When The Red Light Turns Green

The so-called soundings between the SPD, Greens, and FDP have been a success and the three parties are ready to start formal coalition talks, subject to a Green elected officials’ conference today and an FDP executive committee meeting tomorrow. They will kick off from a heads-of-agreement paper that Der Tagesspiegel published here.

The content of this twelve-point plan is not particularly surprising especially in the light of this Handelsblatt op-ed, published the day after the election, by economist Jens Sudekum. Sudekum argued first of all that a traffic light coalition was unavoidable because neither the Greens or the SPD nor really anyone else would agree to a government led by Armin Laschet or Friedrich Merz, and given that, the only remaining option with a majority was the traffic light.

The major barrier to it, something everyone has been talking about for months, is the FDP’s insistence on keeping the kinda-sorta balanced budget amendment and no new taxes, and having the finance ministry to make sure they get it. This is both difficult for the SPD’s social policy goals, and maybe even more difficult for the Greens, whose very purpose requires far-reaching changes that must be expressed in terms of infrastructure. The wider, global shift of emphasis in climate policy from cap-and-trade or tax-and-rebate options to infrastructure-based change makes this conflict even more jarring. Further, sheer personal power is at stake – implementing the Greens’ vision would require a powerful ministry with a large discretionary budget to push the projects through, and giving that to the Greens implies that the FDP must get something comparable.

Sudekum pointed out that there was a potential fix. The FDP likes the idea of the pension system investing in assets, like a sovereign wealth fund. This implies capitalizing the fund up-front, and hence the government borrowing money. The party squares the circle by excluding this from the deficit target on the grounds that the state is acquiring an equivalent amount of assets, ones that could be expected to grow, and therefore its net indebtedness hasn’t increased. As sauce for the goose could be sauce for the gander, perhaps the capital programme could be treated the same way? Further, although the FDP had been promising tax cuts all round for businesses, they had also shown willingness to accept more generous capital allowances instead of basic rate cuts.

Yesterday’s document looks a lot like the fix is in. The fund is in there, as are the capital allowances. So is the return to budget balance, although pushed off another year into the future under the emergency pandemic exemption. The Green, or green, investment programme is there, as is a big slug of public housing investment, the €12/hour minimum wage, and sweeping changes to the welfare state. As everyone has already noticed, this pretty much requires a lot of fudge in the financing, with things like new income under the global minimum tax regime, unspecified involvement of private investors, cuts to subsidies, and a crackdown on fraud and error (now there’s an old classic), as well as the expected post-pandemic revival of growth all chipping in.

This piece points out that the document promises to guarantee the necessary investments in climate policy, digital, education, research, and infrastructure, within the framework of the balanced budget amendment, and that this would cover anything from an investment carve-out, providing the lawyers could come up with a form of words to deal with the predictable appeal to Karlsruhe, or just using the whole of the emergency authorisation for 2022-2023 to pre-fund the programme, something which in itself could go as high as €100bn.

Robert Habeck, interestingly, gave an interview in which he said that the talks were more advanced on the financing issue in private than the heads-of-agreement reflected, perhaps a signal that he has a surprise up his sleeve. Perhaps the proposed sovereign wealth fund could even invest in the projects itself?

Probably the best blog post you’ll read this year

Eli Rabett publishes a translation of Stefan Rahmstorf’s superb German-language discussion of what climate scientists expected from a world with unusually low spring maximum sea-ice cover, what their computer models forecast, and just how closely the forecasts correspond to the weather North-West Europe is putting up with.

That’s what you get if you plug the expected results for surface pressure into a weather forecasting model. Red is unusually hot, blue is unusually cold. And here are the observed temperatures:

Bloody freezing.

For Whom The Bailout Tolls

“On an optimistic view, that a deal was struck implies that neither side was ultimately willing to risk a Greek exit because they recognise that no one fully understands all the ramifications of such a decision. Under this scenario, when pressure again builds, the authorities will do the same: let Greece remain in the euro, even if it fails to keep to its adjustment programme. So, the reality of “bail-out II” means that, if the situation becomes critical, there will be a bail-out III”. Sushil Wadhwani, writing in the Financial Times

 So Greece has finally been awarded a second bailout. One may wish the country will live to tell the tale. Continue reading

Sympathy for the devil. Well, at least he’s not Berlusconi

Well, what a week that was. 7% was the new 6%, the cows broke through the ECB’s electric fence, the Greeks took a week to decide who ought to be prime minister after, to be honest, the G20 decided George Papandreou shouldn’t be, and Silvio Berlusconi went the same way.

