Tag Archives: Niall Ferguson

Brad Delong tries to detangle Niall Ferguson’s most recent blatherings. I’m in sleepy Rochester, Minnesota (under less than desirable circumstances, but celebratory nonetheless) and, like always, Ferguson gives me the chance to write something fun. On the bright side, Ferguson’s article is a rare example of pundits updating their priors. Only, in this case, it’s within the same piece of writing.

To understand the contradictions within this article, one must first understand Ferguson’s pathological relationship with free markets, his intellectual heroes, and aggregate demand. We begin:

What’s so seductive about the efficient markets hypothesis is that it applies nine years out of ten. A lot of the time it works. But when it stops working, you blow up. Much of the time it looks like you’re in the Bell Curve, and then something happens that your model tells you will happen only once in a million years, but which history tells you happens about once every 50 years.

Key to Ferguson’s intellectual framework are mathematically efficient markets, or at least the program prescribed thereof. His hagiographic pieces on Reagan, Thatcher and supply-side reform in general derive from work by the likes of Robert Barro in the context of Ricardian Equivalence or crowding out. Niall Ferguson is a free marketer, but also a Jeffersonian in the image of producerist currents. That is, the bankers, lawyers, and special interests within the government manipulate power against the common man.

But the ultimate implication of efficient markets is embodied in its eponymous hypothesis: the price is always right. Ferguson can live with this “nine times out of ten”. More accurately, this hypothesis (arguably) vindicates Ferguson’s world view nine times out of ten.

But today, the markets are not telling us the United States of America will default on its debt. Not now, nor ever in the future. Today the markets are not telling us that Washington “is playing Russian Roulette with our creditworthiness”. And suddenly, markets are wrong. Suddenly, Sir Niall Ferguson the first is better than the market at evaluating its own signals. This flies in the face of his own ideology.

Capitalizing on his Jeffersonian credo, he tries to blame the Fed on manipulating the market:

So long as the Federal Reserve continues with the policies of near-zero interest rates and quantitative easing, the gun will likely continue to fire blanks. After all, Fed purchases of Treasurys, if continued at their current level until the end of the year, will account for three quarters of new government borrowing.

But in the world of efficient markets – the world in which Ricardian Equivalence, crowding out, and real business cycles too reside – the Federal Reserve cannot trick investors. Indeed, if the market believed we were spending recklessly – sustained only by a massive balance sheet expansion on part of the central bank – eventually inflationary expectations would become unanchored precipitating a rapid rise – not fall – in Treasury yields.

Here emerges the next in Niall Ferguson’s theory. On the one hand, he heaps praise on Milton Friedman and his “skepticism towards government and faith in individual rationality”. And yet, he disregards a key implication of this theory:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

But this would fly in the face of Ferguson’s position on monetary policy.

Niall Ferguson could rightly – or at least arguably – take the position that government spending is less efficient than the private sector and hence we should avoid expectations of a future increase in tax rates. Niall Ferguson could express disdain at the ideology of a large government, quite independent from its economic effect, in libertarian spirit. But instead he insists that fiscal crisis is nigh. But this contradicts Ferguson’s every belief in the efficient market.

Niall Ferguson’s two contradictions fold into an ultimate third: a contradiction between aggregate demand and aggregate supply. On the one hand, Ferguson is a fervent supply-sider with a saintly view of the Thatcher and Reagan reforms. On the other, he believes supply matters not at all:

Only a fantasist can seriously believe “this is not a crisis.” […] Net interest payments on the federal debt are around 8% of revenues. But under the CBO’s extended baseline scenario, that share could rise to 20% by 2026, 30% by 2049, and 40% by 2072. By 2088, the last date for which the CBO now offers projections, interest payments would—absent any changes in current policy—absorb just under half of all tax revenues. That is another way of saying that policy is unsustainable.

