As Good as it gets

Why the global political machine seems to be running on fumes

[Lady Receptionist] “How do you write women so well?”

[Melvin turns toward the receptionist] “I think of a man, and take away reason and accountability.”

From the movie “As good as it gets” With Jack Nicholson, Helen Hunt, Greg Kinnear, Cuba Gooding Jr.

The Recent period in history has been characterized by an accelerating rate of intervention both by all kinds of political authorities, be they supranational organizations, governments and  Central Banks in order to jog economic growth out of the more advanced economies, usually  under the assumption that this was a crisis of insufficient demand instead of insufficient productivity, with varying but rather dismal outcomes.

“Industrial policy”, environmental investments, ESG, ever increasing standards for goods destined for private consumption, from cars to electronics to food, haven't so far produced the “desired results”, and now Vaccine Passports in my poor Italy have been the latest rage (Only Saudi Arabia has a similar regime).

Yet, there has been an area where not only investment by governments has been inadequate to nonexistent, but that it would be ideally suited to international cooperation: the “Red Team” approach, where you try and find the best and brightest and put them in a lean and above all MEAN organization whose only goal is to destroy proposals.

 In fact, the concept is as old as time, see Josephus and his quip about the Roman Legions, "It would not be far from the truth to call their drills bloodless battles, their battles bloody drills". The generation who grew up watching "Top Gun" has forgotten WHY western military forces frantically built up specialized outfits which had to impersonate the likely opponent  in open ended exercises, usually teaching by inflicting pain on the "friendlies". Even the COVID response could have been impacted positively, just by providing a a small additional investment.

Alas, not only it never happened, but it never will. You see, governments lost that opportunity way back... in late 1989. Old “Cold War” practitioners, deep thinkers to a man (or woman), were well aware of the added intellectual acuity that came from being threatened externally and internally by the Soviet Union, and when that ended, they had three paths opened to them:

1. they could have fully embraced a “strong market system”, enforced strong protection of market forces and price discovery as a guide both for the population and the political class (consumer/saver protection rules enforcing parity of treatment, no favoritism of state/quasi state actors outside security related issues, etc);

2. They could have established strong “Red Team” units, with full transparency toward citizens, to check and attack all project/schemes/ plans/laws in order to find and “exploit” in a simulated environment any defect/fallacy before those plans had to be put into practice and found wanting when it was too late to remedy;

3. OR, they could have muddled through as if nothing had happened on the assumption that the newfound peace was a kind of “get out of jail free” card allowing to mold reality according to what their principle or whim of the ruling class of the day dictated.

Of course, only one of the three courses exempts the elite classes from scrutiny or “involuntary turnover”, albeit at the cost of being in my opinion the worst in terms of outcomes in all possible way, economic, political, etc.. Guess what the pick was.

Yet, it might not be too late. Or rather: it might not be too late to at least manage the changeover when money runs out, and I mean REAL money, not the “Game of Monopoly” kind Central Bankers seem to think works and will work forever. That however would entail a willingness on the part of public authorities to really put their skin in the game, a possibility as remote as predicting the numbers of Superenalotto in Italy right... on two consecutive draws.

Yet, for the sake of offering a “Solution” instead of being my usual grumpy self, let's start.

First, a bit of number crunching.

In Europe, and especially in Italy, where I dwell, public spending dwarfs the private economy. The official 2020 figures are still a whisker below 50% of GDP, but that's optics, obviously: With a deficit just within 10%, plus another 10% of illegal activities thrown in for good measure (drug dealing etc, an accounting convention which earned Italy an IG Nobel in 2014 for being the icebreaker in the EU), it doesn't take a particular genius to guide any reasonable person to acknowledging that in Italy now over 60% of the economy is state owned or directed. Probably more.

It stands to reason that, all else being equal, the biggest share of spending by far should attract the politicians' undivided attention. Instead, as the recent Next Generation EU guidelines attest, politicians are strangely attracted to further instruct the meager third still outside their grasp on almost anything. Yet, they could invest, as I said in point 3 above, in a strong, credible and transparent “Red Team” approach. That should be also easy enough to do since that approach has been continuously practiced in an important if yet again underfunded part of the public administration: the Military. Of course, the recent abandonment of Afghanistan by the US administration seems to attest that my hypothesis is no longer true and the Military have embraced the “Let's make it up as we go along” approach so cherished by the political class ( and by Brian of Nazareth when preaching in Monty Python's “Life of Brian”), but don't be fooled: under the surface the mindset is still there. Lives at stake do an amazing job of focusing attention.

So, how could this be made to work? Remember that, on paper, what I suggest is already in place: there are lots of “supervisory authorities” all over the world, be they the GAO in the US or to stay closer to my home, the “Corte dei conti”.

Yet, in all these and seen from three miles up, supervisory authorities broadly fall into two categories now: the useless and the compromised. The “useless”, like the two examples above, mean well but have practically no traction on reality. That is partly due to competing authorities that alas have fallen into the second camp, as have all monetary authorities and many others in unrelated fields, but the real factor is that in the past decade governments have decided that they should not be subject to the slings and arrows of outrageous fortune like their peasant citizens, see QE and the attendant rate repression.

Hence, there are two requirements on this: transparency and an adversarial relationship.

All data available and necessary to make a decision should be made available for scrutiny before any firm decision has been made, and the process should be mandatory AFTER politicians have produced a final draft. Also, to ensure that there is no mad rush toward consensus decisions, in all drafts and official papers the Red Team should go first: the opening pages of any measure should be against it. Perhaps also two political cycles sunset clauses should be introduced, in order to get two positive results:

1. the end of those nonsensical political virtue signaling laws “XXXX will be banned from (add 1,5 election cycles to the present year)!”

2. Cheating on the forecast results would become more costly, because proponents would have to repeat the shenanigans again while justifying having been “wrong” the previous time.

Yet, to yet again go local in my unfortunate country, Italy, we've been nominally interested in ex ante checks on regulations and ex post analysis of the relevant results since 1999, a thing that not only hasn't worked at all here, but given what is transpiring on the energy markets, neither has been done at the EU level (Yes, Energiewende, I am looking at you).

The NextGenerationEU exercise, like some previous pieces of EU legislation, leaves practical economic observers breathless, in the worst way: most of what is forced upon governments as spending target is cutting total factor productivity. So, as always, I am not optimistic. My concept will remain within the things I think should be done, but I am not complaining that it won't: I am sad that it hasn't even been discussed.