Saturday, June 21, 2008

Small Countries Versus Centralization

In the Financial Times (June 19) Samuel Brittan aptly qualifies as “nonsense” the reactions of the European establishment to the Irish No vote in the referendum on the Lisbon treaty. It is not a “defeat for Europe” as the establishment would have it but a defeat for a certain, centralizing, vision of Europe. This vision took over from the original liberal trade area project that was clearly beneficial in the world of the 50s, fragmented by trade barriers. It is less so today in a globalized economy. The new goal of politicians and bureaucrats since the 80s has been to shift more and more decisions to the EU level, even to the point of extending to the Brussels level decisions that are left to the state level in the US.

Samuel Brittan adds that – in spite of John Major confidence – one still cannot find an example of a newly Europeanized decision turned back to the member states after having been centralized. And he defines – rightly - as “corporatist” the second eurocrat ambition: to entrench the so-called “European social model” which, in eurospeak, is often confused with democracy.

Not so says Brittan who warns:
“There are dangers in policies determined by producer bodies selected neither by the market nor by a recognized political process”.

A growing “democratic deficit” in other terms, or more exactly an anti-democratic trend, characterizes the whole enterprise. It is thus not surprising that smaller states are reluctant to participate in the process since they are the most likely losers from centralization. When a single policy is adopted, large states have their say but smaller ones cannot prevail. The more “different” they are, the more they can expect to lose. But the Irish want to keep their freedom to choose tax policies, while the Czech, freshly emancipated from a heavy centralizing hand in the East are not keen on submitting to another one in the West.

The confirmed refusal of the Czech Republic, on Friday, to give an explicit promise to approve the treaty illustrates the difficulty. Expect more on the way since the European elites’ thinking is still firmly rooted in the old XXth century realities, the century of empires, power through bigness, and economies of scale, while the late XXth and early XXIst belong in the information age of “small is beautiful” and “decentralization is optimal”.

The opposition to the centralization of Europe is mounting, step after step, from the special conditions obtained by Britain and Denmark, to the French No of 2005, the Irish one of today, and maybe the Czech one of tomorrow. The corporatists should reexamine their creed.

Monday, June 16, 2008

Lead and Youth Criminality

I am no great fan of « green babble ». But this analysis is worth pondering. In the April/May issue of The NBER Digest (free on the NBER website) Linda Gorman summarizes an interesting new paper on “The Impact of Childhood Lead Exposure on Adult Crime” (Working Paper N° 13097). The conclusion of this econometric study is that higher childhood exposure is associated with higher adult criminality, twenty years later. Controlling for other possible determinants of crime rates the author, Jessica Reyes, estimates that a large portion of the decline in the U.S. violent crime rate between 1992 and 2002, unexplained or difficult to explain, may be attributable to reductions in gasoline lead exposure.

Between 1976-80 and 1998-2002 average blood lead levels in children aged 1 to 5 decreased from 15,0 to 1,9 micrograms per deciliter, following the introduction of new regulations.
The study suggest that environmental policy can have far reaching effects on social outcomes.

Friday, June 13, 2008

Irish Voters Say "NO"

The chasm between some European voters and political elites is growing. Ireland’s unambiguous rejection of Lisbon raises profound questions, in particular about integration policy but regarding also the economic and old fashioned Frankfurt monetary strategy, and its dire consequences.

As Michael Martin, Ireland’s foreign minister recognized: “Perhaps there is a disconnect between Europe and its people, between European Union institutions and the people”. Indeed.

Undisciplined voters, once more after the Dutch and French votes in 2005, did not do what their leaders wanted. Could the latter be able to prove that they are right and the voters wrong, instead of pushing as usual for more of the same policies that voters reject? Could they, really?

Tuesday, June 10, 2008

What I've Been Reading

The Return of History, and the End of Dreams, by Robert Kagan.

A slim little book which shows that the "end of history" diagnosed by Francis Fukuyama was an illusion (See also the 1999 book by Martin Van Creveld, The Rise and Decline of the State, the concluding chapter of which was simply titled "Beyond the State", that tells it all about the dreams of the period).

