Book report - July 2016

Although readers (going by page views) seem to like the odd diversion into the world of books, I haven't had the time to do many recent reports, the latest being 'Then and now', my look at the latest volume of Charles Moore's excellent biography of Margaret Thatcher (before that, I'd written up The Fall of the Celtic Tiger, and earlier GDP: A brief but affectionate history and Wellbeing Economics: Future directions for New Zealand).

Now, along has come another great new biography - Volker Ullrich's Hitler, Ascent 1889-1939, with a follow-up second volume in the works. It's both very readable (Ullrich is as much journalist as historian) and professional: Ullrich has gone back to many of the original sources and found new takes on them.  People at every end of the political spectrum have loved it: the Guardian's review called it "an outstanding study" and the Telegraph's review called it "chilling and superb".  Even if you've already read Joachim Fest's Hitler: A Biography and Ian Kershaw's Hitler 1889-1936: Hubris and Hitler 1936-1945: Nemesis, you'll get a lot out of this book.

His overall approach, responding to the question that German media asked abut the 2004 film Downfall, "Are we permitted to depict Hitler as a human being?", is to say, "The only answer is: not only are we permitted, we are obliged to". It would certainly be easier, he argues, to explain Hitler away as either a criminally energetic cretin or a psychopathic monster, but one-dimensional perspectives miss important parts of the story. He concedes that what he regards as the key chapter, "Hitler as Human Being", has a "somewhat unsettling title" but goes on to say

To depict Hitler in human terms is not to elicit sympathy for him or to downplay his crimes. This biography seeks to show the sort of person he was since the 1920s: a fanatic Jew-hater, who could tactically conceal his anti-Semitism but who never lost sight of his aim of 'removing' Jews from German society

For me the key takeaways were two. One was that the idea of Hitler as a confused grab-bag of incoherent noxious ideas is wrong: all the evidence is that he had a long-held, mutually consistent set of them, melding the Treaty of Versailles and the 'stab in the back', the need to restore German power through rearmament and to claim lebensraum in eastern Europe, and hatred of Jews and Bolshevism (he may have caught his particularly virulent dose of anti-semitism in Vienna, which is an easy place to catch it). And the other was the total shallowness of the Nazis' pretence at being a democratic party: within weeks they had suborned virtually every civil institution - the public sector, trade unions, professional associations - into executive arms of the Nazi party. If you ever needed one insight into the nature of the Nazi regime, it's this: Hitler was appointed Chancellor on January 30, 1933. Dachau opened on March 22.

As a colleague recently wrote to me, "The fact that we study Hitler biographies to understand our own times is frightening". So it is, but here we are, with very ugly movements underway in the US and parts of Europe (and undercurrents of them in Brexit). Time to wise up on how and why these things get going, and why they need to be stopped. And if any of this has piqued your interest, then move on to Richard Evans' wonderful three volume set, The Coming of the Third Reich, The Third Reich in Power, and The Third Reich at War.

On the fiction side, there are some great books set against the backdrop of the Second World War and the run-up to it. If you'd like thrillers generally around the general themes of intelligence agencies' manoeuverings and resistance against German occupation, often entangling civilians and often in obscure parts of central Europe, then you'll appreciate everything Alan Furst has written: I've just finished his latest, A Hero in France. Each is self-contained: you can start anywhere. Another great series is Phillip Kerr's one about Bernie Gunther, an officer in the Berlin criminal police during the war. Best read chronologically: last time I was in the University Book Shop in Dunedin, they were selling a cheap omnibus edition of the first three books, marketed as Berlin Noir. You'll also have to go chronologically through David Downing's Furst-like six book espionage series about an Anglo-American journalist in Berlin from the late 1930s onwards: they're named after Berlin railway stations, starting with Zoo Station and finishing with Masaryk Station.

On a darker note, there's Jonathan Littell's The Kindly Ones, a huge book formally about SD officer Max Aue, actually an allegory about the German people's relationship with Nazism. As flavour, in one incident, Max is with the Nazi annihilation squads in Eastern Europe:  they go to find a clearing in a forest to bury/hide the corpses, only to find all of the clearings already full of victims.

