Wielding hammers

Paul Lewis:

Nearby a group of young men emerged from Haringey and Enfield magistrates court wielding hammers. They had shunned the temptation of the looted stores to break seven windows in the courthouse.

They burned the probation office too. As you will have heard, there have been riots in Britain; in several cities simultaneously. Police forces have been bussed around the country in a whack-a-mole style effort to put the rioting down. They’ve not had any obvious success, but the rioting has now stopped, and it’s time for explanations. OK, the cynical among you might sneer, but the explanations are necessary if there’s going to be politics, and there does need to be politics, for the alternative to politics is rioting (something nicely expressed here).

The British political right – that is, the current administration – has already decided on its explanation: moral decay. If pushed, they’ll extend this explanation chronologically by dragging in the preceding generation; parents have decayed morally; the rioters are those with bad parents. Actually, I think the Tories et al. are on the money with their moral decay claim: it’s probably true that some time before the riots, attitudes for some were a certain way, and that those attitudes then changed, hence the new behaviour. If you want, call this moral decay.

Trouble is, you’re nowhere further forward with explaining the riots. Saying ‘it’s moral decay, that’s what it is’ equips you with nothing in the way of a guide to action. For that, you need some reasonable theory as to what will block – more or less – the development of pro-riot attitudes. The likely Tory response here – if they respond at all – is more prison. More convictions and longer sentences: ‘criminals whimpering in the dock’. A possible second Tory front is education: school reform. Finally – and probably most egregious – there are the proposed benefit withdrawals. The simple, practical effectiveness of all of these is highly questionable; further, such policies promise social exclusion (life history: expelled from school, denied housing, banished into jail) rather than a fix. Having said that, I won’t get into what the alternatives might be. However, I think it’s worth saying this: if you’re going to debate social policy with Tories, you will need some theory as to what caused the riots. Here, I think some people generally opposed to the right-wingers are tempted to stick – sceptically – to moral decay style non-explanations of their own. I’ve picked up three versions so far. Here they are, very roughly:

(1) Rioters just hate the police. Always have, always will. But rioting in some form has always offered this possibility; the rioting isn’t novel in its police-baiting aspect. And rioting is not a constant. This doesn’t happen every summer. So what’s changed?

(2) Rioters are just indulging in a stupid, dangerous sport, like the Pamplona bull runners. They’ve discovered just how much fun it can be to run from a Jankels armoured car. They would have done it before, if they’d known about it. This falls foul of the same objection as (1); rioting has always – I’d guess you’d all agree – offered the possibility of thrills. It also doesn’t explain the looting of certain sorts of shops, the targetting of a magistrates court, the arson at a Sony warehouse full of CDs and DVDs. There’s information there, albeit in some hard-to-recover form.

(3) The riots are just a new way to steal, like ram-raiding was in the 1990s. Innovation in thievery explains what’s going on. This doesn’t explain the non-thieving (but criminal) behaviour we’ve seen. Looters who’ve taken their loot onto the street and promptly smashed it. Rioters who’ve torched the shops they were in the process of stealing from (arson has been somewhat rare, thankfully).

Those are the reductions I’ve seen. All of them attempt to give the riots their full explanatory basis in the attitudes of certain people; that is, the rioters. I don’t think it’ll work, and as I’ve said, it’s not enough for policy. Not if you don’t want to concede that using tougher / better police tactics and getting rid of those who have rioted by imprisoning them are the only answers.

Mark Duggan, Rodney King

Surprising no one with a memory for these things, the Guardian reports,

Mark Duggan, whose shooting by police sparked London’s riots, did not fire a shot at police officers before they killed him, the Independent Police Complaints Commission said on Tuesday.

Releasing the initial findings of ballistics tests, the police watchdog said a CO19 firearms officer fired two bullets, and that a bullet that lodged in a police radio was “consistent with being fired from a police gun”.

Police force with history of institutional racism, check. Confrontation with a member of a minority group, check. Suspicious death, check. Initial statements from the police that are misleading at best, check.

I’m sure that people who study urban policy and policing can provide both a longer list of ingredients and of riots. You can’t really say which bad police incident will lead to a riot, but with the ingredients above, especially with a heaping helping of economic dislocation, eventually there will be a riot.

The work of prevention should have been done long ago — the Lawrence report is more than a decade old — and the hard work of preventing the next round will begin as soon as the fires this time are out. Many media outlets will say controlling the riots will be a test of Cameron’s premiership. Nonsense. The test is what he and his government and that of the Mayor of London, fellow Conservative Boris Johnson, will do to keep a repeat from happening. There won’t be many headlines, just lives saved and improved.

The continued embarrassment that is European monetary policy … economists?

In the summer 2008, when concerns were growing that a weaker economy was approaching, the ECB raised its rates – a step that had to be reversed pretty quickly as we know. Quite embarrassing.

