In 2007 Naomi Klein got quite a bit of attention and mostly favorable comment for her book, Shock Doctrine. It promulgated that global elites used periods of crisis around the world to force damaging neoliberal policies derived from the Chicago School and Washington Consensus upon unhappy populations that suffered greatly as a result. This was “shock therapy” that was more like destructive electroshock than any sort of therapy. There is a lot of truth to this argument, and it highlighted underlying ideological arguments and outcomes.

The argument largely seems to hold for the original poster boy example in Chile with the Pinochet coup against the socialist Allende regime. A military coup replaced a democratically government. While Chile was experiencing a serious inflation, it was not in a full-blown economic collapse. The coup was supported by US leaders Nixon and Kissinger, who saw themselves preventing the emergence of pro-Soviet regime resembling Castro’s Cuba. Thousands were killed, and a sweeping set of laissez-faire policies were imposed with the active participation of “Chicago Boys” associated with Milton Friedman. In fact, aside from bringing down inflation these reforms did not initially improve economic performance, even as foreign capital flowed in, especially into the copper industry, although the core of that industry remained nationalized. After several years the Chicago Boys were sent away and more moderate policies, including a reimposition of controls on foreign capital flows, the economy did grow quite rapidly. But this left a deeply unequal income distribution in place, which would largely remain the case even after Pinochet was removed from power and parliamentary democracy returned.

This scenario was argued to happen in many other nations, especially those in the former Soviet bloc as the Soviet Union disintegrated and its successor states and the former members of the Soviet bloc in the CMEA and Warsaw Pact also moved to some sort of market capitalism imposed from outside with policies funded by the IMF and following the Washington Consensus. Although he has since expressed regret for this role in this, a key player linking what was done in several Latin American nations and what went down after 1989 in Eastern and Central Europe was Jeffrey Sachs. Klein’s discussion especially of what went down in Russia also looks pretty sound by and large, without dragging through the details, although in these cases the political shift was from dictatorships run by Communist parties dominated out of Moscow to at least somewhat more democratic governments, although not in all of the former Soviet republics such as in Central Asia and with many of these later backsliding towards more authoritarian governments later. In Russia and in many others large numbers of people were thrown into poverty from which they have not recovered. Klein has also extended this argument to other nations, including South Africa after the end of apartheid.

Having said all that it must also be recognized that in some parts of the book Klein overstated her argument even to the point of including outright false information:

The case that really sticks out in this regard is Poland, arguably especially important as it was the place where the term “shock therapy” was first used. As it turns out, many observers have an inaccurate perception of what happened there, with Klein’s account not helping. It is understandable that many might be misled given that it was the Polish finance minister during the worst of the crisis and shock in 1990-91 when economic output fell sharply and unemployment rose, Leszek Balcerowicz, who coined the term and said that it was being applied in Poland. But this turns out to be an exaggeration, with much of what he wanted with the support of Jeffrey Sachs and the IMF at the time not happening due to an election in 1993 that threw out the shockers and mitigated the policies substantially. The upshot ultimately was that Poland ended up performing better than any other of the former socialist transition economies of the former Soviet bloc, becoming in fact one of the best economic performers in the entire continent of Europe, the only nation there not to go into recession in 2009 and now further ahead than any of the others economically. While inequality and unemployment are somewhat higher than in 1989, they are not dramatically so while many other economic variables are strongly better. The unemployment rate in August 2018 was 3.4%, higher than the less than 1% of 1989 but lower than in the US or most other European nations. The Gini coefficient is now somewhere in the .32 to .34 range, higher than ..25-.28 of 1989, higher than in Sweden or the Czech Republic but about the same as in Germany and much lower than in Russia, the US, or China.

The vast majority of the population is unequivocally better off economically now than in 1989. Comparing 2013 to 1989 as a ratio, real per capita GDP in Poland was 2.98, higher than any Soviet bloc transition economy aside from Turkmenistan (whose data is unreliable), with Russia at 1.44, the Czech Republic at 1.68, Hungary at 2.17, and Moldova at 0.82, now Europe’s poorest economy falling below Albania at 2.55. Poland suffered an inflation rate of 6905 in 1989 but this is was brought down fairly rapidly and is now barely above zero. It had the least level of graft of any of these economies as of 2013, There has been major environmental cleanup, especially in its southwestern corner, formerly part of the “dirty triangle,” one of the most polluted locations ever on this planet. The ratio of measured happiness between 2013 and 1989 is 1.44, higher than in any of the other transition nations.

