The Economist: get off Greenspan’s back!

The Economist is, by far, the best general-circulation magazine for anybody who wants to know about what’s going on in the world. It is knowledgeable, incisive and irreverent. It is also opinionated, in the best tradition of Oxford and Cambridge debating societies where most of its journalists cut their teeth. They find it difficult to resist a temptation to go against the “conventional wisdom” of academic pundits and policy makers. Sometimes they are right (the case of the Economist prescient anticipation of the “sun setting over Japan” in late 1980s is probably the best known) but sometimes (it happens even among the best and the brightest), they are wrong. This, of course, does not prevent them for strenuously arguing their case and to marshal whatever evidence (no matter how, admittedly, shaky) they can find to buttress it. Alan Greenspan and US monetary policy is the case in point. For years, at least since early 1998, the Economist has been criticizing Greenspan, for being too complacent, and the Fed policy, for being too lenient. They kept prodding him to raise rates sooner rather then later. Strangely enough, Greenspan had the cheek not to listen to the august advice and continued to manage the US monetary policy and to steer global economy according to his own lights. He is now leaving, unquestionably the best Chairman of the Fed ever, if judged by any rational criteria: economic growth, financial markets performance, inflation control, crisis management. Yet, apparently driven by a contrarian spirit, the Economist wants to make sure that the chorus of praises which accompanies Greenspan’s departure is not universal. Its January 14^th issue makes its position very clear. To say it is not complimentary is an understatement. Its cover is headlined “Danger time for America” and shows Greenspan handling the relay baton in a form a dynamite stick, named US economy. In case, you did not get it right away, the leader states in a subtitle that “US economy is a much less healthy state than it is popularly assumed.” And a subsequent in-depth examination of Greenspan record elaborates the reason for this ill health: Fed’s own policies for at least a decade, which have erred on the accommodating side. This provoked a ballooning of deficits and of debt. It is only a matter of time before brutal adjustments are bound to occur, including drop in dollar value and sharp slowdown in the economy.

As my old Lit professor used to say, there are only two things wrong with this thesis: its form and its content. The form is definitely bad, with a timing that smacks of opportunism and a lack of balance in the assessment of the legacy of an exemplary public servant, who always carried out his duties with integrity, clarity and diligence (more on this below). On the content side, the problem is two-sided. First, the criticism is unwarranted. Second, although it has been persistent, it is not consistent with other assertions made by the Economists.

The main thrust of the Economist’s criticism is the Fed has been practising an asymmetric monetary policy: prompt to ease and slow to tighten. A related reproach is that the Fed has downplayed asset price bubbles. What particularly worries the magazine is that the new Fed chairman, Ben Bernanke, is likely to continue this policy.

To show how unwarranted and inconsistent this criticism is let us look at the actual track record of Greenspan. As a crisis manager, he was peerless. During his tenure, he was confronted with several cases of major market breaks, starting with October 1987 crash, continuing with 1998 Russian crisis, 2000-2001 bubble deflation and 2001 9/11 aftermath shock. In three of out those four cases, Fed policy could not be considered as a main reason for the market break. In all four cases, Fed response was rapid and clear: ease any liquidity fears and prevent deflationary effect of the market fall. In all four cases, the policy worked: there was no panic or meltdown, no macro-economic contagion, no recession and no price inflation.

This policy was based on lessons of painful experience. Two of the most durable economic disasters of the XXth century, the prolonged US depression in the 1930s and the protracted Japanese recession (from 1989 to early 2000s) were both a direct result of overly tight monetary policy. You do not have to take my word for it. The Economist made this point quite often and in case of Japan, quite emphatically. And in the US post-bubble period, the magazine did recognise that there was a real risk of macro-economic contagion and global recession. More recently, following the December 2005 euro rate increase, The Economist criticised (and rightly so) the European Central Bank for being too hawkish. So what gives: was Greenspan right to seek to prevent a global recession by easing his policy or should he have tightened and risk a painful repetition of historical errors of central bankers?

