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Book Review: Boom and Bust: A Global History of Financial Bubbles by William Quinn and John D. Turner

Published by Anonymous (not verified) on Tue, 26/01/2021 - 10:09pm in

In Boom and Bust: A Global History of Financial BubblesWilliam Quinn and John D. Turner take readers on a 300-year tour through the history of the world’s most significant financial bubbles, aiming to improve understanding of why bubbles happen, their destructive and sometimes beneficial consequences and potential policy measures to help prevent bubbles. Hans G. Despain praises the book as a well-written, entertaining and accessible read that is particularly impressive in providing a predicative analytical framework for theorists, policymakers and investors. 

Boom and Bust: A Global History of Financial Bubbles. William Quinn and John D. Turner. Cambridge University Press. 2020.

Find this book (affiliate link): amazon-logo

We are just 21 years into the 21st century and there have already been three major economic crises, each one worse than the one before. The century began with a severe global slowdown in the world’s largest economies of the United States, the European Union and Japan. The slowdown was topped off with the dot-com collapse in financial markets caused by excessive speculation in internet companies. The Financial Crisis of 2008 was even more devastating, destroying incomes, crushing middle-class lives and increasing the number of low-income workers. We are now enduring the third major crisis, accelerated by the economic shutdown caused by the COVID-19 pandemic. Liberal state governments, especially the US and the UK, have addressed the economic hardships ineptly at best. Unemployment remains high, incomes destroyed and an unprecedented number of small businesses have gone bankrupt.

Financial bubbles that often trigger economic crises also seem to be happening more and more frequently. A notable recent example is the cryptocurrency bubbledom. The price of one bitcoin rose from $555 in August 2016 to $19,783 in December 2017; one year later it nosedived to $3,263, and at the end of 2020 it hit a new all-time high of $29,280. During its freefall in 2018, Professor Nouriel Roubini of New York University called cryptocurrency the ‘mother of all scams’ and the ‘mother and father of all bubbles’. The two-year rocky ascent in price has not changed Roubini’s mind.

When financial bubbles pop, they not only destroy wealth, but they can also hurt the macroeconomy. They have devastating consequences for those who did not participate in the activity that caused the initial inflationary boom of the bubble, or what former Federal Reserve Chair Alan Greenspan called ‘irrational exuberance’.

In their brilliant and highly accessible new book, Boom and Bust: A Global History of Financial Bubbles, authors William Quinn and John Turner take us on a 300-year historical tour of the world’s twelve most notorious financial bubbles. Starting in 1720 in the tri-country schemes to finance public debt in France, England and the Netherlands, the book ends in the bubble-riddled 21st century with the dot-com bubble in 2001, the US real-estate bubble in 2008 and the Chinese stock market bubbles in 2007 and 2015. However, this book’s goal is not strictly historical. Instead, Quinn and Turner aim to understand why bubbles happen and to contribute to policy measures to hopefully aid us in ‘devising policies which may prevent bubbles’ and reduce the damage they cause (12).

Quinn and Turner find the conventional explanation of bubbles as the ‘irrational’ behaviour of investors to be ‘unhelpful’ – in fact, ‘almost useless’ for understanding bubble dynamics (11).  Likewise, the very term ‘bubble’ is controversial (3). As an alternative analytical lens, they propose their ‘bubble triangle’ framework (4-9).

The ‘bubble triangle’ begins metaphorically by viewing financial bubbles as fires. Fires are destructive and difficult to stop once started. They can also be beneficial to some ecosystems by providing conditions for renewal. Given sufficient levels of oxygen, fuel and heat, a fire can be started by a simple spark.  Extinguishing a fire requires the removal of at least one chemical component. In a financial fire the analogue chemical components are, respectively, marketability (the ability of a commodity to be marketed), money/credit and speculation; the spark is from two sources, technological innovation or government policy (8). Quinn and Turner demonstrate chapter by chapter how their analytical framework explains both how financial bubbles begin and how they come to an end. They maintain their bubble triangle framework provides predictive power for future bubbles (210-11).

Bubble containing cityscape

Economic literature tends to explain the causes of specific historical episodes, while the bubble triangle framework provides a more general theory for explaining the causes of bubbles. In addition, although John Maynard Keynes’s herd-like behaviour of investors and Hyman Minsky’s instability hypothesis are powerful theories for predicting the regular recurrence of bubbles, they are less able to explain why no major bubbles occurred from 1931 to 1981. Quinn and Turner’s framework fills this analytical gap.

Quinn and Turner demonstrate the power of their analytical framework by examining twelve historical financial ‘bubble triangles’ in ten wonderfully written, extremely entertaining and exceptionally erudite chapters. They cover the first bubble in 1720, the Latin American mining stocks bubble in the 1820s, the UK railway stocks bubble of the 1840s, the Australian land bubble of 1886-93, the UK bicycle bubble of the 1890s, the US stock market bubble of the 1920s, the Japanese stock and real-estate bubble in 1985-92, the dot-com bubble of 1995-2001, the subprime mortgage bubble of the 2000s and two Chinese stock bubbles in 2007 and 2015.