What else have I been reading that's worth a look? Christopher Petit's The Butchers of Berlin, another Berlin police story from 1943. John Guy's Elizabeth: The Forgotten Years, excellent biography of Elizabeth I. Andrew Taylor, The Ashes of London, a fine whodunnit set in the immediate aftermath of the Great Fire of London in 1666. And although I'm not usually a great one for legal thrillers, try Gianrico Carofiglio, who in real-life is an anti-Mafia prosecutor and has written a series set against that background: I enjoyed his latest, A Fine Line. And though they're aimed at younger readers, anyone of any age will enjoy Neil Gaiman's The Graveyard Book and Katherine Rundell's The Wolf Wilder. And for something completely different, Antoine Laurain's The President's Hat (translated from French, the president being Mitterand).

Not much economics in that lot, I know, but I'll make up for it with two I've got on the bedside table, Richard Grossman's Wrong: Nine economic policy disasters and what we can learn from them, and David Evans' and Richard Schmalensee's Matchmakers: The New Economics of Multisided Platforms. Also lined up to go: Philippe Sands, East West Street: On the origins of "genocide" and "crimes against  humanity"; Timothy Garton Ash, Free Speech: Ten Principles for a Connected World;  and Ann Patty, Living with a Dead Language: My Romance with Latin.

Then and now

I've just finished the second volume, Everything She Wants, of Charles Moore's authorised biography of Margaret Thatcher. It covers 1982-87, and it's excellent. Whatever your political views are - and many people will be starting from a strong opinion about her -  you're likely to end up with a more balanced view. The first volume, Not For Turning, was equally good, and won multiple industry prizes.

From an economist's point of view, it's interesting to look back on the economic policy of thirty years ago. One particularly striking aspect was the bizarrely uncoordinated way of running fiscal policy, or as the book puts it (p185)

Under the British system, the Budget is not a Cabinet decision, though the Cabinet is perfunctorily consulted and informed before it is unveiled to Parliament. It belongs exclusively to the Chancellor [of the Exchequer], and 'The only person the Chancellor is obliged to consult is the Prime Minister'

Some other aspects of fiscal policy also looked questionable. One of the motivations for asset sales was the cosmetic effect of appearing to reduce the fiscal deficit by counting the sales proceeds as current revenue - a bad practice. And monopolies such as British Telecom (BT) were sold off to maximise the sale price, with inadequate controls on subsequent profiteering. Not that the UK was alone in taking the money and running - as recently as 2002, the Australian government sold off Sydney Airport on terms which effectively prevented any rival airport getting underway.

The big UK Budget set-pieces also reminded me that once-a-year adjustment of revenue and spending looked odd even back then, and has become even more anachronistic since. There may be some reasons why you can't adjust fiscal policy day-by-day (people would have some difficulty staying on top of their tax owing, as would the IRD in collecting it), but on the other hand there's been a big step forward in automating the likes of payroll systems over the past thirty years, and some of the supposed constraints on more frequent than annual tax or spending changes may well have dropped away. And there's certainly no good reason why (say) increased infrastructure spending has to wait till May 16 (our Budget date this year) for the starter's pistol to go off.

Monetary policy was relatively primitive. Early on the Thatcher government set out on a tough anti-inflation squeeze - my first mortgage, which I took out in the UK in 1979, was on a fixed 14% rate - and ran policy by trying to manage one or more of the monetary aggregates (typically 'sterling M3'). But Goodhart's Law kicked in, and Chapter 13 consequently deals with 'The death-knell of monetarism'. Monetary policy as we mostly know it today - with an independent central bank and an inflation-targetting regime - didn't arrive in the UK till 1997, under an incoming Labour government with more modern ideas.

Not that everything back then was ramshackle. The UK took a trick with a politically adroit way of allocating shares in British Telecom - "Everyone applying for 400 shares or fewer got 100 per cent of what they sought. Those who applied for 100,000 shares or more got nothing" (p198) - which sat nicely with the 'popular capitalism' aim of the sale, and which might be worth revisiting if we ever get round to future privatisations (that 45% stake in Kiwibank, maybe?).

And the Thatcher government (belatedly) came up with regulation for the likes of BT that was state of the art, including Professor Stephen Littlechild's 'RPI minus X':

This was not supposed to be the ultimate answer to the monopoly problem, but was more of a stop-gap measure until sufficient competition developed. As matters turned out, however, it stopped a great many gaps, and became a regulatory model for other privatizations (p196)

I think it can still plug a great many gaps, and I'm not sure we (and other countries) are doing a better job with highly complex and expensive 'rate of return' alternatives.

