Thursday, December 31, 2009

Africa Can … End Poverty

This is the title of Shanta Devajaran’s blog ( Devajaran is the World Bank Chief Economist for Africa. He writes:

“For the first time in 30 years, Sub-Saharan Africa is growing at the same rate as the developing world (save India and China). For more, see the book “Africa at a turning point?”. If African countries can sustain this growth and make it more widely shared, the dream of a continent free of poverty can become a reality.”

In a recent post, “African Successes” (2009-09-17), he lists 42 striking success stories from which around 20 cases will be selected for in-depth study in order to evaluate the drivers of success, the sustainability of outcome, and the potential for scaling up successful experiences.

In a lighter perspective, the New York Times signals Africa’s renewed visual and artistic influence that is touching film, music and fashion here .

Is a new Afrocentric wind rising?

Tuesday, December 29, 2009

The Stock Market Crash and the Real Economy

James Hamilton has an interesting post on the “lost decade for stocks” (Econbrowser, December 26) here .

The boom and bust episode, exceptional by historical standards, is quite apparent in the Price/Earnings series, here:

And it is well explained by the evolution of real earnings, here:

My comment: the market exuberance was not that irrational after all, nor was the crash.

Old Media and New

Bloggers now get front row seats at fashion shows: or, how the communication revolution impacts the fashion elite.

Read the New York Times story here .

Friday, December 25, 2009

Tax Competition and Public Services : California vs. Texas

California taxpayers don’t get much bang for their bucks. While high taxes could be OK when public services are plentiful and high quality, California now exemplifies the new Big-Spending, High-Taxing, Lousy-Services Paradigm.

Read the William Voegli paper here .

My comment: one suspects that high taxes European countries follow or surpass the same Californian model. States’ real productivity has probably reached a phase of decreasing returns.

Hat tip to Tyler Cowen (Marginal Revolution).

Tuesday, December 22, 2009

Stopped Clocks and Cooling Hysteria

Want to read something really different about current scares? Have a look at Macromania, the blog of David Andolfatto, and especially the two recent posts on Doctor Gloom (December 18) and climate change (December 15) here .


Monday, December 21, 2009

William Easterly on Summitry

With regard to the Copenhagen flop, Easterly writes on his blog Aid Watch (December 19):

« We have had tons of international summits, almost all of them have failed to produce anything of value. Why do we keep setting our expectations so high? Maybe we should try some other path of change besides the Big International Summit?”

My comment: For global problems too, decentralized coordination is more realistic – today , in the extended second twentieth century – than attempts at world level centralization.

Sunday, December 20, 2009

Greece, and the ECB as a Regional IMF

I have been thinking for a long time that the real nature of the European Union is that of a “regional United Nations Organization” and not that of a "super-state" in the making.

Now Simon Johnson writes in The New Republic here that the Eurozone and ECB are a regional IMF, sort of. I agree.

Thursday, December 17, 2009

State Spending vs. Tax Cuts

What type of budget deficit is the most efficient? Beyond the investment-consumption debate the state spending increase versus tax cuts debate is no less important. Greg Mankiw here favors tax cuts and argues that they have a more positive impact on activity than government spending. Nate Silver here shows that the Obama policy does include substantial tax cuts.

This was after all a policy that an American “liberal” such as John Kennedy adopted, following the advice of Paul Samuelson.

It is a policy that should claim the higher priority to boost the over-taxed European economies.

The Grabbing Hand

“Who invented the totalitarian state?” is a lucid post of the blog Understanding Society. The rise of the modern authoritarian states during the past century has been linked to a much increased administrative and taxing capacity. A revealing economic perspective.

Read the complete post here .

Hat tip to Mark Thoma.

Tuesday, December 15, 2009

Political Short-Termism

Mojmir Hampl , vice-governor of the Czech National Bank and a member of the EU’s economic and financial committee, chastises politicians in a Wall Street Journal opinion column for “cheap lecturing of the markets in may countries around the world (…) when it is easy to see that the advocates of such lessons lack credibility in the subjects on which they preach”.

While the political elite in most of the advanced democratic countries have been lecturing the financial markets about their irresponsible, myopic and reckless behavior, it has hardly been offering a textbook example of care for long-term goals stretching beyond terms of office and political cycles. There are always elections on the horizon, be they party, local, national or pan-European, and long-term thinking is the exception.

Whereas “there have been few times so good for public budget management as the “great moderation” years of solid growth and low inflation that preceded the present crisis, (…) the vast majority of EU countries ran substantial budget deficits (…)

It is ironic that in the current EU, the new regulatory measures are being written and promoted primarily by the large Western countries whose financial systems proved to be the most vulnerable in the crisis. Just imagine how it would look if new financial regulations in Central and Eastern Europe were written mostly by Latvians.”

My conclusion: one should listen more often to the Czechs, they really understand public choice theory.

Read the paper here .

