Are Swiss Bankers Stupid?

Are Swiss bankers stupid?

Yes, answer most commentators. Paul Krugman thinks their depegging the franc from the euro is simply inexplicable. Scott Sumner is similarly perplexed. He calls the act "panicky." Megan McArdle writes "[f]rom an economist’s perspective, this seems like the wrong decision, not just because of the chaos, but because, as Krugman notes, this is going to be hell on the exporters." But she's more generous--they're not stupid. Instead they just made a politically-motivated mistake.

Only the New York Sun editorializes in favor of the gnomes. "Congratulations to the doughty Swiss, we say." But then they ruin their argument with gold-buggery, claiming the world should go onto the gold standard.

So I will rise--somewhat lamely--in defense of the Swiss. But the main purpose of this post is to explain precisely what happened, especially to those who don't follow the financial news as closely as I do.

The Swiss National Bank (SNB) is a private bank that serves as the country's equivalent to the Fed. It has a special deal with the government that enables it to act as a central bank. That is, it is the lender of last resort, guaranteed never to be illiquid, and accordingly it can print money. It's charged with a mission: "It is obliged by Constitution and statute to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability, while taking due account of economic developments."

So last Thursday at 9:30 am the SNB did some very strange things. First, they reneged on a pledge they had made to peg the Swiss franc (CHF) to the euro (EUR). The promise had been reiterated even just days before, and that the bank would renounce it so precipitously took everybody by surprise.

The pledge consisted of this. The SNB guaranteed that the euro would never cost less than 1.20 francs. If the euro fell below that price the SNB would print francs (they can print as many as they want) and buy euros until the market priced them at CHF 1.20 or above. Because the euro has been weak, the SNB was printing goo-gobs of francs to maintain the peg. Accordingly, the SNB owned lots and lots of euros.

The Swiss actually had a good problem--they were trying to keep their currency from rising (identical to keeping the euro from falling). Any central bank can do that by simply printing more money. The opposite problem--the one now faced by Russia or Venezuela among others--is to keep their currencies from falling. Those countries have to sell foreign reserves to make that happen--which works until they run out of foreign exchange. Russia, for example, can't print euros or Swiss francs.

So there was, in fact, no intrinsic reason why the Swiss couldn't just keep printing francs indefinitely and maintain the peg forever. That's what they said they'd do. And they did that until they broke their promise.

What happened is that within minutes of the announcement the euro dropped from 1.20 francs to 1.05 francs, or about a 13% drop. (As of this writing, 1.01 francs buys a euro.) This in a market where fluctuations are typically in the 0.1% range or less, and it put a number of foreign exchange brokers out of business. Also hurt were Polish and Hungarian homeowners. Since the zloty and the forint are not regarded as stable currencies, home mortgages in those two countries were issued in Swiss francs, thought to be the gold standard. Those poor slobs now owe 20% more on their mortgages than they did last week.

So that's the first mystery--why did they break their promise? The second mystery is why they did it on Thursday morning at 9:30 am, in the middle of a trading day? Normally--according to the wise and the good--such announcements are made over a weekend, just after the close on Friday. This gives people a chance to adjust and plan, and so minimize losses. The Swiss didn't do that--instead they picked the most disruptive time possible--the morning of a busy trading day.

So it's been described as a "panicky mistake," the kind of thing you'd do if you're in a corner with only bad options. But that hardly describes Switzerland. The problem with the "panic theory" is there was no good reason for the SNB to panic. There are any number of things that could have solved their problem (if they had a problem) that wouldn't have been as disastrous. They could, for example, have moved the peg from 1.20 to 1.18--a small but meaningful change. That would have shocked the markets, but hardly been the "disaster" that happened.

Conventional wisdom has it that the cause of the SNB's decision was the imminent quantitative easing by the European Central Bank (ECB), the keepers of the euro. The ECB has promised that they were going to print euros in an attempt to induce inflation in the Eurozone. Inflation is needed because governments and people are hopelessly in debt. Inflation effectively lowers the interest rates on existing debt.

Of course printing euros will lower the value of the euro, which means the Swiss would have to print overtime to maintain the peg. The Swiss apparently decided they didn't want to do that. So now people are predicting that the euro will fall to parity with the dollar (as I predicted here, quite by accident).

But the ECB's quantitative easing, while imminent, does not spell crisis for the SNB. It has been announced for some months now--no surprise there--and likely had already been priced into the market. So I simply don't buy the panic theory. I think the Swiss acted with due diligence.

One reason people claim this was a mistake will be massive deflation in Switzerland. Any exports to the Eurozone are now 19% more expensive than before. This will kill exporters, such as the vaunted watch industry. And no doubt this is a problem. But as this Der Spiegel article (in German) indicates, the Swiss are already adjusting. There is a concerted move to lower wages across the board. Swiss in border areas (e.g., Basel or Geneva) can easily buy groceries in Germany or France at a considerable discount. So deflation will hurt them in the short term, but probably not the medium or long term. In a year they'll have adjusted.

Another reason for thinking it's an error is that the SNB will lose credibility. They said they'd keep the peg indefinitely, and then they broke their word--in the most dramatic way imaginable. But the incredible Swiss are crying all the way to the bank--their currency is now worth 19% more than before. Every Swiss citizen is now substantially richer than they were before.

