It was with a sense of despair, frsutration and anger that I reviewed the just released report on government fiscal policy by the CD Howe Institute. Self styled as the ‘venerable’ centre of economic policy in Canada, the report simply confirms the depth of the failed orthodoxy in economics today and the incredible inability of intelligent people to think and act outside the politically correct language and narratives of a discipline that once placed empirical kinowledge and research ahead of immoveable beliefs.

The Institute is, like all of us, thinking of policy after the highly successful stimulus and the deeply flawed monetary policies of the past year and one-half. It seems to have learned nothing from developments of the last 18 months that should have set off a period of deep reflection about all of the old nostrums that brought us to the sorry state the world economy is in today. Measures badly needed like credit rationing to avoid new bubbles in the face of run away money creation and measures to steer the massive help given to banks into invesment in the real economy get no attention. These it seems cannot be contemplated if you are a true believer in the make believe economic world of the Institute’s experts. Nothing about industrial strategy and re-positioning major parts of our economy even comes to mind. What about the necessiity of policy to sustain a high wage, higg skilled, knowledge based economy, much of which would be devastated by its proposals? And of course social development is beyond its remit, so child develoment and the like can be left a casualty for all the Insititute cares. So what does CD Howe want? Well predictablly cuts in government expenditures. And – how imaginative – these must be driven by another round of dramatic cuts in transfers to the provinces. And higher taxes on workers. But of course nothing at all of that sort for capital, notwithstanding that there are strong arguments for targetted capital taxes, say on banks and international capital flows, just for starters.

The Institute’s ideas come as they always have from two sources: orthodox economics and the interests of the corporate sector. The Institute feeds off its well heeled partners , each enjoying the other’s prerogatives and perks. If it relies on any substantive argument at all for the policy measures it proposes, it is that they were needed in the 1990’s and it must be repeated to avoid a deficit and debt crisis. Defict and debt, absolutely critical long term concerns if we are to have stable development, seems never to have occurrred to it when for instance all governments – the BC government is a particularly apt example – spent like drunks on infrastructure through massive future payment obligations to PPP’s – debt in disguise – during the mid -2000’s.

The important point is that there are virtually no parallels between the two periods. The 1990’s assualt on government spending followed a prolonged structural deficit that had its source as much in embedded neo-conservative ideas supporting tax cuts and de-regulation as it did in uncontrolled spending. But spending was planned on false assumptions about revenue (and it was not all foolsih liberals – read kemp on Reagan). There was no doubt that fiscal integrity had to be restored and that someone would have to pay. Whether the targets were right can be argued, but is largely irrlelevant today, since the current situation is completely different.

Canada is strugglying its way out of a unprecedented economic crash. It resulted from world wide economic polilcy error founded on the beliefs of the CD Howe Institute and others. The ability to use monetary policy was completely shattered by the developments that flowed from these years of foolish adherence to ideology. When push came to shove, fiscal policy was all there was, and it has worked exceptionally well. But the recovery is going to be long and slow. Cool and sensible heads must prevail. Ideology, based on nothing more than big ideas – the kind of thinking that was once the preserve of socioligists – needs to be vigoursly rebuffed.

Substantial government management of the economy will be essentail for a very long time. Re-regulation of banks and credit markets must be vigorously and intelligently pursued. Volker and Tobin are shining beacons as are lots of young thinking economists sidelined in the poltically correct frenzy of the past two decades within the economics profession. Fiscal policy must not now be undermined by continuing prejudice and self interest. It is no time to undermine seeds of the recovery and the powerful affect of fiscal stimulus on real demand and perhaps more importantly expectations. Stock markets are expressing a more or less rational expectation that the stumulus and other measures are working. It is not time to undermine that. Stable fiscal transfers between Ottawa and the provinces will be important if we are to have a rational, stable, dependable fiscal environment, so necessary to a good solid recovery. It is not the time to return to the bad old ‘let’s-make-a-deal federalism’ that CD Howe suggests.

Perhaps one shoould not be surprised by the shallow, reflexive and largely ideological thinking of the Institute. After all, these views have been appearing in columns in the business pages for the last few months. However, the Institute does occupy an important place in the national policy dialogue. It is sad to see in caught in signs of such ideological bankruptcy. Most of us would wish it success in its work. But this deeply disappointing report, taken in conjunction with the Institute’s failure to come forward to embrace sensible recovery policies, some of which I have written about on these pages, and all of which are well known among good economists, is a disappointing sign that ideology still holds its grip over established policy institutions.

A highly respected climate change scientist has taken aim at fellow members of the UN’s International Panel on Climate Change who engage in political advocacy. Andrew Weaver, a professor at the University of Victoria, is concerned that some panel members have become involved in advocating particular climate change policies and actions rather than serving simply as science advisers. He suggests that those who do so should resign, and that the Panel needs to re-organize to remove the taint of such activity. He suggests that the culprits take their leave of the Panel.