Greenspan’s asymmetry was also based on the empirical experience that the impact of tightening is much more pronounced and durable on the economic activity than the impact of easing is on the inflation. Greenspan was an attentive and astute student of economic reality. He based his decisions on careful and far-ranging analysis. His speeches and writings may not be the easiest documents to read but they show his deep understanding not only of the way the economy functions but also of its evolution. Hence his interest in the new economy, based on information, knowledge and intangibles. He grasped early its importance and its contribution to reducing inflationary threats and lifting capacity constraints. He made Fed policy consistent with his views, and achieved outstanding results. The Economist praises itself on its understanding of the new economy, which it has covered extensively and often (it even quoted my work on intangible economy in a 1996 survey of cyber-economics). Yet, it fails to make the obvious link between the new economy and the monetary policy.

One can argue that the past track record does not really matter as the Economist focuses its attacks on the future consequences of Greenspan’s legacy, and in particular the global imbalances it is supposed to have caused. Yet, in a September 2005 survey of the world economy, Zanny Beddoes argued “that there are plenty of reasons for America to carry on borrowing abroad. (…) America might sustainably run a current deficit of, say, 3-4% of GDP for many years yet.” Yet, in the next paragraph, The Mrs. Beddoes pronounces the present deficit “excessive and dangerous” and urges remedial action. If I understand correctly from her article and from January 14 pieces, such action should entail simultaneous tightening of the fiscal (eliminating mortgage payment deductibility) and the monetary (raising short-term interest more quickly and to a higher level) policies. I fail to understand how such a policy would prevent a serious economic slowdown in the US (which is presented in the January leader as the major risk for 2005) and thus reduce the risk of a global recession (which Ms. Beddoes professes to fear in the absence of the policy). The proposed cure may succeed with only one minor hiccup: the death of the patient.

And there is another consideration, discussed in an earlier blog: the whole discussion of US imbalances, particularly of its domestic savings shortage, may be fundamentally flawed by faulty data. For instance, two US economists, Richard Peach and Charles Steindel, have argued in a September 2000 that the fall in personal savings was due to an outdated definition and the US consumer was not spendthrift. Where did I find this reference? In the Economist, of course.

Uncertainty of data, complexity of the modern global economy, lessons of experience - all suggest that the safest course of action is the continuation of the current Fed policy and approach: thoughtful, deliberate, seeking to minimize market disruptions and surprises. To argue otherwise may be bracing and provocative, it is also irresponsible.

Polish politics and perils of Sunday filing

The new polish Government has puzzled the mainstream media, both in Poland and abroad, from the very beginning of its formation in late October 2005. Parliamentary and presidential elections did not go according to widespread expectations. The “respectable” center-right party, Citizen’s Platform (Platforma Obywatelska (PO)), widely expected to win, was ambushed by its junior partner, Law and Justice Party (PiS), which successively gained the largest share of votes in legislative elections and prevailed in a tense duel with the PO candidate. Logically enough, after both elections, PiS started discussions with PO about the composition of the new government. PO, however, had difficulties coming to terms with its defeat and insisted that it should basically run the government and the Parliament. As these demands were not met, PO broke the talks in a huff, making widely reported statements that it is a real pity for Poland as PO has the best qualified people to run the country.

PiS then proceeded to form a government on its own. It was a delicate task. It could not form a ruling coalition with other parties: SLD was always off limits due to its association with ex-Communists, and two other parties, LPR and Samo-obrona, were small, their policy views were extreme and unrealistic and they were clearly more interested in rabble-rousing than in actual policy execution. Furthermore, once Lech Kaczynski was elected President, his twin brother (and main architect of PiS’s political strategy) could not become Prime Minister. Therefore, PiS made two decisions: it designated Kazimierz Marcynkiewicz as a new Prime Minister and appointed a number of little-known “technical” experts to some key posts, which had been reserved for PO partners. These included Zbigniew Zeliga, a well-known surgeon, who became Minister of Health and Teresa Lubinska, a little-known Economic Professor from a city of Szczecin, who took over the Ministry of Finance.

