Friday, May 29, 2009

Réduire l'impôt sur le travail

La réforme du financement de la santé a fait l’objet d’une présentation de ma part suivie d’un débat lors d’un petit déjeuner au Sénat, devant le Networking & Business Club, le 26 mai. Le compte rendu se trouve ici .

Wednesday, May 27, 2009

Feldstein on US Recovery

Martin Feldstein (past President of the NBER) assesses the economic growth prospect in: “Has the US Recovery Begun ?”. You can find the paper on the Bruce Blog (May 26).

Monday, May 25, 2009

Government funding and university quality

Research productivity is highest for schools in states that allow more autonomy. This is the conclusion of a new NBER Working Paper (No. 14851) “The Governance and Performance of Research Universities: Evidence from Europe and the U.S.” (Philippe Aghion, Mathias Dewatripont, Caroline M. Hoxby, Andreu Mas-Colell, and André Sapir).

The authors have constructed an index of research productivity that includes patents, number of alumni who have won Nobel Prizes in science, citation indices, and numbers of highly cited researchers for 196 European universities. They find that “the average Shangai ranking for a European university that must get its budget approved by the government is just above 200 while the average ranking for a European university that does not need budget approval is 316. In general, each percentage of a university’s budget that comes from core government funds reduces its rank by 3.2 points.”

European universities required to pays the same amount to all faculty members with the same seniority and rank have an average Shangai ranking of 213. Universities free to pay faculty as they see fit have an average ranking of 322. Universities free to select undergraduate students as they see fit have a Shangai ranking 156 points higher than those in which the government determines who will attend . Competition also improves research quality. Each percentage of a university’s budget that comes from competitive research grants increases its ranking by 6.5 points.

And the results for state universities in the United States are similar.

The conclusion for university reform policy is straightforward: grant less importance to the “führer prinzip” that seems to inspire the French government, and rely more on the competition principle: competition for non government funding, competition for good students, and competitive remuneration of faculty.

While academics overwhelmingly don’t like markets, still markets would be good for them.

Thursday, May 21, 2009

Google’s Chairman on the Future of Newspapers

Questioned by The Financial Times (May 21), Eric Schmidt answers about the possibility of charging readers for online content on the web:

“I think it’s unlikely to work although people will certainly try it and they’re welcome to do so. And the reason is that for most content people are preferring an advertising model. There will be some very specialized content, you know, high-quality newspaper articles, magazines, that sort of thing, which I suspect subscriptions will work for. But for the average news that everybody gets today they would prefer an advertising-supportive model.”

Read the rest of the interview here.

Stock Prices : Reverting Towards the Mean

The secular mean of the price-earnings ratio (the Graham ratio) has been around 15 (The graph is posted by Brad De Long on his blog).The implied long term return on investments in stocks in the U.S. has been slightly above 6.5 per cent a year (1/15). The recent free fall of the stock market has brought back the ratio in that neighborhood but not lower than the historical mean. It would thus be rather surprising if that level would constitute a bottom for the next few months: there is still room for further fall if history is to be a guide.

Another interesting interpretation emerges from these past data: bull markets occurred during intense innovation periods. That was the case of the “second industrial revolution” in the two decades preceding 1900, the case also of the generalized diffusion of automobile and electricity in the 1920s, during the post WWII consumers’ equipment boom, and more recently during the communication and information revolution – the IT revolution - starting in the early 1970s.

Stock market crashes following these “exhuberant” episodes probably purge the investment excess of the real economy booms. Since they are relatively far apart from each other, investors forget, or new investors arrive that have not been through such an experience. A new innovation phase is then possible …

Wednesday, May 20, 2009

Green Shoots: V or U ?

Up 7.6 % since the start of 2009, does the rise of the Rogers International Commodity Prices Index validate a V-shaped economic recovery asks Nouriel Roubini's RGE Monitor’s Newsletter?

“Even if GDP growth around the world has bottomed, growth may continue to be negative or sluggish until 2011. As such, commodity price gains might reveal a false sign of economic recovery – and so might the recent spate of (stock) market rallies (…) and inflows into emerging markets. (…) Commodity prices could snap back to reality before resuming a more moderate uptrend in line with a U-shaped global growth path.”

Tuesday, May 19, 2009

Internet & the News Industry

Is there a future for newspapers? Here is a telling figure (The Economist, May 14).