Someone who believes in the importance of aggregate supply cannot reasonably speak of predictions into the  year two thousand and eighty eight ( = 2088). Someone who believes in the importance of aggregate supply (or, indeed, the efficient market hypothesis) cannot possibly imagine the growth of gross domestic product can be predicted in any sensible fashion by the Congressional Budget Office.

But perhaps Ferguson’s 2010 column – “Today’s Keynesians Have Learned Nothing” – explains everything:

When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war.

You see, high deficits are okay in times of war, but not of peace. Markets are efficient nine times out of ten, but not when millions are out job in which case bond yields are too low, because… well… because. Aggregate supply is important when it’s used to justify tax cuts and low public spending, but not when we can predict the infinite future like certain Scottish Sages.

As I have documented in detail before, Niall Ferguson’s grand theory is devoted to a time of big government, but of a different kind. He yearns for the day when big governments taxed the poor to finance colonial adventures and fought with each other for glory and nothing else. Indeed, as he’s written before, he yearns for the day when “Britannia bestrode the globe”.

We today owe our intellectual and humanitarian heritage to Franklin Roosevelt. Not because he vindicated principles of easy money or public finance. Not because he vindicated principles of modern liberalism. But – for the first time in the history of our nation and all nations – he demonstrated that government can exist for the great benefit of the many at the minor cost of the few. For almost a century both political parties have lived by this end, if disagreeing on the means.

There is an ideology that accommodates the worst of efficient markets, supply side economics, and neoliberal economists like Milton Friedman. It is called right wing hackery, with Niall Ferguson as its high priest.

Rarely is a book’s title, subbed How Institutions Decay and Economies Die, so well-suited for its own description. Let me start by noting I agree with Niall Ferguson’s principal charge; that is institutions more than geography and culture explain global economic disparity, and their decay – especially in the West – should be of concern. At least more than it is right now. Also, despite the fact that he seems to know almost nothing about monetary policy, I found The Ascent of Money to be invaluable. Never, however, have I read a book – no less from an endowed chair at Harvard – that is so blatant in its fraudulent claim, only vindicated by a lawyerly interpretation of grammar: something, as any reader of the book knows, Ferguson does not like.

This book is clearly written for a lay audience, given its understandably pedantic explanation of what exactly an “institution” is (no, friends, not a mental asylum reminds us Ferguson). Therefore, it is fair to assume Ferguson does not expect his audience to have read the papers cited throughout. It is his responsibility as a member of elite academia to represent those papers with honesty and scholarship. As page 100 of the Allen Lane copy suggests, Ferguson does not agree:

It is startling to find how poorly the United States now fares when judged by these criteria [relating to the ease of doing business]. In a 2011 survey, [Michael] Porter [of Harvard] and his colleagues asked HBS alumni about 607 instances of decisions on whether or not to offshore operations. The United States retained the business in just ninety-six cases (16 per cent) and lost it in all the rest. Asked why they favoured foreign locations, the respondents listed the areas where they saw the US falling further behind the rest of the world. The top ten reasons included:

1. the effectiveness of the political system;

2. the complexity of the tax code;

3. regulation;

4. the efficiency of the legal framework;

5. the flexibility in hiring and firing.

As it happens, I have read this paper. And, like I said, the only way Ferguson’s cherry-picked nonsense can be justified is through the emphasized grammar. Indeed the “top ten” reasons did (in different words) include the above. Take a look for yourself:

The reader is led to believe that the five listed reasons are at or near the top of a such list created by Porter and his team. To the contrary, the biggest reason, almost twice as prevalent as anything else, was “Lower wage rates (in the destination country)”. That would seem to suggest that “globalization” and “technology” play a role, which Ferguson shrugs off as irrelevant. The tax system, is sixth down the list and cannot in any way be considered primary. There is a chance that Ferguson was using another, more defensible, graph in defense of his claim:

However, this division is not directly emergent from the study of HBS alumni themselves, as Ferguson suggests, but from later analysis. These are not “responses” at all. Furthermore, even though higher skill and education of foreign labor were core components of offshoring, Ferguson does not cite from the above graph America’s lagging “K-12 education system”. Or take the “flexibility in hiring and firing” which, from this graph, isn’t definitively a weakness or deteriorating at all. (Edit: if it is this graph, “flexibility in hiring and firing” is still a very clear strength – and looks stable. So it would be purely dishonest to list it as a reason for decay. It’s like cherry-picking cherries from a apple orchid.) He even fails to cite “logistics infrastructure” and “skilled labor”, whose deterioration leads the authors to note “investments in public goods crucial to competitiveness came under increasing pressure” at all. They do not gel with his hypothesis that “state is the enemy of society”.

What of Reinhart and Rogoff’s famous report, “Growth In a Time of Debt”? This study has much documented methodological and computational errors, but even before these were furiously publicized in the past three months – in academic circles to which Ferguson supposedly belongs – the results were highly disputed. Even the authors, explicitly at least, warned of confusing correlation with causation. But Niall Ferguson notes “Carmen and Vincent Reinhart and Ken Rogoff show that debt overhangs were associated with lower growth”. “Associated” with? Okay, cool. But then he, gleefully, argues against deficits “because the debt burden lowers growth”. And here I thought they teach historians about correlation and causation at Oxford. Also, with gay abandon, he ignores R and R’s consistent claim that inflation is a necessary tool today, arguing instead that higher inflation will lead to no good, signing his name on letters warning of hyperinflation.

Already, there is a pattern of citing microscopic elements of large, nuanced (in the former case), or debunked (in the latter case) studies without providing the appropriate context, or indeed the truth at all. Again, grammar – and that alone – can vindicate Ferguson’s convoluted logic.

The confusion doesn’t end with misrepresentation of facts and opinions, however. He even misrepresents the legends. Most educated but lay readers know very little of Adam Smith, only something about the free market and the famously invisible hand of the price mechanism. So they can be easily lied to about his beliefs. He inaugurates his book with a tribute to Smith via his writings on “the Stationary State” – (the “West” today) noting:

I defy the Western reader not to feel an uneasy sense of recognition in contemplating these two passages.

He pastes Smith’s lucid argument that standard of living of labor are high only in the “progressive” state, “hard” in the “stationary state” and “miserable” in the “declining state”.

This Smithian motif continues throughout the book. What readers are not told is that Adam Smith believed all growth was eventually stationary. Famous phrases like “the division of labor is limited by the extent of the market” aren’t catchy for nothing. He believed as wages increased, so too would the population, pushing them down, continuing in perpetual negative feedback into a steady-state population.

Adam Smith did believe that deregulation and free trade – contrary to mercantalist principles of the day – would increase that maximum steady state. But he, like so many classical economists around him, did not believe in the power of human ingenuity to lift human living conditions. Permanently. Indeed, he certainly did not nuance his argument through modern prescriptions of “institutional change” as forwarded by Acemoglu and Robins as caveats thereof, as Ferguson tries to have you believe.

And if the misrepresentation of philosophers (sorry, Professor Ferguson, but John Stuart Mill bordered on socialist), economists, facts, and opinions is not enough; perhaps the sheer internal inconsistency of the whole thing is. He casually notes:

Nor can we explain the great divergence [between the West and the Rest] in terms of imperialism; the other civilizations did plenty of that before Europeans began crossing oceans and conquering.

On the next paragraph, I kid you not, he cites “the ghost acres” of enslaved Caribbean farmers,

which were soon providing the peoples of the Atlantic metropoles with abundant sugar, a compact source of calories unavailable to most Asians.

SUCKERS! He also argues that the massive buildup of British debt “was a benign development”. But there was one big difference between them, and us. They were imperialists:

Though the national debt grew enormously in the course of England’s many wars with France, reaching a peak of more than 260 per cent of GDP in the decade after 1815, this leverage earned a handsome return, because on the other side of the balance sheet, acquired largely with a debt-financed navy, was a global empire […] There was no default. There was no inflation. And Britannia bestrode the globe.