So I think the SNB dropped the peg for good reasons. And here they are:

1) While deflation is bad for debtors, the Swiss are not in debt. Indeed, quite the opposite. They're global creditors. Deflation is good for creditors. So if any country can withstand a bout of deflation, Switzerland can.

2) The Swiss franc is not going to be a reserve currency. It's a tiny country with only eight million people. There is no way they can bail out the euro, which is what everybody was expecting. Far from being a mistake, breaking the peg was the right thing to do. It corrected the previous error of making the peg in the first place.

3) As a small country dedicated to free markets and free trade, the Swiss do not have much macroeconomic control over their economy. They can't regulate either inflation or unemployment. All they can do is set the value of their currency. By tying it to the euro they forfeited even that control. The SNB has credibly reclaimed what little power it once had.

4) Anybody who has savings in Swiss francs is now 19% richer than they were last week. Most Swiss bank savers are Swiss. So what's wrong with that?

5) By doing it suddenly and dramatically, the prevent anybody gaming the system to Swiss disadvantage. Also, all the bad news is out there. There are no more shoes to drop. Folks can get back to their business.

So I don't think the Swiss are stupid. But even smart people make mistakes. We'll know that by this time next year--if unemployment rises substantially then yeah. But I don't think that will happen. Switzerland has never been a low-cost country. Their products are not price sensitive. They'll be able to adjust.

Further Reading:

• The Laws of Economics
• Book Review: Arnold Kling's Macroeconomics Book
• Imperialism

Beware the Amazons!

I have not read Adrienne Mayor's new book, entitled The Amazons: Lives & Legends of Women Warriors Across the Ancient World. It would never have crossed my radar screen but for an article in Socialist Action.

From the preview at amazon.com it looks to be charmingly written and beautifully researched. Appropriately, it's doing well in the sales rankings and has been widely reviewed elsewhere. I have read two "bourgeois" reviews from The Independent and the Wall Street Journal. There's nothing wrong with the book. It's just that I have lots of other stuff to read first that's more important to me.

Ms. Mayor's opus concerns female warriors from Scythia. That land was in Central Asia, and the warriors (both men and women, as the WSJ points out) were members of nomadic tribes who depended on finding new pastureland and/or booty for survival. Occasionally they attacked Greek communities (unsuccessfully, I gather), inspiring a voluminous and enduring series of myths about Amazon warriors. They caught the Greek imagination.

Ms. Mayor writes

After Heracles, Amazons were the single most popular subjects in Greek vase paintings. Amazons appeared in city murals and monumental civic sculptures in Athens and other Greek cities; tombs and places linked to Amazons were revered in the Greek and Anatolian landscape.

Ms. Mayor's effort is to separate fact from fiction--what was true about the Amazons, and what was myth. It's a book about art, culture, fashion, archaeology, and sex. I think it will be a bestseller.

So why am I writing about a book that I have no plan to read? It's because of the odd, idiosyncratic review provided by Socialist Action's resident feminist, Christine Marie, entitled A challenge to the myth of male dominance. Ms. Marie reads much more into the book than I think is there.

The title of Ms. Marie's review gives the game away. She reduces a complex, romantic tale to a cardboard cutout. Mayor's book is little more than an anecdote to justify some Marxist theory.

Her first claim is that the very existence of female warriors is in doubt. Of course that's not true--we have Amazons even today--the US military is almost completely gender-integrated. Ms. Marie thinks that we males are sent into paroxysms of psychological despair by the mere thought of female warriors. Then how does she explain the idolization of said Amazons in today's video games?

Second, she suggests that the acknowledgement of women soldiers has been the secret knowledge of Marxist anthropologists.

Collections of works by Marxist feminist anthropologists such as Eleanor Burke Leacock are kept in the public eye thanks only to small radical publishing houses. And so, when academic publishers commit to printing a new book that challenges the mainstream on these questions, it should be celebrated.

This ultimately reduces to a conspiracy theory--that well-known academics (almost all of whom are Leftists, and the majority are women) are somehow keeping important knowledge under wraps. How could this happen? And why?

Then comes the bizarre argument that because women died in battle, therefore there is a threat to male dominance. The logic escapes me. I do not see the connection between the title of Ms. Marie's piece and the substance of Ms. Mayor's book. Over 700,000 British soldiers died in World War I, many of them in futile attempts to move the front lines by a few hundred yards. Is that an argument for male dominance? And yet Ms. Marie will have us believe that the discovery of graves of a few hundred female battle victims implies that women were equals way back when.

And then there is the category error. She is taking a tale from history and turning it into a fact of anthropology. Ms. Mayor's book looks to be a rousing good tale, analogous perhaps to the myriad Civil War stories. These are at best anecdotes. And true enough--collect enough anecdotes and eventually you get data. But Ms. Marie has one anecdote and from there she argues for Marxist anthropology. The premise does not justify the conclusion.

