “One should mind one’s own business... unless one has anxiety that one’s neighbors will bring him harm.”

Impeach George W. Bush. Impeach him now.

Andrei Shleifer and Me: Harvard Class of 1982

Paras Bhayani of the Harvard Crimson:

Andrei Shleifer and J. Bradford DeLong : Published On 6/4/2007 8:59:39 AM: In the fall of 1978, two students from backgrounds that could not have been less similar moved into connecting rooms in Weld Hall. The first had been in the country only two years, having fled his native Russia at age 16. He had spent the time in America attending an inner-city public school in Rochester, N.Y., and arrived at Harvard with a still-shaky command of English. The second student, the son of two Harvard alumni, had attended a prestigious private school in Washington, D.C. He could read a book in less than 20 minutes and manage to retain everything.

Today, the first student, Andrei Shleifer ’82, is a Harvard professor, one of the most widely-cited economists in the world and a winner of the John Bates Clark Medal, the biennial award given to the top economist under the age of 40. His freshman suitemate, J. Bradford DeLong ’82, is now an economist at the University of California at Berkeley who has written several influential papers on economic history and a host of macroeconomic issues, and runs one of the most popular academic blogs on the Web.

In the years since Shleifer and DeLong first lived together in Weld Hall, they have collaborated on issues including trading and markets, the Great Depression, and the development of cities in America. But the two were working together years before they would ever publish anything in an economics journal. And their first steps on the path of academic stardom began on the east side of Harvard Yard.

A YEAR IN THE YARD After arriving in the U.S. in 1976, Shleifer turned to the popular television show Charlie’s Angels for his first lessons in English. When he moved into Weld in 1978, Shleifer says that he was totally unprepared for the rigorous academics that Harvard expected from him. “I was definitely not acclimated by the time I got here,” Shleifer says. “I did not do very well freshman year, especially in Expos.” He applied to Harvard only because a recruiter came to his school and handed him an application, and after being admitted, he entered the College intending to study math. “Math 55 permanently disabused me of the idea of becoming a mathematician,” Shleifer says. Though he would tough the class out and remain a math major, he says he became drawn to economics—-a subject he knew nothing of in high school—-after taking some introductory courses in the field.

DeLong, in contrast, breezed through his first year. Shleifer and DeLong’s freshman year roommate, Joseph Evall ’82, both say that DeLong was primed for Harvard, and that his reading ability left them in awe. “He would read a book with lightning speed-—far faster than any of the rest of us who were slogging through the material,” Evall says, “and he would retain 100 percent of what he read.” Shleifer says that after seeing this, he thought DeLong was “some kind of a super-human,” but he realized later that DeLong just “knew how to skip pages.” “Nobody ever told me about skipping pages,” Shleifer says.

[Skim! Not skip, skim!]

Even though DeLong would eventually choose social studies as his major, he joined Shleifer in Math 55—-a class the math department still calls “probably the most difficult undergraduate math class in the country.” DeLong’s secondary preparation came through for him again, and he credits this with impressing Shleifer favorably enough that they have continued to collaborate over the years. “I had had the first quarter of the course in high school the previous year,” DeLong said in a toast when Shleifer won the Clark Medal in 1999. “So for the first quarter of the year, conversations about math between me and Andrei would end with me remembering something from the previous year, saying ‘How about if we do it this way?’ and finding out that it worked.” DeLong added: “So Andrei’s first impression was that I was a true genius. This first impression has stuck with him—in spite of much evidence to the contrary—for 21 years, and has greatly enriched my life.”

ONE IN CAMBRIDGE, ONE TO CAL The two remained friends throughout their time at Harvard, taking classes together and arguing a great deal, though Shleifer says that DeLong “won every argument.” In his sophomore year, Shleifer made an appointment with Lawrence H. Summers—-who had managed to become an assistant professor at MIT while still studying for his PhD at Harvard-—to point out mistakes in a paper Summers had written. The two hit it off. Shleifer says he became a research assistant to Summers at the end of that year, staying with the future Secretary of the Treasury for the next three or four years. “He was much more influential than any classes,” Shleifer says. DeLong, meanwhile, says that he took extremely challenging classes in a broad range of fields, spanning everything from econometrics to Straussian philosophy. He also became close to then-Harvard professor William Lazonick, a business historian who now teaches at the University of Massachusetts at Lowell. Lazonick ended up advising DeLong, who is now noted for his work in economic history, on his thesis, which examined the industrial revolution through the lens of classical economic theory.

