The world financial crisis continues to discredit socialism

I’ve already done three posts on this.  One on the EU elections, one on the Indian elections, and one on the Argentine elections.  But each time you socialists and pessimistic libertarians keep telling me I am wrong.  So I’ll just have to keep doing them until people get so sick of it they stop commenting.  As this article shows, today the conservatives won a big victory in Germany. When I discussed the sweeping victory of the right in the last EU elections, some commenters pointed out that it might represent an anti-immigrant vote, not a pro-free market vote.  OK, I’m ready this time.  Let’s take a closer look.

I have followed German politics for decades, and it is generally pretty predictable.  Both the (moderately left wing) Social Democrats and the (moderately right wing) Christian Democrats used to each get about 40% of the vote.  This time the Christian Democrats got only 33.8%.  So why is it called a major victory for Merkel?  The key is the performance of a third party, the Free Democrats.  This small third party has traditionally been liberal on social and foreign policy issues, and conservative on economic issues.  In other words they are the closest thing Germany has to a libertarian party; although of course they aren’t at all libertarian by American standards, just a bit more so than the two big parties.

Usually the Free Democrats struggle to cross the 5% threshold that is required for any seats in the German Parliament.  They often barely make it with 7% or 8%.  This time they got 15%, which is the most I ever recall them getting.  So not only was it a swing to the right, it was a swing toward the more socially liberal and free market part of the right.  Now Merkel can govern without help from the Social Democrats.  And given the strength of the Free Democrats, I don’t see how anyone can say this is just an anti-immigrant vote.  Rather, it is a vote against socialism.

The article doesn’t even mention immigration, but does mention that both winning parties campaigned on tax cuts:

“Both argued that tax cuts would boost the economy, ultimately leading to higher tax revenue.”

Hmmm, where have we heard that idea before?  Don’t the German voters know that supply-side economics is an Anglo-Saxon idea that has been thoroughly discredited?   The leader of the losing party put it best:

“There is no talking around it: this is a bitter defeat,” a subdued Steinmeier said, vowing to lead a strong opposition.

I’d say so.  I hope all you pessimistic libertarians will accept some good news for once.  Krugman was wrong; this crisis doesn’t show that free markets don’t work.  Don’t make me do any more of these posts.


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34 Responses to “The world financial crisis continues to discredit socialism”

  1. Gravatar of Pedro Pedro
    27. September 2009 at 16:32

    That may be so for most of Western Europe but, sadly, Portugal continues to go in the opposite direction. The overwhelming failure of left-wing politics is punished with… even more left-wing politics. We now have one official communist party (PCP, 8%), a Trotskyist party (BE, 10%) and another workers’ communist party (PCTP/MRPP, slightly less than 1%) is now eligible for state funding. The socialist party (PS, 37%) won the elections yet again. What is even more baffling is that there is a widespread notion in the country that post-1980′s “neoliberal reforms” are to blame for slow growth and high unemployment. I’ve given up trying to figure out exactly where this comes from (the ghost of 4 decades of fascist rule still scare people shitless, I’d venture) but, given your previous thoughts on the political economy of other small, open economies, I’d love to hear what you have to say about Portugal, if anything.

  2. Gravatar of William William
    27. September 2009 at 17:29

    “Both argued that tax cuts would boost the economy, ultimately leading to higher tax revenue.”

    Yikes, I wonder if they still wear Members Only jackets and listen to Cyndi Lauper

  3. Gravatar of Blackadder Blackadder
    27. September 2009 at 18:18

    When I saw this story I thought about posting it in the comments to one of your posts. But it was unrelated to any of the recent ones, and I figured you’d see it soon enough. Guess I was right.

  4. Gravatar of Thorfinn Thorfinn
    27. September 2009 at 19:48

    The left isn’t doing well across Europe, but it’s not because voters suddenly love free markets. If you poll Germans, they say they don’t want the sort of free market reforms the government wants to deliver.