Any effort to do anthropology has to take into account evolutionary psychology. From what I've read, there is nothing in Ms. Mayor's book that contradicts evoPsych. Nor as a work of history would one expect it to. But anthropology looks at a much bigger canvas over a much longer timeframe. Marx knew nothing about genes or genetics, nor did he have any ability to track their propagation through human populations. We have that toolkit today, at least in rudimentary form.

I don't expect Ms. Marie to change her mind. A person's political opinions are likely innate, or at least not changeable after age 30 or so. It all depends on what categories you put things in, and what values you consider important. To use Arnold Kling's language, Ms. Marie puts everything in terms of an Oppression/Liberation axis. Women are oppressed, and the political goal is to free them.

I prefer (in this context) the Civilization/Barbarism axis, i.e., that rules of civilized behavior are a crucial ingredient of our modern world. Civilization requires some limits on freedom. Men, for example, are not allowed to form street gangs with the purpose of going out to rape women, Genghis Khan style. Women, on the other hand, need to provide domestic life that keeps families and communities intact. When these institutions break down, we'll all be much worse off.

So Ms. Marie is from Mars and I'm from Venus, or whatever. I relinquish any effort to alter her world view. But I will suggest that she could become better at making her own case if she knew more. And that, of course, applies to me as well. So I'll make a deal with her. If she reads one book that I recommend, then I shall return the favor. The goal is not to change minds (impossible), but rather just to inform.

My recommendation for Ms. Marie is Steven Pinker's The Blank Slate. I don't agree with everything in that book. It's also somewhat dated. Nevertheless, I think it makes the strongest case against Marxist anthropology as historically understood. Now a reformulation of Marxism is possible, but that will require some understanding of evolutionary psychology.

I await Ms. Marie's instructions for what book I am to read. I promise to review it here.

Further Reading:

• Book Review: The Righteous Mind
• Book Review: A Troublesome Inheritance
• Stitched-Up Snit

Predictions for 2015

I used to be in awe of public prognosticators. Anybody who could publish a set of predictions in venues like Time Magazine or Barron's surely must know something about the future. Of course they don't know any more than I do. Not even Nobel Prize winners can predict the future any better than me.

The other side of that coin is that I can't predict the future any better than them. I have learned that my stock market picks are useless. Accordingly, my only investments now are in broad-market index funds. I make no effort to time the market.

My forecasts for larger economic and political changes are slightly better than random. For example, I have long predicted that either a Democrat or a Republican will win the next presidential election--and I have yet to be wrong. Seriously, long before the events occurred, I correctly predicted the collapse of the Venezuelan economy, the instability of the Euro, the decline of China relative to the US, and much more. But none of these were particularly out on a limb.

So with that disclaimer, here are my predictions for 2015. A few of them are pretty safe, and some of them are not much more than guesses. We'll see how well I do a year from now.

They are listed in no particular order.

Enjoy.

1. Oil will continue its decline for the first half of the year, and then recover to a stable price, probably around $70/barrel.
2. Interest rates will remain low. The 10-year treasury will end the year yielding less than 2.5%.
3. The Fed will probably not raise interest rates, but if they do it will be inconsequential. Too much money will be flowing in from abroad for it to make any difference.
4. Wages will not go up in nominal terms. Workers will not get a raise. The extra-high minimum wages imposed in places like Seattle and Chicago will not be a trend.
5. While nominal wages will hold steady, real wages will rise because of continuing deflation. The collapse of oil and commodity prices will spread through the economy. Utility costs will decline.
6. Food prices will decline in 2015 because of successive years of good weather.
7. Housing will be soft, and rental costs will top out and begin to decline.
8. A key driver of deflation will be the continued rise of the dollar. Accordingly, prices of imports will go down, forcing a price decline on American manufacturers. The USDJPY will climb to 150, and the EURUSD will fall to parity.
9. The stock market will not crash, but it will trend lower over the year.
10. Tsipras (SYRIZA) will win the Greek election, and in consequence Greece will be pushed out of the Euro. This will cause considerable short-term damage to the Euro economy, but it will drive Greece into long-term depression and poverty. Greece will become a third world country.
11. al-Assad will be overthrown in Syria. The new head of government will realize that the Alawites cannot win a war of attrition and will seek a cease-fire arrangement with its enemies. This will formalize new international boundaries between a truncated Syria (Damascus, Homs, and the coast) and the Islamic State. The Syrian war may continue between IS and the Kurds, and also over Aleppo between IS, remnants of the Free Syrian Army, and the remaining Christian population. The government will stay out of it.
12. There will be no dramatic events among Trotskyists. All of the the grouplets will suffer a slow decline in membership. There will be no important conventions this year. Jack Barnes will not write a book.
13. The shit will hit the fan in Illinois after Bruce Rauner becomes governor. The pension & budget crisis is too acute to postpone. I predict (more in hope than any other reason) that Illinois will become a Right-To-Work state, and that the public employee unions will be forced to take significant haircuts.

Further Reading:

• Socialist Action's Convention
• The 47th SWP Convention
• Book Review: The Lord of the World

Book Review: The Righteous Mind

Like many people before him (e.g., John Lennon and Steve Jobs), author Jonathan Haidt traveled to India seeking enlightenment. There he learned that he was morally challenged, a discovery that led in part to this book The Righteous Mind. Among the first indications of this occurred when his academic hosts in India advised that he should stop saying "thank you" to his servants as they did their jobs. In contrast to his experimental subjects in Orissa state, he discovered he was WEIRD.