Shleifer and DeLong would actually write one paper on a similar topic—-the growth of cities before the industrial revolution-—which Shleifer credits to DeLong’s interest in and knowledge of history. After graduating from college, Shleifer chose MIT for graduate school while DeLong remained at Harvard. Summers moved to Harvard the next year, and the three would soon after collaborate on a series of papers on “noise trading”—-the buying and selling of stocks in the absence of new information that allows traders with information to make money.

THE ROARING NINETIES After Shleifer and DeLong completed their doctorates, each taught at a few different universities before joining Harvard and Berkeley, respectively. But pure research was not the only thing on either of their plates in the early 1990s—-each soon took up an important policymaking role, and Shleifer’s would soon land him in hot water. In 1991, Summers became chief economist at the World Bank. That same year, the Soviet Union collapsed and the Russian-American Shleifer-—under the auspices of the World Bank—became an adviser to the Russian government, eventually leading economic liberalization efforts through the Harvard Institute for International Development. The advisory role turned out to be ill-fated. Shleifer and his wife, hedge fund manager Nancy Zimmerman, made investments in the Russian economy even as he advised the government on economic reform. The conflict of interest would lead to a federal lawsuit against Shleifer, one of his associates, and Harvard, resulting in a $26 million fine against the University and $2 million penalties apiece for Shleifer and the associate. When the dust settled, the University stripped Shleifer of his endowed chair—-but not tenure—-and the furor contributed to the ouster of Summers from the Harvard presidency.

DeLong, who had also taken on a policy role in the early 1990s, contributed to many of the early economic initiatives of the Clinton administration, though he would also become sharply critical of at least one of his colleagues by the time he left Washington. Both Summers and DeLong had joined the Treasury Department when Bill Clinton took office in 1993, with DeLong working on budgetary issues and free trade. He also played a role in the unsuccessful effort at creating universal health care, laying much of the blame for the legislation’s demise at the feet of then-First Lady Hillary Clinton, who had led the effort. In one of the most famous posts on his blog, DeLong wrote that, based on his experience working with Clinton, “there is no reason to think that she would be anything but an abysmal president.” He adds that she “had neither the grasp of policy substance, the managerial skills, nor the political smarts” to lead the effort.

FORGING AHEAD With his legal troubles now permanently behind him and his year-long sabbatical over, Shleifer says he continues to concentrate on the things that are most important to him: students, colleagues, and research. This year, Shleifer has emerged on campus as a much-sought-after undergraduate instructor: he teamed up with Professor of Economics David I. Laibson ’88 to teach a course on psychology and economics, and also taught a small seminar on political economics as part of the economics department’s first ever junior tutorial program.

Meanwhile, DeLong, by way of the often-incendiary posts on his “semi-daily journal,” has become one of the nation’s most influential academic commentators. He writes widely on the media, politics, and economics, frequently excoriating investment strategist Don Luskin, who DeLong terms the “Stupidest Man Alive.” But the blog is just an extra-curricular activity--DeLong chairs Berkeley’s political economy major while keeping up with his teaching and research, even though he has written that universities should be rewarding blogging alongside more traditional academic pursuits. “They have both conducted research on a wide-range of economic issues that are of critical importance,” Maier Professor of Political Economy Benjamin M. Friedman ’66 says of DeLong and Shleifer. “They are exemplary economists and stars in the profession.”

—Staff writer Paras D. Bhayani can be reached at pbhayani@fas.harvard.edu.

This is, I think, not fair to Andrei. As I undertand it, the U.S. government would have been entitled to $120 million if the judge had found that hte government's theory of the case--that Harvard and Andrei Shleifer had filed a false claim in order to get money from the government--as opposed to the alternative theory of the case--that it was a bureaucratic screwup in a situation where HIID was hiring Andrei as a consultant to advise the Russian government while Andrei's wife was trying to deploy her fund investors' money in Russia. The government's willingness to settle for $30 makes me think that their lawyers thought their chances of persuading the judge that theirs was the most likely story were only 1/4.

