Economics/Finance

… It was pretty silly when Standard & Poor’s started wagging the finger at the UK and expecting to be taken seriously. Trying to do the same thing with respect to the USA is pretty much the definition of tugging on Superman’s cape.

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

I can confirm that although it was “at least one” economist that burst out laughing, it was not “at most one”.

For at least the last decade, there has been a boom in work on the economics of happiness. But following Tolstoy[1], I’ve always wondered why we don’t study the economics of unhappiness instead: after all, there’s so much more data.

For the last year or so, I’ve been planning a paper in which I took off from this point and made the case for unhappiness as a driver of economic activity and particularly of economic change (including ‘growth[2]’). But, as usually happens[3] with my thoughts along these lines, it looks as if someone has beaten me to it.

Chris pointed me to this piece by Stefano Bartolini, which argues that people strive to increase their wealth as a response to the negative externalities generated by positional externalities[4] and the destruction of social capital.

I’ve also been reading a translation of Sedlacek’s Economics of Good and Evil, a surprise hit in the original Czech, which discusses many of the same issues, focusing on the contrast between the economics of the ancients and that of Adam Smith.

I have a more positive take on unhappiness. It’s possible, I think, to want something better than what you have (for many different values of “better”) without being actively miserable. In a world where change, both good and bad, is inevitable, cultivating a position of stoical detachment seems to me to be something of a copout[5}

fn1. Tolstoy had his own economic ideas, which drew (not surprisingly for the time, and for a dissident landowner on Henry George)

fn2. Growth, like GDP is a tremendously unsatisfactory and misleading concept when dealing with complicated economic aggregates, some components increasing and others decreasing. But that’s another post.

fn3. Often by a fair stretch of time, as I’m very slack about reading the literature. I was very pleased with my discovery of Ramsey’s Rule of Saving until I discovered that Ramsey had got there first.

fn4. To translate from the economese, the fact that some social benefits depend more on your relative position than your absolute wealth means that if one person becomes better off, others are worse off.

fn5. Does this useful slang term have an equivalent in formal English? I can’t think of one that isn’t a paraphrase.

Both recommended:

First: Kevin O’Rourke’s “more general take”:http://ineteconomics.org/sites/inet.civicactions.net/files/BWpaper_OROURKE_040811.pdf (PDF) on the trilemmas facing the eurozone.

bq. What we have seen instead is a series of ineffectual moves on financial regulation, and now a complete unwillingness to confront the European banking crisis head-­‐on. Rather than promoting pan-­‐European growth strategies, the institutions of the Union have been enthusiastically promoting pro-­‐cyclical fiscal adjustments in the periphery, even as they insist that heavily indebted governments repay private creditors of private banks in full. Not only is the policy incoherent, making sovereign default more likely on the one hand, while preaching austerity on the other; the insistence that taxpayers rather than investors pay for bank losses is also setting the stage for a potentially very damaging confrontation between core and periphery taxpayers. The political consequences of this are unknowable, but in Ireland, just three months after the troika’s intervention, the political party that had been dominant since the 1930s was annihilated at the polls, with the radical and Eurosceptic Sinn Féin now sniffing at its heels: and this in one of the most conservative, and Europhile, countries in Europe. What three or four years of the current policy mix will do is anybody’s guess.

The paper is particularly interesting in its focus on the _politics_ of Eurozone governance, which does not get nearly as much attention as it deserves. John Quiggin and I have a piece forthcoming in _Foreign Affairs_ which talks to the medium-term consequences of institutionalized austerity at the European level – O’Rourke’s piece provides a good general take on the same set of issues, as well as discussing topics (class and distributional divides) that we don’t get into. The paper is being presented at INET – there is much other interesting looking material available “here”:http://ineteconomics.org/initiatives/conferences/bretton-woods/agenda.

Second, Kate McNamara’s more “topical piece”:http://www.foreignaffairs.com/articles/67710/kathleen-r-mcnamara/can-the-eurozone-be-saved arguing that the European Union needs to take the plunge and become more like a state.

bq. In the eyes of markets and skeptical observers, the European Union is more than an intergovernmental organization but not yet a state. When the European Union bickers and dithers, the markets have no idea what may happen. The euro is the only single currency in history that has not been tightly linked to broader state- and nation-building efforts (often following wars, during which military action required budgeting and taxation). Although the euro is an extraordinary peacetime achievement, it suffers from a lack of supporting political institutions that can make broader macroeconomic policy. The European Union needs to change that and move beyond the structure of its current economic and monetary union — which were seemingly designed for a world in which private and public actors never over-borrow and financial markets never question their ability to repay — to real political and economic cohesion, something international markets would recognize as parallel to a nation state.

