Monthly Archives: December 2015

Debt, debt, debt, debt

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I’m rather late to [amazon_link id=”022627165X” target=”_blank” ]House of Debt[/amazon_link] by Atif Mian and Amir Sufi, which is recently out in paperback. It argues eloquently and persuasively that the Great Financial Crisis was not only a banking crisis but also a household debt crisis, and that the length and severity of the downturn can largely be explained by the private debt overhang. This is not the received wisdom, of course. All the policy attention has focused on the near-catastrophe of the banking meltdown, and it is terrifying even now to think how serious the economic consequences would have been if the payments systems had stopped working, as they almost did in the UK. The book acknowledges that the authorities were absolutely right to act swiftly to prevent banking meltdown, and argues that more would have been better – more in the sense of the famous ‘helicopter money’ drop advocated by Adair Turner, for one, in his recent [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil.[/amazon_link]

[amazon_image id=”022627165X” link=”true” target=”_blank” size=”medium” ]House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again[/amazon_image]

However, Mian and Sufi also point out that while political campaign contributions can be shown to have led the US Congress to support bank bailouts, there was next to no household debt relief. The core of their argument is that the effects of household leverage spilled over to the whole US economy, and that writing off some of the debt owed by homeowners underwater (not because of idleness or irresponsibility but because of a macro shock) would have benefited everyone. I found their argument convincing, along with the corollary that you can not fix an excess debt problem by getting people to take on more debt. The book makes a strong case for reducing the attractiveness of debt, due in large part to the tax system. They write:

“Debt instruments lead investors to focus on a very small part of the potential set of outcomes …In a world of neglected risks, financial innovation should be viewed with some degree of scepticism. If investors systematically ignore certain outcomes, financial innovation may just be secret code for bankers trying to fool investors into buying securities that look safe but are actually extremely vulnerable.” They are also critical of the extent of the bailouts for the financial sector: “The fundamental business of a bank is lending, just as the fundamental business of a furniture company is to sell furniture. Few economist believe that the government should promote the sale of bad furniture by stepping in to protect the creditors and shareholders of a poorly performing furniture company.” This understates the externalities involved in a bank failure, of course, and – as I noted – Mian and Sufi do not condemn the authorities’ response in 2008/9.

Given where we are, they advocate instead a range of measures to reduce debt dependence in future, including levelling the tax code as between debt and equity, and encouraging the use of more equity-like financial instruments, including in lending for home purchase. They cite approvingly Bob Shiller’s suggestions for instruments to insure against macro risks (in his book [amazon_link id=”B00C791JJI” target=”_blank” ]Finance and the Good Society[/amazon_link]) and [amazon_link id=”B00HZ634AU” target=”_blank” ]Admati and Hellwig'[/amazon_link]s advocacy for far higher levels of equity as opposed to be debt to be required on banks’ balance sheets. These kinds of arguments are slowly making headway in both economics and in policy circles. But slowly. Meanwhile, what is terrifiying is the evidence of a re-inflating of the debt bubble in some economies, including the UK. Can we really be ready to risk going around the same hamster wheel again, just because the financial sector lobbies so effectively?

Thinking about welfare economics – or not

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I’ve been reading I.M.D.Little’s [amazon_link id=”0198281196″ target=”_blank” ]Critique of Welfare Economics[/amazon_link] (1950 originally – I have Andrew Sentance’s slight musty, rescued from his garage, 1973 paperback). He wrote: “There can be no significance in national-income comparisons unless a value judgement about changes in distribution is presupposed. But statisticians … do not, of course, wish to make any such presupposition.” He continues that they can tell us that the market value of consumption goods has increased, but cannot conclude that consumption has increased. “There is, after all, no such thing as consumption, the size of which can be measured.”

[amazon_image id=”0198281196″ link=”true” target=”_blank” size=”medium” ]A Critique of Welfare Economics[/amazon_image]

Winging its way to me now, courtesy of a recommendation by Martin Wolf, is [amazon_link id=”0521094461″ target=”_blank” ]Theoretical Welfare Economics[/amazon_link] by J de V Graaff (1957), which one contemporary review described as “an elegantly executed demolition of ordinary welfare theory.” I don’t need a lot of persuading about the demolition-worthiness of the theory but it does leave rather a huge question about (a) what we think we’re measuring with the national accounts and (b) what we think standard evaluations of public policy are telling us. The answer, of course, is that mostly we don’t think about it.