I am, I think, not fair to Hillary Rodham Clinton. Her people say that if all she had done was 1993-1994 Health Care Reform, it might be fair to argue that she would be "abysmal." But she has done an awful lot more over the past fifteen years, and done almost all of it very successfully. It's the disaster of 1993-1994 that is the anomaly and the outlier, they say--and they have a point. She definitely has the political smarts and (on almost all issues) enough of a grasp of policy substance to distinguish truth-tellers from liars, which is the most important presidential qualification (one which George Bush definitely lacks, and the Republican candidates appear to lack). Managerial expertise is harder to gauge: there's nothing else quite like managing the Executive Branch.

And those most responsible for the current gap between what our health care system is and what it ought to be do not include Hillary Rodham Clinton. The real villains in 1993-1994 had names like Robert Dole, The HIAA, Newt Gingrich, and so forth.

I Do Wish Somebody Would Respond to Martin Wolf re Sarkozy

Martin Wolf says that he doesn't know what will happen. Neither do I. But I do wish somebody who does have an informed view would comment...

Economists' forum: **Why Sarkozy’s triumph portends strife in Europe:** What does the election of Nicolas Sarkozy mean for France, the European Union and the world? The answer will depend on whether what now emerges is a European France, a French Europe or a France set against Europe. Any of these three outcomes is possible. Only the first would be desirable. Which it will be depends on Mr Sarkozy’s true identity. Will he be an economic liberal or a populist interventionist? It is probable that he will turn out to be a mixture of the two. If so, his arrival is likely to deliver the last of the three alternatives: France against Europe.

The French agree on few things. But on one thing, they have close to a national consensus: free markets and free trade are a diabolical Anglo-Saxon plot. In a thought-provoking book on the challenge for French policymakers, Georges de Ménil, himself an American-trained liberal economist, ascribes this hostility to the legacies of Catholicism, Cartesian rationalism, revolutionary utopianism, nationalism and the dominance of the state.

For a modern politician of the right, such as Mr Sarkozy, it is the last two elements that are most important.

I would guess that a "French Europe" is most likely. I've talked to too many Frenchmen, Germans, and Britons over the past five years who say that George W. Bush has made it very clear that Europe needs, for its own safety, to start acting like a superpower. And I suspect Sarkozy is of that faction. And that would mean a "French Europe."

Avoiding Weimar Russia

Matthew Yglesias writes:

Matthew Yglesias: Beyond Economics: Over at Brad DeLong's site you can see a fascinating discussion of America's Russia policy in the 1990s between DeLong, Martin Wolf, and Lawrence Summers. One remark I would make is that to an extraordinary extent, all three participants are willing to accept the premise that the only goal of US policy toward Russia in the 1990s was a good-faith effort to induce Russian prosperity, with such efforts being hampered by political constraints, the objective difficulty of the task, and pure policy errors...

Well, yes. Russia was once a superpower and may be one again. One would have thought that the history of 1914-1945 would teach ample lessons about the national security undesirability of trying to keep great powers--like Weimar Germany--poor and weak. One would have thought that the history of 1945-1990 would teach ample lessons about the national security desirability of trying to help great powers--like Japan and West Germany--become prosperous, democratic, and well-integrated into the world economy.

One top of the national-security strategic argument there is the economic argument: the fact that richer trading partners are better trading partners: they make more and more interesting stuff for us to buy.

Plus there is the moral argument. "Russia" is not a government. "Russia" is people, families of people--people dead, living, and unborn. Those of us alive today in western Europe, North America, and elsewhere are eighted down by a heavy burden. We owe an enormous debt to many Russians who are now dead: the soldiers of the Red Army, the peasants who grew the food that feed them, and the workers of Magnitogorsk and elsewhere who built the T-34C tanks they drove saved us from the Nazis. We are all under the enormous obligation created by this debt to repay it forward, and Russia's living and unborn would be appropriate recipients for this repayment.

Last, there is the credibiilty argument. The people of the United States, the nation of the United States, and the government of the United States will have a much easier and happier time if they are and are perceived to be a people, nation, and government that plays positive-sum games of mutual aid and prosperity and resorts to negative-sum games of encirclement, sabotage, and war only when the necessity is dire. And the the necessity now is not dire.

Compared to these four mighty, weighty, and heavy reasons to make the only appropriate goal of U.S. policy a good-faith effort to induce prosperity in Russia, the prospect of a minor advantage in some penny-ante Bismarckian-Metternichian-Tallyrandish-Kissingerian game of diplomatic realpolitik is lighter than a small chickenhawk feather.