    Instead, the left is caught with the fact that the European right (unlike the American right) is actually financially sane and so gains credibility during a crisis (they are actually like Democrats in many ways); and the fact that the far-left socialists are gaining in importance. The ‘grand coalition’ furthered the last point; leftists thought the coalition was insufficiently leftist, so they left the social democrats for the greens and socialists.

    In fact, the situation is the exact opposite of India. There, a center-left coalition kept power (crushing the center-right), but the lefitsts lost. Here, the center-right went up a bit, but the lefitsts gained. Yet you interpret both events as an endorsement of voters discrediting socialism.

  5. Gravatar of Thorfinn Thorfinn
    27. September 2009 at 19:50

    sorry, replace leftists with “bona fide socialists” in the last paragraph. Tough to keep the center-left and hard-left separate.

  6. Gravatar of Tim Worstall Tim Worstall
    28. September 2009 at 02:12

    “In other words they are the closest thing Germany has to a libertarian party; although of course they aren’t at all libertarian by American standards, just a bit more so than the two big parties.”

    Classical liberals really. Smith, Ricardo, Mill, bits of Friedman and Hayek but as you say, not Ayn Rand and Lew Rockwell…..

  7. Gravatar of Current Current
    28. September 2009 at 02:57

    For what it’s worth the Labour party will probably get a kicking at the next general election in Britain.

    But the current Conservative party that will replace them are quite similar. They are a toned down version of New Labour. They are socially quite authoritarian and will probably continue to support similar economic policies of high spending and taxation.

    However, what happens after that seems a difficult problem for the left. In the left-wing Guardian newspaper I read many columnists who obviously don’t know very much about socialism (?!?).

  8. Gravatar of Joe Calhoun Joe Calhoun
    28. September 2009 at 04:20

    How does this trend translate to the US? We don’t have a viable classic liberal/libertarian party and while Americans may reject the far left, they equally reject the far right. I do think the US is trending more libertarian or classic liberal if you will, but I’m not sure that means they’ll be voting Republican. They might just stay home.

  9. Gravatar of Lorenzo (from downunder) Lorenzo (from downunder)
    28. September 2009 at 04:22

    While I am happy the Free Democrats did well, it looks to me like a vote against the incumbents, since all three opposition Parties (the classically liberal Free Democrats, the Greens and the hard-left PDS) had their best results ever.

    Thorfinn:
    Since the re-elected Prime Minister of India is (1) the first Indian PM to be re-elected after completing a full five-year term since Nehru and (2) as Finance Minister, the central figure in the first phase of the liberalising of the Indian economy in 1991-1996, I think our blogger has a point about the 2009 Indian election results not being socialism-positive.

  10. Gravatar of Current Current
    28. September 2009 at 05:22

    William: “Yikes, I wonder if they still wear Members Only jackets and listen to Cyndi Lauper”

    I met a bunch of Germans on Tuesday in a pub. They were several were wearing leather jackets. A couple had pointy shoes, one had a very brightly coloured tie.

    I think you may be right.

  11. Gravatar of Joe C. Joe C.
    28. September 2009 at 05:32

    Hi Scott,

    I agree with you, although I cant say that I follow German politics. I dont know why socialists believe socialism that erodes personal decesion making and responsibility is more efficient or better than free markets. I believe Hayek when he says that while free marktets has flaws, those same flaws exist in a socialist regime with only different actors taking advantage and these actors have more control over our lives.

    P.s. I promise Ill only post on this issue this one time.

  12. Gravatar of ssumner ssumner
    28. September 2009 at 05:36

    Pedro, I wish I knew more about Portugal. I visited the country only once, and liked it a lot. But then I tend to like countries in inverse proportion to how well they are governed. I do know that Portugal is the poorest country in Western Europe, so perhaps the voters should rethink their opposition to neoliberalism.

    I know Spain gets a massive amount of foreign investment in retirement communities. Portugal has an equally delightful countryside and climate, does it also get a lot of foreigners building homes? If not, is there some regulatory barrier?

    William, You just brought back memories I hadn’t thought of in decades. I thought my black Members Only jacket was really cool.

    Blackadder, Great minds think alike.