The assessment of the new government by the media was not made easier by the PR strategy of PiS. Kaczynski brothers are not only conservative but dare to say it openly. Lech Kaczynski, who was until his election as the President of the country a mayor of Warsaw, went as far as to forbid the gay parade in Warsaw. Kaczynskis distrust mainstream media and seek alternative channels of communications. Thus, their favourite media outlet is a deeply conservative and populist radio station, Radio Maria, run by an outspoken priest. If this sounds like the tactics which made the US Republican Party so successful, it is not an accident. Not only Kaczynskis’ goal is to build a Polish equivalent of the Republican Party but they are staunchly pro-American. The new Minister of Defense is Radek Sikorski, whose pro-US and pro-Nato positions are well-known in Poland and internationally. And the Government moved quickly to squash any rumors of early pullout from Iraq.

Given all these factors: deep political uncorrectness of PIS, their provocative media strategy and the unexpected composition of the government, it is not surprising that mainstream medias made their mind quickly and their view was not positive. Thus, based on Kaczynski’s gay decision, his election was widely reported in the international press a sign of return to the dark ages. Kazimierz Marcynkiewicz, a provincial politician, slightly built and unassuming, could only be a puppet for Kaczynski brothers and the new government was just a bunch of incompetent hicks. And then, in early November, Mrs. Lubinska had a misfortune to give an interview to Financial Times. Mrs Lubinska has a number of insuperable handicaps. First, she comes from a city, whose name is hard to spell, Szczecin. Second, she is plain-spoken. In Szczecin, for instance, in 2002 she went to the shipyard to explain to its workers that the shipyard was a monetary black hole and needed to be restructured. As one can imagine, her speech was not well-received. Naively, she thought that if she could handle hostile workers she could deal with international press. That of course was a mistake. Her comments about Tesco not being necessarily the most welcome of foreign investors in Poland and that joining euro was not a priority for the government were put on the front page of company news of FT and swiftly interpreted by “friendly” media both in Poland and abroad to mean that Poland was now closed to international business. Never mind that her pitch in favour of increasing government effort in support of the new technology was completely overlooked. Or the plain political fact that her statement about Tesco was quite helpful to the minority government which needed Parliament support. The media view about Ms. Lubinska was now cast in iron.

In the meantime, Poland, with Marcinkiewicz in the front line, has successfully negotiated its share of the multi-year EU budget, the Warsaw Stock Exchange had a record run and zloty continued to appreciate (probably too much). But of course actual achievements and practical results could not stand in a way of entrenched opinions. So when on Saturday January 7, a major government reshuffle was announced, with Mrs. Lubinska ceding her seat to another woman Professor, Zita Gilowska, there could only one media conclusion, which was drawn quickly by the same journalist, Jan Cienski, who interviewed Ms. Lubinska for the FT: she was given the boot. This dispatch was filed on Sunday January 8 and published in the Monday edition of FT.

The only, but a rather serious, problem with the dispatch and similar ones published in other newspapers is that things did not happen this way. The reshuffle was made necessary by the resignation from the government of the Treasury Secretary, who quit because of apparent personal improprieties. As government sought his replacement, the name of Mrs. Gilowska came up. Contrary to Ms. Lubinska, (who has no political party affiliation), Ms. Gilowska is a political heavy-weight. Not only she was, until last May, a leading member of PO, but she was the principal author of the economic program of PO. Bringing her into government would be a major political coup for PiS. Mrs. Lubinska is a close friend of Ms. Gilowska and was actively involved in discussions with her. But there was a major quandary. Mrs Gilowska could not be content with a minor post. And finance is her specialty. Therefore, after extensive discussions with her friend, with Kaczynskis and with the Prime Minister, Mrs Lubinski accepted to leave her current post. However, she did not leave the government. She was nominated as a Secretary of State in the Prime Minister’s office. Her nomination was announced on Monday January 8 morning and therefore was missed by FT’s dispatch. To correct what I considered to be misleading information, I sent a letter to the editor and exchanged mails with Cienski. Yet, so far, no correction was published. Why I am not surprised?