Monday, May 18, 2009

Deregulation not guilty, Ferguson.

Historian Niall Ferguson sets the record straight on the alleged « excessively deregulated capitalism» that would be the cause of the financial crisis:

“… crises are more often caused by bad regulation than by deregulation. (…) both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. (...)so that (for example) the ratio of Citigroup’s tangible on- and off- balance-sheets assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1 the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts. (…)

The continental Europeans – who supposedly have much better-regulated financial sectors than the United States – have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States.”

And remember that the eurozone countries "benefit" from a double layer of monetary authorities: the European Central Bank (ECB) and their own national central bank that did not disappear with the creation of the former, and even three counting the Bank of International Settlements (BIS) in Basle! Is that really “deregulated capitalism”?

Read the complete New York Times magazine article here .

Sunday, May 17, 2009

U.S. Subprimes Not the Whole Story

An interesting graph published by Rebecca Wilder, a financial economist, on her blog News N Economics (May 16).

What strikes me is that contrary to what many observers write, the housing boom and crisis does not appear to have begun first in the U.S., and the housing price inflation has hit earlier and stronger Ireland, Britain, and Spain. Moreover, since the housing crisis has also been but only a part of asset markets general bubbles and crashes, it seems difficult to assign the main responsibility for the current worldwide recession to the American subprime subsidy policy and subsequent mess.

More fundamental phenomena are at play.

Saturday, May 16, 2009

Europe, version française

L’éditorialiste du Figaro-Magazine intitule son papier, ce 16 mai, « Euro-indifférence », ce qui me semble assez proche du « Disinterest in Europe » de ce blog d’hier. Et de se plaindre de la « marée de l’abstention qui … risque de tout submerger le 7 juin, … et n’a rien de nouveau ». La raison en viendrait, selon lui, de l’apaisement de la querelle des « pro » et des « anti », alors que l’Europe des Etats triomphe dans les faits en dépit du volontarisme européen affiché par le président français.

Mais aussi, ajoute-t-il, « encore faudrait-il que l’Europe, de temps à autre, tienne compte » de l’avis des peuples. Autre écho bienvenu à l’analyse de ce blog.

Le diagnostic paraît toutefois trop étroitement circonstanciel : Puisque la tendance de l’abstention est ancienne, comme en témoignent les sondages officiels Eurobarometer, cela signifie que le désintérêt en question ne trouve pas sa source dans les évènements courants ni dans les politiques récentes. Le mépris des dirigeants européens pour la volonté exprimée des électeurs ne constitue ainsi qu’un seul des facteurs que nous évoquions, le plus récemment manifesté à propos des "NON" référendaires français et irlandais. D’autres influences, profondes, sont en jeu depuis le début des années 80, que nous signalions hier, dans la version anglaise : la disparition d’un ennemi menaçant et voisin à l’est, la désagrégation des grandes structures étatiques dans le monde depuis la révolution de l’information et l’impossibilité corrélative – dans ce contexte - de construire de façon volontariste un grand Etat continental par absorption de nations hétérogènes et de traditions anciennes.

En somme, l’expérience faisant son chemin dans les esprits, qui n’accordent en général aucun crédit au seul raisonnement, même reposant sur les faits, il commence à être compris aujourd’hui (avec dix ans de délai comme de coutume) que le projet d’intégration politique européenne était bien une erreur, n’est-ce pas ?

Il est toujours agréable d’être lu, mais il le serait plus encore d’être complètement compris. Peut-être, néanmoins, le virage est-il en passe d'être pris ...

Friday, May 15, 2009

Disinterest in « Europe »

In the May 7th issue of The Economist: persuading Europeans to vote in the June election is a losing proposition writes "Charlemagne":

“Average turnout has fallen in every election, from 63% in 1979 to 46% in 2004, even though the parliament’s importance has grown. (…) Yet a recent Eurobarometer poll found that just 34% are likely to vote this time (and previous such polls have overestimated turnout).”

The reason? According to the London based weekly,the Parliament does not work properly, can be intolerant to dissent, and lacks legitimacy.