Quinn and Turner’s approach is not to mine for new historical data, but to review the scholarly literature and demonstrate that in each episode the bubble triangle has formidable explanatory power. Generally they find in all bubble occurrences that marketability rises or is already high, money and credit are greatly expanded and speculation always ablaze.  In each case they contend the initial spark was either innovation or government policy. They further highlight that all too often fraud and ignorance function to add more money and make a heated speculative moment even hotter.

The series of events in 1720 are especially interesting in that they constitute three separate bubbles. The Mississippi Bubble in France, the South Sea Bubble in the UK and the Dutch Windhandel represent the first, and by some measures, the largest global financial bubble in history. In each case, ‘all three sides of the bubble triangle [were] in place’ (33). According to Quinn and Turner, propaganda, fraud and government policy were the spark (33).

The negative economic consequences were far more severe in France than in the UK and the Netherlands for two primary reasons. A much greater proportion of the French population were exposed due to John Law’s currency schemes and the French banking system was much more deeply involved in manufacturing and participation in the Mississippi Bubble (37). France experienced a deep recession and was saddled by public debt and financial chaos, prohibiting France’s economic development and ‘indirectly’ linking the bubble ‘to both the French Revolution and the ultimate failure of Napoleon’ (35). Meanwhile, the UK and the Netherlands’ bubble avoided the severe economic and political consequences. In the case of the UK, the South Sea Bubble may have been a net positive because the recession was short-lived and the debt burden was significantly reduced (36).

The UK bicycle bubble of the 1890s also generated net positive consequences. Although the number of new bicycle firms was unsustainable and the bicycle stock bubble destructive (98-108), many of the unprofitable and bankrupt firms quickly transitioned into other forms of manufacturing (111) following the bursting of the bubble. This augmented the industrial capacity of Britain. In addition, bicycles provided health benefits to riders and reduced harmful waste products from horses, making pedestrian activity safer (113).

It is therefore important to appreciate that bubbles can have positive consequences; nevertheless, ‘not all bubbles are benign or socially useful’ (192). The 2008 subprime mortgage crisis is notable for its economic destruction (189- 92) and devastation of home values (173). In the early 2000s the bubble triangle was in supercharge. The fuel of the crisis was the money rushing into real estate following the dot-com stock crash in 2001. The oxygen was the great increase in stock market activity from the 1990s as well as the increase in middle-class wealth and in financial innovation following financial deregulation. The heat was provided by real-estate speculation due to the rapid increase in house prices, the financial media that emboldened real-estate investment and television shows that encouraged house flipping (185).

Quinn and Turner contend the spark to the housing bubble triangle was ‘political’ (192) and to be found in government housing policy that aimed at creating an ‘ownership society’ and reducing inequality (186). They underscore the ‘unhealthy symbiotic relationship between property developers, banks and politicians’ (189).  Moreover, central banks were ‘powerless’ to prevent the boom, but powerful in clean-up operations: ‘However, in so doing, they saved reckless banks and distorted asset markets with their extraordinary monetary policy. The long-term effects of this clean-up might therefore make the next bubble more likely – and more dangerous’ (192).

As wonderful, entertaining and instructive as this book is, substantive criticisms are in order. First, Quinn and Turner miss an opportunity to apply their bubble triangle framework to the real-estate bubble in China and Hong Kong, and to the Wealth Management Products which have financed it. This bubble is currently deflating, suggesting this as the site of the next crisis.

Second, Quinn and Turner have very little faith in governments preventing bubbles. Thus, the best we can hope for is central banks to clean up ‘the mess from the collapse of the bubble by soothing the pain of its bursting’ (217). They anticlimactically conclude the ‘chief lesson for investors from our book’ is merely to examine ‘each situation to see if the elements of the bubble triangle are present’ (221). ‘Investors beware’ is a highly dissatisfying punchline.

Third, Quinn and Turner explicitly (189) and implicitly throughout their book worry about the ‘unhealthy’ relationship between the state and financiers as a primary source promoting the bubble triangle. Far more attention should be given towards defining the conditions constituting a ‘healthy’ relationship and the institutional forms that would help to solidify a healthy symbiotic relation between the state and financiers.

Fourth, they provocatively claim that the most severe consequences of bubbles are dependent on two conditions. First is the degree of leverage and involvement of banks, versus the involvement of financial investment institutions in that leverage (213). Second, whether the initial spark is innovation or political. When the initial spark is political and the banking system proper is heavily leveraged, the consequences are catastrophic. This is certainly an important insight. However, there are good reasons to believe that the Mississippi bubble in 1720 and the 2008 subprime crisis were caused by financial innovation more than government policy.