Kagan argues that great powers are once again competing for honor and influence. Nation-states remain as strong as ever as do the old, explosive forces of ambitious nationalism. The world remains "unipolar", but international competition among the United States, Russia, China, Europe, Japan, India and Iran raises new threats of regional conflicts.

Moreover, a new contest between western liberalism and the great eastern autocracies of Russia and China, as well as the violent struggle of radical islamists, has reinjected ideology into geopolitics.

This is a mixed bag. Agreed, the State is not obsolete. On the contrary, as I showed in The Second XXth Century, it is best characterized as one of a worldwide triumph of the State, albeit smaller than before, on average. These smaller States are also severely finance constrained due to the international mobility of capital and labor. States are more numerous in the world, and thus a "success", but financially weaker, and less agressive territorially. This means that competition between them is increased, in an industrial organization perspective, and is not one of "explosive forces of ambitious nationalisms". These latter forces were due not to ideology or competition but to an increase of optimal State size, leading to the clash of expanding imperialisms, as Lenin clearly perceived (but he failed to understand the real reasons, not capitalism in itself as he thought but the result of new technologies decreasing the costs of management) .

The present "atomistic competition" of nations is unlikely to lead to frequent inter-state wars, as data clearly show. Some of the competitors mentioned by Kagan are notoriously confronted to many difficulties that distract them from agressive nationalism: Europe (which is not really a country, nor a State) is trapped in the enlargment process and its governance is weak. Japan is a rapidly aging society and has been a low growth area for more than a decade. And Russia new found oil wealth is vulnerable to another downward trend of its price.

Agreed, eastern autocracies do not trust democracies that would like to force them to adopt more open political systems, but is this a real justification for going to war? Downsizing States are more likely to absorb themselves in their internal problems with regional dissidence or even secession, and what could autocracies expect to gain from wars with democracies at a time when the dominant trend is towards smaller size?

Our time is more like the westphalian era of competitive States in the post-napoleonic Europe - an age of peace between States and self determination of nations -, than the imperialistic age of the late XIXth and early XXth centuries. And the terrorist phenomenon, although in part subsidized and "outsourced" by some rogue States, is evidence of the rise of non-state violence rather than an instrument of a return to ideological State conflicts.

Yes the end of the XXth century generated dreams, but a return to realpolitick does not mean a return to the imperialistic clashes of "first XXth century".

Monday, June 9, 2008

The Phillips Curve is Still Alive.

Greg Mankiw participates today, and until Wednesday (June 11), in a conference on “A Phillips Curve Retrospective” organized by the Federal Reserve Bank of Boston.

Despite intensive criticism, especially in the 70s and 80s, many academic economists, policy makers and financial correspondents use the concept in discussing the influence of demand growth on inflation, as well as the relationship between unemployment, wages and prices. The curve today is not that of fifty years ago write the organizers, and the economy and our understanding of price setting behavior, the determinants of inflation and the role of monetary policy have all evolved considerably over that period. The participants in the conference will re-examine the theoretical and empirical validity of the curve in its recent specifications and consider what it has taught us about how the economy works.
Among them, John B. Taylor, Robert M. Solow, and Ben Bernanke.

Details are on Greg Mankiw’s blog.

Sunday, June 8, 2008

Les erreurs du passé.

Lorsqu'on formule, en économie, un avis qui diffère du consensus courant on s'expose évidemment à la question: "mais pouvez-vous avoir raison contre l'opinion de tant de personnes intelligentes et en principe compétentes"? Un bref rappel des erreurs "consensuelles" du passé montre que cela n'a rien d'impossible, tant l'usage raisonné de l'analyse économique théorique est peu répandu, aussi bien dans l'opinion que chez les décideurs politiques.