    Thorfinn, You said,

    “In fact, the situation is the exact opposite of India. There, a center-left coalition kept power (crushing the center-right), but the lefitsts lost. Here, the center-right went up a bit, but the lefitsts gained. Yet you interpret both events as an endorsement of voters discrediting socialism.”

    It doesn’t matter what you or I think, it matters what investors think. And in both cases (but especially in India) investors thought the election results meant faster economic reforms. That means in both cases the decisive swing was pro-market. In India it was the communists (who had blocked all reform) getting thrashed. I don’t agree that the right and left in India differ in terms of market reforms. They are both moderately (but not strongly) pro-reform. In Germany the decisive swing was toward the Free Democrats, so that is clearly pro-market. And the total vote for the right was also higher. Again, look at the stock market responses–Germany outperformed the other European markets today, and even the other markets might have been helped by this vote (which makes it even more likely the Tories will win next year in England.)

    I don’t pay too much attention to poll questions. The media has made “capitalism” and “neoliberalism” and “market fundamentalism” into dirty words, of course they won’t poll well. Voter actions speak louder than words. The left needs to look in the mirror and ask why they aren’t getting the same bounce they got from the Great Depression.

    Tim, I agree. But of course they are more moderate than even Friedman and Hayek.

    Current, Yes, they are running as Tony Blair Tories. But that’s an improvement over Gordon Brown. Blair was more of a neoliberal than Brown. Is Brown proposing to raise the top rate to 50%, or is it already done?

    Joe, In the long run it is not about who wins, it is about the direction of each party. In the 1970s-1990s both parties moved to the right on economics. Since 2000 both moved to the left. We need a swing back to the right. I think it is more likely that the Dems will lead the way (beginning in 2013), as the Republican party is currently in disarray.

    Lorenzo, See my response to Thorfinn. Also, the combined vote of the right increased sharply, so it wasn’t just a swing to the fringe. And Merkel was the most incumbent of the incumbents, so it was surprising that she was helped by an election in the midst of a huge recession.

    I agree on India. The 17% move up by the Indian stock market on the day after the election was pretty unambiguous.

  13. Gravatar of Thorfinn Thorfinn
    28. September 2009 at 06:31

    @Lorenzo,
    In the last five years, Singh’s government has done zero, nada, zilch in the way of economic reforms. Then they took rising tax revenues and turned it into enormous deficits. They campaigned on the basis of more leftist populism. The real political power is held not by Singh (who, by the way, has never shown a reformist bone in his body before or after the 1991 reforms, which were pushed by external pressure), but by Sonia Gandhi, and she is pretty leftist. Even the socialists who lost power did so because they tried to industrialize, and were out-lefted by Mamata Banerjee.

    @Sumner,
    It’s easy to overinterpret market fluctuations, which can represent any sort of exuberance or not. It’s important to tie the signals from the market to subsequent outcomes to see if they actually mean anything. In the case of India, the government has followed up by introducing zero, nada, zilch in the way of economic reforms. Quite possibly, the market was worried about a hung parliament (or communist-dominated gov), and continuity of even a left government was good (and maybe a rightist government would have been even better). The market went down some time later as it became clear the government, with or without communists, was never going to introduce reforms (and has gone up again, for who knows what reason).

    Moreover, you can’t just say “the stock market went up, so clearly the government is free market.” If the gov was really free market, profits would disappear and markets would crash. Stocks rise on rents, and it’s tough to determine whether the left or right is better at delivering on rents.

    You can’t even say “the voters have spoken”. Voters vote for many reasons–cultural heritage, personal popularity, etc.–personal policy preference is about last on the list. Maybe they all have false consciousness. But I trust them when they say they find Merkel personally popular, but disapprove of her policies.

    I would agree with you probably on most policies. I’m just more skeptical that governments are actually about to deliver on them, regardless of what election results indicate.

  14. Gravatar of Current Current
    28. September 2009 at 08:07

    Scott: “Yes, they are running as Tony Blair Tories. But that’s an improvement over Gordon Brown. Blair was more of a neoliberal than Brown. Is Brown proposing to raise the top rate to 50%, or is it already done?”

