Sunday, March 27, 2011

Oil, Secularism, and Libyan Partition

Second thoughts by Barkley Rosser for EconoSpeak here .

For a better understanding of Arab polities have a look at Culture and Conflict in the Middle East by Philip Carl Salzman: it’s all about the importance of tribes and the unimportance of law in nomadic societies.

Thursday, March 24, 2011

Unraveling the Euro Zone

It is well known that several highly indebted European governments will face severe refinancing difficulties in 2013 and 2014, and probably default (or more elegantly put “restructuring” of the sovereign debt) for some of them. Hence the call for a “European economic governance” in order to “save the euro”, that is, for fiscal centralization and a quasi-federal management of the zone under the leadership of France and Germany. 

Such an organization appeared, however, highly improbable given the general trend towards decentralization, secession, and fragmentation affecting all states of the world in the wake of the information and communication revolution.  

Now the high hopes of the French and German governments seem already jeopardized according to Geoffrey T. Smith today's article: “Agenda: Euro Zone Letting Slip A Grand Chance.”


“A couple of months ago, the euro zone appeared to be within sight of a halfway-convincing solution to its debt problems. … the strong would help the weak keep afloat long enough to correct key weaknesses in their economies, in return for permanently ceding a degree of control over their policy making to stop a repeat of the current crisis. Today, it seems a lot further away. … the prospect of disorderly default has become much more realistic. It shores up the liquidity positions of the troubled states marginally without doing anything to address their solvency issues, and financial markets are starting to price in post-2013 restructurings, making it more likely the whole edifice will collapse even earlier.”

Read the whole paper in the  Wall Street Journal  .  

Wednesday, March 23, 2011

Is The Leviathan Alive and Well?

The Economist publishes an interesting  special report  on the future of the state.


“By the 1990s many people thought that global capitalism would stop the state’s advance. (…) A special report in this newspaper, published in 1997, examined the then fashionable idea that the state was withering away. Its author, Clive crook, now at the Financial Times, argued that it was not.

He has been proved right several times over. In continental Europe, where the state’s share of the economy was already pretty big, it has not risen that much. However, in America a Republican, George Bush, pushed up spending more than any president since Lyndon Johnson.”

The data in the article, however, tell a slightly different story: the government spending as a share of GDP had in fact stopped growing during the 80s and 90s, only to resume its upward trend by the middle of the past decade, marked by the “great recession”. The average government spending as a percent of GDP for thirteen developed countries was thus   43.2 % in 2000 versus  43.8 % in 1980, but jumped to 47.7 % in 2009 (see the data in the article here).

 It is no surprise that government spending is less downwardly elastic than production, thus determining a rising ratio when GDP is stagnating or contracting. Moreover, one has to note that the current increase in state spending has been massively financed by debt, which means that increasing takings by taxes has become more and more difficult in open, competitive economies.

It follows that the idea of a withering away of the state may well become fashionable again when growth returns to sustained, pre-recession, levels.

Friday, March 18, 2011

The Other Danger From Nuclear Power

Earthquakes (Japan) are one risk; bad maintenance and human error (Tchernobyl) are another. But the third risk from nuclear power could prove even more lethal.

Interviewed in April last year, Charles Ebinger, Director of the Energy Security Initiative at the Brookings Institution commented on the,  “global nuclear renaissance”, here.


“The Chinese have 24 reactors under construction and another 100 planned. The Indians have very vigorous programs for the future; the Russians, there’s growing interest in the Middle East in the United Arab Emirates, Saudi Arabia, Egypt.”

“As we have more of these sensitive facilities potentially for what we call uranium enrichment and reprocessing, which are part of the fuel cycle, what you need for atomic civilian power, but once you have one or both of those technologies, you de facto have the capability of making a weapon. And I don’t think most of us are going to worry if developed countries that are considered highly stable, expand nuclear power, but as we start moving nuclear reactors in to the Middle East and other politically volatile regions of the world, we certainly want to make sure that all the vendors that sell this equipment are as vigilant as possible to make sure that somehow under a dual use item, that’s said to be used for one thing, that it can’t be used for another. And it’s a very, very serious problem.”

And as insurers know, as a matter of statistics, a risk is always going to happen, eventually, someday. 

Wednesday, March 16, 2011

Realpolitik: The Euro Payoff

“European monetary unification … has been to Germany’s own great economic advantage” writes Adam S. Posen (“The Euro Payoff: Germany’s Economic Advantages from a Large and Diverse Euro Area”, Peterson Institute for International Economics, March 3, 2011). Thus “coldhearted economic calculations should compel Berlin to step up for the euro”.

Indeed, “a smaller member economy of a currency union might suffer from increased size, in that the monetary policy decisions made put too little weight on the conditions in that economy (which is arguably part of what happened to Ireland and Spain pre-crisis).” But “for the anchor currency of a monetary union – the largest economy and the one that the other member economies’ business cycles respond to most – monetary policy decisions will be largely the same as those that would have been made for the anchor economy itself, because of its economic and political weight.”