A particularly controversial issue is that of the poverty rate in Poland, for which there are competing measures. Depending on the measure, the poverty rate in the 1980s was probably in the 5-10% range. In 2012, 6.7% of the population was below a living wage level, while alternative measures had it at around 11% or even as high as 16%. The poverty rate certainly rose sharply as did income inequality in the crisis years of 1990-91, but then fell and rose again before falling afterwards. A low point after the transition was 2003, the year before Poland entered the EU and began receiving substantial agricultural subsidies that helped the poor largely rural southeastern region long marked by small unproductive farms (Poland had mostly private farm ownership throughout the communist period), with by one measure the poverty rate possibly getting as high as 24%.. This is a point where Naomi Klein’s analysis basically went completely off the rails. Her story on Poland basically stops with 2003, which can be understood given her book came out in 2007. But she claims a poverty rate in 2003 of 59% (pp. 241-242), and declares strongly that the economic quality of life in Poland had completely collapsed. This is simply false, a wild exaggeration,

So, how did Poland end up doing so well, actually one of the best performing economies in Europe over the last quarter century? Crucial is that in fact it did not follow through on important parts of its supposed shock therapy, although most people (including Naomi Klein) do not seem to know this. Very important was that it did not undo its generous social safety net, especially its generous pension system. This was a central issue in the 1993 election, with both Blacerowicz and Sachs unhappy about this outcome. I remember well the 1994 ASSA convention at which Sachs gave a major speech in which he basically whined about this election outcome and essentially accused the Polish people of being a bunch of spoiled brats for wanting to hang onto their supposedly overly generous pension system. I note that he has since changed his tune and now recognizes the stabilizing and human nature of maintaining a decent social safety net in these economies.

The other area where Poland did not follow through on its shock policies involved privatization, which was supposed to be rapid and complete. It was not and has never been completed. Indeed, today Poland has the highest rate of state-owned production in its economy at around 30% of GDP of any OECD economy, another little-known fact. Privatization was resisted, especially because of fear of German companies taking over Polish firms, and what privatization that happened tended to be gradual, with a large part of the private sector consisting of brand-new firms owned by Poles, arguably the most dynamic part of the economy. In this areas, Poland actually resembles China substantially, a comparison made by a number of careful observers. The current populist government of the Law and Justice Party has if anything tightened restrictions on foreign ownership of banks and land, if not having engaged in any outright renationalization as we have seen in Russia and Hungary.

Given that much of the shock therapy program did not happen or did not do so shockingly, where was there shock therapy. This did indeed happen with respect to macro policy, driven by the problem of getting the incipient hyperinflation that had developed by 1989 in largely market socialist Poland under control. This did involve sharp pain with falling output and rising unemployment and poverty in 1990-91, but Poland was the first of the Soviet bloc transition economies to turn around, with most still having declining output in 1994 and quite a few until well after that. The pain in Poland was sharp, but it was short, and the longer run state has outperformed the others and put Poland far above where it was in 1989.

The politics of all this has been quite complicated and involved some important and curious twists and turns. From 1989 on there has been a broad “left-right” split with probably the most important constant in this being attitudes towards the Roman Catholic Church in famously devout Poland, with being pro-Church being on the right, with people coming out of the old Communist Party veing on the left. But the positions on economic policy regarding these groups have changed over time. in the 1989-93 period, the supporters of the shock therapy were on the right, although including the workers of the Solidarity movement. However, by now the rightist Law and Justice Party that is in power and attacks its rivals for being leftover communists and also strongly opposed Russia (in contrast to the populist rightist regime of Orban in Hungary who is friends with Putin), has in it populism become more the defender of both the social safety net and supporting the state-owned enterprises compared to the supposedly crypto-communist left, now out of power.

