Is the Ferrari F450 faster than the new Lamborghini Murcielago? What wine is the best pairing with blue-rare beefsteak? If you put Bill O’Reilly, Rupert Murdoch and Alan Greenspan in the ring, each with a tack hammer, which one would kill the other two? Any of these questions could easily inspire spirited debate, and perhaps even argument. In fact, even flowers have been known to generate a disagreement in which a woman bit off her neighbour’s finger. It’s hard to say what will get people worked up.
By way of contrast, it’s not hard at all to say what will make people’s eyes glaze over, as they put their thumbs in their mouths and start to rock rhythmically. Economics. Yes, economics is a boring topic – so numbingly boring that economists sometimes have to take out special insurance policies against wilfull damage caused to their persons or property for the crime of boring people past their Personal Fury Threshold (PFT).
But today, we’re going to talk a little about economics. I’m not an economist (I have friends), but I’m going to rely on the words of those who are. Normally I avoid the subject altogether, but I had to dig into it a little as a result of this piece, by The Democratist. Some of you might recall The Democratist getting a shellacking recently on Leos Tomicek’s blog, when his addled musings attracted Leos’s bitter Czech contempt. For a little while after, his postings appeared fairly muted; almost sensible – but it didn’t last. Now he’s once again blathering the gospel of the reformers.
All right, then, let’s take a look at it. According to his/their view, conceptual must-haves put forward in the Strategy 2020 blueprint for Russian economic strategy are now causing open mutiny among the widely-respected economists who drafted those requirements. These economists, we’re told, “advised the government to cut social expenses and concentrate on reduction of the budget deficit“.
We need to pause for just a second here, because I can’t help noting the parallels between these economists’ recommendations in the sentence above, and those of the U.S. Republican party – which seems currently bent on crippling the American economic recovery. Show of hands, please: is concentrating on reduction of the budget deficit rather than increasing social spending a sound strategy in an economic downturn? NO!!!! Jesus H. Christ, NO!! Who says it isn’t? Every economist who correctly predicted the American economic collapse well in advance of the event, and there were a few. Significantly, the Chairman of the Federal Reserve was not among them. According to the Economic Policy Institute (EPI), the economic stimulus domestic spending package introduced by the Obama government “clearly has been effective at providing the economic support for spurring output and employment that was promised by its architects”.
Prior to the implementation of the Act, EPI says, “the private economy was contracting at an annualized rate of 6% and posted monthly job losses at 750,000“. In the following quarter, private job losses fell by nearly half and the economy witnessed a growth of 5% on an annual basis. “Investment in the nation’s transportation and energy infrastructure creates jobs and promotes the sustainability and global competitiveness of the economy” says EPI – are you listening, you three mutinous numpties?
You might say, fairly, that what works in one set of circumstances may not work in others, and you’d be right. But the economists who correctly forecasted disaster have, in my book, a credibility that the lemmings who parroted, “the economy is just fine, and if it’s not, we need more deregulation” cannot match. But the second part of my question is, what deficit? The Mau/Gurvich/Yasin Triad of Tools says the government must focus on reduction of the deficit. Why? According to this economic report, prepared for BMO Nesbitt Burns, Russia has the lowest deficit in the G-20, and the third-highest current account balance in the world after Saudi Arabia and China. The national section says, for Russia, “Russia’s FX reserves have been climbing steadily since early 2009, and are at a 2-year high of $490 Billion as of September (2010). The current account surplus has been among the largest in the G-20, although it narrowed to 3.8% of GDP in 2009, the smallest share since 1997“. Russia’s budget deficit is down to less than 2% of GDP as of end of last month, and Russia plans to cut back on its borrowing this year. Just to put that in perspective, the USA’s deficit is 10.9% of GDP, and it has the largest economy in the world. Jeez, who hired you guys?
A Dangerous Display of Independent Thought and Common Sense, says The Democratist. Is it? Let’s take a closer look. Let’s start with Vladimir Mau. “It was the authorities, and not the market at all” says Mau confidently, in The Global Crisis as Seen from Russia, “that began to make decisions on who should be guillotined or pardoned. The situation…does not stand interpretation in market terms. The government simply decided to sort out relations with one corporation and to help the other, as happens in a centrally planned economy. And of course all of this was wrapped up in the appropriate rhetoric“.