    The 50% rate on >£150K per year income is law, but it only comes into effect in April 2010.

    I don’t think the difference between Brown and Blair has much to do with the tax increase or other more left-wing policies. Rather it’s something the Labour party did to rally their core support and ensure funding from trade unions. Blair would have done it if he had been in office.

  15. Gravatar of bill davis bill davis
    28. September 2009 at 08:10

    Scott’s observation that Germany appears to be moving toward more market based policies is to be contrasted with the opposite trend in the U.S. It is in part a reflection of the inclination of the populous to abandon any approach that is perceived to be flawed. Most of the citizenry does not vote from a firm understanding of economic history or capitalism. Many Americans grudgingly accepted the superior performance of the American brand of quasi-capitalism of the last quarter of a century but were quick to blame it and abandoned it —quickly reverting to their latent collectivist proclivities.

  16. Gravatar of Joe Calhoun Joe Calhoun
    28. September 2009 at 10:01

    Scott,

    Do you really believe the Democrats will move right (I assume by this you mean more classic liberal) on economics? I don’t see how they can with the disparate groups they’ve cobbled together to get to a majority. The one thing that unites all their factions is lefty economics. The only way we got a Democratic President to move “right” on economics was to handcuff him with a Republican Congress. Clinton would have never changed course without the Republican takeover of congress; do you really believe Obama will? I have talked with a lot of Democrats (a good friend is head of the local Democratic party in Miami Dade) about how they could capture the classic economic liberals and I can tell you they aren’t interested in the least. They believe they can retain power with the coalition they have now and since we are rapidly approaching the point where a majority won’t be paying income taxes, I think they may be right. I hope you are right, but I am not hopeful.

  17. Gravatar of Blackadder Blackadder
    28. September 2009 at 11:34

    Sorry for the off-topic post, but I can’t seem to find your email anywhere on the blog.

    I just read the paper you presented at GMU. I found it to be excellent overall, but I do want to quibble with one particular bit, namely your use of the Orson Wells/Harry Lime quote from the Third Man:

    “In Italy for thirty years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance; in Switzerland, they had brotherly love, they had five hundred years of democracy and peace, and what did they produce? The cuckoo clock.”

    I used to really like that quote as well, but as I’ve looked into the matter it seems that the Renaissance was less a function of the Borgias than the Medici. That is, it was the relative prosperity of Florentine commerce and merchants, rather than a chaotic military or political situation, that gave rise to Michelangelo, da Vinci, and the rest.

    Also, while I don’t know that much about the homegrown art scene in Switzerland, it does seem that artists like to hang out there. Joyce, Borges, and Nabokov, to cite three examples, lived there for decades, which suggests that it can’t really have been all that boring or culturally stultifying a place to live.

    I realize that your use of the quote was a concession to potential critics, and that my criticism of you for using it is therefore partially ironic. But whatever.

  18. Gravatar of Admiral Admiral
    28. September 2009 at 12:32

    You’re dead on, Professor. Part of it is frustration with the CDU, and an absolute refusal to vote for the leftist coalition, but no doubt many are wisening up there. I just wish some mainstream media would come forth with a solid analysis like yours so more people would know.

  19. Gravatar of Current Current
    29. September 2009 at 01:44

    Blackadder: “I just read the paper you presented at GMU. I found it to be excellent overall”

    Thanks for pointing that out Blackadder. I’ve read it now too. I disagree with a lot of it, but I found it very interesting.

  20. Gravatar of Tim Worstall Tim Worstall
    29. September 2009 at 04:42

    “But then I tend to like countries in inverse proportion to how well they are governed.”

    So true: my years in Russia were huge fun precisely because governance was so bad that you could get away with almost anything. On the other hand, I could also simply leave if someone tried that with me.

    “I know Spain gets a massive amount of foreign investment in retirement communities. Portugal has an equally delightful countryside and climate, does it also get a lot of foreigners building homes? If not, is there some regulatory barrier?”

