Tuesday, October 11, 2016

The Preadator State

James Galbraith is the economist son of famous economist John Kenneth Galbraith. In Predator State he provides a critique of the Bush administration's economics as well as many modern economic practices from both sides of the political spectrum. His criticisms are sound. However, his alternatives are not as powerful.

He identifies "lucky coincidences" that caused various economic theories to be proven. The oil shock of the 70s had an immediate cause in OPEC's quadrupling of oil prices. However, the price rise was forced due to the devaluation of the US dollar caused by the dropping of Breton Woods. Since commodities were priced in dollars, a less valuable dollar meant lower prices even as the dollar value per barrel remained the same. The weaker dollar was caused by the US no longer being the master exporter.

Following economic booms were caused in part by the fall of Russia and the rise of China. Russia had a surplus of cheap energy it wanted to export. China had great demand for raw materials as well as plenty of cheap good to export. Together, this lead to a global economic boom that would have happened regardless of interest rates or strict government policy.

He is critical of "balanced budgets". The US deficit is caused by the dollar's status as a reserve currency. Other's need dollars, so the US will need to have a deficit. (However, this argument has some flaws. Why are the deficits rising even as countries like China are using a "basket" approach to reserves. And what about the limit to the deficit. If debt payments grow to consume most of the budget, the easy solution would be to devalue currency. However, this would reduce the dollar's value as a reserve currency and upset the US as well as the world.)

Free markets receive the brunt of his criticism. Enron is a prime example of free markets gone amok without noticeable improvement. The health insurance system is also something that has resulted in great costs that would have not been needed with a fully public option. (He wrote this before Obamacare. I'd imagine he would absolutely hate the system that we have in place now.) School vouchers are also on his "naughty" list. He has some sound arguments, but seems to go a little too far. Competition does have its benefits in producing innovation and improvements that could not be made by government fiat. Government programs tend to be overly bureaucratic and slow. The lack of profit motive is often accompanied by a lack of urgency and a desire to "please everybody". A true balance is needed with competition where appropriate and universal "utility" where not. Regulations need to be created for the benefit of society not for the few regulated industries. "Crony Capitalism" that benefits oligarchs is not helpful for the general public.

The book had an interesting discussion of unemployment and equality. Countries like Denmark with low unemployment, low income equality and significant social welfare programs are held up as the vanguard. Unemployment is seen as function of income inequality. When incomes are more equal, unemployment will be lower. High CEO pay is a "rent seeking" activity that does little to benefits companies.

He provides some critique of economics in general and supply-side economics in particular. He desires a more centrally planned solution. However, in his "central planned" solutions he relies too much on the status quo. A cap and trade system is "bad". Instead the government should create elaborate programs to research improvements in automobiles to make them more fuel efficient. However, this dismisses better alternatives like flat carbon tax or a restructuring of our transportation system. In 100 years we terraformed the earth to facilitate people traveling in cages that weigh 10 times as much as they do. Creating a more efficient system for moving people and goods along with an improved allocation of space would do wonders to solve the climate problem. However, spending government capital in one area to improve vehicles, while in an other area to optimize land use for inefficient vehicles doesn't help. The approach needs to be unified. Alas, doing that in a complex government is difficult, especially as many have already adapted to old regulations and would love to sue to maintain them.

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