Not only is Mr. Haidt WEIRD, but so am I, and likely as a reader of this blog so are you. The acronym stands for Western, Educated, Industrialized, Rich, and Democratic, terms that describe almost all college graduates in the Western world. But they don't describe the rest of the human race (including many American subcultures); the pun is totally intended.

Mr. Haidt postulates that our moral reasoning is done with a set of biological tools. These are analogous to taste buds, of which there are five: sweet, sour, bitter, salty, and savory. The myriad combinations of these result in the cuisines of the world. You can think of them as the alphabet.

Analogously, human beings are possessed of six moral processors (call them moral-buds, if you will) that are part of our innate, human biology. The six moral axes are care/harm, fairness/cheating, loyalty/betrayal, authority/anarchy, purity/impurity, and liberty/oppression. Culture determines how these are mixed together in making specific, moral choices.

What's weird about WEIRD people is that we only use three of these moral-buds, mostly ignoring the rest. It's as if we devised a cuisine that only used the sweet and salty taste buds--we'd be culinarily challenged compared to the rest of the globe. Accordingly, says Mr. Haidt, we fail to understand how much of the world thinks about moral issues. The three WEIRD axes are care, fairness, and liberty.

Mr. Haidt's Orissa hosts, for example, employed the authority/anarchy module in their advice to stop thanking the servants. Contrary to Western opinion, authority is not necessarily oppressive, but rather serves the interests of social order. It involves reciprocal relationships and obligations, for which no thank you is required. We WEIRD people might recognize this in a beloved teacher. We grant him great authority, trusting him to consider our benefit, and it would not occur to us to say "thank you for teaching us arithmetic today."

Likewise, WEIRD people often fail to understand the moral power of dietary laws, or rules regarding sexual intercourse. The rules of kosher or halal seem silly and arbitrary to us--mere social conventions. Yet to most people on the planet those sorts of rules carry as much moral weight as thou shalt not steal. They preserve purity.

The subtitle of Mr. Haidt's book, Why Good People are Divided by Politics and Religion, describes why conservatives are likely to be more successful than liberals or libertarians. Conservatives are less WEIRD than the others--they appeal (at least somewhat) to the other three axes. For conservatives, for example, gay marriage is not primarily an issue of fairness, but rather one of purity. Gay sex is disgusting because it is impure, and therefore immoral. That makes little sense to us WEIRD people, but since humans come with a built-in purity moral-bud, it will strike a chord with most of the world's people.

I guess I'm a pretty WEIRD person. The raw conservative moral arguments don't make too much more sense to me today than they did when I was a Trotskyist. Still, thanks to my long-standing interest in religion, and now thanks to Mr. Haidt's book, I do believe I understand better than I did.

Mr. Haidt describes human nature in terms of aphorisms, one of which is human beings are like an elephant with a rider, and the rider serves the elephant. Our biological, subconscious impulses are the elephant, by far the strongest part of our make-up. The tiny rider represents our conscious selves. Perhaps one can compare it to Freud's id and ego. But unlike in Freud's scenario, where the ego is constantly fighting the id, Mr. Haidt tells us that the elephant and the rider are on the same side, with the elephant in charge.

First impressions matter. The elephant leans one way or another when confronted with new people or situations, either for or against. This is technically known as affect, which lasts for about eight seconds. The rider, meanwhile, serves as the elephant's lawyer or public relations agent, devising post-hoc rationalizations for why the choice was made. The rider's job is to preserve our reputation. Mr. Haidt claims that the elephant almost never listens to its own rider, though it will more often take advice from other people's riders.

This all rings true to me. Short term behavior is made instantaneously, and often regretted later. "I didn't mean to say that," is the oft-heard excuse when the rider can't come up with anything better. I think Mr. Haidt accurately describes behavioral psychology.

But it's not a description of moral psychology. Moral decisions are always conscious, made by free will if put in theological terms. The law certainly recognizes it that way--accidents, or actions done while insane are not considered criminal. Spur of the moment crimes--crimes of passion committed by the elephant--are treated more leniently than the premeditated sort committed by the rider.

Mr. Haidt never discusses free will, and probably for good reason. It is not amenable to scientific investigation. Nevertheless, it likely exists. Unless one is some kind of super-Calvinist (i.e., you believe that every event is predetermined since the Big Bang), then there must be some freedom in the universe. Given that, then both logic and common sense suggest that some of that freedom lies within the human brain.

Without free will it is impossible to discuss morality, at least as theologically understood. Unfree decisions are not moral decisions. Decisions made by affect have no moral content. Mr. Haidt's book, however interesting and however correct, is not really about moral psychology.

For all that, I found Mr. Haidt's book totally convincing. It certainly delimits the constraints on our moral behavior, better defining the scope of free will. It is a tour de force of evolutionary psychology (evopsych), using clever experiments and evolutionary reasoning to derive counter-intuitive conclusions. If you don't like evopsych, then you will hate this book. My Trotskyist friends, for example, believe in the miraculous exemption theory, i.e., that human being are somehow exempt from the laws of evolution as they apply to all other life on earth.