    I’m one of those foreigners doing exactly that in Portugal. Although I live/work here rather than just retire.

    Given that both Spain and Portugal are EU members there are no restictions for EU citizens in either. It’s as tough (or easy) as moving State in the US.

    There are indeed retirees and holiday homes down here in The Algarve and Lisbon has some too. But the worst of the Portuguese economic decline is in the big northern industrial cities: Oporto, Viseu, Braganca. People tend not to immigrate to them for the same reason they tend not to go to Detroit or Buffalo. Even though house prices can be as low as they are in Detroit (there are plenty of places up in the north where a 2 or 3 bed house can be got for well under €50,000). The weather up there can be a bit like the west of Ireland too: very green and lovely to look at but that’s a positive correlation with lots of rain.

  21. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    29. September 2009 at 08:55

    If by Capitalism you mean the Welfare State, then I agree that it isn’t going anywhere. It’s a remarkably robust and stable system. There is some expressed annoyance with the Crony/Special Interest domination of the WS, but I don’t see any major changes coming as yet. Germany had Cash for Clunkers and Hypo, after all. It is true that Merkel and Steinbruck talked a better game than Aso and Yosano, say. It’s also true that they were in different parties, and suffered different fates in this election.

    When I read about the German elections:

    http://online.wsj.com/article/SB125415019392446515.html

    I do not see anything radical. That doesn’t bother me. In fact, I like the results. But I don’t see how ideologists on either side can feel hopeful that their ideas are gaining any traction during this crisis. I see a much stronger, independent Fed, with a very powerful chairman. What am I missing? If these positions can’t gain ground now, then when will they ever gain ground?

    My worry in this crisis is Nationalism. So far, it’s been contained, but it could get uglier. After all, Germany, China, and Japan, are all Saver/Exporter Countries. From their perspective, I think that the US consumer is TBTF. What I see is that they’re assuming a smaller pie, and trying to gain the upper hand over the other, although they’ve all been careful about pushing their plans too far.

    I think that Andrew Sullivan has it about right:

    http://andrewsullivan.theatlantic.com/the_daily_dish/2009/09/im-still-on-the-right.html

    “I’m Still On The Right

    On Europe’s right, that is:

    Europe’s center-right parties have embraced many ideas of the left: generous welfare benefits, nationalized health care, sharp restrictions on carbon emissions, the ceding of some sovereignty to the European Union. But they have won votes by promising to deliver more efficiently than the left, while working to lower taxes, improve financial regulation, and grapple with aging populations.

    Europe’s conservatives, says Michel Winock, a historian at the Paris Institut d’Études Politiques, “have adapted themselves to modernity.”

    Of course, when I look at Britain, I’m on the right of the current Tory party. ”

    That looks like my agenda of a Guaranteed Income and Milton Friedman’s Health Plan and Cap and Trade, for example.

  22. Gravatar of ssumner ssumner
    29. September 2009 at 16:14

    Thorfinn, In 4 1/2 of those 5 years the communists blocked every reform. Let’s wait and see. Some reforms don’t make the headlines. China has done massive reforms, but many of the most important were never mentioned in any newspaper.

    You said;

    “Moreover, you can’t just say “the stock market went up, so clearly the government is free market.” If the gov was really free market, profits would disappear and markets would crash. Stocks rise on rents, and it’s tough to determine whether the left or right is better at delivering on rents.”

    Sorry, but I strongly disagree here. Reforms mean rapid economic growth. And that means much higher stock prices. Not just in India, but all over the world stock prices are positively correlated with economic reforms. But I agree that “pro-business” and “pro-market” are not the same. In Japan the LDP has been pro-business for 20 years, and stocks have done poorly.

    Current, According to The Economist, Blair and Brown feuded constantly over market reforms of health, education, etc. By market I mean injecting a bit of competition. Is that wrong? I rely on The Economist for British news.

    Bill, I think there is some truth in what you say, but I think we will eventually have to follow the rest of the world and get serious about privatization. We also need much lower tax rates on capital. Those rates are falling fast in Europe.