But Matthew Yglesias does not see it that way:

In the real world... policymakers and presidents -- though perhaps not Treasury Department economists like Summers -- concern themselves with questions of power politics. A prosperous Russia was seen as.... not nearly so good as a Russia... willing to concede to the United States an equal (or even greater than equal) share of influence in Russia's "near abroad." This is a big part of the story of the relatively uncritical backing the Clinton administration provided to Boris Yeltsin...

Not inside the Treasury it isn't. Inside the Treasury the belief is that a Russian that is properly assertive would be much better in the long run than if reformers were to be seen as beholden to foreigners who want a weak Russia. That was, after all, the card that Hitler and company played against Rathenau and Stresemann in the 1920s.

Sigh. If only Matthew Yglesias had been an economics rather than a philosophy major. But at least he wasn't an international relations major.

---

UPDATE: Matthew Yglesias responds:

Matthew Yglesias: I think Brad DeLong and I are talking about cross purposes with regard to Russia policy in the 1990s. I agree with him as to what the goal of America's policy should have been. In his earlier post, though, Brad was writing about why our policy didn't achieve those results and all I'm trying to say is that we should consider the possibility that we didn't achieve what Brad (and I) think we should have achieved because these weren't the actual policy goals the Clinton administration was pursuing. They may well have been the Treasury Department's goals (it seems to me that economists generally have sound foreign policy views) but the Treasury Department doesn't ultimately set policy toward major countries like Russia.

To which I reply:

In the making of U.S. policy toward Russia in the 1990s, there are four players (a) the Treasury, which means Rubin-Summers-Lipton; (b) the Congress, which is unwilling to vote any Marshall Plan-scale aid package; (c) Strobe Talbott at the State Department; and (d) Bill Clinton.

I saw Clinton in action: Clinton felt that he might have turned into Yeltsin had he been born in the Soviet Union, empathizes with Yeltsin, and is willing to cut him enormous slack. I didn't see Talbott in action doing anything other than agreeing with Clinton, but I presumed that Talbott had talked to Clinton privately beforehand, and it was extremely rare for anybody to do anything other than agree with the president in any meeting large enough for me to be a part of it. I saw Congress in action, and they were unsympathetic to the argument that $10 billion in aid now might well save us $500 billion in military spending in a decade. And I saw the Treasury.

My sense is that AEI and PNAC and Condi Rice and company saw the U.S. victory in the Cold War as a chance to act toward Russia like Clemenceau had acted toward Germany in 1919: a chance to permanently enfeeble the hated adversary. My sense is that simply wasn't a consideration among the players in the Clinton administration. But I didn't see everything.

The extent to which AEI and PNAC and Condi Rice and company influenced the thinking of Gingrich, Dole, and company in the Congress is not something that I saw.

Larry Summers Asks Questions About Boris Yeltsin...

Larry writes:

Economists' forum: Lawrence Summers: I am in general agreement with Martin's thoughtful appreciation of Boris Yeltsin and his strengths as well as his weaknesses. I'd be interested in people's thoughts on three issues.

1. Was it really a mistake ex-ante to provide financial support in May/June 1998, given the stakes involved and the possibility of success and the reality that it was not ultimately costly, given that IMF and others have been fully paid back?
2. Was loans-for-shares a necessary price for Yeltsin to pay when he paid it for winning against the communists/staying afloat? What were the right alternatives at the time?
3. Does Martin really mean to take the strong "resource curse" view that it would be better for the Russian people if oil prices went down and so more reform was spurred?
4. Given corruption issues/absorption capacity problems etc., in what form should a greater level of assistance earlier on been provided? I am sympathetic to this but uncertain how it could have been done. My sense is that ex post it looks right not to have written off debt, but others may disagree.
5. Should policy have been as personalized towards Yeltsin as it was? Is the G7 better off for being a G8?

And Martin Wolf responds:

I thank Larry Summers for his prompt response. He was, of course, heavily involved in the policy decisions of the 1990s. I recognise that they were extraordinarily difficult to make and that there is, in consequence, a degree of hindsight in any judgement.

Let me respond to his questions in the spirit in which they were asked.