Needless to say, there is much discussion about how it is that Poland has been by so many measures so economically successful, yet since 2015 has come to be ruled by a reactionary populist party that has been restricting media and judicial independence, although it may be that it is going to hold back on some of this compared to Russia, Hungary, and Turkey. I think two things are important. One is that although Poland avoided going into recession in 2009 (largely due to staying out of the euro and also being strongly linked into the supply chains of neighboring Germany), its growth rate has slowed in more recent years while remaining positive, something happening throughout all of Eastern Europe, which has stopped catching up to Western Europe. And the second is that the frame of reference has changed. Whereas Poland has done well compared to its formerly socialist neighbors, the population now compares themselves to those in Western Europe, especially neighboring Germany, whom they are clearly well behind. Many young Poles have left for the West, with a cliché in the Brexit debates in UK being about the supposed problem of “the Polish plumber” coming in to take away British jobs. The Poles may be much happier than they were 30 years ago, but the bloom is off the rose as the transition has been long over. Where they will end up is unclear.

A final irony is that for all his advocacy in 1989-93 (and later as Director of the Polish central bank) for the hardline version of shock therapy many think happened in Poland, Balcerowicz himself at one point advocated something pretty much like what came to pass, a gradual privatization and maintaining most of the social safety net while advocating shock monetary policies to bring inflation under control. This was before the transition started and the Communist Party was still in control. Indeed, I met him in this period and heard him advocate pretty much this approach, which he also advocated in print. It was 1988 and I was teaching summer school at the University of Wisconsin-Madison when he showed up in town as part of a general wandering around the US talking to people and giving talks. We had some beers on the famous Union Terrace there by beautiful Lake Mendota. I confess thinking him a naive dreamer with all his plans for Poland that at the time seemed so unlikely and utopian. But that was one of those lessons for me: one should never discount a wandering prophet without position. He can end up running the show and making at least some of his dreams become reality.

Barkley Rosser

I am back from the annual ASSA/AEA meetings in Atlanta.  I learned a new term that on checking I find has been around for about five years. It is “econogenic,” coined by George DeMartino, who spoke on this in a session on “Ethics and Economics” held by the Association for Social Economics. It means “harm done by economists,” and it is inspired by “iatrogenic,” referring to harm done by physicians.  His talk focused on this and claims that the medical profession  is 50 years ahead of the economics profession on dealing with harm they do.  For physicians he praised the patients’ rights movement that took off in the 1960s and has gained substantial legal support, with patients now having say on how they are treated by physicians rather than living in a world where the physician was always right.

DeMartino noted policies supported by many economists that can be defended on the grounds that they supposedly lead to gains that outweigh losses with Hicks compensation potentially able to make things right and pay off those who might be hurt.  Lots of economists have supported such policy changes when convinced that such calculations are correct.  The problem is that most of the time, indeed, the vast majority of the time, those compensating payments are not made.  And to make things worse, while those gains may exceed those losses, they often are widely spread across many people, while the costs are intensely concentrated very painfully on a smaller group of people.

I am not somebody who makes endo/beginning of year predictions, and I am not about to stsrt now.  But I have just read a guest post by Jeffrey Frankel on Econbrowser where he brags about making six accurate predictions for 2018 while not reporting on some others he made that did not work out so well.  I happened to largely agree with them when I saw him making them, with some questions on two, while myself quitely making some that failed to come true.  I shall comment.

Frankel’s six predictions were: 1) market volatility would increase (presumably across many markets), one I expected and that clearly has come true; 2) the stock market would fall, which I had mixed feelings on, thinking that indeed the bull market of 2017 was over but given my expectation of high volartilty unsure how it would end and indeed the markets did hit new all time highs a few months ago, only to plunge more recently to end the year lower. 3) that Trump would switch from criticizing the Fed for not raising interest rates fast enough to for it raising them too fast, with my only caveat there being that I think he was already in 2017 makking noises about wanting the Fed not to raise interest rates too fast; 4) that minerals prices would fall, with my view on this being basically the same as my view on the stock markets, expecting greater volatility without being sure of where they would be at this point and with them indeed not too long ago being well above starting year levels if now lower; 5) tax cuts wouls raise deficits, for sure, and 6) those deficits would raise both the dollar and the current account deficit, darned tooting.

Outgoing Chair of the House Judiciary Committee, Bob Goodlatte is my Congressman.  I even know him, having had civil almost friendly relations.  He has been in office for 26 years.  But his career exemplifies the degeneration of the Republican Party from a Lincoln-derived progressive force in US politics to the racist and reactionary disaster that it has become with Donald Trump as president. The quick story on this is that he was once an aide to a predecessor, M. Caldwell Butler, a “Mountain Valley Republican” who voted to impeach Richard Nixon as a member of the House Judiciary Committee back in 1974, the committee that Goodlatte has come to chair.  In contrast to his former boss, Goodlatte, who entered office as a supposed “moderate,” if not a full-blown Lincoln-derived Mountain Valley Republican, he has suppressed investigations of Trump and done much worse.

