Monday, August 8, 2011

Protest movements teach economics to bankers

Al Jazeera

In order to avoid continued economic malaise, the European Central Bank should raise inflation rate targets.
The European Central Bank (ECB) is run by people who are not very good at economics. They continue to adhere to a fundamentally wrongheaded view of the economy and the central bank's role within it.

Unfortunately, there is no internal pressure for change because, like the Communist Party in the Soviet Union, acceptance of the ideology is the price for admission into the clique of economists who can influence the ECB.
The central tenet of ECB dogma is that the central bank should target a low inflation rate - two per cent - and pretty much ignore everything else in the economy.

In the past decade, this meant ignoring the massive housing bubbles that were driving the economies of Ireland and Spain. The bank was happy all through the period in which the bubbles were growing to ever-more-dangerous levels because it was hitting its inflation targets.

More recently, the ECB has been raising interest rates even as most of the eurozone economies remain mired in high unemployment. These interest rate hikes slow growth and job creation. Higher interest rates also exacerbate the fiscal problems facing heavily indebted countries, since they make it more expensive for them to service their debt.

In the firing line

In other lines of work, the disastrous consequences of the ECB's recent and current policies would get people fired. However, no one is really in a position to fire the ECB bank president and top staff, so they could in principle continue their failed policy approach indefinitely.

But there is hope. Because the people running the ECB are not very good at economics, they keep running into difficulty with their plans to "rescue" Greece, Spain, and the other eurozone countries facing fiscal crises. As a result, they have to continually run back to these countries and work out new loan packages. Each package involves new and more onerous conditions for the debtor countries.

What the ECB has failed to recognise is that its own policies are making it more difficult for these countries to make their loan payments. This is due both to the fact that the policies are contractionary for the eurozone as a whole, and also because the conditions imposed on debtor countries slow growth. With weaker growth, tax collections fall and more money is paid out in unemployment insurance and other transfers to the unemployed. The result is higher deficits.

This is where the popular movements like 15-M in Spain come in. While the governments may be willing to inflict upon their population whatever pain the ECB requests, the popular movements are making this an increasingly difficult process. The governments of these countries are being forced to recognise that they must consider public opinion and not just accept the dictates of the ECB.

The default position

In fact, since the ECB would never want to see one of the eurozone countries default, the popular movements could find themselves in a situation where they are effectively negotiating with the ECB, since they can set bounds on the conditions that their governments can accept. This will allow them to teach the ECB crew some basic economics.

First on the list of lessons is to tell the ECB that the days of worshipping two per cent inflation targets is over. That may have been cute policy before the downturn, but everyone knows now that it was boneheaded. Central banks have to take greater responsibility for maintaining stability and high levels of employment. Furthermore, a low rate of inflation - like two per cent - provides insufficient room for the adjustments that must be made in the sort of crisis the world economy now faces. The popular movements can assign the ECB staff this excellent paper on the topic by Olivier Blanchard, the IMF's chief economist.

The second item, which would be especially relevant to Spain, would be a requirement that governments take strong measures to get vacant homes back on the market. According to government data, Spain's building boom left the country with more than 1m vacant units. This is pure waste - what economists call "deadweight loss".

The government can give the builders or banks that own these properties a strong incentive to sell or rent them by imposing a large tax (eg five per cent of value) on units that are vacant for long periods of time. If the tax isn't paid, then it could seize the property and then make it available directly. It could even use sound free-market principles, like allowing people to take possession of property and then become the owners if they live in and maintain it for a long enough period of time. This would follow the example of the Homestead Act in the United States.

Finally, governments can take the lead from the United States in another area and adopt bankruptcy laws that make it easier to shed debt. As it stands, many people who bought homes at bubble-inflated prices stand to spend the rest of their working lives paying off their debts. In addition to being cruel to people who made a mistake, it also creates enormous disincentive to work or to work in the underground economy.

If a person has to commit 15 per cent of their income to paying off debt, it has the same effect on incentives as a 15 percentage point increase in the income tax. Economists understand that taxes can have a disincentive effect. They should be able to understand that debt repayments can also have a large disincentive effect.

This would be the start of a good economics lesson for the ECB. It will mean better policy, and maybe it can even help turn the people running the ECB into competent economists.

Dean Baker is an American macroeconomist and co-founder if the Center for Economic and Policy Research.

U.K. riots spread to 4th city

Violence and looting raged across London and spread to three other major British cities on Tuesday, as authorities struggled to contain the country's most serious unrest since race riots set the capital ablaze in the 1980s.

In London, a third straight night of disorder saw buildings, vehicles and garbage dumps set alight, stores looted and police officers pelted with bottles and fireworks, as groups of young people rampaged through neighborhoods. It was an unwelcome reminder of London's volatility for leaders organizing the 2012 Summer Olympics in less than a year.

As authorities struggled to keep pace with unrest unfolding at flashpoints across London, the violence spread to the central city of Birmingham, the western city of Bristol and the northwestern city of Liverpool. Prime Minister David Cameron cut short his summer vacation in Italy and was headed home for a meeting of the national crisis committee on Tuesday morning.

The riots appeared to have little unifying cause - though some involved in the violence claimed to be motivated by government cuts to public spending.