Monday, December 14, 2009

Big Banks Get Bigger

Felix Salmon (Reuters Blog) publishes the above chart that comes from the Congressional Oversight Panel’s latest report.

Read his comment here .

Samuelson and Random Asset Prices

"Proof that Properly Anticipated Prices Fluctuate Randomly" is my favorite Samuelson article. The title tells all, the theory is concise and powerful.

But the question that comes next is: can we identify prices that are not properly anticipated and estimate the biases in anticipations?

Read the paper here . Hat tip to Tyler Cowen (Marginal Revolution).

Sunday, December 13, 2009

Paul Samuelson Dies at 94

A really superior mind who durably transformed the field of economics.

Read a complete New York Times bio here .

Saturday, December 12, 2009

Tracking the Recession and Coming Recovery

Casey Mulligan has developed an intriguing real business cycle model which has « no adverse productivity shocks, no shocks to capital markets (these variables just react to events in the labor market), no monetary policy, and no fiscal stimulus. Simply put: I view this as a one (type of) shock recession, and the labor market is ground zero for that shock.
This version of the model has a labor market distortion that gets progressively worse for the two years (2008 & 2009), at which point it partly reverses itself although never getting back to pre-recession levels.”

OK all this seems extremely difficult to believe as a description of the current recession, but surprisingly the model’s simulations do track observed evolutions in labor usage, consumption, labor productivity and investment rather well (see Mulligan’s blog “Supply and demand”, "What Happens Next? Part II", December 9).

Seven Lean Years for the US ?

Mark Thoma (University of Oregon and Economist’s View) calculates that, from the experience of previous US recessions, seven years could be necessary for the unemployment rate to return to five percent. The process could be accelerated, he believes, by adequate economic policies.

Note that the current unemployment rate is quite similar to the one reached during the 1981-82 recession (10.8 percent).

Read his paper here .

Wednesday, December 9, 2009

Two Real Estate Booms and Busts Compared

Eugene N. White compares the 1920s and the recent episode in an NBER working paper here . He concludes that the elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. These factors combined induced risk-taking that was crucial to the eruption of the recent financial crisis.

Paul Volcker Joins the Classical Banking Club

The former U.S. Federal Reserve Chairman called in Bonn for separating the business of commercial banking from the riskier business of proprietary trading and hedge funds, offering a government safety net of deposit insurance and emergency lending only to the traditional banking business.

Read the Wall Street Journal article here .

The US and the Payroll Tax

The United States Treasury is going “European” on tax matters. Casey Mulligan reports in his blog today (“Approaching a Tax Milestone”, December 9) that the payroll tax has, for the first time in history, become the single largest federal tax, replacing in that role the federal income tax.

As a conclusion he wonders “Will it be Democrats who first harness the revenue-collection power of the payroll tax? Or will Republicans appreciate its favorable incentives?”

I disagree with the last sentence claim: the incentives provided by the payroll tax are not “favorable” but strongly detrimental to labor supply. And the transatlantic differences in its level go a long way to explaining differences in hours worked per capita, and consequently production per capita, on both sides of the Atlantic as Edward Prescott showed (see my paper "Comment gagner plus" on my homepage here ).

Read the Mulligan post here .

Saturday, December 5, 2009

The Great Trade Collapse and Crisis Theory

According to Richard Baldwin in the introductory chapter of the new book he is editing for the world’s trade ministers WTO gathering in Geneva, Causes, Consequences and Prospects,

“World trade experienced a sudden, severe and synchronized collapse in the late 2008 – the sharpest in recorded history and deepest since WWII.”

After all, maybe the US Federal Reserve was not the main culprit …

Hat tip to Menzie Chinn (Econbrowser) for the report and for the link to the book here .

Friday, December 4, 2009

The Global Savings Glut Theory of the Great Recession

The Guardian journalist Robin Wells blames the crisis on cheap credit and excessive thrift by Germans and Chineses. And we haven’t seen the end of it. “Worse yet, the glut’s continued existence will feed a succession of asset bubbles until we confront it, head on, and find a way to soak up the excess” she writes.

I agree that once a huge amount of liquidity has been deluged on the world economy it can only be returned to a more reasonable level by several successive asset markets crashes that dissipate some wealth each time, absent a new innovation boom that would require a large amount of new real investment.

Read her paper here .

Macroeconomic Theory Did Not Fail, Sumner

Scott Sumner (The Money Illusion) claims that an (almost) standard “aggregate demand-aggregate supply” (AD-AS) model, just modified by Alex Tabarrok and Tyler Cowen in their new textbook in order to substitute the inflation rate for price levels, goes a long way in explaining the current great recession.

According to him the Federal Reserve did cause the contraction by its ultra-restrictive monetary policy in 2008. He however does not exclude that some real supply side difficulties also contributed to the crisis, but that too can be inserted into the AD-AS diagram.

Read the paper here .