While he has supported a long list of corporate special interests, probably the ultimate sign of how low he and his party have fallen is his final act as Judiciary Committee Chair, reported in today’s Washington Post.  He single handedly blocked a bill that was unanimously passed by the Senate to protect Native American women from violent attacks.  His reason for this was totally obscure and ridiculous, a trivial concern that the bill favored certain agencies over others in making complaints about such violence.  The bill was originated by outgoing Dem Sen. Heidi Heitkamp of ND, but apparently it will be reintroduced by Lisa Murkowski of AK next year, and hopefully it will pass.   Indeed, I really do not know why Goodlatte is going out on this.  What makes this all the more appalling is that our Congressional district contains the largest Native Indian tribe in Virginia, the Monocans, who have had a long history of being ignored and discriminated against.

Yesterday President Trump announced that he was removing all US troops from Syria over the next 30 days.  Today, “Mad Dog” Jim Mattis, the US Secretary of Defense and widely viewed as “the last adult in the room” among the Trump national security team, announced his resignation effective at the end of February.  This is not a coincidence, although his letter makes it clear that he had been thinking about this serously for some time.

In his letter the most fundamental issue seems to be his concern for proper relations with US allies, with Trump obviously treating nearly all of them badly.  So a  crucial sentence is the following.

“While the US remains the indispensable nation in the free world, we cannot protect our interests without maintaining strong alliances and showing respect to those allies.”

Later after noting that 29 democracies supported the US after the 9-11 attack as showing the importance of allies he writes:

“The Defeat-ISIS coalition of 74 nations is further proof.”

Now I have mixed feelings about various pieces of this.  Many of those upset by this sudden and unexpected decision by Trump are focused on Iran and Russia and Assad in Syria: that Assad will remain in power with both Russia and Iran influential there.  I agree Assad is a murderous dictatorial creep, but Russia (and before it the USSR) has had a naval base there in Tartus since 1971 that they are not remotely going to give up.  The Iranians are less important,so the worry about them is mostly silly huysteria.  And on Assad, those most likely to replace him were radical Sunnis allied with al-Qaeda, the group that attacked the US on 9-11.

I have the deepest respect for Robert Shiller, who has been one of the most serious students of the dynamics of speculative bubbles there is, winning a well-deserved Nobel Prize for his work on this important topic.  One of the more significant parts of his work has been on housing bubbles in particular, with his Case-Shiller indices being the most widely watched housing price measures in the US. Furthermore, in the second edition of his excellent Irrational Exuberance he laid out the case that housing prices from 19997-98 onwards into the early 2000s were almost certainly a massive bubble that would crash hard with dire consequences.  He was right.

So it is with some trepidation that I question his arguments in a recent New York Times column and in other outlets to the effect that we are again experiencing a speculative bubble in US housing markets (and it should be kept in mind that these are local so varied and not all behaving similarly).  The centerpiece of his argument is that the average nominal house price in the US has now reaxhed and seems to be surpassing the peak level in 2006 before the crash that brought on the Great Recession.  Needless to say, this is serious stuff that desrves a close look.

Unfortunately these recent public statements by Shiller lack a crucial item that was crucial to the case he made in the second edition of his Irrational Exuberance that there was the biggest housing bubble in U/S history.  That would be take account of the best measure of the fundamental, housing rents, or to translate that, to consider the path of the price/rent ratio.  That he convinceed many people, including me, that housing prices in the early 2000s were a major bubble was that he showed that the average price/rent ratio had been rising in an unprecedented way, with it having been relatively stable theough most of the 20th century, including during the 1940s period that saw a major increase in housing prices.  But that increase paralleled a rent increase thar indicated that indeed there was a major shortage of housing.  The fundamental rent indicator triggered after a few years a supply repsonse that stabilized both rents and housing prices.