He is right. The panel has over 100 members who are asked to investigate and work on climate change as independent scientists. The work of the Panel has been excellent. Unfortunately that excellence has been compromised in part because some members and associates have become active in advocating for particular policies, including acting as paid consultants to those with an interest in the climate change issue. This creates at least the appearance of using their association with the Panel to further their own interests, which is a sure fire way to discredit the Panel’s work.

Some may think the target here are those who advocate on behalf of the public interest. Oh that this were the case. In an earlier posting I reported on a similar issue related to the activities of one of the panel members from BC. In that case an academic from my own university who has been associated with the work of the Panel took work as a consultant to the Independent (Private) Power Producers association of BC, an industry lobby group. In his report he attacked and attempted to discredit another energy expert who is a recognized professional and author of public interest reports and testimony before the BC Utilities Commission. The expert’s sin was to challenge the positions of the private power producers, who were and are lining up for special deals from the government all the while using the climate change issue to justify highly questionable contracts to supply expensive and largely useless power to BC Hydro. The consultant’s industry sponsored attack came in a widely publicized report paid for by the association. The attack was both unfair and in some aspects just plain wrong. However, it got widespread coverage and was given credibility in part through the author’s association with the work of the UN Panel. Needless to say, it was very damaging to the victim’s reputation and credibility. The attack was couched in very personal terms, notwithstanding the fact that the subject of the attack is one of the most honest, reputable and thorough experts in the field.

One cannot help but think that Andrew Weaver in part had this case in mind when he went public with his concerns.

He is right. This sort of thing must stop. Taking the side of an industry lobby group is about the most unappetizing form of political advocacy possible. Doing so while having acted as a supposed independent adviser to the UN Panel is especially egregious. Those who participate in bodies such as the International Panel on Climate Change must be free of the taint of political activity that furthers private interests. The Independent Power Producers should know better and so should those who do their dirty work, but clearly they do not. The UN should not tolerate this kind of thing from the people who work on its independent panels.

As a matter of interest the same private power producers that bought and paid for this disreputable undertaking in order to undermine and silence an informed and carefully researched critic are apparently once again taking after one of their prominent critics. The highly respected and independent minded journalist Rafe Mair reports that a group associated with the private power interests are circulating a poisonous email about him, twisting something he wrote in December in the Tyee that was critical of them. (see posting at http://www.greenenergybc.ca/media_280110.html). Discrediting critics is clearly part of their way of operating. Mair reports that the circulated email states:

“Rafe Mair’s new found love of nuclear energy is quite suspect. Rafe is ostensibly against run of river hydro because of what he claims to be high cost of production, among other things (which is untrue, as run of river production costs less than what it costs BC Hydro to produce new power).”

These are the words of the private power producers. Note the claim that he “loves” nuclear energy, the careful distortion of facts and the implication that he makes “untrue” claims. And all intended to personally discredit this honourable man.

Rafe’s response is as follows:

“I do not, repeat not, say we should adopt a Nuclear power program in BC, only that we stand back and look at Nuclear with a jaundiced eye but still look. We are, under the Campbell Liberals, bound and determined to destroy our rivers. Campbell, nose growing all the time, says we need the power and that’s why our rivers must be sacrificed. His nose stretches because we do not need the power and even if we did, private river projects won’t help because they only produce power when BC Hydro doesn’t need it. But if there’s a valid alternative, shouldn’t we look at it?

There are, as I see it, these concerns to be dealt with, any one of which would negate the arguments for Nuclear energy.

1. Is it, under 2009 conditions and knowledge, safe? Even if it’s safe
under everyday circumstances could terrorists use it to create an atom
bomb like disaster?

2. How do we dispose of the waste? It’s been this problem that has for
many people made the issue a non starter.

3. Is it cost effective? We know that they haven’t been but are the
numbers better now?

4. Is it really green, considering what it takes to build and maintain a
facility?

We would be damned fools to rush into a pro nuclear policy but also damned fools not to consider it.”

Right minded people should protest this industry group’s tactics to distort and silence critics. One hopes that people across the province will make their disgust about these kind of tactics known in no uncertain terms. These private companies are being granted valuable public land and water licenses with which they will make big returns producing next to worthless power. If they don’t understand that the gift of these licenses requires that they show some basic social responsibility, it is time for BC residents to make this clear to them. They survive and prosper with implicit consent of the people through an unwritten social contract. If they can’t act responsibly and ethically, the contract should be terminated. The people have the power to make that happen.

President Obama has announced a new plan to limit the size of banks and place restrictions on the trading and holding of assets of uncertain value by banks. “The American taxpayer will never again be held hostage by a bank that is too big to fail”, he said.