Relatedly, the justifications for the George W.Bush administration’s ownership society policy were inequality, lack of health-care and inadequate retirement funds. The Federal Reserve promoted the real-estate boom due to their concerns regarding the dot-com stock market crash. Why not identify the forces generating inequality and the dot-com crisis as the spark of the subprime bubble triangle? Identifying the definitive spark is more problematic than Quinn and Turner present.

Even with these constructive criticisms, Quinn and Turner’s book deserves the highest recommendation. It is accessible to the layperson and simultaneously edifying and provocative for the expert. It is extremely well-written and brilliantly edited. Most impressive is the powerful explanatory and predictive capacities that its analytical framework will provide to theorists, policymakers and investors.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. The LSE RB blog may receive a small commission if you choose to make a purchase through the above Amazon affiliate link. This is entirely independent of the coverage of the book on LSE Review of Books.

Image Credit: Photo by Aaron Ledesma on Unsplash

 


How to use local and hypothecated bond issues to fund the recovery

Published by Anonymous (not verified) on Tue, 26/01/2021 - 9:47pm in

I made a suggestion in a video yesterday that it is now essential to the restoration of balance within the UK economy that the accumulating pile of savings that the last decade has created should be directed towards social and productive purpose when that is not the case at present.

To give some illustration, wealth has increased dramatically over the past decade. As indication, maybe £70 billion a year goes into ISAs, and more than £100 billion a year into pensions. The tax subsidy to achieve these contributions costs almost £60 billion a year. In itself that is a cause for asking why a social dimension is not required with regard to these savings, but there is another aspect to this.

Savings have not just gone up because of the sums saved. The extraordinary increases in wealth cannot have happened for this reason alone. Instead, they have also happened because of the deficits that the government has run over the last decade.

Those deficits have been necessary and appropriate. Indeed, they may well have been too small. But they had an inevitable consequence. When the government runs a deficit someone else has to run a surplus. That’s a fact dictated by double-entry accounting. The sectoral balances show this. This is the latest UK version, from the Office for Budget Responsibility:

As deficits go up so too do savings. And so, the stock of savings in the UK has grown.

This has had an exponential consequence. Since almost all this saving has gone into land, housing or shares, all of which are kept in deliberately short supply by markets keen to maximise profit, the prices of those assets have risen, considerably. The result has been an even greater increase in wealth than there has been in savings. This is data from the ONS from last April when I last looked at the data on this in detail:

I am sure that not much has changed since then in terms of the trend.

But there is a problem here. QE, rightly or wrongly, has been in use for a decade now. And what QE does, quite deliberately, is to force money out of safe bonds and into speculative investment, so pushing up the price of both with the intended aim of reducing effective interest rates. It does then, effectively, inject hot money to fuel speculative activity into the economy.

There are massive consequences of this. One is the resulting enormous increase in financial wealth, and so an increase in inequality.

Another has been an increase in the return to speculation that has discouraged any form of real investment, at cost to real production and jobs within the economy.

The third is a complete disconnect between financial markets and real investment return.

And fourth there is always a risk that the financial markets might crash, simply making overall economic well being worse, and not better.

And fifth, whilst all this is going on, many quite reasonably resent it and become alienated from society and politics which they correctly see as offering them very little of real consequence, whilst the returns to a few rise exponentially. This is a recipe for the social breakdowns that we are now witnessing politically.

My remedy is to address the disconnect between savings and investment in society. My logic is as follows.

First, there is a massive investment shortfall in society if we are to meet current needs for new infrastructure as well as creating the transition to sustainability that we require.

Second, we need this investment to deliver the recovery that is now required post-Covid.

Third, the subsidy that the state gives to the already wealthy by providing them with incentives to save must be applied for social gain. It’s hard to imagine a counter-argument.

Fourth, inequality must be tackled. Even the IMF and OECD now say so.

Fifth, we must seek to avoid a financial crash which continuing QE of the type now used might promote.

Sixth, further QE of that type plus any increase in tax or borrowing must be avoided, as all work against achievement of the above objectives.

Seventh, so too does simple money injection work against that objective since it too increases the sectoral imbalances and does therefore increase savings, whether that is the intention or not, meaning that modern monetary theory has not got all the answers on this.

Which means we have to do something more radical, which is to now reconnect savings, and those that we subsidise through the tax system in particular, and the real economy by encouraging the rather novel (as it turns out) idea that savings might be used as capital to fund the investment that we need for the benefit of all in society.

Doing this is easy. As I have noted, the relationship between tax reliefs and savings in the UK is very marked. Something like 80% of all private wealth is saved in tax incentivised assets, whether that be pension funds, ISAs, other tax driven schemes, and housing, which is massively tax subsidised by being free of capital gains tax.