But my former comrades do have some cause for doubt, for evopsych has been something of a moving target. Mr. Haidt's book is a nice summary of the evolution of evopsych.

In the beginning was Edward Wilson's groundbreaking work on the sociobiology (his term for evopsych), emerging from his study of ants. The theory was generalized and popularized by Richard Dawkins' excellent classic, The Selfish Gene, which was my introduction to the discipline. That book identified evolution of the individual gene as the key player.

The second iteration is due to improved experimental technology. For many years it was assumed that we had stone age brains, evolved in an Era of Evolutionary Adaptation (EEA). The impression was that during historical time human biology was more or less fixed. However, as Mr. Haidt details and as I described in my review of Nicholas Wade's book, it has become apparent that evolution moves much faster than that. Mr. Haidt introduces the concept of gene/culture coevolution.

Finally, Mr. Haidt asserts the heretical concept of group evolution, something that Mr. Dawkins thought he had vanquished once and for all. Mr. Haidt states that religion offers benefits to the entire group. The classic example is that devout Jewish observance builds substantial social capital, sufficient to allow diamond traders to make million dollar deals based on a handshake. Mr. Haidt convincingly refutes the Dennett - Dawkins thesis that religion is some kind of parasitic growth on human society.

Overall, I really enjoyed Jonathan Haidt's book, and highly recommend it.

Further Reading:

• Book Review: Lord of the World
• David Berlinski & Evolution
• Marxism & EvoPsych

Cuba

Last Wednesday President Obama announced a change in American policy toward Cuba. The US will open an embassy in Havana, will permit banking transactions, and will liberalize (but not eliminate) travel restrictions. In addition, it will release the remaining three members of the Cuban Five.

In exchange, Cuba will free Alan Gross, an American held prisoner for five years. And we'll get more rum and cigars.

We should have seen it coming, for there have been a number of articles in recent weeks that augured the event.

Let's begin with last week's Socialist Action (SA), oddly entitled Cuba Expands Women's Reproductive Rights. Here's the lede.

Abortion has been legal in Cuba since the victory of the Cuban revolution in 1959 and was codified into law as a women’s “sovereign right” in 1968. 

Vilma Espin, a feminist and revolutionary fighter, was made the head of the new Federation of Cuban Women and later created the National Center For Sex Education, now headed by her daughter Mariela Castro Espin. As a result of Espin’s role in the revolution and heading an organization of over three million Cuban women, women’s reproductive rights were always on the agenda. Not only was abortion legalized; all women have access to free contraception.

Cuba is now launching a new campaign to address the low birth rate, which is due to the choices Cuban women have been making for decades.

No kidding about the low birth rate. Cuba's fertility is now 1.45, way below 2.1 required to maintain the population, and even below the United States' 2.01. It's odd that SA should point this out. After all, they're long-time and enthusiastic supporters of abortion rights. It should go without saying that women who use birth control and have abortions are less fecund than those who don't. Champion contraception long enough and extinction is eventually what you'll end up with.

A low birthrate is not Cuba's only problem. In addition people leak out as emigrants. Anybody with any smarts or ambition is leaving the country, not only for the US, but also in favor of Mexico and other Latin American countries. Folks remaining in Cuba are disproportionately lazy and stupid.

Note also that SA inadvertently reveals the corruption and nepotism of the regime. Chief bureaucrat Vilma Espin consorted with the high and mighty and passed her sinecure on to her daughter, who inherited the position partly by spreading her legs. She's married to a Castro. Who needs revolutionaries like that?

The Militant remarks on a Nov. 3rd editorial in the NYTimes (apparently not available on-line) in which the Times explicitly recommended today's strategy. Author John Studer invents a distinction between the Times and the Washington Post.

In decades past the Times was a major voice of the U.S. ruling families, but today it represents a narrower section of bourgeois public opinion. Instead, it has come to more reflect the prevailing views among meritocratic professionals centered in academia, the media, “think tanks,” “nonprofit” institutions and the like.

Speaking for the great bulk of the U.S. propertied rulers, the Post responded Oct. 20 to theTimes’ campaign for a shift in U.S. policy toward Cuba in an editorial titled, “Cuba Should Not be Rewarded for Denying Freedom to Its People.”

Mr. Studer appears to claim that the US rulers wouldn't take the Times' advice. If so, then Mr. Studer is wrong.

So why is this deal happening now? The Cuban government had many opportunities to normalize relations going all the way back to the Nixon administration. Walter Russell Mead offers some insight here, but the basic reason is simple: the Cubans are desperate.

Cuba has never had a self-sustaining economy. Prior to to 1991 it was a vassal of the Soviet Union, subsidized as an unsinkable aircraft carrier. The bankruptcy of the Soviet bloc plunged Cuba into its own bankruptcy, known today as the special period. As Michael Totten describes it,

...the country experienced unprecedented pain and deprivation when Moscow cut off its subsidies after the fall of the Soviet Union. Journalist and longtime Cuba resident Mark Frank writes vividly about this period in his book Cuban Revelations. “The lights were off more than they were on, and so too was the water. . . . Food was scarce and other consumer goods almost nonexistent. . . . Doctors set broken bones without anesthesia. . . . Worm dung was the only fertilizer.” He quotes a nurse who tells him that Cubans “used to make hamburgers out of grapefruit rinds and banana peels; we cleaned with lime and bitter orange and used the black powder in batteries for hair dye and makeup.” “It was a haunting time,” Frank wrote, “that still sends shivers down Cubans’ collective spines.”