1. Yes, I do believe it was a mistake to give support in May/June 1998. The difficulty, by then, was not just that there was an excellent chance of failure. That, in itself, is not a decisive objection to taking such risks. On the contrary, official intervention exists to take risks. I think the big mistake was to associate ourselves so closely with a morally bankrupt and increasingly unpopular regime.
2. I have never understood why loans for shares was the best strategy for defeating the communists. Yes, I understand that Yeltsin needed some finance for his campaign. But he (or, more precisely, Mr Chubais) didn't have to give so much of Russia's wealth away to achieve that end. His financiers had an overwhelming personal interest in his victory (since the communists would surely have taken everything away). They should have been told to make contributions to the campaign on which their own survival depended. As it was, this deal tainted capitalism in Russia for the indefinite future.
3. Yes, I actually do believe strong "resource curse" view, in this case. Actually, the Russian government has done rather a good job of containing the fiscal and exchange rate effects of the increased oil revenues. But I really do believe that reform would have gone far further and the long-term prospects for Russia would be much better if the oil price had remained at, say, $20 a barrel. This is a country with considerable human capital. It should not be living of natural resources. But if it is to use that human capital, the policy and institutional regimes must change.
4. I think the crucial requirements in the beginning were a debt moratorium, at the least, and, above all, a massive technical assistance effort orchestrated at the highest level. In the first few years, the reformers were simply overwhelmed by the task. What they needed was not just an army of good advisers, but strong political engagement from the western side. Just think of the disastrous consequences of the monetary laxity in the rouble zone after the dissolution of the Soviety Union. I would guess that this window existed for little more than a year and a half. Once it had gone, it had gone. We did enough to be blamed by Russians for everything that went wrong, but not enough to give the country a reasonable chance of success.
5. I think it was absolutely reasonable to bet on Yeltsin for at least the first term and the election to the second (since the alternatives were so bad). After 1996, it was a mistake. I am uncertain whether it was a mistake to invite Russia into the G8. It may have been a reasonable gamble at the time, though not one that has paid off.

In his book, Strobe Talbot provides some context as to how it looked in the mid-1990s. As I wrote about Talbot's memoirs a couple of years ago:

Strobe Talbott, The Russia Hand: Archive Entry From Brad DeLong's Webjournal: In such a situation, the American government can do only two things. First, it can come up with enough money in the form of aid to make the dislocations and privations of transition smaller. Second, it can speak with one voice to assert that the currents pushing for reform are indeed headed in the right direction, and that short-run political difficulties arising from faster economic reforms are likely in short order to be outweighed by longer-run political advantages as successful economic policies begin to have their effect. From my perspective, the most interesting thing about Strobe Talbott's book is how weakly the U.S. government's attempts to undertake these two things were.

One thread running throughout [Talbot's] book is the disconnect between President Clinton's commands that those aiding Russia "think big" and the tiny drips of aid money that in fact appeared. Talbot writes (p. 61) of how Clinton and Gore commanded Congress to "'think big and act big' on Russia, and how Clinton smiled when Newt Gringrich 'gave a stem-winding speech on the overriding importance of helping Russia as "one of the great defining moments of our time,"' whispering "'Ol' Newt's trying to... out-Russia me. That's fine, as long as I can keep him with me.'" Talbot writes (p. 58) of how "only when we came back to the President on March 23 [1993] with a[n aid] package worth $1.6 billion was he satisfied." After the end of the Clinton administration, Talbott and Clinton would talk in Clinton's house about how Clinton "...wished we'd done things differently.... [H]e thought we should have done more--much more--in our effort to underwrite the transition to a market economy. He regretted that we hadn't been able to mobilize international support early in the administration for the kind of program that Larry Summers and David Lipton tried to develop... to alleviate the pain and dislocation that came with privatization." But the money from the U.S. wasn't there. And without large-scale U.S. money, the pockets of the Europeans and the IMF are shallow indeed. $1.6 billion is, after all, only $10 per Russian.

Why was the U.S. government thinking of $1.6 billion totals for aid to Russia, rather than $50 billion? If the U.S. was willing to spend $8 trillion over a generation to defend itself against Communist Russia, shouldn't it be willing to spend more than $1.6 billion to try to keep Russia non-Communist? One would think so. But the Reagan administration's deficits in the 1980s had eliminated the ability of the U.S. government to undertake large-scale initiatives. By 1993 the fear was that the exploding budget deficit was on the brink of causing large-scale Latin American-style economic chaos. (Recall that Argentina's total debt at the moment of its late-2001 economic collapse was no larger a share of GDP than and growing no faster than the U.S.'s total debt in 1993.)