Mitterrand: un politicien fractal

A juger par la réaction de la classe politique, des médias et de l’opinion publique à l’anniversaire de la mort de François Mitterrand, il est faux d’affirmer que la France est un pays antimonarchiste et laïque. Pèlerinages de masse, veillées de recueillement respectueux, émissions de souvenir ému, livres thuriféraires : c’est le roi mort dans toute sa splendeur que l’on célèbre avec un dévouement touchant voire une dévotion profonde. Pour ses proches ou, pour être plus précis, ses apôtres, il fut paré de toutes les vertus : sagesse, culture, beauté, courage – un véritable Saint François. A quand le lancement formel d’une procédure de béatification ? Après tout, il est parti avant Jean-Paul II, dont le procès en béatification a déjà été ouvert par le nouveau pape, Benoit XVI. Et il n’y que les esprits malveillants et étriqués qui oseraient affirmer que le pâtre polonais a plus fait pour le bien-être de l’humanité que le Président français. Le rétablissement de la lumière après les ténèbres de l’ère giscardienne ne s’apparente-t-il à un miracle?

Pour un profane et non-croyant que je suis, ces célébrations ubiquitaires ont permis de se remémorer les éléments marquants de la vie et du parcours intellectuel et politique de François Mitterrand. Je dois avouer que l’expérience est instructive et passionnante. Il ne fait aucun doute que Mitterrand fut un politicien hors pair; je dirai même plus, hors normes. A telle enseigne qu’il est difficile à comprendre et à appréhender à travers les catégories traditionnelles d’analyse sociopolitique. Par conséquent, je pense qu’il mérite une catégorie a part: François Mitterrand est le spécimen d’un politicien fractal.

Pour ceux qui ignorent ce terme, il s’agit d’une notion nouvelle de géométrie, inventé par Benoit Mandelbrot en 1974. Elle décrit des formes complexes, brisées ou morcelées, qui ne peuvent pas être appréhendés par la géométrie traditionnelle des droites et des courbes. Les cotes bretonnes, les poumons, les graphiques des prix boursiers fournissent des exemples des fractales. Leur usage ne cesse de s’élargir aux nouveaux domaines : cancérologie, prévention des désastres naturels, graphiques d’ordinateur. Il est peut-être temps d’explorer leur application à la politique.

Pour la plupart de personnages historiques, la géométrie euclidienne suffit pour analyser leur trajectoire, qui se compose de quelques segments rectilignes, structurés autour d’un nombre réduit des concepts que l’on retrouve tout au long de leur vie. Pour de Gaulle, ce fut « une certaine idée de la France, » pour Trotski, « la révolution permanente, » pour Alain Juppé, « droit dans mes bottes.». Rien de tel pour François Mitterrand. Il fut Croix de feu dans sa jeunesse et à la fin de sa vie prit Leon Blum comme modèle, y compris dans son accoutrement. Son admiration pour Pétain fut fervente mais il a aussi été un résistant ardent. Détracteur implacable de la Constitution de la Ve République, il en fut par la suite un gardien vigilant. Parti Communiste n’a pas eu d’allié plus fidèle et pourtant il a été l’artisan le plus efficace de sa marginalisation politique. A l’inverse, alors qu’il a été adversaire déclaré du Front National, il a contribué consciemment à la montée de celui-ci et notamment à sa présence au Parlement.

D’aucuns diront que son comportement était opportuniste et que, pratiquement depuis le début de sa carrière, il fut qualifié de Florentin et de machiavélique. Mais, pratiqué avec telle constance et une maitrise, il ne peut être réduit à l’habilité manœuvrière (même si celle-ci est indiscutable). L’engagement de François Mitterrand ans les causes diverses et variées était souvent entier (à défaut d’être toujours sincère) : à droite, il était à l’extrême droite, à gauche, à l’extrême gauche. Sa fidélité pour Petain, depuis la demande de la francisque jusqu’au dépôt chaque année d’une gerbe sur son tombeau, a duré toute sa vie. Il pouvait avoir simultanément comme amis intimes, Elie Wiesel, avec qui il discutait des racines du judaïsme, et René Bosquet, responsable de la déportation des juifs par la police de Vichy (de quoi parlaient-ils je n’en sais rien). Qui plus est, Mitterrand, loin de gommer ses contradictions et ses virages, les assumait au point de pratiquement s’en vanter.