While Castro made some halfhearted attempts to juice up foreign investment and revive tourism, the special period didn't end until another sugar daddy came along, in the form of Hugo Chavez's Venezuela. That country has been giving Cuba 100,000 barrels of oil per day in return for medical services. Unfortunately, the Venezuelan economy is imploding and the price of oil is down by 40%. That sugar daddy is about to disappear.

Apart from Venezuelan oil, Cuba's largest foreign exchange earner is likely prostitution. The trade drives much of the tourism traffic. That's hardly the hallmark of a healthy society.

So Cuba is forced into the arms of the Yanqui imperialists. That's not good for the regime--more American money, tourists, and influence will make running a police state even harder. So they're doing their best to keep us at arm's length, as Walter Russell Mead describes. Still, the regime can't let life get any worse than what it is. Michael Totten describes.

Even employees inside the quasi-capitalist bubble don’t get paid more. The government contracts with Spanish companies such as Meliá International to manage Havana’s hotels. Before accepting its contract, Meliá said that it wanted to pay workers a decent wage. The Cuban government said fine, so the company pays $8–$10 an hour. But Meliá doesn’t pay its employees directly. Instead, the firm gives the compensation to the government, which then pays the workers—but only after pocketing most of the money. I asked several Cubans in my hotel if that arrangement is really true. All confirmed that it is. The workers don’t get $8–$10 an hour; they get 67 cents a day—a child’s allowance. 

The maximum wage is just the beginning. Not only are most Cubans not allowed to have money; they’re hardly allowed to have things. The police expend extraordinary manpower ensuring that everyone required to live miserably at the bottom actually does live miserably at the bottom. Dissident blogger and author Yoani Sánchez describes the harassment sarcastically in her book Havana Real: “Buses are stopped in the middle of the street and bags inspected to see if we are carrying some cheese, a lobster, or some dangerous shrimp hidden among our personal belongings.”

Cuba is a country where even potatoes are considered contraband. That's hardly a beacon of hope for those of us who oppose poverty.

I support Mr. Obama's opening toward Cuba. It probably won't work, but then what we've been doing for the past 50 years definitely doesn't work. If it improves the lives of even a few people, it's probably worth it.

Down with poverty!

Viva Cuba Libre!

Further Reading:

• A Marxist Pope
• Immigration? Si!
• Viva Poverty!

The Laws of Economics

People on the Right are fond of accusing Leftists of not understanding the Laws of Economics. Specifically, this blog has posted many articles schooling my Trotskyist friends in the dismal science. Though they apparently never learn.

Back in the day, we comrades responded by noting that economics is not like physics. Instead, it is a human activity, and therefore amenable to human intervention. There are no "laws" of economics, but merely conventions that (not coincidentally) serve the interests of the ruling class. Accordingly, the so-called "laws" were constructs of "bourgeois" economists, who unfailingly acted in connivance with the rulers. Their advice could be safely ignored.

So as I aspire to be an amateur economist, it behooves me to learn more about the basics of the discipline. Accordingly, I have spent the past couple of months working through Robert Gordon's text, Macroeconomics. I'm about half way through. I'm using the 11th edition that I picked up used for about ten bucks, published in 2009, and obviously written before that. Indeed, the biggest problem facing macro in those days was understanding the great moderation, i.e., the attenuation of the business cycle in the form of shallower recessions and weaker booms. Would that we had such problems today.

So I am now in a better position to judge the "laws" of economics, and surprisingly, I think my Trotskyist friends are at least partially right.

Macroeconomics (as best I can judge) is based on three sets of premises. The first are accounting identities, such as the requirement that a balance sheet has to balance. These are as true as the rules of arithmetic, essentially unchanged since Sumerian times. The key equation of macro is that Y = E, where Y stands for the economy's income, and E for its expenses. This has to be true simply by virtue of accounting.

That means that raising the income of fast food workers to $15/hour, for example, is going to raise expenses or lower income for somebody else in the economy. Or put more colorfully, there's no such thing as a free lunch--not even at a fast food place. This is a law of economics that not even a Trotskyist can deny.

The second set of premises are assumptions that are based on empirical observations. For example, it is assumed that raising the interest rate will diminish the gross domestic product, all else equal. This is held to be true because it makes plausible sense, and because it looks to have been true in the past. But there is nothing here that constitutes a "law." It's more like a reasonable assumption.

Indeed, a couple of years ago some talking heads on television were arguing that the Fed should raise interest rates because it would increase GDP. Current rates, they argued, were too low to clear the market. I don't know if this statement was true, but if true then it renders much of Mr. Gordon's book irrelevant. The equations will all get turned upside down.

It seems fairly clear that this second set of assumptions no longer holds true as much as it did prior to 2007. That's why macroeconomics is often thought to be in crisis. The "laws" they thought were true turn out not to be as true.