As she recognizes (and O’Rourke argues too) there is little enthusiasm among European leaders (let alone publics) to make this jump. This obviously generates normative objections (some perhaps fundamental) as well as practical ones. But equally, it is not at all clear that the European Union can survive as it is, as a kind of ungainly half-way house between an international organization and a genuinely federal system.

Mark Blyth has a “somewhat different approach”:http://triplecrisis.com/the-problem-of-intellectual-capture/ to the Greenspan op-ed of last week, which looks to be emerging as the fruit fly genome/Enron email corpus/Zachary’s karate club of theories about post-crisis bogus rationalization.

bq. Rather than deal with the crisis as it happened, or even address what it cost, Greenspan dealt with the crisis on a purely rhetorical level. I mean rhetorical in the sense that Albert Hirschman identified twenty years ago in his fabulous book The Rhetoric of Reaction. (Really, if you haven’t read it, read it now – it’s like a Dan Brown crypex for crisis-newspeak). Hirschman pointed out that conservative arguments come in three distinct theses. First is the “Perversity thesis” where any well meaning reform produces its opposite outcome: ‘welfare makes you poor’ – that sort of thing. The second is the “Jeopardy thesis” where reforms put at risk more than they can ever deliver–­ the fear of extending the suffrage is typical. Third is the “Futility thesis” where reforms are simply pointless – fill in any and all opposition to global warming. Greenspan begins with a few vignettes concerning Ford’s inability to get a credit rating on an ABS and how the banks will suffer if their ATM card fees are regulated, but he soon hits his stride. I gave him a “Hirschman Scorecard” of four perversities, three jeopardies, and two futilities in one column …These ranged from bemoaning how “consequences cannot be readily anticipated” (Jeopardy), to noting how prop-trading rules will force operations abroad (Futility), and hand waving about complexity regarding “undesirable repercussions that might happen” (Perversity).

The rest is also well worth reading, but quite depressing.

Alan Greenspan is back as free market evangelist, and it’s rather wonderful.

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

It’s best not to interpret this as an empirical claim, but a carefully-thought-out bid for Internet immortality. It has the sublime combination of supreme self-confidence and utter cluelessness of previously successful memes such as “I am aware of all Internet traditions” and the “argument that has never been made in such detail or with such care,” but with added Greenspanny goodness. I tried to think of useful variations on the way in to work this morning – “With notably rare exceptions, Russian Roulette is a fun, safe game for all the family to play,” and “With notably rare exceptions, (the Third Punic War for example), the Carthaginian war machine was extremely successful,” but none do proper justice to the magnificence of the original. But then, that’s why we have commenters. Have at it.

Ryan Avent and Matt Yglesias ponder whether the degree of disagreement among economists is exaggerated in public debate. The classic statement of this argument, of course, is Alan Blinder’s dictum in Hard Heads, Soft Hearts that:

Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most.

But ever since reading this argument, I’ve wondered whether it was quite right. Blinder’s observation helps explain a readily observable empirical correlation between (a) disagreement among economists and (b) apparent prominence of economists’ arguments in public debate. But _prominence_ is not the same thing as _influence_ – and I can’t help wondering whether the causation goes the other way, so that economists are only middling influential at most when they disagree. Consider the following model (for _extremely_ casual senses of the term ‘model’). [click to continue…]

Over the fold, an opinion piece I wrote for today’s Australian Financial Review. Non-Oz readers may need to Google some names. Also, although it refers mainly to US experience, the piece is written with an eye to influencing Australian policy debates, so some of the angles may seem a little counter-intuitive to those outside Oz.

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Brad DeLong “writes”:http://delong.typepad.com/sdj/2011/03/topic-there-is-a-growing-faction-in-the-academy-arguing-that-education-for-global-citizenship-requires-that-students.html :

bq. Karl Marx wrote that the “country that is more developed industrially… shows to the less developed the image of its own future…” Karl Marx was wrong.