    Joe, Both parties aver very pragmatic. Do you think the Republicans follow the economic beliefs of their hardcore voters? I didn’t see Bush going the small government route. Both parties are pragmatic, and at some point do what’s necessary to get the economy in at least somewhat decent shape. BTW, most people may not pay income taxes, but most voters do. And there are also huge numbers of people in the 18-25 bracket who don’t make enough to pay income tax, but expect to as they get older.

    Blackadder, Good point. Of course Venice was also a very entrepreneurial city. To the list of Swiss artists you could add Balthus and Klee.

    Admiral, You said;

    “I just wish some mainstream media would come forth with a solid analysis like yours so more people would know.”

    The very next day the NYT had a similar story (maybe they read my blog!) But it came with the typical NYT left-wing bias thrown in in places. Still it was pretty tough on the socialists.

    Current, Where do you guys find the paper? Is it on the GMU website?

    Thanks Tim, What’s your perception of the human capital situation? Is Portugal behind Spain in terms of education?

    Don, You said;

    “I do not see anything radical. That doesn’t bother me. In fact, I like the results. But I don’t see how ideologists on either side can feel hopeful that their ideas are gaining any traction during this crisis.”

    I agree that laissez-faire isn’t gaining much traction in Europe. But a few months ago there was an almost universal belief that this crisis reflected too little regulation, and was a black eye for capitalism. I think it’s interesting that it hasn’t had the expected political impact, or the impact the Great Depression clearly had on politics.

    I don’t think China is assuming there will be a smaller pie, the Asian pie is growing at a very rapid pace. perhaps the US pie will be a bit smaller than expected.

  23. Gravatar of Mike Sandifer Mike Sandifer
    29. September 2009 at 18:37

    Dr. Sumner,

    Correct me if I’m wrong, because I haven’t looked at any figures myself. Robert Reich claimed in a blog post earlier this year that the primary determinant of the loss manufaturing jobs in the US is not the emmigration of manufaturing to other countries. In fact, he states that even China has lost manufacturing jobs in recent years. Instead, he writes that most of the jobs losses in manufacturing are due to productivity gains facilitated by increased automation. You can view his blog post, “Friday, May 29, 2009 The Future of Manufacturing, GM, and American Workers (Part I” here:

    http://robertreich.blogspot.com/2009_05_01_archive.html

    If it is true that a disporportionate share of the benefits of increased automation are going to the wealthier among us, can that not be an argument for more progressive taxes and more benefits for the less well-to-do?

    Now my thoughts are that many of the benefits of au

  24. Gravatar of Current Current
    30. September 2009 at 01:31

    Scott: “According to The Economist, Blair and Brown feuded constantly over market reforms of health, education, etc. By market I mean injecting a bit of competition. Is that wrong? I rely on The Economist for British news.”

    It’s a contested point. Blair and Brown didn’t like each other. They disagreed about the Euro, Brown won that dispute. Brown is certainly less friendly to the US. Apart from that though it isn’t clear that they disagreed about many policy issues.

    I think that it’s generally wrong to chalk up the differences between recent policies to the decision makers themselves. As you have pointed out before, they are often hostage to time and circumstances.

    I think much of the change comes from funding. In the early years of Blair’s leadership membership of the labour party was high. It was 176,891 in 2008 compared to 405,000 in 1997. Also, contributions from millionaires have become less frequent. As a result Trade Unions have become much more important again as financiers. See http://www.guardian.co.uk/business/2009/sep/13/unions-labour-finances if you’re interested.

    Scott: “Where do you guys find the paper? Is it on the GMU website?”

    On Pete Boettke’s site:

    http://economics.gmu.edu/pboettke/workshop/Fall2009/Sumner.pdf

  25. Gravatar of Tim Worstall Tim Worstall
    30. September 2009 at 04:27

    “Thanks Tim, What’s your perception of the human capital situation? Is Portugal behind Spain in terms of education?”

    Have to say that I’m not really sure. I don’t really work in the Portuguese economy. The internet allows me to run my small business and write while sitting in a reasonably low cost and decently climatted country. So I do.

