Thursday, July 29, 2010

Aging Societies and the Coming Entrepreneurial Boom

The Kaufman Foundation published, some time ago, a great report by Dane Stangler, The Coming Entrepreneurship Boom (June 2009).


Contrary to popularly held assumptions, it turns out that over the past decade or so, the highest rate of entrepreneurial activity belongs to the 55-64 age group. The 20-34 age bracket, meanwhile, which we usually identify with swashbuckling and risk-taking youth (think Facebook and Google), has the lowest rate. Perhaps most surprising, this disparity occurred during the eleven years surrounding the dot-com boom—when the young entrepreneurial upstart became a cultural icon.

In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34.

For the entire period, the 55-64 group averaged a rate of entrepreneurial activity roughly one-third larger than their youngest counterparts.

These trends seem likely to persist: in the Kauffman Firm Survey, a longitudinal survey of nearly 5,000 companies that began in 2004, two-thirds of firm founders are between the ages of 35 and 54.3

Additionally, Kauffman research has revealed that the average age of the founders of technology companies in the United States is a surprisingly high 39— with twice as many over age 50 as under age 25.4”.

The punch line:

« Given the shifting age distribution of the country, the continued decline of lifetime employment and the experience and tacit knowledge such employees carry with them, and the effects of the 2008-2009 recession on established sectors of the economy, we may be about to enter a highly entrepreneurial period. »

Read the paper here.

My conclusion: Farewell to the ageing society pessimism.

Tuesday, July 27, 2010

Was the Development of Modern Nations Pre-Determined 3000 Years Ago?

Diego Comin (Harvard), William Easterly (NYU), and Eric Gong (Berkeley) raise fascinating questions in a new article published in the American Economic Journal: Macroeconomics (July 2010,

“To the extent that history is discussed at all in economic development, it is usually either the divergence associated with the Industrial Revolution (e.g., Robert Lucas 2000) or the effects of colonial regimes. Is it possible that history as old as 1500 AD or older also matters significantly for today’s national economic development?”

To explore this question the authors “assemble a new dataset on the history of technology over 2500 years of history prior to the era of colonization and extensive European contacts” for the predecessors to today’s nation states. They look for very long run influences on economic development in the presence or absence of written language, the wheel, agriculture rather than hunting-gathering, iron tools, etc. 1000 years before the present era, in year 0 AD, and in 1500 AD.

They find that technological differences are surprisingly persistent over long periods of time. Specifically, their most interesting, strong, and robust results are for the association of 1500 AD technology with per capita income and technology adoption today. They also find robust and significant technological persistence from 1000 BC to zero AD, and from 0 AD to 1500 AD.

Their hypothesis is that the cost of adopting new technology falls with the stock of previous technology, thus generating the surprising long-term persistence observed in the data. They claim that historians reach a consensus on many mechanisms that cause past technology to have an effect on future technology, while past technology could not be sufficient to explain why Europe, and not China, experienced the Industrial Revolution (other factors such as institutions and values could matter too).

Instead of being a radically new phenomenon, the Industrial Revolution could well have been a simple speeding up of technology dynamics, by which new technology adoption is a function of the past technologies already accumulated.

Monday, July 26, 2010

The Euro Didn't Fall Enough

The Economist (July 23rd) is publishing the latest version of its Big Mac index here.

The most overvalued currencies, relative to the dollar, are first the Norwegian krone (by more than 90%), then the Swiss franc (by more than 60%), the Brazilian real (by 31%), and then, yes, the euro (by 16%, which implies a PPP exchange rate value of 1.08 dollars to the euro, instead of the current 1.29). Personally I would say that a value closer to one dollar for one euro, or even less than that, would be preferable for the health of the Eurozone economies.

The most undervalued currencies are, in that order, China’s yuan (unsurprisingly), the Hong Kong dollar, and Argentina’s peso, all of which having to be doubled, or a little bit more than doubled, in dollar value to return to approximate PPP levels.

The debate of last spring on the future of the euro, initiated by the French government for the twin purposes of saving French and German banks from possible failure (due to excessive lending to the Greek government) and depreciating the euro -- against the will of the ECB --, had the immediate virtue of weakening the euro and boosting German exports.

But unfortunately it has been stopped, deliberately I believe, much too early. With a euro at its PPP value, and the economy accordingly returning to sustained growth, the next elections, in Germany and in France, were still winnable by incumbent conservative majorities. With the euro at 1.30 dollars or so, the expansionary effect on the economy is much too limited to secure such an outcome, and the time schedule is now much to short for another monetary policy initiative to be launched.

The weakening of the euro was the right policy, but the politicians did not have the guts to pursue it to its logical term. Now they should not complain if in two years time commentators tell them “it’s the economy, stupid!”