Much of the media attention has focused on the apparent attempt to use this initiative to shift to a more populist form of politics. Up to now, he has appeared quite timid about the question of bank re-regulation. Many analysts believe that this is because he is listening to his economic advisers, other than Paul Volker, rather than his political advisers who have sensed a restive public unhappy that the banks are not being brought under tighter regulation. Exceptionally, Mr. Volker, a former Federal Reserve Bank Chair, has advocated that Obama move on bank regulation, but the other orthodox economists have, amazingly, remain wedded to their belief in unregulated markets.

However Mr. Obama and Mr. Volker are right, as a matter of policy. If that coincides with the mood of the majority of voters, it is just another indication that the voters often get it right. The trouble with conventional experts on economics and social issues is they too often embrace orthodoxies and conventional wisdoms that mistake their belief systems for factual descriptions. Thank goodness for democracy, and its ability to force correctives in policy.

One fundamental problem with the conventional economists’ views on bank regulation is that it embeds a construction of an idealized world that among other things fails to distinguish risk from uncertainty. Risk can be measured and can be assigned probabilities. Uncertainty cannot. All that can be known about uncertain outcomes is that they can be very damaging if they occur. But the probabilities of different possible outcomes can’t be calculated. Thus it is not possible to insure against them, or to devise instruments that will act as natural counterbalances to them.

The complex derivative financial instruments that were used to finance the highly risky mortgages banks made were so opaque and confusing as to make it impossible to make risk calculations about them. This was the case with the so-called toxic asset backed paper that brought the banks down all across the world. Because they could not be assessed in terms of risk, they could not be insured against, and they could not be made subject to market discipline. The economists advising government were unable to see the implications of this because their education never let them think about market as institutions that can only work under certain situations, and their sluggish minds couldn’t grasp the significance of the difference between calculable risk and uncertainty. So they assured policy makers that risk is the only relevant or real idea, that any numbers are always better than no numbers (even if they are imaginary it seems) and that investors, who are by definition very smart, will always correctly assess risk and trade in instruments that will insure against massive bank failures that might otherwise arise from holdings of toxic assets.

The result that banks were left unregulated in terms of holding such assets. The economists pictured every bank as fully quipped with very smart risk assessors calculating to the millionth decimal point the risk and the appropriate risk protection strategies. It seems never to have occurred to them, and apparently still does not, that this couldn’t be done for the exploding class of derivative assets.

Some say that ii is not fair to criticize the economic advisers for not seeing the need to regulate the investment by banks in these kinds of assets because they were new innovations and their existence could not be understood. This is a faux criticism based on a narrow idea of what it means to understand something. From the 1930’s until the de-regulation of the 1980’s and 90’s, policy thinkers were a bit more broadly educated, and banks were prohibited from investing in any assets that carry these kinds of uncertainties and hard to calculate risk. And it worked. The problem was well known, even if the exact nature of the assets changes from time to time. It was the narrow minds of the policy makers and advisers, and the pressure from self interested financial community that caused governments to de-regulate, not the inability of intelligent humans to understand the problem.

Truth to tell, the conventional economist’s beliefs, and beliefs is all they were, suited their ideological conviction that regulation is a thing always to be avoided in favour of market based mechanisms. To rationalize this they had to construct the imaginary all knowing risk calculators as the actors who protected the whole system. But they were pure fiction, because the risks could not be calculated. The ordinary people, and now Obama, are fortunately a little more subtle and intelligent. They see the problem and they see a simple solution. If the risks associated with these assets can’t be calculated, its simple – don’t let the banks invest in them. It is simple to put in place regulations that block their ownership by banks. This Obama now intends to do, against the advice of his economists. He also intends to limit the size of the banks so that if some still make bad decisions with depositor’s money, they will be small enough when they fail so as not to threaten to bring the whole system down, forcing government to bail them out.

Obama’s and the people’s understanding is absolutely correct. Perhaps they should all get Ph.D.’s, but really it is just practical common sense. And to be honest, there are quite a few economists who agree. But they have been cast in the past as pro-regulation, which is a bad thing to be, and thus have been silenced by the dominant view within the profession. Price based instruments, the dominant view argues, are always better. So they still constantly talk about the challenges of pricing risk as the policy problem, and then excuse the banks because it is so, so hard to do in these cases. Which it is. Indeed it is impossible in these kinds of cases. But they are just wrong in defining the problem, as the experience of the last couple of years has clearly established, and thus fail in reasoning through what to do. It is of no policy use to sympathize with the banks for how hard it is, and to puzzle over how they might better price such risks in order to make policy. It is time for a more practical, intelligent, fact based analysis if we are to have good policy. If it is too hard to price risks, and banks don’t know enough to avoid them, the simple solution is to block the banks from holding such assets. Which means tough regulations that prohibit them from doing so. QED.