The government was aiming to toughen its stance against the violence, as some communities complained that stretched police were struggling to contain the unrest with rioters plundering from stores at will, menacing shocked customers at restaurants and attempting to invade homes. Stores shut early across London, fearful of violence and looting.

Violence first broke out late Saturday in London's northern Tottenham district when a peaceful protest over the fatal police shooting of Mark Duggan, a 29-year-old father of four who was gunned down in disputed circumstances Thursday, turned violent.

Two police cars and a double-decker bus were set alight, stores were looted and several buildings along Tottenham's main street - five miles (eight kilometers) from the site of the 2012 Olympics - were reduced to smoldering shells.

Duggan's death stirred old animosities and racial tensions which prompted riots in the 1980s, despite efforts by London police to build better relations with the city's ethnic communities after high-profile cases of racism in recent decades.

As the unrest spread, some pointed to rising social tensions in Britain as the government slashes 80 billion pounds ($130 billion) from public spending by 2015 to reduce the huge deficit, swollen after the country spent billions bailing out its foundering banks.

In south London, a massive blaze swept through a 100-year-old family run furniture store in the borough of Croydon and sent thick plumes of smoke into the air, forcing nearby homes to be evacuated. Police also confirmed they were investigating a nonfatal shooting in Croydon, but were unable to say whether the incident was linked to the chaos.

Dozens of people attacked shops in Birmingham's main retail district, and clashed with police in Liverpool and Bristol - spreading the chaos beyond London for the first time.

In the Hackney area of east London, hundreds of youths attacked shops and set fire to cars, leaving a trail of burning trash and shattered glass. Looters ducked into a small convenience store as the blackened shells of two cars burned nearby, filling plastic shopping bags with alcohol, cigarettes, candy and toilet paper.

"This is the uprising of the working class. We're redistributing the wealth," said Bryn Phillips, a 28-year-old self-described anarchist, as young people emerged from the store with chocolate bars and ice cream cones.

Phillips claimed rioters were motivated by distrust of the police, and drew a link between the rage on London's street and insurgent right-wing politics in the United States. "In America you have the tea party, in England you've got this," he said.

Police acknowledged Tuesday that major new bouts of violence had flared in at least five locations, badly stretching their resources. Many more neighborhoods saw mobs vandalize commercial streets or break into buildings - some acting with virtual impunity, as authorities struggled to deploy officers to every scene of unrest.

"The violence we have seen is simply inexcusable. Ordinary people have had their lives turned upside down by this mindless thuggery," police commander Christine Jones said, as she confirmed that 239 people had been arrested and 45 people charged with offenses.Though the unrest escalated through Sunday as disorder spread among neighboring areas, the crisis worsened Monday - with violence touching areas in the east and south of London previously untroubled by the chaos.

"There is significant disorder breaking out in a number of our communities across London," Tim Godwin, the acting London police commissioner said Monday, acknowledging that 1,700 extra officers had been deployed across London, but were struggling to halt the unrest.

Some residents called for police to deploy water cannons to disperse rioters, or call on the military for support.

About 100 young people clashed early Tuesday with police in the Camden and Chalk Farm areas of north London, while others tore through a department store in the busy south London suburb of Clapham.

The small groups of youths - most with their heads and faces covered - used SMS messages, instant messaging on BlackBerry smartphones and social media such as Twitter to coordinate their attacks and stay ahead of the police.

Once the preserve of businesspeople, BlackBerry handsets are popular with teenagers, thanks to their free, fast instant messaging system. Blackberry's manufacturer, Research in Motion, said in a statement that it was assisting authorities in their investigation and "feel for those impacted by the riots in London."

Police were also monitoring Twitter, and warned that those who posted messages inciting the violence could face arrest.

In the Peckham district of south London, where a building was set ablaze along with a bus - which was not carrying passengers - onlookers said the scene resembled a conflict zone. Cars were torched in nearby Lewisham, and shops looted in south London's Clapham district.

"There's been tension for a long time. The kids aren't happy. They hate the police," said Matthew Yeoland, a 43-year-old teacher watching the unrest in Peckham. "It's like a war zone and the police weren't doing anything. There were too many people and not enough police."

Police said Duggan was shot dead last week when police from Operation Trident - the unit that investigates gun crime in the black community - stopped a cab he was riding in.

The Independent Police Complaints Commission, which is investigating the shooting, said a "non-police firearm" was recovered at the scene, and media reports said a bullet had been found in an officer's radio. However, the Guardian newspaper reported that the bullet in the radio was police-issue, indicating Duggan may not have fired at the officer.

Duggan's partner, Semone Wilson, insisted Monday that her fiance was not connected to gang violence and urged police to offer more information about his death. But she said the riots appeared to be no longer linked to the initial protests. "It got out of hand. It's not connected to this anymore. This is out of control," she said.

London riots: Violence erupts for third day

Violence has broken out for a third consecutive day in London, with riot police deployed and firefighters tackling blazes across the capital.

Shops were looted and buildings, among them a furniture store in Croydon, set alight as police clashed with youths.

Trouble first flared on Saturday after a peaceful protest in Tottenham over the fatal shooting of a man by police.

The prime minister is returning early from holiday to chair a meeting of the government's emergency committee Cobra.