Talbott does, I think, owe his readers an obligation to connect the dots. If there truly was a disastrous waste of opportunity (and I think it probable that there was) in the failure of the U.S. to aid Yeltsin in his first term with more than an eyedropper, it is important to understand that the eyedropper was used not because Clinton and his staff did not understand what was at stake but because Reagan had taken away the hose.

A second thread running through the book is the failure of the White House to consistently back what weak reform factions were present within Yeltsin's government. On one side of the internal debate within the Clinton administration were Larry Summers and his right-hand David Lipton, believing that "...Russia's ability to make proper use of the G-7 money depended" on the continuing power of "pro-Western economic reformers like Yegor Gaidar... and Boris Fyodorov" and the eclipse of "those who believed in maintaining employment through subsidies to inefficient enterprises and churning out rubles, propelling Russia back toward the brink of hyperinflation." Summers's reaction to Yeltsin's firing of Gaidar and Fyodorov was, as Talbott recounts it (p. 117), "high dudgeon. Yeltsin, [Summers] said, was inflicting a major blow on Russia's chances... Larry asked me to get word to Clinton that he should intercede with Yeltsin immediately to keep Gaidar and Fyodorov." But Clinton's reaction was not what Summers had hoped. As Talbott tells the story: "'I'll do it', said Clinton, 'but it's a tough one. Their political requirements are at cross-purposes with good economics.' He went off to talk to Yeltsin, while I went looking for Mamedov.... His advice was... 'Don't get excited; don't overdramatize.... You want us to be a democracy... so don't be surprised when a president and a prime minister have to sacrifice a minister of two who are tarred with the brush of what are seen as failed policies. This is real politics. At least we don't shoot people...'"

Or consider the U.S. government's reaction to the infamous 1996 loans-for-shares scheme. Over a the Treasury, Summers and Lipton were horrified. Talbott writes (p. 208) of their "...deep qualms... sure to make instant billionaires... cast discredit on the very idea of market democracy... bad economics, bad civics, and bad politics." The Yeltsin administration responded that the favor that loans-for shares did "the oligarchs was nowhere near as bad as the communist victory it helpd them avert." In retrospect Talbott appears to regret the White House's failure to back Summers and Lipton: "The Russians... calculation... was debatable, and we, as the reformers' constant backers and occasional advisors, should have debated it more with them. We would have done so if we'd had more time, more foresight, and more influence..." Or consider Al Gore's belief that "...Larry's arguments were right on the merits... but... needed to be balanced against the imperatives of Russian democracy, since they, too, exerted 'a force as powerful as gravity or thermodynamics.' Our policy, said Gore, ought to be a 'synthesis between the iron laws of economics and the hard realities of Russian politics'."

What Clinton, Gore, and Yeltsin seem not to have gotten was that doing the "politically smart" thing this year puts you behind the 8-ball when the year after next rolls around. You see, economic policies have consequences. In any but the shortest of runs, there is no trade-off between good politics and good economics. It is only if your economic policies work that you have a chance of being politically smart. The task of a leader is to figure out what good economics is, and how to reframe the situation so that good economics becomes good politics--not to figure out how much economic rationality to sacrifice to short-term political advantage.

Who Is Paul Staines (aka) Guido Fawkes?