It’s hard to feel much for bunga boy, but this post from James Hamilton at Econbrowser explains why I feel some sympathy for the old devil. Basically, as everyone sort of knows, the long term constraint on a government budget is that nominal GDP growth is ahead of the nominal interest rate on the debt it needs to raise (or roll-over) every year. As Italy is close to primary-balance, the roll-overs are the interesting bit.

How you think about this is important – quite a few people are arguing over whether Italy is “illiquid or insolvent”. But this is a distinction without a difference, as it’s quite possible to get from solvency to insolvency (or the other way around) just through changes in the nominal interest rate. The rate is both cause and effect at once. On the other hand, you could say the same about GDP and indeed Hamilton and our own Ed Hugh do.

But once you accept this, there are some important policy implications. For a start, it creates the possibility of self-defeating austerity.

If you decide to increase taxes and/or reduce government spending in order to increase the primary surplus and pay down the debt faster, you are basically going to reduce nominal GDP. Public-sector saving is a withdrawal from national income. You may argue that this represents supply-side reform that will have good consequences down the line, but does anyone imagine that the long run was uppermost in anyone’s mind last week? And if it was, how come Italy can sell one-year treasury bills at better rates than it can 10-year bonds? Clearly, the markets actually expect that the worst is still to come.

Similarly, you might argue that it is internal devaluation, but then, the constraint is nominal GDP growth higher than nominal interest rates. And you’d have to make some brave assumptions about the price-elasticity of your exports, the percentage of their price accounted for by labour, and the impact on the consumer sector of the internal devaluation. The condition of non-exploding debts says nothing about whether growth is internal or export-led.

Another problem is that the market can stay irrational longer than you can stay president. Imagine a scenario in which there really is some package of reforms that need a dramatic cuts plan right now, but certainly will pay off in higher GDP growth in the future. I mean, I can’t, but perhaps others can, as so many politicians seem to manage it. Does anyone doubt that, if it depressed GDP in the first year enough to get significantly under the constraint, that the interest rate wouldn’t spike high enough to bring about a massive budget crisis in short order?

So yes, Berlusconi was dancing around the very real possibility of a completely pointless and indeed self-defeating purgebinge. Wouldn’t you?

There is a wider point here. Kantoos is very keen on the point that Italy lost a sizable margin of competitiveness during the 2000s. (And who’s responsible for that? we all cry – would it be the dynamic businessman from Milan with the permanently refilled Viagra prescription by any chance?) But this Street Light post makes an excellent point. Southern Europeans put in more hours per worker, and in some countries more of them work, than Germans. The fact that all this effort is going to waste should embarrass everybody, and especially Silvio Berlusconi. But it is more embarrassing that the proposed solution is to put a lot of them out of work!

That reminded me of this post of Peter Dorman’s at Econospeak on another frequent AFOE concern, demography. He makes the excellent point that it is a problem in so far as productivity growth per worker doesn’t keep up with the dependency ratio, and only in so far as it doesn’t. If you want me to take you seriously about why Italian or Greek wages should fall, kindly set out your proposals for what Italian and Greek management can do to close the productivity gap.

There’s an argument that the best thing managers could do would be to resign and leave the workers to self-manage, but it’s somehow unlikely that this will be on offer. It’s true, however, that getting rid of employment protections has no measurable benefit in terms of GDP growth.

All that said, Dani Rodrik has a fascinating paper out on manufacturing and productivity. Specifically, it’s the only sector that shows a clear global trend in which less productive economies catch up with the best in class. Worryingly, this is most pronounced in exactly the subsectors that the German economy is strongest in. That certainly puts this Blodget Insider post in an interesting light. On the other hand, even in China, we’re seeing the end of cheap labour.

Surely There Is Nothing “Funny” About What Is Going On In Japan?

As Japanese officials continue to toil away in what we all hope will be a successful bid to avert a worst case scenario nuclear meltdown even while thousands of Japanese still remain missing and unaccounted for, financial market participants across the globe have been struggling with themselves to answer one and the same question: just how serious are the economic consequences of all this devastation likely to be? Continue reading

Velma and the cloud of krypton

Jim Gutshall:

It was coming up 441, when you’d come up the road, you could taste it. Up there around Wickersham Road. And right around the Hoover farm. It must have been that it hit the high spots. I can’t really say anything else other than the metallic taste. My main thing was that taste.