Let us add three additional causes: in 1979 the Soviet Union was still there and also a real military menace. Closer cooperation between western European nations seemed useful indeed, much more than today. Since that date, the general and new trend of organizations, worldwide, whether private or public, has been towards downsizing large hierarchies, firms as well as states. Trying to build a continental size NGO appears more and more as an obsolete enterprise.Would anyone dare to dream of making a federal state out of the United Nations? And third, voters especially in France and Ireland, have been taught by experience that European authorities do not consider a “NO” for an acceptable answer. In that case why bother to vote?

Thursday, May 14, 2009

The Classical Banking Club : Further Suggestions.

Laurence J. Kotlikoff (Boston University) and John C. Goodman (National Center for Policy Analysis) join the club with their proposal of “Limited Purpose Banking”.

In a paper published in The New Republic (“Back to Basics”, May 14), and signaled by Greg Mankiw on his blog, they suggest a radical reform of the way banks do business.

The disease, they write, is letting financial companies borrow in order to gamble with depositors’ money by buying various financial assets that could put them and their customers in a highly risked position, while the depositors expected a secure one. Under their proposed “Limited Purpose Banking” all financial corporations, including banks and insurance companies, would function exclusively as middlemen. They would never, themselves, own financial assets or borrow to invest in securities but would be permitted to one and only one set of activities: create safe as well as risky collections of securities (mutual funds), sell shares to these funds to the public, and use the proceeds to purchase assets for the funds.

The funds would be specialized, for instance in mortgages, or commercial paper, or cash management, and so on and would thus be perfectly transparent, under the control of the financial authorities, and provide finance to the economy. Checking account money would be placed exclusively in cash mutual funds and thus would comply with a one-hundred-percent reserve requirement, as was advocated by leading economists such as Henry Simons, Irving Fisher or Frank Knight in the 1930s.

Under this scheme, banks would let buyers of the funds gamble if they want, but not gamble themselves. They would never be in a position to fail because of ill-advised financial bets and would not need massive capital reserves as guarantee against possible runs.

There is a drawback, however, to this proposal: “Bankers will likely fight this reform tooth and nail”.

Rapid Recovery ?

Paul Krugman said Tuesday, at a forum in Shanghai, what the readers of this blog know already (“Stock Prices: A Sucker’s Rally?”, May 9) about the two-month rally that has restored $ 8.9 trillion to stock markets around the world:

“It looks to me as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely” (Bloomberg, May 12).

46 million Americans cannot afford health insurance?

That’s what many people, and especially Europeans, have heard, and still believe. But, notes Sally Pipes ( The Top Ten Myths of American Health Care: A Citizen’s Guide, Pacific Research Insitute, 2008, quoted by Robert Goldger in The American, May 11), of those 46 million uninsured, 10 million make more than $ 75.000 a year and almost 18 million make more than $ 50.000 a year.

That means 36 percent of the uninsured likely make enough to afford health insurance but choose not to buy it.

An additional 14 million are fully eligible for government assistance, tax-funded coverage programs like Medicare and Medicaid, but also choose not to enroll.

Why should we think then that the 18 million make the wrong choice, and why should an additional bureaucratic program improve the lot of the 14 million who can already enroll for free in government assistance insurance but choose not to?

This count should leave the new administration with a target of 14 million people to which some new coverage would be useful, not 46 million. And some more reflexion is required about the reasons why eligible people do not enroll in available government programs.

Wednesday, May 13, 2009

Asymmetric Europe

According to the Financial Times (“Eurozone industrial output plunges”, May 13) “Industrial production in the 16-country region was 20.2 per cent lower than a year before … The latest figures … were dragged lower by weak Italian, Spanish, and French performance. In contrast, industry in Germany … has shown clearer signs of moving closer back towards growth.”

Do you remember the claim of economists favorable to the euro pretending that the single currency, once created, would unify the real economies of the zone, making it (unbelievably !) “endogenously optimal” even though it was not so initially.

Well, back to the drawing board please.

La relance et les délais.

Selon le New York Times du 12 mai, ("Stimulus Aid Trickles Out, but States Seek Quicker Relief"), près de neuf mois après que le président Obama ait approuvé le budget d’accroissement des dépenses publiques de 787 milliards de dollars, destiné à défendre ou créer des emplois, le gouvernement fédéral n’a mis en circulation que moins de 6 % de cette autorisation de dépense, et principalement sous forme de remboursement de dépenses sociales aux Etats.