So, ISAs must only be allowed in future if the ISA funds are invested in bonds that in turn fund activities that can be shown, without doubt, to produce new jobs that support the required transformation of the UK.

I also suggest that 25% of all new (not existing) pension contributions should be required to be invested in the same way.

Together these two measures could result in maybe £100 billion a year of capital being available for investment in the UK, which is more than enough to fund the Green New Deal (which the Climate Change Committee thinks might cost £60 billion a year) and ample other social investment as well, whilst freeing government revenue budgets to address other vital issues, like health, care, education and justice issues.

How could this be done? I suggest that hypothecated bonds be issued. These could be regional (big enough to be effective, but small enough to be local e.g. East Anglia or South Wales) or they could be activity focussed e.g. health, housing, the Green New Deal, and so on. There is no reason not to do both, and mix the benefits.

The bonds would be invested fir the use for which they were subscribed. But the investment projects and their amounts would be set by government. So investment limits may have to be set, and government should also make good shortfalls: this should not be a rationing mechanism.

As important, the interest rate should be the same for all funds, and be both attractive in the market (above average, towards top end for the periods offered, and locking up funds for a period would be part of the deal) and guaranteed by the government. It could also be tax free, as ISAs are.

Redemption should always be possible. Normal circulation should cover this issue. If not QE could, but that would be Green QE in this case, because the funds would then be linked to a specific purpose and not be randomly allocated within markets.

Long term capital redemption would be funded by renting assets created to the government. If funds were made available to the private sector (and they might be, via a National Investment Bank, acting like a venture capital fund) they would obviously be expected to pay a return.

And the interest would be covered by government. Suppose the rate might be 1%. On £100 billion that’s a £1 billion annual cost. Let’s not over-sweat the cost in that case. Putting a cap on balances that might be held in these accounts (less than £500,000 I would suggest, and maybe more like £100,000) would make sure that not to much of this is captured by the already wealthy.

So why do this? Because it solves the problems I note, which are real, politically, socially and economically.

And why do this, rather than do existing bonds as I have been asked? Simply because these existing bonds might be economically ‘efficient’ but they create the social, political and economic consequences I note. Efficiency is a very long way from being the criteria for success in the political economy that I care about.

So will they work? In terms of attracting funds I have not a shadow of a doubt. I think people would be queueing to get them.

In terms then of freeing the government to fund other activities, I again have not a doubt.

In terms or promoting an awareness of the relationship between savings and investment, that will depend on the marketing and reporting. It will be vital that people think there is a relationship between their savings and outcomes. Good reporting will then be vital.

And in terms of additional funding for investment? I am sure that will happen.

Whilst tax reliefs will be better spent.

And two other things will be achieved. Savers are older. Those who will get work from this will mainly be younger. This activity could promote inter-generational solidarity in that case, which is now vital.

In the process it could also underpin what I call the real pension contract (explained here) which requires inter-generational transfers of income and wealth.

We will also get a Green New Deal, better housing, schools, hospitals, transport and other infrastructure. And by freeing government budgets for alternative use other than funding investment we will end up with better services too.

We could even have full employment. And for those who worry about such things, balanced budgets follow on from full employment.

Now, what is not to like?

The missing information on unemployment is the 1.3 million people who have upped sticks and left the country

Published by Anonymous (not verified) on Tue, 26/01/2021 - 7:53pm in

Tags 

Economics, Europe

As the Guardian notes this morning:

The UK’s unemployment rate rose to 5% in the three months to November – up from 4.9%, and the first time it’s been that high in more than four years, according to the the Office for National Statistics.

This means that the number of payroll employees has fallen by 828,000 since February 2020 and that around 1.72 million people were out of work in the quarter, up 418,000 on the same period the previous year, and 202,000 higher than in the previous quarter.

All of these numbers are troubling. I have a loathing of unemployment and real concern for all who suffer it. And yet, what is also baffling is how low the figures are. The economic crisis we are facing remains very deep. Why are so few unemployed?

One answer is, of course, continuing economic support via furlough and other schemes. This results in data being massively distorted, albeit with hope that jobs might just survive this crisis still.

There is also another factor that the FT notes today. Foreign workers are fleeing the  UK as the coronavirus pandemic and Brexit impact on job prospects. I have read the data underpinning their findings, which rightly says the figures are uncertain, but it is likely that 1.3 million people have left the UK in little over a year, with 700,000 leaving London alone.

The figures are, of course, approximate, but they are also evidence based. And they also seem likely. Many in sectors badly hit by coronavirus, in particular, have given up hope of working in the UK, and left.

No wonder unemployment seems so small.

And no wonder rents are falling in London.