Alright, folks, so this is what tenured professors at the world’s by and far most prestigious university want you to know: debt is okay so long as it finances a navy and enslaves other people on whom you may force a market. Or if it fuels a war (throughout the book Ferguson talks about “peacetime” debt, as if using your credit card to kill and maim is chill). This explains why Niall Ferguson was hush about George Bush’s credit fueled war on Iraq, and presumably the lovely occupation thereafter. But when debt finances education or infrastructure; food stamps or healthcare; unemployment relief or development aid we must “be cautious of inflation and slower growth”. Thereupon we develop Fergusonian Inequivalence: Ricardian equivalence, by economic law, holds only for peacetime debt. What?

In fact, contrary to his initial claim, the whole damn chapter is about the benefits of imperialism. But here’s a little secret: just like everyone can’t run a trade surplus, everyone can’t imperialize the shit out of other countries. In fact, Niall Ferguson’s sex relationship with imperialism is deeper than at first glance. Through the book, he pays tribute to the responsible “capital accumulation” that so helped 19th century European economies. However, as we know from John A. Hobson, one of England’s best economists, imperialism is the direct and necessary outgrowth of such accumulation. Capitalists could no longer finance sufficient profit on domestic consumption alone, requiring large and bountiful export markets. Furthermore, domestic industry would no longer require capital at a rate commensurate with high profits, which would need to be invested somewhere. Contrast, hence, the domestic versus national products of British colonies to see just what Niall Ferguson believes was a good thing.

I would devote paragraphs to every other flaw within, but then I’d have to write something longer than the book itself, so here’s a good summary:

  • Ferguson repeatedly invokes Edmund Burke’s “partnership of the generations” in the context of fiscal irresponsibility. He’s also delighted about the failures of the “green fantasy” and more than once criticizes those worrying about degrading the “environment”. I will leave it as an exercise to the reader to find the irony.
  • He keeps talking as if central banks should control something called “asset price inflation”. First of all, huh? Second of all, we tried that once upon a time. It’s called the “gold standard”. Remember how that went? (If you need a history lesson, take a look at Europe today)
  • He talks a lot about America’s broken regulation system and how it’s “consistently” beat by Hong Kong. Yes.
  • He cites World Bank Ease of Doing Business indicators, and yet fails to tell the reader – shock! – that the only three countries ahead of America (Singapore, Hong Kong, and New Zealand) have a population the size of less than New York. He has no problem, however, citing Heritage’s far more subjective “Economic Freedom” index which places America far behind. By the way, Heritage is a far more scholarly organization than the World Bank, folks.
  • He tells us in a footnote that Iran’s appearance on IFC’s “Doing Business” report “is a reminder that such databases must be used with caution”. So apparently his only inclusion criteria for “further consideration” is the Boolean variable “is this country part of an Axis of Evil”.
  • As Daniel Altman has suggested, British legal institutions may not be all that great.
  • He consistently wants to confuse the reader with stocks and flows. Sometimes China is this amazing story of incredible growth of which America should be afraid. He devotes pages and pages to the West’s relative decline against the “Rest”. But suddenly against a purported counterpoint to his argument regarding state capitalism, he also notes that America is way more productive than China.
  • On this note, he waxes eloquent about the “Rest’s” amazing sovereign wealth funds valued in the trillions. On the same page, he talks about the ills of state capitalism. Huh? Where exactly does he think China and Saudi Arabia get their money from? Selling software?
  • For that matter, he talks about the “artificial” purchase of American debt from China keeping American interest rates unfairly low. What exactly does he think China should do with its trade surplus? Burn it?
  • (A retrospective edit from my notes). He so dismissively passes off Steven Pinker’s claim that violence has decreased over time, saying he hasn’t seen “statistics”; does he know his colleague has written a 700-page book about the subject? Also brings doubt to his whole “this is peacetime” thing.
  • He devotes a whole chapter to the erosion of civil society. Beneath the veneer of an actually valuable point is an argument that we should replace progressive taxes with volunteerism. Yeah, okay, that’s new. But anyway, an overwhelming portion of civil charities, believe government provision of goods and services to the poor is complimentary to their job.
  • He bemoans the fact that even if the average donation amount has increased, the number of people who donate has fallen. This bothers me too. Except I don’t call it the battle between “Civil and Uncivil Societies”. I call it “inequality”. As the divergence between mean and median wages continues, this is to be expected. That is by definition the result of an increase in relative poverty.