Saturday, July 24, 2010

Friday, July 16, 2010

Europe Is Doing Everything Wrong

That’s what Mario I. Blejer and Eduardo Levy Yeyati claim in a recent post on Project Syndicate.

First, European governments should relieve the pressure on peripheral countries (Greece, Portugal, Spain, Ireland, and perhaps some others) through a significant depreciation of the euro. Second, for these countries to regain competitiveness within the zone the inflation differential that built up during the pre-2008 capital-flow bonanza should be reduced. And third, last but not least, the debt/income adjustment problem should be helped by higher overall eurozone inflation and, at least in some cases (particularly Greece), by an ordered process of debt restructuring.

“So far, European policymakers have chosen to do precisely the opposite on each front. They have tried to talk up the value of the euro, though currency markets have dismissed this as mere political rhetoric, (…)”.

They also have tried to dispel doubts about the imminence of Greek and other sovereign-debt restructuring. But lenders understood the unfeasibility of the underlying fiscal cuts. “In a recent survey of global investors, 73% call a Greek default likely.”

And European governments seem to be competing to carry out the most drastic fiscal adjustment (leading, I would like to add, to additional local deflationary pressures to worldwide ones).

This is a self-defeating solution that can appeal only to the most myopic market analysts – and, curiously enough, to a bipolar International Monetary Fund that, less than a year ago, correctly advocated synchronized fiscal stimuli.

“In this context, Germany’s new austerity package is the latest and most striking element in a sequence of ill-advised responses. Fiscal austerity in Germany can only reduce demand for eurozone products, and result in lower German inflation. And lower inflation in Germany means that, to close the inflation differential, peripheral countries will need a bout of outright deflation.”

My comment: A reasonable diagnosis, at last. But even the first adjustment that the authors consider positive is not that convincing: the recent depreciation of the euro has benefitted the German economy most, without bringing real relief to the other Europeans still suffering from the intra eurozone inflation differentials (see my previous post on the advantage of a weak euro for German exports). It follows that the German government does see further stimulation of its economy as necessary,of course, even though the Obama administration would like to obtain some more stimulus on ts part in exchange for the added deflationary impact in the US of the dollar appreciation relative to the euro.

Diverging national macroeconomic interests and flawed macroeconomic analysis push together all the other European economies in the wrong direction. The more so since the depreciation of the euro, from 1.45 dollars to 1.20 or 1.22, has been reversed in the last few days, and partly compensated by a new rise to 1.30 dollars.

Something has got to give. And the always excellent “Lex Column” in the Financial Times (Thursday July 15) was titled “Dis-membering the euro”, echoing my own article of a few weeks ago in Le Figaro , precisely titled “Il faut démonter l’euro” (“The euro should be dis-membered”) (downloadable from my homepage at http://www. The conclusion? “the possibility of a (Greek) departure (from the euro) has been awakened. Policymakers should at least be ready for it.”

Blejer and Levy Yeyati punch line:

“ … Europe and the IMF, by endorsing unqualified fiscal restraint, fail to recognize that the European crisis calls for differentiated policies to achieve multiple and different objectives. Implementing today’s conventional un-wisdom promises only a deeper recession and the postponement of the inevitable day of reckoning.”

Saturday, July 10, 2010

Deflation Warning

The always excellent John Makin sees a rising threat of deflation in his July 2010 American Entreprise Intitute Economic Outlook.


“U.S. year-over-year core inflation has dropped to 0.9 percent—its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe’s year-over-year core inflation rate has fallen to 0.8 percent—the lowest level ever reported in the series that began in 1991.

Meanwhile in Japan, while analysts were touting Japan’s first-quarter real growth rate of 5 percent,few bothered to notice that over the past year Japan’s gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling every year since 2004. As of May, Japan’s year-over-year core deflation rate stood at 1.6 percent.

By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe. Moreover, the recent appreciation of the dollar, especially against the euro, exacerbates the U.S. deflation threat.

More recently, an ominous drop in commodity prices and commodity-sensitive currencies, such as the Australian dollar, has accompanied signs that the pace of expansion in China may be slowing rapidly, in part because of stern measures aimed at deflating China’s property bubble. The price of copper—a widely followed bellwether for global demand—has dropped 20 percent since April. A combination of weakening currencies in commodity-rich nations and lower commodity prices, coupled with a move toward deflation in the G3 economies, is a troubling sign that a series of rolling financial crises may lie before us. That outcome would seriously exacerbate the balance sheet problems of commercial banks worldwide that hold substantial quantities of debt that is less likely to be repaid in an environment of global deflation.”