Ceci confirme tout à fait l’une des principales réserves émises par les critiques du plan de relance : il faut beaucoup de temps pour mettre en place effectivement un programme de dépenses publiques, et les dépenses en question risquent de n’intervenir, pour partie, qu’une fois la conjoncture en voie de rétablissement, lorsqu’elles seront devenues inutiles.

Il ne reste plus qu’à attendre la confirmation par les faits de la deuxième critique fondamentale de ce genre de politique : il est très difficile de trouver des projets nouveaux d‘investissements rentables, ou à défaut, simplement un peu utiles … A suivre.

Monday, May 11, 2009

Political classification and market structure.

In a post today (, Greg Mankiw expresses fear that the Obama administration is planning to restore a more activist antitrust policy, which would lead, inevitably, to mistakes such as the lawsuits against Microsoft and Intel in the 1990s.

He reminds us of his definition of the difference between the right and the left:
“The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy”.

In the first case, markets should be trusted, and in the second case government regulation would be needed. But what about European economies where government intervention often has had for result the development of large corporations (whether privately or state-owned) with substantial degrees of monopoly power and rather inactive antitrust policies?

I wonder: could that specific continental market structure explain why, on this side of the Atlantic, the dominant opinion - whether officially on the left or officially on the right side of the political spectrum - is so frequently anti-market and pro-regulation (and favorable to mercantilist policies), and thus uniformly on the left in Mankiw’s definition? If this hypothesis makes sense then it is not surprising that mercantilists of both stripes are so firmly entrenched and classical liberals in such disrepute here. There is even an officially registered “antilibéral” party in France, where any opinion that would qualify as “middle of the road” in the US is dubbed “ultra-libérale”, and where more government intervention is the only "solution" that most people ever think of. Let us call that a self-fulfilling political strategy: first distort or prevent competition, then call for government intervention to correct the resulting market failure...

Sunday, May 10, 2009

Becker on modern conservatism.

Gary Becker diagnoses a serious conflict in the Modern Conservative Movement between the classical views of Locke, Hume and Smith that opposed big government and favored private decision-making, on the one hand, and other, more recent components such as an aggressive foreign policy to promote democracy in other countries, and government actions to further various goals such as fewer abortions or outlawing gay “marriage” (The Becker-Posner blog, May 10).

“Classical conservatives would argue that governments are no more effective at interventions internationally or on social issues than they are on economic matters” he writes. Even a large party, like the Republican Party, is usually stronger when more coherent. And the Democratic Party is now fairly well united in the belief that governments frequently do better than private decision makers in both the economic and social spheres.

The shift in the attitudes of the Republican Party toward more interventionist views on social issues, and to some extent also on military involvement to create more democratic governments in other countries, has created the crisis in conservatism.

It is time, according to Becker, for the conservative movement to return to its roots of skepticism toward governmental actions in general.

How to get out of the slump.

I found this remarquable graph on Brad de Long's blog. Now think more generally in fixed exchange rates terms - rather than in fixed gold price terms - and apply especially to Europe and the eurozone ...

Inflation is not in the cards.

Scott Sumner lists on his blog, The Money Illusion, 10 (very good) reasons why the return of high inflation is unlikely. Here they are.

Saturday, May 9, 2009

Stock prices: A sucker’s rally ?

« Beware of the sucker’s rally on Wall Street » warns Spencer Jakab in the May 8 issue of the Financial Times:
“The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many skeptics that a new bull market has begun. (However) … most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker’s rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.

The 2000-2002 bear market had three, with average gains of 21 per cent in the Dow Jones industrials over 45 days.

The granddaddy of all bear markets, 1929-1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.”

But aren’t the currently low price-earnings ratios indicating that the bottom has been reached? Not yet apparently:
“Professor Robert Shiller (of “Irrational exhuberance” fame) notes that all four big bubbles of the 20th century saw stocks exceed 25 times cyclically-adjusted earnings and trough between 5 and 8 times. On this measure, the 2000 bubble never fully deflated and even the recent low did not breach 11 times.”

And remember that, given the current correlation among world markets, the same conclusion should apply to European stocks as well …

Friday, May 8, 2009

The European Predicament

The European economy is a problem for the world recovery according to Desmond Lachman (The American, The Journal of the American Enterprise Institute, May 7th, The European Commission sees little prospect for a pickup in growth before early 2010, and a recent International Monetary Fund report warns that the shortage of capital in European banks is larger than in American ones. On top of that, the German Government now concedes that, with present policies, the German economy will contract at a staggering 6 percent in 2009 before recovering only marginally in 2010.