But nothing so far comes close to measuring the deepest flaw in this book, and indeed his worldview. The whole argument behind his “fall of the West” thesis comes from relative decline. Indeed, the first graph in the whole book shows the historical ratio between British and Indian per capita income levels. Maybe the recent fall in that ratio bothers neocolonialists like Niall Ferguson, but to me it is empowering. To me it is the amazing comeuppance (as pointed out by commenter Julian, I’ve used this word incorrectly) rise of my country – which, mind you, was suppressed for so long by his. I would not make it personal if he shared the accepted, and indeed correct, view that colonialism was largely extractive, with a few piecemeal benefits on the side.

Let me tell you, Niall Ferguson, that I will not be happy until the damned ratio in your primary graph falls to, and below, one. What you see as the fall of some stupid and glorious ideology is what over three billion people of this Earth see as the final coming of dignity and prosperity.

As an American I share with you the concern about decaying institutions. But I’m looking at pictures of Detroit and New York City after Hurricane Sandy. As a true believer in market institutions I am looking with concern, but full understanding, at the Occupy movement. I am looking at a world which now mistakes America as a warmonger and projects onto us a mantle you wear so elegantly: “imperialist”.

There are different levels of argument. There is that of fact. Then of analysis. And then of meta-analysis and beyond. Debunking this book requires little more than the first. For it is nothing more than the whimper of a dying idea.

As if to mock the current intellectual conversation on “derp”, Niall Ferguson has a new column in the Wall Street Journal arguing that regulation is the cause of all American decline. I am happy to report to you that, in this special Niall Ferguson edition the “ease of defeating derp” remains quite high.

Starts Ferguson:

Not everyone is an entrepreneur. Still, everyone should try—if only once—to start a business. After all, it is small and medium enterprises that are the key to job creation. There is also something uniquely educational about sitting at the desk where the buck stops, in a dreary office you’ve just rented, working day and night with a handful of employees just to break even.

“Everybody go become an entrepreneur” profoundly fails Kant’s categorical imperative. Also, mind you, this is the “Laurence A. Tisch” professor at Harvard telling us the virtues of “sitting at the desk where the buck stops, in a dreary office you’ve just rented, working day and night with a handful of employees just to break even”. Anyway, here’s Ferguson’s wisdom from his “experience” as a serial entrepreneur:

As an academic, I’m just an amateur capitalist. Still, over the past 15 years I’ve started small ventures in both the U.S. and the U.K. In the process I’ve learned something surprising: It’s much easier to do in the U.K. There seemed to be much more regulation in the U.S., not least the headache of sorting out health insurance for my few employees. And there were certainly more billable hours from lawyers.

Before I talk about this, let’s set context with this random quote from Ferguson’s article:

Consider the evidence from the annual “Doing Business” reports from the World Bank and International Finance Corporation.

Okay, Ashok, let’s “consider the evidence” from World Bank’s “Doing Business” reports:

Country/region 2013 2012 2011 2010 2009
Singapore 1 1 1 1 1
Hong Kong 2 2 2 2 2
New Zealand 3 3 3 3 3
United States 4 4 5 4 4
Denmark 5 5 6 6 5
Norway 6 6 8 10 10
United Kingdom 7 7 4 5 6
South Korea 8 8 16 19 23
Georgia 9 9 12 13 16
Australia 10 15 10 9 9

To use technical jargon, “ruh-oh”. So you’re telling me the three non-entitites that are “easier” than America have a sum total population less than… the New York metro area? Oh and what “regulation” does Niall Ferguson hate?