Who is Paul Staines and why are articles calling him Guido Fawkes showing up in my email inbox? >prisonlawinsideout: Paul Staines (aka) Guido Fawkes sue me and see if I care...: The Guardian 31 May 1986: Tory student leader in ‘ racist ‘ party link / Paul Delarie-Staines of FCS attempts to form pact with British National Party in Hull >By David Rose >A leader of the Federation of Conservative Students wrote to an organiser of the British National Party proposing joint ‘direct action’ to disrupt the meetings of leftwing students. Secrecy, he emphasised, was essential: ‘The Reds would simply go wild if they got to hear of a BNP-FCS link. I would personally be in danger of being expelled from the Conservative Party.’ >The author of the letter is Mr Paul Delarie-Staines, the chairman of the federation’s 50-strong branch at the Humberside college of Higher Education. Mr Delarie-Staines, who is in his first year of a degree course in business information studies, wrote on May 22 to Mr Ian Walker, a BNP organiser in Hull. >He was, he said, against several of the aims of the BNP, which campaigns for the repatriation of black citizens. Several of its members have been convicted of offences under the Race Relations Act, and others for crimes of violence against ethnic minorities. Its leader, Mr John Tyndall, is a former chairman of the National Front. >Mr Delarie-Staines said he did not share the BNP view on immigration: as a member of the ‘libertarian’ faction of the FCS he advocated the free movement of labour, albeit with the caveat that ‘you come here to work - or starve. ‘He went on: ‘I share a lot of your objectives.‘ These included a return to leadership and statesmanship, the abolition of the welfare state, and ‘the elimination of Communism in Britain - the mass media, the trade unions, and the schoolroom. ‘Mr Delaire-Staines continued: ‘Nevertheless, even though we have our differences, I know a lot of BNP people at college do support the FCS (some are members of the FCS). I can certainly envisage some degree of cooperation. >‘For instance, we are moving away from just the normal political debate and towards more direct action - anti-Communist slogans on bridges, disrupting the leftist meetings by posing as leftists and then causing trouble, and also convincing individual leftists of the error of their ways. >‘Perhaps members of the BNP would care to join us in our anti-leftist activities. We can arrange a meeting to discuss possible joint future activities. ‘Other examples of Mr Delaire-Staines work reached the Guardian, including a number of songs. One, entitled FCS Bootboys, reads: ‘Gas them all, gas them all, the Tribune group trendies and all. Crush Wedgwood Benn and make glue from his bones, Burn the broad left in their middle class homes. >‘Yes we’re saying goodbye to the Left, as safe in their graveyards they rest. >‘Cos they’ll get no further, we’ll stop with murder, the bootboys of FCS. >‘In a letter to a friend, Mr Delaire-Staines said that he had been on a ‘community arts course - well. not exactly community arts, more spraypainting a bridge at 3am. Quite good fun really, ducking out of sight of passing police cars’ >Mr Delaire-Staines told the Guardian that he had not meant violence by direct action at leftist meetings, only ‘causing as much noise as possible’. He said that he had tried to forge links with the BNP because ‘we share their anti-Communist view’. >He added: ‘They’re not far-right. They’re just racists, they believe in one colour. ‘Mr John Barrow, the national chairman of FCS and a Lambeth councillor, said that Mr Delaire-Staines was ‘a bit silly. I wouldn’t hold it against him. I’m sure he’ll grow out of it.’ After hearing extracts from the letter to the BNP he added. ‘He’s absolutely right that he’s in danger of being thrown out of the Conservative Party.’Mr James Goodsman, the Conservative Central Office official responsible for the FCS, said: ‘If the evidence comes my way I will certainly look into it.'

The European Economy Since 1945

Sheri Berman on Barry Eichengreen's The European Economy since 1945:

The European Economy Since 1945: Eichengreen argues that the key to understanding Europe's initial triumphs and later troubles lies in recognizing that the recipe for growth varies.... In the years after 1945, Europe needed to recover from the war and catch up with the United States. This involved what economists call "extensive growth"... increasing the number of workers doing familiar kinds of jobs. Extensive growth requires adopting existing technology, using labor more efficiently and generating high levels of investment. After the war, Europe developed a variety of institutions well suited to these tasks. Large trade unions, employer organizations and corporatist arrangements.... Unions agreed to hold down labor costs and in return were given either representation on corporate boards (Germany), influence over government planning and policy making (Sweden and France... providing workers with generous benefits to offset their wage restraint and the unemployment generated by industrial restructuring. Schools and training programs.... Banks developed long-term relationships with their corporate clients....

All this worked just as it was supposed to, generating prosperity across the continent. By the early 1970s, however, the potential for extensive growth had been largely exhausted.... At this point, Eichengreen says, "the continent had to find other ways of sustaining its growth. It had to switch from growth based on brute-force capital accumulation and the acquisition of known technologies to growth based on increases in efficiency and internally generated innovation."... The problem, of course, was that Europe was now saddled with institutions ill suited to the creativity and flexibility that intensive growth demands.... [T]he same structures and practices that had led to the continent's golden age have now produced a malaise....

So what should the nations of Europe do now?... Eichengreen suggests that international competition is compelling Europe to abandon its distinctive model and become more flexible. This will not be easy. Eichengreen himself stresses the difficulty of institutional change.... Yet thanks to political will and creative policymaking, as Eichengreen points out, some countries on the continent, particularly the Nordic ones, have managed to adapt successfully. They are keeping themselves internationally competitive even while continuing to provide social benefits in health, education and social insurance far above American standards. Others, like France and Germany, will have to follow their lead. Otherwise, they will probably face the decline the pessimists have long been predicting.