As most regular readers here know, I have long and old connections to the state of Wisconsin, having gone to high school, undergraduate and graduate school, as well as having family members there since then, with me visiting on a regular basis.  When I first moved there back in 1963, the state had the reputation not only as a Progressive stronghold, the home of “Fighting Bob” LaFollette as well as the location of Ripon, where in 1854 the Republican Party was founded in its days as the anti-slavery party of Abraham Lincoln (that first meeting had a non-trivial number of refugees from the failed German Revolution of 1848).  On top of that, and at least as important, it had a reputation for clean government, super clean government.  William Proxmire was a senator from there who refused to take campaign contributions and made his name exposing wasteful government programs with his “golden fleece” awards (actually that came after I arrived).  I was a conservative/libertarian in those days, making me less proud of the progressive heritage, but I was proud of its clean government rep.

OTOH, there was also a dark side, which even my conservative father disliked, the fact that Proxmire was the successor to none other than Joe McCarthy, one of the worsst senators in US history.  That was also part of the state’s heritage, although many who voted for him thought that they were doing so as part of an effort to clean up corruption by an Eastern Establishment elite, just as many voting for Progressive “Fighting Bob” thought they were doing (and I am certain that there were people in the state who voted for both, with some of them probably also later voting for George McGovern, who was popular in Wisconsin, also out of an anti-Eastern Establishment motivation).  In any case, Wisconsin has long had a deep political polarization, with this long being mostly within the Republican Party, with different parts of the state adhering to different traditions, with the reactionary McCarthy’s base in the northeastern part of the state still the base for that dark side, even if awful outgoing Governor Scott Walker coming from the Milwaukee suburbs.

Which brings us to the current situation following Walker’s defeat by Tony Evers for the governorship after two terms, in which along with GOP control of both houses of the legislature as well as the state Supreme Court he undid substantial portions of the progressive heritage of the state on many fronts, with Walker openly denouncing that heritage and proud of his handiwork.  Of course for some time he had dreams of taking all this to Wasington as president, but somebody named Donald Trump pushed him aside to get the job.  And now Walker is on the way out.

For all of his personal decency and moderation, as well as his generally capable and cautious handling of foreign affaris, Bush can be criticized for many things, mostly regarding domestic matters.  He opposed the Civil Rights Act at the time it was being considered, although he later regretted that.  His campaign ran the infamously racist Willie Horton ad when he ran for president in 1988.  He ignored his own warnings about how Reagan’s claim that he could cut taxes, increase defense epending, while reducing the budget deficit amounted to “voodoo economics,” to join the Reagan admininistration as vice president and then promise “read my lips, no new taxes” while running in 1988.  Of course he damaged himself politically by violating that promise in a budget deal in 1990 that involed raising taxes, with this preceding an economic downturn that led to his defeat by Bill Clinton in 1992.

So said Donald Trump on several occasions in connection with possibly appointing her as Fed Chair, according to an article in today’s Washington Post by Philip Rucker, John Dawsey, and Damian Paletta.  This article, along with several others, mostly covered the 20 minute interview these three had with Trump in the Oval Office.  Most of the news was wxs expected: on MbS still “maybe he did and maybe he didn’t” on his role in the Khashoggi murder; “i don’t see it” regarding evidence of a human role in global warming presented in the recently released climate change report, and California forest fires still due to poor forest management (with Interior Sec under investigation Ryan Zinke weighing in on that one about the importance of good forest management).  No, the top story was about the economy.

So Trump is blaming GM’s impending layoff of 15,000 workers on the Fed raising interest rates, no role for his steel tariffs.  Janet Yellen should probably grateful she is not in the firing line.  It is Jerome (Jay) Powell who is, with Trump declaring “So far, I’m not even a little bit happy with my selection of Jay.  Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the fed is way off-base with what they are doing.”

Now arguably the Fed is being too vigorous about raising interest rates, and they may well slow down or even halt this if the rumblings of growth slowing become louder.  That said, if Yellen had been reappointed probably we would have seen interest rates this year, if possibly maybe not quite as rapidly as we have seen (or would have with some hawk outsider many Congressional Republicans were pushing like Jon Taylor).  But the Fed is much more of a group operation than many realize, especially given that the Chairs for quite some time have sought more or less consensus decisions, even as they are often scattered dissidents making public noises.  And this consensus has a strong element coming from the staff and their models, wirh all of this building in a lot of momentum.  Once the Fed gets itself into doing something, like deciding on the string of interest rates they have been doing, it is hard to undo that.