Sounds pretty edgy, right? Oh, Vova; you crazy economist, you. Crystal clear, Vladimir (Hey, that rhymed: I could so do hip-hop). Except he’s not talking about Russia. He’s talking about the United States, circa 2008, when Bear Stearns ended its 85-year run with
an embarrassing faceplant, and the Federal Reserve generously backed J.P. Morgan in its takeover of the former independent securities firm for $236 Million – just about 1% of the firm’s value as represented by its record close just 14 months before. Remind you of Russia in the 1990’s, a little? For those interested in dollars and cents perspectives, Bear Stearns closed on December 14th, 2006 at $159.96 a share. J.P. Morgan picked them out of the gutter on March 16th, 2008 for $2.00 a share. Good times. Did I say economics was boring? What was I thinking?
Hey, remember Yegor Gaidar? He died just before Christmas, 2009. Many remember him as the architect of an unprecedented financial disaster in Russia – the New York Times describes its effects thus: “Racketeers and bandits created a multiheaded mafia that remains potent and ubiquitous. Privatization led to the transfer of vast wealth to a handful of oligarchs and to rampant corruption.” It goes on to mention offhandedly that Vladimir Putin is taking back the controls Gaidar and his fellow reformers tried to release, as if the state described in quotes was somehow the desirable one.
Did you know Gaidar had an Institute of Economic Policy named after him? Yes, indeed; he created it and served as its permanent director from 1992 until his death. The Institute is a non-profit that studies – unsurprisingly – economics, policy and politics. It enjoys active cooperation with several institutions in the United States, including MIT, UCLA, the John F. Kennedy School of Government at Harvard, and Duke University, where Boris Nemtsov is a frequent guest speaker. Vladimir Mau is a Director. So is Khodorkovsky chum and privatizations architect Anatoly Chubais, described by the BBC as having “organised the “loans-for-shares” privatisations a decade ago which made two dozen Kremlin-connected businessmen – known as “oligarchs” – enormously wealthy while most of the nation was gripped by poverty.” According to Robert V. Daniels in “The End of the Yeltsin Era”, under Gaidar, “…price controls were removed, inflation soared, and state-owned assets were indiscriminately privatized, all to the advantage of former Soviet managers and the banking conglomerates that quickly sprang up.”
They say one of the first rules of directed instruction is “Isolate the slow learners”. Umm…Mr. Mau… could I…ah… talk to you outside for a minute?
All right. Enough about Vladimir Mau. Let’s talk about fellow mutineer and economic rising star Yevsei Gurvich. I honestly don’t see what Mr. Gurvich’s problem is with the economy; in 2008, in the initial stages of the global financial crisis (which he apparently didn’t see coming – surprising, since it was already in progress), he was positively bubbly. “Capital inflow into Russia is expected to be higher than projected by Russia’s monetary authorities“, he said in May 2008. He and the IMF figured capital inflow to Russia could hit $70 Billion in 2009. By September, the IMF at least had lifted a finger to test the winds – they revised their forecast to “between zero and $15 Billion“. What actually happened – anyone remember? Yes, that’s right: the worst global recession since the 1930’s, with severe implications for the Russian economy, immediately manifested in a sharp reversal of capital inflow. It bounced back so hard in the second half that it had to have limiting controls placed on it to curtail runaway inflation.
But let’s be fair; economic forecasting is an inexact science, right? Nobody could really have seen it coming.
Whoops, I’m afraid that’s incorrect. Economic forecasting, although it tries to look at cyclical fluctuations and crash models and that sort of thing, seems to boil down to saying, “This is what I predict will happen if everything to do with the economy stays more or less as it is right now“.
A reasonably math-aware ninth grader could do that. And yes, people did see it coming. Paul Krugman, for one; the New York Times columnist and Professor of Economics at Princeton University saw it coming 2 years before it started to topple. Dean Baker, co-director of the Center for Economic and Policy Research, saw it coming even earlier. Yevsei Gurvich? Apparently, not so much.
If you’d like another example of Gurvich foresight, here’s one. The rapid growth in world commodity prices, he tells us in early 2007, is expected to be replaced by their decline. “The Urals oil prices, after growing by more than 2.5 times in the last three years, are expected to go down to US$50 per barrel in 2010“.
Do tell. Well, I’m looking at the figures for 2010 (and so are you), and only once did the price dip below $70.00 per barrel; the last week of May. I’m much too lazy to work out an average for the year – somebody who likes economics can do that – but the price appeared to stay pretty much in the high 70’s to mid-80’s, and Urals 32 closed out 2010 at just over $90.00 per barrel, clearly trending up. Today, it’s $104.69.