I was also reminded of the then closed, snobbish, sexist nature of the City of London, where a provincial, middle class woman with a science degree like Margaret Thatcher was, not to put too fine a word on it, outright despised:

[Cecil] Parkinson recalled meeting her returning from lunch at a big bank before her first victory in 1979. 'They had given her hell. She was very depressed. I said: "Don't worry; they'll vote for you, and they'll forget it". "They may", replied Margaret, "but I won't"' (p215)

Final words to the inimitable Denis Thatcher who was accompanying Mrs Thatcher at a Commonwealth conference in India:

At this conference, Denis's irritation with the physical arrangements boiled over. During the leaders' 'retreat' in Goa, there were constant power cuts. He emerged on the balcony of the chalet allotted to the Thatchers and bellowed: 'This place is very high on the buggeration factor' (p548n)

A cautionary tale

I've just finished reading The Fall of the Celtic Tiger (Oxford University Press, hardback 2013, paperback 2014), a fine book cowritten by my old classmate at Trinity College Dublin, Donal Donovan, and our former monetary economics lecturer, Antoin Murphy. Well worth reading from many perspectives: the story of how the best performing economy in Europe became a financial basket case is gripping, and it's got many lessons for countries elsewhere, including for us.

One is the importance of keeping a very close eye on the structural fiscal balance - the true shape of the government's books, shorn of cyclical influences. The Irish government of the first half of the 2000s spent up large on the back of a cyclical and unsustainable boom in revenue, a lot of it emanating one way or another from the massively overheated Irish property sector. In reality, its spending (and the future commitments it also entered into) left it hugely exposed, financially, when its revenues plunged.

At the time, as the book explains, watching the structural balance wasn't much in vogue, and it didn't help that when the first estimates were eventually made of the true Irish position, they didn't correctly pick up the sheer awfulness of the fiscal books. These days we're more on the ball - though the media attention at Budget time is still disproportionately on the government's headline fiscal numbers and not enough on what's really happening under the bonnet - and I was pleased to see that Treasury continues to beaver away at improved ways of calculating where we really are.

I was also struck by how quickly the Irish fiscal situation deteriorated when the balloon finally burst, and there's a lesson there too. Here is what the level of Irish government debt looked like before things went to hell in a handbasket (based on the data in Table 6.1 of The Fall of the Celtic Tiger).

That looks good, doesn't it? Despite the big spendup, revenues were so large that the government could scatter cash to the four winds and still have enough left over to work government debt down to what looks like a conservative level of just under 25% of GDP. You'd think that debt at that level was low enough to be able to cope with anything the domestic or global economy might throw at you, wouldn't you?

But it wasn't.

So when our Fiscal Strategy Report says,

The Government has five fiscal priorities:

...

2 Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18

...

...

5 Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020 

I say, right on.

And finally there is the whole issue of overheated property markets: as you read the book, you find yourself asking, are we on the same slippery slope to a property bust as the Irish were?

On balance I'm inclined to think not. We do have some of the same characteristics as the Irish did: a surge in property demand from growth in incomes, strong net immigration, and a monetary policy imported from elsewhere that doesn't suit our circumstances (in Ireland's case it was the common eurozone monetary policy, in ours the Fed's which has, for example, helped drive our fixed rate mortgage rates to low levels). But we don't have others, notably the reckless lending of the Irish banks in general and their huge lending to property development companies in particular.

But sorting out what's happening in real time is as hard here as it was in Ireland. You can easily miscategorise things: what looks to you like a 'genuine' increase in housing demand meeting a near-fixed short-term supply curve could as easily be the early to mid stages of a speculative bubble. And often enough there may be elements of both stories happening at the same time.

Which is why I thought this chart was so interesting. It's by Ronan Lyons, an assistant professor at Trinity, and it appeared a few days ago in this article on the Irish economy blog. It's his estimate of the strength of the different factors that were driving the Irish housing boom/bubble.

As you can see, different things mattered at different times. As the boom started (1995-2001), you had decent sized contributions from a variety of sources - people's incomes (blue), demographics (green), bank lending (red), and those too-low eurozone interest rates (yellow) all played a part. The bubble period of 2001-2007, however, was driven overwhelmingly by loose lending.

Wouldn't it be useful to see the same analysis done here?