Is it just me that thinks it is odd for DeLong to write this? It used to be a commonplace for people to say that Marx was wrong about this. But the people who said that he was wrong were typically _leftists_ , and their reason for saying it was the claim that Marx had failed to anticipate imperialism, the “development of underdevelopment” and all that stuff. So for them, Marx was wrong, because he thought that capitalism would develop economies everywhere, whereas they thought Lenin had shown that it would force some societies into a permanent state of underdevelopment. But DeLong is, by his own repeated admission, a “card carrying neoliberal”. And surely “card carrying neoliberals” believe in a future of globalized markets, urbanization, universal prosperity and (the cynics amongst us would add) strip malls and McDonalds. So am I missing something here? How do “card-carrying neoliberals” disagree with Marx on this point?

A useful bit of interactive data visualization for Emmanuel Saez’s time-series on historical trends in income growth and distribution in the United States. As you can see, between 1970 and 2008 people in the bottom 90 percent of the income distribution typically chose not to partake of annual increases in total income, presumably because of a tendency to prefer and thus self-select into lower-paying jobs, or possibly because of an innate dislike for the more complex mathematics (surrounding tax calculations, car payments, and budgeting generally) that is associated with earning more money.

Via Tyler Cowen comes a Michael Lewis thumbsucker about Ireland. Lewis is a great writer, but I do wonder whether he should have listened to his driver a bit less:

When I went looking for some Irish person to drive me around, the result was a fellow I will call Ian McRory (he asked me not to use his real name in this article), who is Irish, and a driver, but pretty clearly a lot of other things, too. Ian has what appears to be a military-grade navigational system, for instance, and surprising knowledge about abstruse and secretive matters. “I do some personal security, and things of that nature,” he says … and leaves it at that. Later, when I mention the name of a formerly rich Irish property developer, he says, casually, as if it were all in a day’s work, that he had let himself into the fellow’s vacation house and snapped photographs of the interior, “for a man I know who is thinking of buying it.” Ian turns out to have a good feel for what I, or anyone else, might find interesting in rural Ireland. He will say, for example, “Over there, that’s a pretty typical fairy ring,” and then explain, interestingly, that these circles of stones or mushrooms that occur in Irish fields are believed by local farmers to house mythical creatures. “Irish people actually believe in fairies?,” I ask, straining but failing to catch a glimpse of the typical fairy ring to which Ian has just pointed. “I mean, if you walked right up and asked him to his face, ‘Do you believe in fairies?’ most guys will deny it,” he replies. “But if you ask him to dig out the fairy ring on his property, he won’t do it. To my way of thinking, that’s believing.” And it is. It’s a tactical belief, a belief that exists because the upside to disbelief is too small, like the former Irish belief that Irish land prices would rise forever.

On the other hand, maybe it’s just as well that Ian McRory — real name, Paddy O’Whackery, or perhaps Liam Mac an Bréagadóir — was on hand to provide the legally required Leprechaun quota for the article, or Lewis would have been unable to get it published. Ian’s dark hints of connections to the Provos, or possibly Dublin gangland, is a nice touch, as are his “The thing about Irish people” musings later in the article.

There was another round of the more-or-less endless debate about the decline of the US not long ago, focused on the weak employment growth that has characterized the current ‘recovery’. I expect that the obvious inability of the US to exert significant influence, in either direction, over the fate of client regimes in North Africa and the Middle East will provoke some more discussion among similar lines.

As a public service, I’d like to bring an end to this tiresome debate by observing that the decline of the US from its 1945 position of global pre-eminence has already happened. The US is now a fairly typical advanced/developed country, distinguished primarily by its large population[1]. Precisely because the US is comparable to other advanced countries in many crucial respects, there is no reason to expect any further decline. [2]

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Doug Saunders has “a blog post”:http://dougsaunders.net/2011/01/china-inequality-hu-jintao-barack-obama/ about Branko Milanovic’s new book “The Haves and the Have-nots“:http://amzn.to/fpjxlu . I haven’t read the book, but, according to Saunders, it denies that there is a convergence in living standards between Western workers and the Chinese. Here’s the reasoning:

bq. “If the U.S. GDP per capita grows by 1 per cent, India’s will need to grow by 17 per cent, an almost impossible rate, and China’s by 8.6 per cent, just to keep absolute income differences from rising,” he observes. “As the saying goes, you have to run very, very fast just to stay in the same place. It is therefore not surprising that despite China’s (and India’s) remarkable success, the absolute income differences between the rich and poor countries have widened.”

bq. And they have: Even as the Chinese worker has gone from $525 per year to $5,000 in two decades, the average American worker has gone from $25,000 to $43,200 – meaning that the income gap has widened from about $25,000 to $38,000, and, he notes, “of course so has the absolute gap in welfare between the average American and the average Chinese.”