    The bit of looking around at it that I have done leads me to two conclusions.

    1) The old Napoleonic Code. The affects things like inheritance (all children, and children of children, get a cut of any real property and you can imagine how that screws up the disposition of it if a 90 year old keels over), bankruptcy (it’s near impossible to get the assets moved on to someone who can use them more efficiently) and say, housing reposessions (our mortgage banker says it takes him on average 7 years to get back a property if someone defaults). None of this is good for the vitality of an economy.

    2) Portugal went from the world’s longest fascist dictatorship (1920s sometime to 1974) through a communist revolution (only 6 months or so) and neither set of rulers were exactly free market. It’s appallingly difficult to fire a worker, even for cause. The minimum wage is around €500 a month and that seems to be about the average wage around where I am.

    I tend to think that some mixture of combination of those two is at least partly to blame (but then as a good little classical liberal myself I probably would blame such things).

    Something else I do note though. The older generation, like the 65 year old woman we bought this house from, were not just low in human capital, they were nearly bereft of it. The old lady was, for example, profoundly illiterate and innumerate (although she was a pretty good bargainer, give her that). To the point of not using a mobile phone innumerate. Her sale document was sealed with her thumbprint.

    Asking around this isn’t that unusual for that sex and age in this rural part of Portugal.

    The current generation? The 18-20 year olds? There are absolutely none of them around. Our little town of 8,000 people or so simply doesn’t have post high school teenagers outside the summer vacation months. They’re all away, maybe 50 km, maybe 200, studying something (well, OK, one is 17 km away doing pharmacy).

    We’re also seeing all of the small outlying villages drain of their people as the oldest generation die. Little hamlets of 10, 20 houses are simply falling over and the towns like ours are growing. Lisbon has boomed massively (a quarter of the country’s population now).

    Essentially, I think the place is going through the sort of rural to town transition that my native UK went though around perhaps 1900, maybe the 1920s.

  26. Gravatar of Scott Sumner Scott Sumner
    1. October 2009 at 09:59

    Mike, No that is not an argument for redistribution. Rather it is an argument against arguments against redistribution. Let me explain that confusing assertion. Some argue redistribution is unfair because the rich worked hard for their earnings. That’s a silly argument. Donald Trump doesn’t work 1000 times harder than a factory worker. Or they argue that their earnings represent what they produced. But that’s also silly as production is collaborative. Without others we’d all be living in caves. The only good argument against redistribution is supply-side arguments, that it would discourage work, saving, and investment. If those arguments are right we shouldn’t do much redistribution, regadless of the fairness issue. And if those arguments are wrong we should redistribute no matter who’s at fault for the workers lossing their jobs. We should all be like Sweden if the supply-side argument is wrong.

    Current, Thanks for the info; I guess I should be less confident that I understand British politics.

    Tim, thanks for the info. I couldn’t help commenting on this:

    “Something else I do note though. The older generation, like the 65 year old woman we bought this house from, were not just low in human capital, they were nearly bereft of it. The old lady was, for example, profoundly illiterate and innumerate (although she was a pretty good bargainer, give her that).”

    I’ve always thought that even fairly uneducated people often had pretty good instincts about self-interest in a market economy. Although of course that doesn’t always carry over into complex areas like investments.

  27. Gravatar of Thorfinn Thorfinn
    5. October 2009 at 06:50

    Sumner,

    Economic growth doesn’t need to translate into higher profits. If the growth came from a freer market, then profits would go down. In Greece, the socialists just won, and the stock market rallied. Can we conclude from this that the socialists are about to launch a wave of pro-market reforms? The links between election outcomes, stocks, and reforms are complicated.

    The situation in India is more complicated than Communists holding up everything. Note that nothing happened even when the communists were out of the government. There is a strong leftist grouping within Congress (which is itself a very leftist party), of which Sonia Gandhi is a member, which also resists reforms. They have chosen to interpret the election results as an affirmation of their populist strategy, and reforms have been stalled since the elections as well. India isn’t China; if reforms happen, the newspapers report them. On the state level, you do have reforms and some enterprising leaders.