But this is not all good news. Some of these people priced themselves into work here, without doubt. But many did so by bringing skills way in excess of that their pay rate suggested they have. They will be badly missed when recovery begins.

The real story behind unemployment is always lost potential. There is more being lost in the UK at present than the headline stats reveal. And that does not have good long term implications. .

The culture war and politics now being injected into UK charities

Published by Anonymous (not verified) on Tue, 26/01/2021 - 6:39pm in

I noticed this tweet this tweet, published yesterday  in response to a letter in The Times, which can be viewed by looking on the link within the tweet (which saves me from suggestion of infringing copyright):

I have followed this issue ever since the Tories appointed a former Tory minister to uphold Tory values with regard to charities as chair of the Charity Commission. I have also followed the row about Prof Corrine Fowler and her team who did excellent work (in my opinion) in documenting the links between slavery, slave owning and National Trust properties.

I deeply resent the suggestion by Baroness Stowell that this work, and others of its type, is culture war. It isn’t. This is history. And anyone who knows anything about history (and I have my own quite niche interests in history and so have some experience in reading developments in it over quite a number of decades) knows that history is not just about facts. It is about our best current understanding of available data (which always evolves) through the lens that society wishes to use to view it at points in time.

So the argument here is not about party politics (and party politics should  always and appropriately kept out if charitable activity). It is instead about how facts develop, and how the view of society develops.

So, for example, now we know Black Lives Matter. It could, of course, be said that we always should have done, but because of developing understanding and events we have finally reached a point where we (I refer to those previously not doing so) seek to view the world through that lens, and ask questions as to why inequality still so very obviously exists, rather than pay lip service to equality in the present without seeking sufficient evidence as to its past cause.

What in any way makes that a culture war? The answer, of course, is nothing at all.

Nor is it non-historical. It is about determining data, as for example the team looking at the National Trust did, and using that to explain events that had not previously been revealed. This makes the approach academic, appropriate, informed and deeply relevant by providing insight into the nature and causes of inequality and its development, as well as perpetuation. Assuming we accept the rather basic maxim for human living that one should love ones neighbour as yourself, which requires that they be treated equally whomsoever they might be, then such work would have to be applauded.

But, apparently it is not. Acceptance of that maxim is apparently party political, which is a little surprising as a suggestion, whilst seeking to explore that causes of current inequality, of various forms, and the nature of the mechanisms of power that maintain it is apparently to pursue a culture war. But, again, it is not. It is about seeking to understand the mechanisms that create disadvantage in our society, and which maintain them through prejudice.

What is true, however, is that there is both party politics and culture war going on here. Both are being pursued by the conservative establishment. The call to respect the opinions  of those who support charities provides the evidence of that. It could not be a clearer message. Honour the wealthy philanthropist it says.

And honour too the Sunday afternoon day tripper to the National Trust, it also says, and their right to enjoy a guilt free, unquestioning, cream tea without mentioning anything so sordid as the role of slavery in building the fabric of not just the tearoom but the very fabric of the society in which it is served.

This honouring is about party politics. It is about the politics of wealth, division, and indifference.

And it is culture war too. It is initially about a war on understanding, on inclusiveness and awareness. But it is about more than that. It is a war on changing the lens through which we view society so that the origins of privilege are not questioned. Most especially that is a war on the culture of questioning itself. It is a demand that we all know our place and do not question why it might be what it is.

In so doing this is a war on education.

And also a war on the process of change that good education must always give rise to, and which charities, by asking questions, promoting education, and seeking reform, have always played a critical role. In that sense this is a war on the very nature of charity.

And why? To perpetuate a power structure that oppresses for the benefit of those who have gained from it at cost to those who have paid the very real price. That is what culture war, and politics through the lens of charity really looks like. When the definition of charity becomes the maintenance of the status quo when it has always been to challenge it by asking the quite essential question as to why charity is ever needed, then a deep malaise is exposed. Baroness Stowell exposes that malaise. Bizarrely, it is of her creation.

The original motivation of Christine Desan may be indicative…

Published by Anonymous (not verified) on Tue, 26/01/2021 - 9:25am in

……and even probably many of us all and perhaps of some of society in general…Christine Desan in discussing her book said she initially “majored in religion and sociology of religion”. The book itself ‘Making Money: Coin, Currency, and the Coming of Capitalism’ is unfortunately expensive to buy but at least it is cheaper as a... Read more

Libraries Are Going Fine-Free

Published by Anonymous (not verified) on Tue, 26/01/2021 - 3:33am in

In recent years the idea of eliminating library fines has been adopted by one city after another. As a result, people, especially low-income folks, have returned books and gone back to using their local libraries. 

libraries

Above is an interactive map of fine-free libraries. You can access it here.