Une des caractéristiques marquantes des fractales est que leurs structures sont similaires quelle que soit l’échelle d’analyse. De même, on peut observer que la Mitterrand fut constant dans toutes les facettes de son comportement et à tous les niveaux de son action. Tous les circuits décisionnels étaient au moins doublés, sinon triplés, tous les organigrammes savamment obscurcis et constamment modifiés. Dans ses relations humaines, il passait autant du temps à contrarier voir contrecarrer ses amis qu’à combattre ses ennemis.

Si l’on accepte notre analyse, Mitterrand n’apparaît plus comme un homme de passé, relégué à l’histoire, aussi hagiographique soit-elle, mais plutôt comme le précurseur d’un nouveau type de comportement politique, comportement qui est en symbiose avec la complexité croissante du monde.

Ariel Sharon's legacy

Ariel Sharon’s reputation as an indomitable warrior is long-standing and well-deserved. Egyptian Army, fellow Israeli politicians, US media and lawyers (who lost a libel case against him), Palestinian militants and Gaza settlers have all experienced his relentlessness, strategic daring, compelling drive and ultimate efficiency. Thus, one cannot rule out that he might yet defy Mother Nature and survive his massive brain haemorrhage. But, even if he does, it is highly unlikely that he will ever return to active politics. Sharon era is clearly over and it is time to assess his legacy. Many pundits assert that he is leaving a vacuum and his forced departure opens an era of uncertainty. I beg to differ. It looks like media are seeking to recycle the material written at the time of the death of Yasser Arafat.

Yet, while the comparison between the two men is instructive, it is also cruel. Arafat left his people in the state of hopeless confusion, his party in a state of deep disarray and Palestinian economy in tatters. Under Sharon, Israeli economic performance has been impressive; its military might, stronger than ever. As for Israeli politics, they never suffered from vacuum; overflow may be a much more accurate descriptive term. The smoothness of transition of power from Sharon to Olmert and the upholding of the election calendar (while that for Palestinians remains in doubt) shows the robustness of the institutional system. Of course, for a man like Sharon, there is always unfinished business. But, in short time of less than a year, he has achieved two dramatic breakthroughs, which have durably affected Israel’s international standing and internal politics: Gaza withdrawal and the creation of a new political party, Kadima. Although their implications have not fully played out as yet, their impact has already been far reaching and potentially irreversible.

By withdrawing unilaterally from Gaza, Sharon has shifted the burden of international community pressure from Israel to Palestinians. The onus is now on Palestinian Authority to put its house in order in Gaza and establish its credibility as a nation-builder. As long as it fails to do so (and it may be a long time), Israeli can afford to play a waiting game in the West Bank. Furthermore, the withdrawal has allowed Israeli to reduce the ever-present threat of international isolation. Under Sharon, Israel diplomacy has regained momentum, particularly in Central and Eastern Europe and in Asia.

Outside Israel, Sharon was seen as a polarising figure. In Israel, however, he was a man of consensus. Some of his most controversial policies were actually initiated under Labour leadership: this is the case for targeted assassination of Palestinian terrorists and for the West Bank wall. He presided over a coalition government.

The launch of Kadima can be seen his as logical extension of his political approach. Its aim is to durably realign the political landscape, traditionally characterised by an out-dated polarisation between the right and the left, and the excessive influence of small religious parties. Although Kadima was created by Sharon and for Sharon, its continuing popular appeal (despite Sharon’s illness, it apparently maintains its lead in pre-election polls) shows that it tapped a widespread yearning for a new voice, which would articulate an emerging consensus on the need to come to terms with Palestinians but without making undue and risky geographic or political concessions. Kadima’s economic policy is similarly centrist: seeking to reconcile the openness and focus on high technology as the development vector with the necessary social net to accommodate the diversity of Israeli population.

Kadima may or may not succeed. But it is unlikely that any government, even if it is Likud, will stray far away from its program. As Sharon himself put it: “Things looks very differently when one looks from above (from the Prime Minister’s perspective) rather than from a side (from a viewpoint of a Minister or a party leader).”