Meanwhile, Greece, Ireland, Portugal, and Spain are all neck deep in recessions of epic proportions, and in Ireland and Spain the bubbles bursting in the housing market make the United States’ own predicament look benign. These countries also feel the shock of global trade and tourism collapse.

In such circumstances governments usually cut interest rates and allow for a sharp depreciation of their currencies, but the euro precludes such a solution since the ECB is overly cautious in its monetary management, and because the relatively high price of the euro on world currency markets (not unrelated to the interest rate policy) renders these economies grossly uncompetitive. The European Union’s advice to tighten their budgets in the midst of this deep recession is obviously not going to help.

Let us add that the housing bubbles have also been a consequence of the euro in those countries where inflation was higher than the Union’s average, while the ECB’s nominal interest rate was the same for all of course, thus determining lower or negative real rates in Spain and Ireland for instance, and providing added stimulus for higher housing prices.

As mentioned in yesterday’s post on this blog, the current triumphalism of European colbertist elites about the alleged superiority of the “continental model” over the more competitive Anglo-American one, could soon be proved counter factual.

Thursday, May 7, 2009

The Pyhrric Continental Model.

The Economist assesses the durability of the colbertist triumphalism that has recently swept continental European countries (“A new pecking order”, May 7th). After reminding the reader that “Mr Sarkozy (who was) once the man who wanted to make Paris more like London now declares laissez-faire a broken system”, the London weekly pursues:

“The strengths that have made parts of continental Europe relatively resilient in recession could quickly emerge as weaknesses in a recovery. For there is a price to pay for more security and greater job protection: a slowness to adjust and innovate that means, in the long run, less growth. The rules against firing that stave off sharp rises in unemployment may mean that fewer jobs are created in new industries. Those generous welfare states that preserve people’s incomes tend to blunt incentives to take new work. That large state, which helps to sustain demand in hard times, becomes a drag on dynamic new firms when growth resumes. The latest forecasts are that the United States and Britain could rebound from recession faster than most of continental Europe.”

Longer eating time, less obesity ...

Catherine Rampell (Economix, Explaining the Science of Everyday Life, May 5) has found an inresting international relationship between average daily time spend eating and obesity by plotting data from OECD. Enjoy!

(Signalled by Alex Tabarrok on the blog Marginal Revolution, May 6).

Tuesday, May 5, 2009

Meltzer versus Krugman

Allan Meltzer disagrees with Paul Krugman and sees the real present danger in inflation rather than deflation. In the same issue of the New York Times (“Inflation Nation”, May 3) he states:

“Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent – a sure sign of inflation.”

Could it be then that both Krugman and Meltzer turn wrong? Since the mid-80s the world growth has consistently reached unprecedented levels without real signs of inflation, nor of deflation however, during those crisis episodes when it was already much feared. Over the medium term, though, the massive recent issues of government debt worldwide make a real debt reducing inflationary policy more likely.

Monday, May 4, 2009

Debt deflation ?

According to Paul Krugman (New York Times, May 3), falling wages now characterize the US labor market condition. More precisely, he quotes a Bureau of Labor Statistic that indicates a quasi stagnation of wages in the private sector during the first quarter of this year. He thus admits anticipating rather than already observing a possible fall of wages. It could happen later in the year. If confirmed, such an evolution would increase the burden of interest payments and debt repayment, dragging down incomes, consumption and the economy in the coming quarters, in a debt-deflation cumulative process. Krugman’s advice: more stimulus, more decisive action on the banks, more job creation …

Saturday, May 2, 2009

La réforme de l'Etat, c'est au Canada ...

Autrement dit, réduire le poids des dépenses publiques en pourcentage du produit national dans un pays riche et dynamique, c'est possible ... mais au Canada. Voici le graphique que publie Alex Tabarrok sur le blog Marginal Revolution.

La France et les libertés économiques ....

C'est le classement international 2009, par niveau décroissant des libertés économiques, que vient de publier la Heritage Foundation. L'exception française, visiblement, n'est pas due à un excès de libéralisme ...