I’m not sure who initiated this idea, but it has caught on widely. Here’s a timeline of its adoption in some major cities:

  • Columbus, Ohio: January 2017
  • Salt Lake City: July 2017
  • Baltimore: June 2018
  • Denver: January 2019
  • Cleveland: July 2019
  • San Francisco: September 2019
  • Chicago: October 2019
  • Phoenix: November 2019
  • Philadelphia: February 2020
  • Los Angeles: Spring 2020
  • London: November 2020

I’m sure I have left out a lot of cities and towns — clearly the idea is a snowball that has gained momentum. But does it work? And does it have any negative consequences? Here are the questions that typically come up.

Why eliminate library fines?

As with lots of fines, overdue book fines discriminate based on income. For instance, in New York, of children and teens with blocked public library memberships, nearly half came from branches in “high-needs” neighborhoods. (In response, the New York Public Library wiped clean all fines for kids and teens in 2017, but it still charges fees for overdue materials.)

nyplThe main reading room at the New York Public Library. Credit: Derek D / Flickr

This suggests that folks for whom a fine is a financial burden often simply stop using the library, while wealthier folks can just return their late books and pay the penalty. Since income in the U.S. often correlates with race, this leads to a lot of BIPOC kids losing access to books, computers or even a quiet space they need to improve their situation. 

So fines are as much a social justice issue as a simple economic one. Library use fosters reading, and reading and literacy leads to better health outcomes. It’s a win-win for the whole community. 

And sure enough, eliminating fines works. When fines aren’t in the way, folks return their overdue books and begin using their libraries again. For instance, when the San Francisco Public Library held a six-week fine amnesty period, some 700,000 items were returned — including a book that had been taken out a century earlier — and 5,000 patrons had their memberships restored. 

Aren’t fines a source of income for libraries?

They are, but for many libraries it’s a tiny percentage of their budget. In Baltimore, which got rid of fines in 2018, it was less than one-quarter of one percent of the library’s operating budget. In other cities like Denver, it’s likewise less than one percent. Can they survive without it? Yes — but there’s a sort of humorous twist here: In some cases, the money brought in from fines was often used to track and process those same fines. Eliminating the fines is therefore often a wash. 

Aren’t fines an incentive for people to return their items?

It turns out, for the most part, they are not. In the ‘80s the Philadelphia library doubled its fines in the hopes of getting more books returned on time. It had zero effect on return rates but overall borrowing went down. 

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In fact, studies have shown that fines have almost no effect on the timely return of books — the stick does not always encourage good behavior. Fines not only don’t encourage borrowers to return books, they act as a barrier that deters folks — especially low-income folks — from using the libraries at all.

Won’t folks just steal books if there are no fines?

Siobhan Reardon, president of the Philadelphia Free Library, which eliminated fines last year, told WHYY that hasn’t been the case. Since you typically can’t check out more books until you return the ones you have, the potential for theft or hoarding is very limited.

How did this wave of policy changes happen so quickly?

In many places it was more gradual than it appears. Eliminating ALL fines makes the news, but many libraries were already chipping away at them incrementally. Cleveland eliminated fines for seniors way back in 1977, for children the following year, for disabled folks in 1992 and for teens in 2001. So for some libraries eliminating all fines was simply the final step in a long process during which they could monitor the effects along the way. 

What are the effects?

A number of library systems have seen patronage rise as overdue books are returned and outstanding fines are forgiven. In Chicago, for instance, the number of returned overdue books jumped from 900 a month to 1,650, and 11,000 of the folks returning them renewed or replaced their library cards. Now, more books in Chicago are being checked out overall — circulation has increased by seven percent from before fines were cut. 

The pandemic put a serious dent in that trend, as libraries had to close, but now folks are checking out more e-books instead. If e-books are the future, we may soon see a day when library fines cease to exist altogether, since you don’t return an e-book to the library — it simply vanishes from your device when the borrowing period expires.

Cleveland Public Library Executive Director Felton Thomas Jr. explained the movement to eliminate fines in a quote I think sums it up nicely: “We want to remove barriers, not block people from accessing the library. We want to connect people to knowledge and ideas, not stand in the way. This important step will help us do our everyday work of fostering learning experiences — sparking curiosity, making connections, and building skills every day for all Greater Clevelanders.”

The post Libraries Are Going Fine-Free appeared first on Reasons to be Cheerful.

Book Review: Decadent Developmentalism: The Political Economy of Democratic Brazil by Matthew M. Taylor

Published by Anonymous (not verified) on Mon, 25/01/2021 - 11:03pm in

In Decadent Developmentalism: The Political Economy of Democratic Brazil, Matthew M. Taylor advances a comprehensive account of Brazil’s decades-long boom-and-bust development trajectory. Taylor pierces through the ideology of developmentalism to offer an institutional and policy examination of the country’s ‘low growth equilibrium’ in order to explain a series of disappointing developmental outcomes, including a social security system that concentrates income and labour market regulations that effectively divide society between privilege and exploitation, writes Mark S. Langevin.