[amazon_image id=”0521094461″ link=”true” target=”_blank” size=”medium” ]Theoretical Welfare Economics[/amazon_image]

The stuff beneath the cloud

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The physical location of the Internet has always fascinated me, so I’ve been enjoying reading [amazon_link id=”0262029510″ target=”_blank” ]A Prehistory of the Cloud[/amazon_link] by Tung-Hui Hu (a network engineer turned English professor). The first half of the book is pretty much entirely about the physical infrastructure and the mismatch between our idea of ‘the cloud’ as something dematerialised operating to new social/political rules and its reality in cables and buildings in specific places. The introduction starts: “A multi-billion dollar industry that claims 99.999 percent reliability breaks far more often than you’d think because it sits on top of a few brittle fibres the width of a few hairs.” It goes on to say that the idea of the cloud as a metaphor for society or organising principle for the economy is sometimes uncomfortably at odds with the material, technological platform. Indeed, he points out, the cloud was responsible for 2 per cent of the world’s greenhouse gas emissions in 2008, since when there has been a rapid increase in the number of data centres.

[amazon_image id=”0262029510″ link=”true” target=”_blank” size=”medium” ]A Prehistory of the Cloud[/amazon_image]

The book then starts with the geography of US fibre optic cables, laid under old railroad tracks: an old-economy, centralised network beneath the cloud as “a vision os globalization that follows the dictates of a multinational corporation – a coalition of geographic arease that move capital and resources through the most efficient path.” We have the impression of the internet as a decentralized network, but it is not – the idealised distributed network described in a famous 1962 article by Paul Baran was never built. The idea that the network got its shape because of the threat of nuclear war is a kind of ‘how he leopard got its spots’ [amazon_link id=”1405279613″ target=”_blank” ]Just So[/amazon_link] story. “Virtually all traffic on the US Internet runs across the same routes established in the 19th century.” (The same is true in the UK, with the east and west coast spines.) Interoperability via IP has only increased the concentration of power, the book argues. Six telcos control the US internet; it is fewer in the UK. Yet there is, “A collective desire to keep the myth alive despite evidence to the contrary.” This chapter ends with an intriguing section on the inherent paranoia of seeing the world through a network lens. If the system is a logical construction overlaid on a physical network, anything and everything can become part of it: the cloud has nebulous edges. Therefore anything and everything – or everyone – can cause breaks or errors.

The second chapter discusses time sharing and virtualization in the cloud – the creation of the illusion that we have our own private part of it. The book presents this is part of a shift away from waged labour toward a flexible economy with a nebulous boundary between paid and unpaid: “By positioning users as intimate partners of the computer, time sharing yoked users to a political economy that made users synonymous with their usage and allowed them (or their advertising sponsors) to be tracked, rented or billed.” The concept of multi-tasking developed out of time share computers, and now refers to flexible working more generally. “Real time actually functions as an ideology of economic productivity.” I am intrigued by the link between time and productivity – not new of course; think of EP Thompson’s famous article about industrial time keeping. Still, time spent using the computer is the work time now to be tracked. “The underlying logic of freeware capitalism is consumption – of time.” The chapter goes on to discuss the privacy debate as the result of the transformation of what had been envisioned as a public utility into a set of private ones, or gated communities, albeit only brought about by virtualization software. The book argues that concerns about privacy contribute to the logic of (dread word) “neoliberalism.”

The n-word put me off quite a lot, as it seems a pretty empty concept, and the third chapter vanishes down the rabbit hole of critical theory, although I like (again) its preoccupation with the built structures of the internet, the data centres – some in old military bunkers. “Computers, like horses, overheat when worked hard.” However, the chapter is about the links between cloud computing and the surveillance state. The basic point is the re-emergence (as if it ever went away) of the claims of sovereign territories and state power over the internet.

With the final chapter the book re-emerges from its rabbit hole, opening with a section on the use of big data as a tool of power. He notes: “Targetted marketing came out of the Eisenhower era science of geodemography … GIS was a by-product of the military’s need to convert populations intro targettable spaces.” The chapter argues that opting out of the connected world is nearly impossible, so we ought to start by acknowledging its structural inequalities of power. “The cloud is a subtle weapon that translates the body into usable information.” Well, everything, perhaps. Airbnb turns housing into a housing cloud; we have car clouds drifting around major cities, and labour markets that deliver “humans as a service.” Although I certainly do not see the world through the prism of neoliberalism (which no doubt confirms me as a neoliberal, as if being an economist wasn’t enough to do so), I found this book a very thought-provoking essay about the economic and political underpinnings of our connected lives. We surely need to have more discussion about the ownership of ‘the cloud’, its physical reality and energy consumption, and the political power that flows from its roots in those old railroads.