Now, if you can put on your economist hat for a minute, you can see where he went wrong. If you look at 2007, prices for Urals 32 were quite volatile – all over the place – but $50.00 per barrel was pretty close. But again, if you can’t predict how world events are going to affect the price of commodities based on their availability or even the perception of their availability, what is the point of forecasting out that far? Anybody who can read can tell you what oil prices were like last month. Anybody who reads the news and understands most of it can tell you what they’re likely to be next month. Predicting what they will be a couple of years away is like asking a meteorologist to tell you if it’s going to be sunny on April 14th two years from now, because you want to get married that day.
Surprisingly, governments fall for economic projections over and over again. Of course everyone in politics wants to be able to see the future, and the higher you are in the organization, the more you want to know. But after so many examples of economists not knowing if their assholes are bored or punched, what kind of gullible boob would you have to be to keep listening? Look at this, for example. The projections were plainly based on Gurvich’s research, since the penultimate paragraph quotes him word for word. The projected budget surplus for 2010 is zero, zip, nichevo. What was it, for real – around $10 Billion? Is it hard to see why the russophobes scurry around squealing that Russia’s economy is collapsing, every couple of months? Not from where I’m sitting.
I don’t want to spend too much time on Yevgeny Yasin, the third mutineer, because this is getting longer than I’d planned. However, it wouldn’t be fair to deny him his turn in the barrel altogether. I’ll just have my Rubenesque Ukrainian secretary, Daryana, get his file. Darya!! Bring me the Yasin file, will you? Ah..thanks. Hey – why are there chocolate smudges all over it? Never mind; I’ll deal with you later.
Sorry you had to hear that. Anyway, back in 2001, Yasin didn’t have a problem with Putin running the show. Thought he was quite the genius, in fact – he referred to the new President’s economic presence as that of “…a stealthy reformer yearning for consensus“. It’s worth mentioning here that the Strategy 2020 mutineers are calling for serious reforms: who better to carry them out than a reformer, an “undercover liberal”, as Yasin also describes Putin, who “…listens to different opinions and lets emotions cool“?
Of course, Yasin was and is being paid as an economist, not as a judge of character. But it turns out he’s not very good at economics, either. On the occasion of Mikhail Khodorkovsky’s arrest, he sorrowfully predicted “…capital flight will increase substantially…long-term prospects are certain to deteriorate“. And he wasn’t alone, he hastened to add: “Russian economic experts are unanimous in sharing this grim conclusion. Only people linked to the regime appear to differ“.
Well, that’s too bad – because, unfortunately for Russian economic experts, “people linked to the regime” guessed right. Capital flight reversed in 2006, and Russia posted a capital inflow of $41 Billion. The economy grew steadily, and Russia posted budget surpluses from 2001 straight through to the wordwide economic crash inspired by the U.S. subprime meltdown. The Russian economy bounced back quickly, and had begun a modest recovery by late 2009. In spring 2010 Russian officials announced an end to anti-crisis bank support, and the World Bank reported “…a systemic banking crisis had been averted…and depositor confidence restored“.
Well, let’s wrap this up. Look – nobody’s arguing there is no need for reforms in Russia. There is. Modernization must take place if the government is serious in its intent to attract more foreign investment, because foreign investors just won’t do business in places that are often observed to have antiquated – frequently contradictory – regulations and a business climate that often appears mistrustful of or outright hostile to foreign businessmen. But it’s fair to say that when Russians see examples like Bill Browder of Hermitage Capital Management (HCM), with his open boasting of investing in undervalued Russian companies, ruining them with whisper campaigns and then reaping obscene profits when the state moved in to clean things up, anyone in their right mind would be resentful and suspicious.
In a climate that has the west shouting angrily that Russia is too dependent on its energy economy and must reform – while pouring cold water on Russian attempts to join international organizations and mocking attempts to reform anything – Russia has in fact done very well. Although the developed world is currently gaga over Brazil and its exploding potential, recent analysis by Business News Europe showed Brazil outperforming Russia among the BRIC countries in only a single category – GINI coefficient. This, for the non-economically inclined, is a figure that relates to equality of income distribution; Russia was second. Russia leads all the BRICs in GDP per capita, percentage of population in the middle class, years of schooling, debt-to-GDP ratio, is lowest for population below the poverty line, and is highest in per capita income and on the UN Development Index.
Would it have achieved those accomplishments if the government paid attention to chinless economists who dropped the ball under Yeltsin, appear eager to drop it again in exactly the same manner, and evidently couldn’t predict yesterday’s trends today? Well, what do you think?