Decadent Developmentalism: The Political Economy of Democratic Brazil. Matthew M. Taylor. Cambridge University Press. 2020.

Book cover of Decadent DevelopmentalismFind this book (affiliate link): amazon-logo

Decadent Developmentalism is as sober as it is provocative, offering an institutionalist analysis of Brazil’s decades-long boom-and-bust development trajectory. Thread by thread, Taylor weaves a tapestry of institutional and policy evaluations that explain how this exceptional nation has fallen short of its promise. The book sets out to explain the ‘low growth equilibrium’, or the sustained patterns of below-average economic growth, educational achievement, infrastructure investment and productivity – along with pervasive inequality – since the transition to democracy in 1985.

Taylor pulls from the comparative political economy literature to offer up an explanatory framework, anchored to the notion of ‘institutional complementarities’, revealing an incentive structure that leads firms and politicians to pursue strategies that are ‘individually first-best, but collectively suboptimal’. While the book is an ‘unabashedly single country study’, its theoretical contributions merit just as much attention as its examination of Brazilian political economy.

Decadent Developmentalism baits a much needed political debate in Brazil, after a lost decade marked by disappointing economic development, world-class corruption, the impeachment of former President Dilma Rousseff and the emergence of a populist-authoritarian movement headed by President Jair Bolsonaro. The title of the book may inflame partisan passions across Brazil’s political spectrum, but its contents represent a well-intentioned examination of those institutions that may be most responsible for Brazil’s developmental paralysis. The author conceptualises institutional complementarities and then applies the notion to an explanation of how they unfold to sustain and reinforce a perverse set of incentives for domestic firms and political factions. Taylor does not discard path-dependency and interest group-based explanations, but he seeks to encompass these theoretical approaches within his explanatory framework.

The book proceeds to detail the five primary domains through which institutional complementarities tend to sustain Brazil’s morass of economic disappointments and political corruption, as well as propel a few steps toward progress. These include: the developmental state; an autonomous government bureaucracy; weak regulatory control; coalitional presidentialism; and what Taylor theorises as the ‘developmental hierarchical market economy’ (DHME). These can be interpreted as attributes of standard variables in comparative political economy, but the author employs them to distinguish Brazil and offer a critique of the shortcomings of Brazil’s ‘neo-developmentalist’ paradigm. A quick glance at Figure 1.2 on page 13 shows the dozens of possible relations or complementarities that can be operationalised from these institutional spaces. Taylor treats each domain by dividing the book into two parts: the first part examines the complementarities within the economic sphere, and the second focuses on the state and its economic, legal and political underpinnings.

Night-time city traffic, Terminal Bandeira, São Paulo, Brazil

Taylor respects Brazil’s intellectual history by offering a rich discussion of the ‘developmental state’, thereby setting up his evaluation of its institutional and policy impacts on economic and social development. He critically examines the relations between firms and the government, with a focus on Brazilian private sector companies with close economic and political ties to the federal government, state-owned enterprises (SOEs) and public sector pension funds. Taylor’s focus on Brazil’s ‘investor state’ reveals the institutional complementarities that allow private interests to become embedded within public institutions.

Much of his examination pivots on ‘cross-shareholding’ and weak regulation wherein successive administrations, begged on by congressional leaders, have chosen to favour influential Brazilian enterprises with favourable public financing, often through the Brazilian Economic and Social Development Bank (BNDES). Taylor illustrates the effect with repeated references to the Brazilian animal protein company JBS, whose owners successfully extracted a fortune in favorable BNDES financing to reach the commanding heights of the global market, but without providing much in return. The book accounts for the case of JBS, as well as the major construction firms that were implicated (and their executives convicted) in the Lava Jato corruption scandal, as the product of complementarities between the economy, the structure of firms and the institutional contours of the federal government, namely coalitional presidentialism and weak regulatory control. These cases also illustrate the segmentation found between firms (domestic versus transnational) and within the labour market (formal versus informal) to frame and sustain what Taylor calls the DHME that has failed to deliver since the promulgation of the 1988 constitution.

The book effectively diagnoses Brazil’s institutional maladies with precision and overwhelming evidence, even if the notion of institutional complementarities is underdeveloped as a comparable concept. While Taylor falls short of erecting a comparable analytical framework, he nonetheless offers a persuasive argument. In sum, the federal government’s propensity to force public finance in political directions and its poor regulatory performance cause suboptimal collective outcomes, including a social security system that concentrates income and labour market regulations that effectively divide society between privilege and exploitation.