Spot the non-sequitur. Even if the dollar income gap has widened in absolute terms there’s no reason to believe that the welfare gap has similarly widened, for the simple, and obvious reason of the declining marginal utility of income. On any plausible picture, the $525 to $5,000 transition is life-changing, whereas the $25,000 to $38,000 change is merely nice (especially if enough other people get the same increase and much of the increase goes on bidding up the price of inherently scarce goods).

Saunders continues:

bq. You may think of the United States as a place of extremes of wealth and poverty, and it is. Nevertheless, at the moment, the very poorest people in America, the 5 per cent with the lowest incomes, have better lives and more purchasing power than the top 5 per cent of income earners in India and the top 10 per cent in China.

Well I won’t quibble with the “more purchasing power” point, but “better lives” is really pretty dubious, since we know that by many objective measures “poor black men in the US do worse than even some poor people in India”:https://crookedtimber.org/2003/12/12/sens-development-as-freedom/.

Much recent discussion of the future of the euro, most notably that of Paul Krugman, has started from the idea that Europe is not an optimal currency area, and that a ‘one-size fits all’ monetary policy is therefore bound to lead to the kinds of problems we are now observing. At any given time, some countries would benefit from a more expansionary policy and others from a more contractionary policy, so the effect of monetary union is an unsatisfactory splitting of the difference.

Without resolving that issue in general terms, I want to argue that this is not an accurate description of the current state of the eurozone. It’s true that Germany is doing a lot better than the eurozone as a whole, and the peripheral countries a lot worse. So, the optimal policy for Germany alone would be tighter than for the rest of the eurozone. The peripheral countries might benefit from an even more expansionary policy (though that’s not as clear to me as it seems to be to others. A heavily indebted country that undertakes monetary expansion is likely to find it hard to sell bonds denominated in its own currency).

But when you look at the actual policies of the ECB, including Trichet’s recent threat to raise interest rates, it’s hard to see that this policy is optimal for any EU country, even Germany.
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Kevin O’Rourke, quoted “in extenso”:http://www.irisheconomy.ie/index.php/2011/01/13/divide-and-conquer/

A friend of mine has just sent me this “link”:http://www.reuters.com/article/idUSPISDCE7QE20110113, in which Sarkozy is saying that it is unreasonable for us to maintain our low corporate tax rates while seeking financial aid from Europe:

bq. “I deeply respect the independence of our Irish friends and we have done everything to help them. But they cannot continue to ask us to come and help them while keeping a tax on company profits that is half (what other countries have),” he said.

For a more inflammatory version of the same argument, by an influential French economist, click “here”:http://www.liberation.fr/economie/01012306493-le-scandale-du-sauvetage-des-banques-irlandaises. And I was struck on my last trip to France by how ordinary people there are making the link between the Irish bailout and our ‘dumping fiscal’.

There are lots of obvious counters to all this, but I think the more important point is that such responses are inevitable, given the European response to the crisis to date. As two recent articles point out (“here”:http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=3002&tx_ttnews[backPid]=901&cHash=c374cd2038 and “here”:http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-citizens-must-fight-rise-of-european-bankocracy-2492637.html), the real cleavage in Europe is between European taxpayers and bank creditors (with the ECB being a third interested party, as another body which could help to fill the holes which have emerged in the European banking system). But since the powers that be are ruling out bondholder haircuts and quantitative easing, the only cleavage we are left with in practice is the one between core and periphery taxpayers.

Of course ordinary French and German taxpayers are going to be angry at lending their money to an insolvent state with lower tax rates than their own. Why wouldn’t they be? Of course ordinary Irish taxpayers are going to be angry at having to pay for high interest loans designed to bail out foreign banks. Why wouldn’t they be?

And while ordinary Europeans get angry with each other, with unpredictable political consequences, capital walks away scot free.

It’s worth expanding the argument that I suspect Kevin is hinting at with his mention of ‘unpredictable political consequences.’ We have seen a lot of analysis from economists which points (correctly) to the inherent contradictions of the Eurozone’s shambolic crisis management strategy. Much less attention has been paid to the _political fallout_ which is considerable. The bailout strategies seem almost purpose-designed to corrode popular legitimacy both in the states giving and receiving funds. If the prospect of a politically viable European Union isn’t quite dead yet, it’s haemorrhaging on the operating table, and the surgeon clearly has no clue what to do. We will be running a seminar on Germany and the EU next week – I have a short piece in it which talks to this at greater length.