The third set of premises assumes that we can collect reliable data about the economy. Historically, for example, extensive data on gross domestic product (GDP) were tabulated. The implicit assumption was that GDP corresponded reasonably well with social utility, i.e, benefit to human beings. That was surely true for much of the Twentieth Century.

But it is arguably less true today. Google, for example, creates enormous social utility while contributing negligibly to GDP. Craigslist is an even more extreme example. This blog (like most other blogs) contributes (slightly) to social utility, but almost nothing at all to GDP. Therefor the relevance of GDP has been called into question, and accordingly the "laws" that Mr. Gordon elucidates are less useful. Similarly, more ambiguity has crept into measurements of the labor force, the money supply, and even interest rates. Hard data are harder to come by.

So the Trotskyists have a point: once one advances beyond accounting identities, the "laws" of economics lose their legality and simply become descriptions--only more or less accurate depending on circumstance. That's why nobody can agree about when the Fed should raise interest rates, if at all, or even on whether or not that decision is important.

Still, my former comrades are way off the rails. First is the conspiracy theory underlying their dismissal of mainstream economics. Economists, they claim, have all been bought out, or are too stupid to understand the brown-nosing role they play in the bourgeois scheme of things. I don't believe that, and neither does nearly anybody else.

More seriously, Trotskyists claim that because the economy is a human invention, it can be treated like any other human invention. Good engineers have designed excellent airplanes that can fly half way around the world. Similarly, a good, Marxist economist could design an economy that would maximize benefits to human beings, i.e., maximize social utility. The only thing stopping us is that malevolent ruling class whose greediness keeps much of the world in poverty.

The first objection to this theory is that capitalism already maximizes social utility. The Marxist slogan human needs before private profits is completely empty. Meeting human need, e.g., maxxing out social utility, requires private profits.

But more, human needs is such an amorphous, undefined term. There are seven billion humans in the world. Which one of those gets to define human needs? Marx famously wrote "from each according to his ability; to each according to his needs." But isn't that exactly what capitalism does? My wife and I want to buy a retirement home in Las Vegas. That's a human need. Who are Jack Barnes or Jeff Mackler to say that I shouldn't be allowed to do that?

Where in the grand central plan have they made way for my vacation home--the one I want and can afford? They haven't, of course. The most I'd ever get from socialism is a vacation cot in some barracks somewhere on a South Carolina beach.

Socialism only works if you assume that somebody else is going to pay for all the goodies. But that violates accounting identities, because eventually somebody else is going to run out of money. Then the goodies need to be paid for by people who work, i.e., by people who do things to meet other people's needs. That depends on my abilities and your needs, and vice versa. With seven billion people in the world, there's no way all those interactions can be centrally planned.

All you'd get from socialism is slave labor working for slave wages.

Further Reading:

• Trotskyists Down On The Farm
• Book Review: Work 2.0
• Brian's Bubbles

Book Review: North Star

Peter Camejo's (1939 - 2008) memoir, North Star, was published after his death. I knew Peter (I will dispense with the formal Mr. Camejo) when we were both comrades in the Socialist Workers Party (SWP). He was the SWP's candidate for president in 1976. I was his chauffeur during his campaign trips to Chicago and Milwaukee. I certainly recall that, but I was on my way out of the Party by that time. I must have driven Peter around on several earlier occasions in the early 70s.

I remember him well. I wrote to him near the end of his life confessing my Republican sympathies. He returned with a very nice letter, admitting that he didn't remember me, stating that he was dying from cancer, and jokingly hoping that none of the candidates I supported would win any election. It is that fundamental civility and good-nature that I admired in him then and now.

Those traits permeate his memoir. He never misses a chance to say nice things about people, whatever their politics. He speaks kindly of Teddy Kennedy, despite the fact that he was a Democrat. He's very appreciative of help he got from the Bill Simon, a Republican. He has nice words for Jerry Rubin, yet another political opponent. This innate charity served him well, and made him much more influential than other Trotskyists, who insisted on using insulting terms such as class enemies or opponents.

As a comrade I was completely unaware of the jealousy and fear that he inspired in the SWP leadership. Jack Barnes, Barry Sheppard, Gus Horowitz, and others did what they could to sabotage his presidential campaign. They arranged to kick him out of the Party shortly afterwards. And no wonder--Peter was an enormously talented politico. He vastly outshone the mediocrities who fancied themselves as leaders. Left unhindered, Peter would have become the leader of the organization. So they had to get rid of him.

Peter fancied himself as a principled political leader--unbought and unbowed. I think that's probably a fair statement, but it's surprising that he never explicitly states what those principles were. So putting it in my own words, they reduce to

1. Fighting for socialism, which he defined as democratic control of the economy;
2. Uncompromising hatred of the Democratic Party, which he thought of as an unprincipled coalition supporting corporate power and imperialist war.

Peter came by his socialism early. While born in New York City, he was the child of an elite, Venezuelan family, growing up in that country. His father founded the Venezuelan tourist industry, building several beach resorts. On vacations Peter would take his current girlfriend and they'd go yachting off the coast of Venezuela. He had enormous respect and affection for his dad, but at the same time wondered about all the construction workers and hotel maids who went home to shantytowns at the end of the day. It was that experience that converted him to socialism.