Moreover: “Germany benefits directly from the stability of currencies that the euro provides to surrounding countries – and that includes southern Euro Area members. Germany gets to run a trade surplus with member countries that otherwise would not be able to afford so many of its exports.” Or more exactly, German exporters would not been able to export so easily their products, were the intra-zone exchange rates at the "right" level.

Thus, “The German economy is protected against exchange rate instability, and likely sharp declines in competitiveness, by keeping its less stable neighbors viably in the Euro Area.” More exactly: the German economy is protected from equilibrium exchange rate adjustment of her partners. 

My summary: Germany gains from a large Euro Area because the monetary policy of the zone is not different from the optimal German one, and because the “less stables neighbors” are prevented from adjusting competitively their exchange rate to equilibrium levels through devaluation, thus giving the German economy the growing advantage of a cumulative devaluation of the “implicit D-Mark” derived from the tightly controlled domestic wage growth, which determines a permanent trade surplus with its European neighbors.

Hence Posen’s conclusion:

“It is in the German’s own enlightened self-interest to provide financing to ease the process of real adjustment in those Euro Area economies that have overstretched on spending on German goods.”

In other words, an undervalued exchange rate determining overstretched exports is well worth the cost of providing finance to neighbors. Especially so since the "strong euro" broadens the international market for sovereign German borrowing, and thus lowers interest rates on German bonds. 

Why then isn’t German public opinion convinced? Maybe because the profits from the export machine are concentrated while all German taxpayers are going to pay for subsidies to Greece, Ireland, Portugal and maybe Spain, while German wage growth is anemic.

The punch line:
The Posen paper is a marvelously clear and cynical exposé of the narrow interests of the German export machine. Domestic wages kept low and higher taxes allow real transfers from German households to the German exporters, by the means of subsidizing other European countries which are pushed into importing more German goods by the overvaluation of their “implicit currencies”, and have been pushed to near bankruptcy borrowing by the inadequate “German” ECB monetary policy.

These other members of the eurozone should think twice about the cost to themselves of a continuing participation in such an asymmetric and detrimental institution.

Read the whole paper here .

Friday, March 11, 2011

Krugman on Ricardian Equivalence

A temporary (not permanent) increase in government spending now (let’s say for one or two years) does not call for a same amount of tax increases in all future periods, but a lower one as far as the tax burden is spread over many future periods.  In that case, the present cut in consumer spending should be less than the public spending increase and the program should have expansionary effects, even if you have full “Ricardian equivalence” behavior (perfect foresight of future fiscal consequences of present policy).

A short post here .

The result of course would be different if future tax increases were to be concentrated in the next few years rather than over an infinite series of future periods. 

Wednesday, March 9, 2011

Does Education Pay?

Not necessarily, writes Laurence Kotlikoff in an article that makes you think twice about government policies that promote higher education as a sure path to economic success. The reasons for skepticism? First, differences in the length of active life, and second, of course, differences in taxes.

The paper is well worth reading on Bloomberg.

Tuesday, March 8, 2011

The Most Heavily Cited Macroeconomic Title of the 20th Century

The Journal of Economic Perspectives publishes a retrospective on New Zealand economist Alban William Housego (Bill) Phillips, a remarkable man, who had an extraordinary life and who discovered (or maybe rediscovered after Irving Fisher’s “A Statistical Relation between Unemployment and Price Changes”, The Journal of Political Economy, March-April 1973 reprint of a 1926 article) the famous inflation-unemployment trade-off Curve.

It reads like a novel here (complimentary). 

Saturday, March 5, 2011

Protestant Reformation and the Printing Press

New evidence provided by Jared Rubin is available here.

My comment: The printing press increased in considerable proportions the amount of information available to the population in the West. According to my thesis, this contributed to the development of decentralized production and a decline of hierarchical production.

A main difference between the Protestant churches and the Catholic dominant one, at the time, was that the  former were decentralized enterprises in the production of religious services while the latter was heavily centralized under the papal management in Rome.

The information revolution produced by the printing press thus determined a rise of the decentralized sector of the religious business, and a contraction of the market share and production of the centralized sector of the same business. This is what I defined as the “Coase-Rybcinski” theorem in my 2000-2006 book. 

Is Trichet out of his ****** mind?!

The tightening of monetary policy in the Eurozone announced by Jean-Claude Trichet on March 4 is a “horrible idea” according to a much commented post on the German blog Kantoos Economics.

A striking graph shows the abrupt fall of the Euro area (15) quarterly NGDP deviation from trend since 2008. It is currently of – 10% and there is still no sign of recovery. Since the beginning of the year the euro has appreciated from about 1.35 to the current near 1.40 dollar, while the total nominal hourly labour costs keep falling as shown by Matt Yglesias here.

Yglesias concludes that “the Euro contraption is being run for the benefit of German bondholders and totally (ignores) the welfare of the majority of Europe’s citizens.”

My comment: This is precisely the theme of my forthcoming book (in press, in French).