In Chapter Six, ‘Rents, Control, and Reciprocity’, Taylor pinpoints the causal mechanisms that trigger the low growth equilibrium and the other elements that poison Brazil’s economic and social development. He applies his analysis across a diverse set of critical, or least illustrative, cases, including the Plano Brazil Maior stimulus programme, the Manaus Free Trade Zone, the INOVAR automotive manufacturing scheme and the ethanol fuel policy, demonstrating the willingness of successive governments to offer generous rents to firms without effective regulatory control or the type of strategic policy management needed to compel firms to become more productive and competitive. For Taylor, the persistence of ‘lackluster control’ stems from politics, the fragmented party system and its corollary, coalitional presidentialism, along with weak strategic coordination across executive branch agencies. More than any other element of the book, Chapter Six provides the most convincing argument that successive Brazilian governments have been ‘ineffective at the essentially political act of controlling the distribution of rents in ways that channel business energies in strategically productive long-term directions’ (192).

Taylor’s evaluation is both careful and conciliatory, but it leaves most of the problem at the doorsteps of Brazil’s political institutions and their feeble capacity to aggregate broad, national interests in the face of the competing private interests of Brazil’s wealthy and well-connected.

Although his book examines labour market segmentation, it does not fully account for the debilitating effects of informal, and often repressive, labour regimes upon developmental outcomes. The mere fact that around half of Brazilian workers labour in the informal sector, far from institutional protections including the constitutional rights to worker association and collective bargaining, explains much about a political system that cannot, or will not, offer strategic economic management and sustained income redistribution. Most Brazilians simply cannot afford to articulate their collective, broad-based interests in Brasília, leaving a well-organised plurality, composed of Brazilian business leaders and professional associations, to squabble over rents and dodge the demands of state-society reciprocity.

Decadent Developmentalism provides an impressive policy evaluation toolkit for understanding, and perhaps even eliminating, the incentives that propel private interests above national policy goals. Taylor’s book teaches us about good governance, but a majority of Brazilians still need to discover how best to articulate and safeguard their collective, national interests to secure formal employment, progressive taxation and equal protection under the law.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. The LSE RB blog may receive a small commission if you choose to make a purchase through the above Amazon affiliate link. This is entirely independent of the coverage of the book on LSE Review of Books.

Image Credit: Photo by Vanessa Bumbeers on Unsplash.

 


Promissory notes, Treasury notes and Bank notes

Published by Anonymous (not verified) on Mon, 25/01/2021 - 9:06pm in

In Felix Martin’s Book ‘Money the Unauthorised Biography’ he quotes this wonderful fact: In 1702, just six years after the foundation of the Bank of England, in Clarke v, Martin, the Chief Justice described the still very new ‘promissory notes’ as ‘a new sort of specialty unknown to the Common Law’ and ‘invented in Lombard... Read more

Mainstream economics — a waste of time on a staggering scale

Published by Anonymous (not verified) on Mon, 25/01/2021 - 7:49pm in

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Economics

Though an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study … Rational choice theory is far too ambitious. In fact, it claims to explain everything social in terms […]

Sunak is the most dangerous man in the UK and looks intent on cementing his reputation

Published by Anonymous (not verified) on Mon, 25/01/2021 - 7:35pm in

I feel as if I have spent much of the last year saying to people that now is not the time to raise taxes when those who should have known better have been arguing otherwise.

It is good in that case to see the FT publishing an editorial saying exactly that this morning, to which they add the suggestion that Rishi Sunak’s determination to curb borrowing will harm the economy. The latter is a sentiment with which I also entirely agree.

The editorial represents one of those continuing moments when the FT tries to talk sense, without quite being able to hide the conflicts that must fester only just below the drafting of its words.

So it can suggest that the Tories face trilemmas of their own making because it promised before Covid not to deliver austerity, or raise any major tax, whilst now seeking to deliver ‘sound finances’. At the same time it can also suggest that resolving this apparently insoluble problem can be deferred. As it notes:

[T]he Conservative party has yet to decide what its commitment to “sound public finances” actually means in an era of low interest rates; borrowing might be at a record high but debt service costs are still falling.

Nor, come to that, has anyone else, except modern monetary theorists, that is.

What is quite certain though is that there is near unanimity, even amongst the likes of the OECD and IMF, that this is not the moment for cuts or tax increases. And that’s simply because the UK, like every other major economy, is in need of government life support  at present when the private sector is falling apart as a result of wholly appropriate Covid restrictions.

So will Sunak accept the advice? Right now I doubt it. Sunak can, in straightforward terms, do the right or wrong thing. The right thing is obvious and logical. The wrong thing, in the form of cuts and tax increases, is dogmatic and solely about  party politics.

I think we can be sure he will go for dogma and petty politics. It’s not for nothing that Sunak is thought to be the most dangerous man in the UK right now, with massively costly policy failures in terms of human lives already to his name. Andy I can’t see him changing his spots. We will all pay the price for the tax increases and cuts he is already trailing pre-Budget.

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