  28. Gravatar of Doc Merlin Doc Merlin
    5. October 2009 at 09:11

    Keep doing these posts, if only for the reason that Socialists and pessimistic libertarians will always be with us, and need to be shown wrong constantly.
    They act as if they socialist calculation debate and fall of the USSR never happened, or if it was a result of some conspiracy as opposed to a result of /horrible/ policies.

  29. Gravatar of Doc Merlin Doc Merlin
    5. October 2009 at 09:12

    Hrmm, ok, the “they act” part was, referring only to the socialists, not the pessimistic libertarians.

  30. Gravatar of Scott Sumner Scott Sumner
    5. October 2009 at 10:50

    Thorfinn, You said;

    “Economic growth doesn’t need to translate into higher profits. If the growth came from a freer market, then profits would go down.”

    In theory this is possible, but as a practical matter I think it almost never happens. It is very hard for corporate profits to grow when the pie is getting smaller. I’m not saying it’s impossible, and of course it is very possible for individual companies, but I believe pro-market reforms almost always increase aggregate stock prices. And it isn’t just me, in the case of India the press interpreted the situation exactly as I did. They also attributed the rise of the stock market to the fact that the communists were ousted from government and would no longer be able to block reforms. I certainly don’t claim that every time the stock market expects free market reforms, they actually occur. But in a few hours I will post a study that shows that the pace of free market reforms around the world has actually accelerated sign the crisis began last year. Stocks move on probablities, that is all we can expect. If the probability of reform goes from 20% to 40%, stocks will go up, but reform may not happen.

    Regarding the regional variation in India, I agree that is a big factor. And I’d bet that corporate profits do better in those fast reforming states in the west and south, compared the the Ganges floodplain area.

    Sorry, I don’t know enough about Greece to comment. I am behind in reading the news. You may be right that it is an exception.

    Thanks Doc, I will honor your request with my next post.

  31. Gravatar of Current Current
    6. October 2009 at 01:51

    Scott: “It is very hard for corporate profits to grow when the pie is getting smaller.”

    I don’t think you understand the situation. As we all know capital only has value because of the consumption goods it can help to produce. If markets become more hampered then capital will not be utilized optimally, the price of capital on aggregate within a country will fall. However, the effectiveness of large businesses depends on their own internal organization, and they have more political clout than small ones.

    I work for a Fortune 100 company. When regulations become tighter that doesn’t affect my employer much because they can devote many people to dealing with them. When my employer wants a new premises they request planning permission through the normal channels, they employ so many people that the state are very obliging. This isn’t the case though for smaller businesses who have to deal with bribing minor bureaucrats and politicians or putting up with the delays they cause. This sort of thing seriously impacts the smaller competition, so it helps large companies that are listed on the stock markets.

  32. Gravatar of ssumner ssumner
    6. October 2009 at 17:18

    Current, I almost never seen the US stock market rise in response to Congressional moves to make us less capitalistic. I’ll believe it when I see it. But I do agree that regulations hurt small business more than big.

  33. Gravatar of Current Current
    9. October 2009 at 02:43

    Scott: “I almost never seen the US stock market rise in response to Congressional moves to make us less capitalistic. I’ll believe it when I see it. But I do agree that regulations hurt small business more than big.”

    In a relatively capitalistic country like the US that is understandable. But, I don’t think it necessarily follows in a much more regulated sort of country like India. The “Licence Raj” is still around in India. The big companies are the ones that already have licences. As a result of higher regulation we should expect the redistributive component of asset prices to be much greater. I’m not saying that things necessarily do work as Thorfinn said, just that it’s not impossible or very unlikely.

  34. Gravatar of ssumner ssumner
    11. October 2009 at 07:20

    Current, Yes it’s possible, but let’s face it, an election result whose big surprise was the ouster of the communists, a party that had blocked all attempts at market reforms, most likely was based on a perception that more reforms would be possible. It’s not certain, I agree, but overwhelmingly likely.

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