Je relisais ainsi le numéro 2 (juillet-août 1980) de la Lettre bimestrielle Politique Economique dans laquelle je commentais l'actualité, il y a (déjà) un quart de siècle. Sous le titre "Inflation et libération" j'analysais l'impact de l'abolition du contrôle administratif des prix que venait de décider le gouvernement de Raymon Barre, sur un possible regain de l'inflation:

"La libération des prix engendre-t-elle l'inflation? L'interprétation tend à se répandre. Gilbert Mathieu s'en fait l'écho dans un article récent intitulé ' l'effet libération ' (Le Monde, samedi 12 avril 1980). Selon lui, ' l'inévitable est arrivé: la libération des prix par le gouvernement a considérablement accéléré les hausses ... entraînant l'aggravation de l'inflation habituelle en pareille circonstance '."

Je montrais ensuite que le déroulement chronologique des faits ne correspondait aucunement à l'existence d'un tel effet, aux dates respectives de libération des prix industriels (à l'été 1978), puis des services et des marges commerciales ( progressive au cours de l'année 1979). Je rappelais également que d'après la théorie économique de l'inflation, la libération ne pouvait entraîner qu'un réajustement modeste du niveau des prix, à ne pas confondre avec une augmentation de la tendance inflationniste durable. Pour conclure par le paragraphe suivant:

"L'effet libération appartient donc au domaine des fausses évidences. A l'examen précis des faits, il ne paraît pas compatible avec les dates et les rythmes d'évolution des divers prix. Il passe sous silence l'influence de l'extérieur dans une économie largement ouverte et ne tient pas compte des évolutions semblables constatées chez nos partenaires. Il méconnaît l'expérience passée des contrôles en France. Il est incompatible avec l'analyse rigoureuse des mécanismes économiques".

La suite de l'expérience a abondamment conforté ce jugement. Il paraît aujourd'hui relever lui-même de l'évidence. Et pourtant, l'ensemble du personnel adminstratif et politique de l'époque s'opposait fermement à une telle libération "qui déchaînerait l'inflation".

La conclusion de tout cela? 1) une erreur économique majeure peut être très largement partagée, et 2) La sortie de l'économie administrative se heurte toujours à des intérêts établis fortement enracinés.

Le même genre de scenario s'est répété, en plus grave, deux ans plus tard, avec la politique de nationalisation de 1982 qui allait à l'encontre de toute logique économique, et qu'il a fallu renverser intégralement - et au delà - quelques années plus tard. Pourtant, la plupart des décideurs publics comme privés y étaient soit favorables, soit résignés, et les quelques voix critiques de cette aventure déraisonnable étaient bien isolées dans le microcosme.

Avons-nous progressé depuis? Oui sur ces deux points précis, mais la sortie d'une économie administrative, d'une ampleur encore considérable en France, reste à l'ordre du jour, dans l'éducation et dans la santé par exemple. Il faut donc s'interroger sur ce qui apparaît encore comme de nouvelles évidences, mais qui vont à l'encontre de la logique économique, même minoritaire.

Monday, June 2, 2008

Ni les années 30, ni les années 70.

Paul Krugman a interrompu pour une fois son activité principale qui était d'exprimer, colonne après colonne dans le New York Times, sa détestation des républicains en général et de George W. Bush en particulier, pour revenir - et c'est un plaisir - à son vrai talent, celui d'économiste.Il signe aujourd'hui dans ce journal un commentaire soulignant que la Réserve Fédérale conduite par Ben Bernanke semble avoir réussi à écarter le danger d'une crise financière majeure renouvelant les affres des années 30, mais elle est, du coup, critiquée par beaucoup d'économistes, au motif qu'elle nous entraîne dans un remake de la stagflation des années 70.

Krugman estime - et je le rejoins volontiers - que cette éventualité n'est guère probable, car l'on ne voit se manifester aucune spirale des salaires et des prix qui conduirait à terme à une inflation à deux chiffres. Au contraire, les demandes salariales ne semblent pas réagir aux annonces d'inflation, ni aux Etats-Unis, ni en Europe.

Il s'ensuit qu'un relèvement des taux d'intérêt d'intervention des banques centrales n'est certainement pas opportun dans le contexte actuel. Il ne faut pas céder à l'hystérie anti-inflationniste dans nos économies où les taux d'inflation restent dans la moitié ou le tiers inférieurs de la zone à un seul chiffre. Et l'histoire se répète rarement.