Ruth Hoover:

That night we had little red spots on our arms where we didn’t have sleeves on. … We saw on TV that night where they said, “Take a shower if you think you had any exposure to anything. To fallout.” I was so scared and I was just glad to be out of there. We never did take a shower until the next morning. I was so emotionally exhausted, all we did that night was just lay there and watch for the news on TV. We talked about it later, that we had little red spots on the arms. We talked to our doctor. He said that it definitely should have been washed immediately. We should have scrubbed it. But, time will tell if anything happens to us. There was quite a few over in Goldsboro (who said they saw the powdery substance). There might have been a couple of people on this side of the river (also). But it was really fine. It wasn’t as large as paper trash or anything like that. It was real fine. 

Marie Holowka:

So, I finally got up after struggling there maybe five minutes or so. I walked to the house. I opened the door. I stumbled into the house. I said to them, “Did you hear anything about Three Mile Island?” They said, “No, we didn’t.” I said, “You know what happened to me. I fell down three times before I could come to the house.” I was just something like a drunk. We stayed in the house. It was blue. You couldn’t see anything or nothing. And we were scared. Everything was blue. Everywhere was blue. Couldn’t see the buildings or anything. It was just heavy blue all that time. We closed up our doors. We stuffed rags underneath the door so this wouldn’t come in. But I think it was all the way in. And we stayed there. It was a warm day. It was a hot day. It was so hot. We shut all the windows and all the doors and we stayed inside. And about nine [a.m.] we listened to the local radios. But they wouldn’t say anything. They were only playing Dolly Parton’s music.

From Three Mile Island: The People’s Testament, by Aileen Smith, 1989.

Aaron Datesman at A Tiny Revolution takes the last of these reports and tentatively puts forward a physical explanation: the Holowka farm had been blanketed in radioactive krypton, the emitted gamma rays colliding with atmospheric nitrogen to produce blue light. One of the messages Datesman wants us to take away is that nuclear accidents have hard-to-predict and hard-to-track outcomes. Uncontained fission products may turn up some distance from the site of the accident, in patches, and in harmful concentrations. There are no systems in place for measuring the spread of radiation over large areas; in any case ‘radiation’ refers to three physical processes (alpha, beta and gamma decay), each of which affects human health differently.

And Holowka’s story is terrifying. But then, it would be. It has classic ghost story ingredients: an isolated, rural setting; a malign, home-invading, luminous ether which suffocates its victims. In his retelling, Datesman adds a sucker punch: a plausible explanation that makes things worse. Normally, with a ghost story, you have a rational ‘out’. Someone plays the role of Velma from Scooby Doo, explaining that the floating lights are just illuminated balloons, or something, and the fear is instantly dissipated. Datesman’s role, by contrast, is to make that same explanation intensify the fear; this time, the rational position doesn’t lead to an out: our world really is like this. There really are ground-hugging poisonous clouds that glow, and will kill you.

It’s not that there are no comforting explanations available, and in this next bit I’ll have a go at providing some. Of course, unlike someone who knows some physics and who—in a pinch—can quantify, I can offer only endoxa, shuffled around. Marie Holowka had a stroke; a transient ischaemic attack. She lost consciousness for a while, then—the blood flow to the part of her brain that processes vision having been impaired—she ‘saw’ blue. No one else reported seeing blue. Ruth Hoover and her sister were sunburned: it was unusually sunny for early spring, and they were just outside for too long. And fallout was something they’d been told about since high school. There’d been an accident at the nuclear plant: yes, you’d expect to see fallout. In reality, some ashes from a neighbour’s fire had been picked up on a breeze. Similarly, Jim Gutshall was the reteller of an urban myth: that radiation ‘tastes like metal’. Everyone in the neighbourhood of Three Mile Island got to hear that same story that year. The local doctor had a stream of people coming to him saying they’d had a funny taste in their mouth.

These, then, are my outs, my Velma stories. If you’re an advocate of nuclear power generation, should they also be your outs, your stories? I tend to think not. Plausible, anecdotal reassurance falls far short of what’s needed. Saying that the worried are irrational isn’t warranted. Datesman is right to point out that we are not systematic in how we measure and report radiation. A quick survey of news reports on Fukushima-Daiichi shows significant confusion over the units involved. Milli-sieverts are reported as micro-sieverts, or vice versa (one is a thousand times greater than the other); the odd reference to grays, rems and curies gets thrown in. Some people are sceptical about the informativeness of the official radiation counts; the suspicion is that they’re cherry-picked. But say the reports are honest. Are they sufficient? Nuclear plants may have radiation-measuring devices at ‘the main gate’, but what’s happening a hundred metres beyond the main gate? At a thousand metres? At ten kilometres? Although there are radiation sensors in various places (aircraft carriers, universities, EPA monitoring stations), there’s no grid of radiation sensors emplaced in the terrain. Could there be? The official response to a lack of reliable, fine-grained information—in the context of a known accident—is to announce an evacuation zone. This may be sensible, but how can it possibly be reassuring? It’s surely the opposite: an evacuation zone is meant to be alarming; you’re meant to take heed, and leave. So say you do leave. At what point is it safe to go back? At Three Mile Island, the official evacuation zone was a five mile radius from the plant, and evacuation was voluntary. After a while—it can only be—most of those who left went back. Did they go back because they were assured it would be safe from then on? Core meltdown at Three Mile Island occurred in March 1979: a release of radioactive krypton—a dense gas, heavy enough to settle on dwellings—was authorised in July 1980. There was no second evacuation. There is some good news: this planned release was to some extent monitored. The US Environmental Protection Agency describes how they went about tracking it:

On a large wall-map of the area surrounding Three Mile Island, EPA scientists plotted the trail of the krypton. The map is divided into 16 pie-shaped wedges radiating out from the power plant, with colored dots showing the location of permanent sampling sites. Other markers show the placement of the mobile sampling units, which were kept constantly informed of changes in the direction of the plume by radio contact. … EPA’s two teams were stationed on the east and west banks of the Susquehanna opposite the power plant. A monitoring team from the Nuclear Engineering Department at Pennsylvania State University took measurements at locations further out to provide an independent check of EPA’s samples. The data obtained by Penn State researchers also served as an assurance that the krypton plume was dispersing as predicted and not touching in high concentrations at remote locations.

Assuming this is how it all actually happened—that any findings of high radioactivity during the single authorised release would have been broadcast promptly—Pennsylvanians of July 1980 had a way to assess risk. You’d hope this was the case: it’s hard to see any other way of making the planned Three Mile Island krypton release acceptable, short of a second, compulsory, evacuation. But what about unauthorised, unplanned releases? In retrospect, it’s widely believed that there were several. Marie Holowka says she saw blue on the morning of the accident. On that day—March 28, 1979—there was no EPA tracking. On that day, no one was expecting Kr-85 (or Xe-133, say) to be floating around Pennsylvania.

Generally, the cause of nuclear power generation is blighted by a mix of real danger and imaginary danger, a mix of good information and bad. The responsibility for this is almost always placed on the public and the press. But in such a situation, a non-specific fear of nuclear power generation is surely rational: we, as people who happen to live near nuclear power plants, nuclear waste processing facilities and nuclear weapons factories, have only the most limited and coarse-grained information, no ready way to weight it, and the cost to us of getting it wrong seems very high. Lumping all the non-experts together and blaming them is a poor response: the official information is bad. If not outright inconsistent, it’s ad hoc and tainted with the narratives associated with nuclear deterrence. State (or state-licensed) nuclear power generation is as matter of historic fact closely tied to state production of nuclear weapons and the emergent security state which monitors for dirty bombs and / or suitcase bombs. There’s an attendant diversity of information, whether it’s the old and crude ‘Duck and Cover’ or ‘Protect and Survive’, or something more modern, like this from the US DHS (note: uses rem as its units). The state, or some part of it, attempts to to equip its own citizens with a reasonable survival plan in the case of accident, terrorist attack, or all out nuclear war. There are attempts at systematicity, and the language tends to the moderate. At the same time the same state (or some part of it; perhaps some other part) wants people to know that fissile material can be deadly: deterrence depends in part on spreading this perception. For example, here’s Kissinger (albeit in 2009, long after leaving office):

The danger posed by nuclear weapons is unprecedented. They should not be integrated into strategy as simply another, more efficient, explosive. We thus return to our original challenge. Our age has stolen fire from the gods; can we confine it to peaceful purposes before it consumes us?

So we all know that nuclear is dangerous: we’ve been told. So when is it safe?


Kevin Drum makes the mistake of reading McArdle and writes “I have to admit that ‘gigantic earthquake in Japan’ was not on my list of possible flash points for the global economy. And in the end, I don’t think it will be.”

It certainly shouldn’t be, if only because Tokyo Earthquake is probably the most widely used wildcard in any sort of future/scenario planning. Sure, it was a low-probability event at any given time, but over longer terms it had a non-trivial likelihood of coming to pass. From financial markets to supply-chain managers, they all should have a file at hand marked Tokyo Earthquake, and the work — for people far away — now involves dealing with how reality diverges from what was planned. Maybe some international actors will be exposed as having neglected to answer this most obvious of what-ifs, but most will have worked through the possibilities.