Why is it getting harder to do business in America? Part of the answer is excessively complex legislation. A prime example is the 848-page Wall Street Reform and Consumer Protection Act of July 2010 (otherwise known as the Dodd-Frank Act), which, among other things, required that regulators create 243 rules, conduct 67 studies and issue 22 periodic reports. Comparable in its complexity is the Patient Protection and Affordable Care Act (906 pages), which is also in the process of spawning thousands of pages of regulation. You don’t have to be opposed to tighter financial regulation or universal health care to recognize that something is wrong with laws so elaborate that almost no one affected has the time or the will to read them.

Because Obamacare and Dodd-Frank were both (!!!!!) passed in 2010, I imagine America’s ranking must have crashed from 4 to…. 5. (And it’s back down to 4, by the way).  For all its flaws, the Doing Business report is a lot more comprehensive than Niall Ferguson’s word. I bet Silicon Valley entrepreneurs are running away to “New Zealand, Australia, Singapore, Canada, Hong Kong and the United Kingdom” to create their billion-dollar startups. Oh and I hear the credit is oozing through Britain. Oh wait…

So not only does Niall Ferguson have the balls to cite a report that directly contradicts his opening speech, he goes on with irrelevant comparisons:

The decline of American institutions is no secret. Yet it is one of those strange “unknown knowns” that is well documented but largely ignored. Each year, the World Economic Forum publishes its Global Competitiveness Index. Since it introduced its current methodology in 2004, the U.S. score has declined by 6%. (In the same period China’s score has improved by 12%.) An important component of the index is provided by 22 different measures of institutional quality, based on the WEF’s Executive Opinion Survey. Typical questions are “How would you characterize corporate governance by investors and boards of directors in your country?” and “In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption?” The startling thing about this exercise is how poorly the U.S. fares.

I think it’s “known unknowns” but, hey, as a neo-imperialist I’m sure you know Donald Rumsfeld way better than I (and, in that case, can someone please explain to me what the hell an “unknown known” is). But, because of people like Niall Ferguson, the decline of American institutions, incidentally, is secret. Regulation is bad in America, but it’s the fundamental distrust George Bush instituted to wage Niall Ferguson’s war that made it okay to start invasions with a lies, and from that we may never recover.

I don’t want to place the mantle of failed imperialism only onto Ferguson, but no one better embodies the neoconservative who knows so little of what it means to be an American, and to be a republic. It is the lying, militaristic, interventionist terror which Niall specifically endorses that has eroded our institutions.

Not the one legislation that is meant to bring peace of mind to the millions of uninsured Americans who, by the way, won’t have the courage to give up wage-work to “start a business”, as Niall would have them do, without universal guarantee. But his only refrain to randomly-selected reports with meaningless indices is, literally, “In every single category, Hong Kong does better”. Well, no freaking shit a port city of 7 million with finance as its sole industry does better than the whole of America.

This man just doesn’t get it:

Yes, we Americans have the right to be stupid if we want to be. We can carry on pretending that our economic problems can be solved with the help of yet more fiscal stimulus or quantitative easing. Or we can face up to the institutional impediments to growth I have described here.

In fact, if there was such an adjective as “American”, Niall Ferguson is the last person that would come to mind. I’d like to see him produce one prominent intellectual who suggests “fiscal stimulus or quantitative easing” are all America needs. Niall fights against a straw-man to create an argument of smoke and mirrors.

Folks, this man believes America should imperialize the world and bear the white man’s burden. If one thing has poisoned our institutions, it is such neoconservatism. Indeed eroding trust in America’s institutions and a burgeoning regulatory state is bad for economic growth, but this should be argued in a measured manner. America is still leads the world in an innovation ecosystem that is unlikely to be surpassed any time soon. Cass Sunstein offers a way to a smart and effective regulatory state. But two, long, bills do not a declining country make.