The punch line:

“A persistent failure to respond to the dangers of further deflation, such as the premature removal of accommodative monetary policy apparently favored at the ECB or a sharp fiscal contraction favored by the European Monetary Union, would sharply elevate the risk of global deflation and depression.
… The G20’s newfound embrace of fiscal stringency only adds to the extant deflation pressure.”

Friday, July 9, 2010

In Praise of a Weak Euro

The euro has been depreciating by about 20 percent against the dollar (and thus against the yuan) between its peak of last November, at slightly over 1.5 dollars, to its recent trough of 1.2 dollars in May.

European officials, including Mr. Trichet now rejoice about the new “resilience” of the European, and especially German, economy. German exports rose by 9.2 percent and industrial production by 2.6 in May. Good enough. But any first year student of economics could ascribe that result not to some hypothetical underlying dynamics in the German economy, but to the substantial currency depreciation driving down the euro to some more reasonable level, after years of blatant and unreasonable overvaluation.

Now just imagine what could happen with a further depreciation bringing the euro in line with its purchasing power parity value, at say one dollar for one euro. This would mean another 20 percent devaluation and a renewed export surge for Germany (and indirectly, in part at least, for the other eurozone countries).

Would business people be daring enough to maintain their usual complaint that exchange rates changes are catastrophic for their firms? And wouldn’t that make a strong case for reexamining the “permanently fixed exchange rate system” included in the euro?

Tuesday, July 6, 2010

The High Cost of Being a Euro Contrarian

The SpiegelOnline International has published in its June 30 edition the story of the four German economists who tried to stop the introduction of the euro with a legal challenge in Germany’s highest court in 1998. Now, 12 years later, they are fighting against a German bailout for Greece – and this time around, people are listening to them.

In the meanwhile their war on the euro entailed a high personal and professional cost. After their 1998 initiative nothing was the same again.

“Suddenly they stopped getting invited to conferences. Newspapers were reluctant to print their opinion pieces. Political allies distanced themselves from the four men. ‘We were the Antichrists,’ says Hankel, describing the mood at the time.”

“For 10 years I was practically barred from writing articles,” Hankel complains. He was so marginal that only right-wing publications like the controversial weekly magazine Junge Freiheit would publish his writing, a circumstance he characterizes today as an act of self-defense.

Read the article here .

Hat tip: Tyler Cowen

Saturday, July 3, 2010

Euro Exit : How to Bypass Eichengreen's Fallacy

The decision to join the euro area is effectively irreversible. (…) A system-wide bank run would follow.”

Barry Eichengreen

The above statement is a bit surprising since nearly 70 countries did exit a currency union during the last few decades according to Andrew K. Rose (see my post on the topic here).

For the readers of this blog who can read French and want to know how to bypass the Eichengreen fallacy about the alleged impossibility of exiting a currency union, a new paper is available on my homepage, in the section "Some Recent Work". It is titled "Quand et comment sortir de l'euro: une stratégie de redressement" (Leaving the euro: when and how. Restoring economic dynamism.).

Friday, July 2, 2010

Long Life Markers and the Coming Revolution in Social Security

Both the Wall Street Journal and The Independent report about a recent research by Boston University scientists that say they have discovered a genetic signature of longevity. They expect soon to offer a test that could let people learn whether they have the constitution to live to a very old age.

Greg Mankiw wonders today how this is going to change the life insurance industry, beating me to the post while I was pondering the consequences for pay-as-you go social security systems. They are obviously going to be confronted with a similar problem. Will individuals with the « long life DNA markers » be required to pay more during their working life or work longer than others with shorter life expectations?

In any case the universal « one size fits all », Bismarckian formula, will probably give way to some more individually tailored contracts.

More Competition in the Production of Ideas and Knowledge

Rajiv Sethi has a very interesting post on the contribution of blogs to the progress of economics here.


“The community of academic economists is increasingly coming to be judged not simply by peer reviewers at journals or by carefully screened and selected cohorts of students, but by a global audience of curious individuals spanning multiple disciplines and specializations. Voices that have long been silenced in mainstream journals now insist on being heard on an equal footing. Arguments on blogs seem to be judged largely on their merits, independently of the professional stature of those making them. This has allowed economists in far-flung places with heavy teaching loads, or those who pursued non-academic career paths, to join debates. Even anonymous writers and autodidacts can wield considerable influence in this environment, and a number of genuinely interdisciplinary blogs have emerged...”

My comment: I completely agree. In the age of information, closed intellectual professions’ monopoly power is eroded while open competition of ideas, both good and bad, prospers. The decentralized production of knowledge has a competitive advantage over centralized, hierarchically organized, production of ideas in large firms (read “universities”). Great times.