And what happened this time? Another commodity boom “tricked” the ECB into raising rates at the worst possible time, even though there were no signs of a pass-through of the currently higher headline inflation to core inflation, and thus, to medium term headline inflation. Now, this step will probably be reversed quickly, too. Why? Because even Germany might be heading for a recession.

As Henry Kaspar has pointed out repeatedly on my (other) blog, I shouldn’t criticise the ECB for following its mandate. Even though we all know that the ECB broke its own rules in the past when there was a need to do so, there certainly is some truth to that. (Update: Karl Whelan points out in an email that the mandate of the ECB is “price stability”, so the ECB might actually have more discretion than is commonly assumed). So let me instead address those European economists that keep missing that monetary policy is a huge part of the problem, and potentially a big part of a shorter and longer term fix for the Eurozone.

First of all, what is monetary policy supposed to accomplish? Very broadly speaking: macroeconomic stability. An important aspect is to keep aggregate demand (AD) on a stable and predictable path. The reason is simple: prices and wages don’t adjust quickly enough to accommodate nominal changes that are caused by changes in the demand for the medium of exchange (aka money). So better keep the nominal values on a predictable and stable path, so that there is no need for across-the-board adjustments.

Usually, an inflation-based approach is sufficient, and it has stabilized inflation throughout a large part of the world, which is historically a big achievement. Whether it has contributed to the build-up of the current crisis is still an open question. In times of a severe crisis, however, this approach has clearly proved inadequate, as the focus on inflation has allowed AD to plummet 10% (!) below trend:

Such a drop in AD would be devastating for any economy, not only a currency union. It is time to realize that the policy of the ECB has been extremely tight since 2008, measured by the concept of macroeconomic stability and is therefore an important cause of the current mess.

Second, countries in a currency union experience asynchronous business cycles. This is a problem because monetary policy cannot be tailored to all different cycles. So even though there is some differentiation that the central bank can impose, a large part of the adjustment has to come through changes in prices and wages – a painful process as Germany learned during the first decade of the Euro. And as for anything else that is painful, there is one rule: get it over with quickly.

How can you overcome nominal rigidities quickly? Wages rarely decline nominally (see this Krugman post for some nice graphs), which means there is a(nother) zero lower bound. When some countries need to adjust wages and prices downwards, it is best to be further away from this threshold. The reason is simple: if the best you can do is to keep wages constant, the higher the general price increase, the more the decline in real wages. A higher nominal growth during normal times increases your room for manoeuvre during adjustment periods.

The essence of this: choose a higher inflation, or even better, nominal spending target the more diverse (read: suboptimal) your currency union is. For the Euro area, an inflation target of below 2% is inadequate. This seems so painstakingly obvious, and yet you will have a hard time finding European, let alone German!, economists who share this view – even though the evidence from the Gold standard era supports this argument, too.

Finally, economic historians like Kenneth Rogoff point out that we are currently in a situation of high debt and over-leverage that happens only rarely. When it does, the decline and adjustment usually takes many years – unless the central bank takes decisive action to prevent a severe drop in AD. This may entail temporarily higher inflation, as a period of deleveraging may hurt growth. But it is worth it, as Kenneth writes:

[In 2008] I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning. … Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

Higher nominal spending growth (or inflation) is therefore an important building block to solve the current, short term European crisis – even if you disagree with my argument above that monetary policy since 2008 is one of the major culprits for leading us into this mess. The ECB’s achievement to keep inflation at 2% is a Pyrrhic victory, as Ryan Avent ironically describes:

If the euro zone does fall apart, a fitting epitaph might read, “The ECB feared 3% inflation”.

I sincerely do hope that I read the wrong newspapers and missed all those European economists and commentators screaming all these things (or even better: that I am wrong). But whenever I try to hear something, there is just silence – or Axel Weber lashing out at Olivier Blanchard. Meanwhile, European policy makers and central bankers are wrecking one of the most fascinating projects in human history, the unity and friendship among the countries of Europe. This is beyond depressing. Way beyond.

Could There Really Be A Recession Risk In Germany?

Oh, come on Edward, surely this time you are going too far? The Germany economy is the strongest in Europe, time and again we have been told it is powering and powering ahead. It has just demonstrated record growth performances. So where the hell could you possibly get the crazy idea that Germany might be in for a double-dip recession? Must be the summer Spanish heat. Continue reading

Spain’s High Risk Election Process

As Mr Zapatero put it on Saturday, when he announced the date of Spain’s general election, the decision “is in the country’s interest” since from now on there will be certainty, and “certainty is stability”. While it is quite possible that almost all of Spain’s politicians shared this sentiment, and welcomed the bringing forward of the election date, they may very well be the only ones to do so. Certainty is undoubtedly a strong positive, but when the only thing about your country which people can be certain of is the election date, then maybe on balance you won’t have gained much. Continue reading