Peter's adult life may be divided into three parts. In his early years, while still a student at MIT, he joined the SWP. His attraction to Trotskyism is no surprise, given that his principles overlapped theirs. He quickly became a leader of the affiliated Young Socialist Alliance (YSA), and became a leader of the antiwar movement in Berkeley, California. This was before I joined the movement, but it is clear that he was only loosely under the supervision of the New York office. He did things that my comrades and I would have regarded as ultraleft.

He was very successful at building the antiwar movement, and I'll let him tell that tale. I relate here some of my responses to his account.

First, he has fond memories about how he out-smarted then-Governor Ronald Reagan. And no doubt in some narrow tactical sense he occasionally did. But in the larger sense he didn't. Quite the contrary--Reagan leveraged his way to the presidency using the threat of unrest promised by the antiwar movement. It was Reagan who rolled Camejo, not the other way round. I don't think Peter ever realized that.

Second, even as he wrote his memoir he regarded the Vietnam war as a conflict between white hats and black hats. The white hats were the Vietnamese people heroically resisting the black hats in the form of U.S. imperialism. He never acknowledges any ambiguity. Peter doesn't mention the aftermath of the war--the killing fields or the boat people. The SWP supported not only the Vietcong, but also the Khmer Rouge during the entire war. Those groups were not democrats. If democratic control of the economy was Peter's goal, he was backing the wrong hats.

Finally, Peter's account of the FBI's efforts to infiltrate, disrupt and discredit the antiwar movement is painful to read. It is so easy for law enforcement to think they're above the law, and the temptation to use extra-constitutional means seems compelling. J. Edgar Hoover was not a friend of American democracy.

The second third of Peter's life began after he was expelled from the Party. He needed a job, and after a false start or two, a friend suggested that he become a salesman for Merrill Lynch. He suffered some pangs of conscience, but it turned out to be a perfect fit for him. He became very good at the job, and soon founded his own investment firm, Progressive Assets Management (PAM). The goal was to seek investments in companies that furthered progressive causes. The larger label was socially responsible investing (SRI).

Peter championed SRI, even writing a book on the topic. He claims it's a better investment than the stock market at large--a statement I find impossible to believe. Nevertheless, he had some successes. He was astonished to find that large environmental organizations had endowments invested in ExxonMobil and the like. Peter was able to convert them to SRI.

While he offers no details, there is no doubt that his investment efforts earned him a good living. During this time he married Morella, a distant relative from Venezuela. They remained married to the end of his life. He adopted her children and grandchildren as his own. None of them wanted for money.

The final episode in Peter's life was his affiliation with the Green Party. He fought two battles within that Party. First and most important, to prevent the organization from throwing support to Democratic candidates. And second, to expand the mission of the Party to include socialism generally, rather than just narrow environmental issues. He worked closely with two Trotskyist offshoots of the SWP, the International Socialist Organization and Solidarity.

He ran for governor of California three times: in 2002 against Gray Davis and Bill Simon. He got 5.3% of the vote. Peter was very proud of that campaign. When Davis was recalled in 2003 he ran again, coming in fourth in a field of 135. He felt partially betrayed by Arianna Huffington, whom he initially regarded as an ally. His last try was in 2006 against Arnold Schwarzenegger and Phil Angelides, the least successful attempt.

I would have thought that his 2004 Green Party run for vice-president (with Ralph Nader) was the highlight of his political life. But he didn't see it that way. He was bitterly disappointed by the "capitulators," i.e., people who refused to support him because they felt compelled to vote for the "lesser-evil" Democratic Party. He is especially upset with Michael Moore and Howard Zinn, but his book contains a long list of famous progressive names. He wonders how you can oppose the war (now in Iraq, and again completely clueless), and then support warmongers among the Democrats. He even calls John Kerry a "murderer" because of what he did in Vietnam.

Peter considered the 2004 race to be a failure.

Peter had intelligence, charm, charisma, and courage. He really was unbought and unbowed. I agree with him on many things. The Democratic Party really is an unprincipled coalition of special interests. We do need to legalize the status of immigrants already in the US. Some reform of our law enforcement agencies looks overdue.

But on the bigger issues he's just plain wrong. Socialism--especially the utopian variant he championed--is both impossible and undesirable. Look at Peter's native Venezuela for the most recent example of socialism's abysmal failure. 

No doubt there is ambiguity aplenty in our wars in Vietnam and Iraq. In both cases one can legitimately ask if we should've gotten involved in the first place. But given our involvement, it would have been much better for all concerned if we had won those wars. Vietnam would today be a wealthy country if we had. Iraq would surely be better off than it is now. Peter refused to see any ambiguity. Despite his personal charity, he was incapable of seeing any good or humanitarian potential in our war efforts.

Peter's book is charming and sentimental. I appeals to people like me, who have a personal connection with him. I doubt somebody without that connection will find it as interesting. Even I found it a tad too long--I skipped over parts.

It's a good book, but not an important one.

Further Reading:

• Book Review: Changing Face Of American Politics
• Immigration? Si!
• Liberals!