Thursday, June 23, 2011

A Great List of Books to Understand Economic and State Development

From Chris Blattman here.

Nothing to add except to emphasize that « Nation building is a long and messy business » and that « War makes the state ».

Managerialism Rules in America

A useful reminder, by Mark Roe, of his well-known analysis of modern American capitalism.


“When it comes to capitalism vs. socialism, we know which side the US is on. But when it’s managers vs. capital-owners, the US is managerialist, not capitalist.”

A comment: Continental European systems are, of course, also managerialist, but on top of that they are corporatist, that is, are characterized by a deep collusion of business and administrative-political elites, an extreme version of that type of system being non-european but Japanese.

Read his post here.

For further references look here.

Monday, June 20, 2011

Krugman on the New Drachma

Even though it has long been obvious that non-default is not an option, the European leaders and institutions pursue a strategy of delay with no solution in sight. Then,

“for Europe ex-Greece, the costs of delay are whatever delay does to reduce the amount that Greece will eventually pay its creditors. I think there’s a good case to be made that at this point demands for even more austerity are counterproductive, even in terms of creditors’ interests: the Greek economy is suffering long-term damage, the Greek political scene is being radicalized, and the chances of Greece just telling its creditors to take a hike while it devalues the new drachma are rising.”  (Krugman’s blog in the New York Times, here).

Economic common sense indeed. 

Dani Rodrik on Greece

“When Argentina defaulted on its debt a decade ago, the country became a pariah in the eyes of foreign bankers and bondholders and was shut off from international financial markets. Yet its economy recovered quickly and experienced rapid growth thanks to a large boost in external competitiveness provided by a vastly depreciated currency. The lesson is that default can be the better option when the alternative is years of continued austerity.” (In the New York Times, here).

Perfect good sense, and I would add that default and devaluation is not only a better alternative: it is the only way to get the Greek economy out of the current mess and back to growth, and international financial markets after a while.

But then – illogically – Rodrik seems to deplore a Greek exit from the euro which would “unleash huge uncertainty about the rule of the game”.

Fortunately, he nevertheless concludes – correctly - that the current strategy of other European governments aims at “protecting German and other European creditors and bondholders while Greek workers, retirees and taxpayer (and also add German and French ones, JJR) pay the bill. This makes no sense economically, and will not work politically.”

I agree. But why did it take so long for most economists to recognize that an exit from the euro was the only durable solution for the Greek economy?  One year ago it was already quite clear (see my May 5, 2010 interview in the newspaper Le Monde, downloadable on my home page).  

Saturday, June 18, 2011

The Hero of Fukushima

A chilling account of what we now know, three months after the tragic nuclear accident, in a BigThink post, by Michio Kaku. Excerpts: 

“1. After months of stonewalling and low balling figures, the utility finally admitted what many US physicists already suspected, that there was most likely a 100% core melt at all three reactors. Physicists in the West, given the meager data fed to the media by the utility, have run independent programs on their computers and have concluded that the accident was much, much worse than the government has been reporting. The new figures, although shocking, now agrees with assessments made in the US.

2. If 3 reactor cores suffered 100% core melts, then why didn't we have three China Syndrome type accidents? Why didn't we see three Chernobyl accidents happening simultaneously? The answer is that, at the very last minute, sea water was flushed into the three cores, stopping the melted uranium from melting through the entire containment structure and releasing vast amounts of radiation into the environment. The utility, however, resisted flooding the reactors with sea water, since it would reduce the reactors to junk, while the utility wanted to salvage the reactors for future use. Apparently, the reactor operator disobeyed direct orders. He was ordered to delay any plans to flush the cores with sea water. Instead, he did it anyway, going against his superiors. He should be considered a hero. Any delay back then might have led to an unimaginable tragedy.”

The punch line:

“Estimates for the clean up vary. Toshiba corporation estimated it would take 10 years. The Hitachi Corp estimated, however, that it would take 30 years. One nuclear engineer estimated that it might actually take 100 years. Remember that it took 14 years to clean up Three Mile Island, where there was no breech of containment. It has been 25 years since Chernobyl, and that accident still has not ended. So 30 to 100 years are not unreasonable guesses for the amount of time the cleanup will take.”

Thursday, June 16, 2011

The Case Against the Euro

 Fernanda Nechio, an economist at the Federal Reserve Bank of San Francisco, presents a set of charts indicating that, according to one well-respected monetary policy rule of thumb (the “Taylor’s Rule” named for Stanford economist John Taylor) Europe’s central bankers have the wrong policy for the peripheral countries (the “PIGS”).

The rule says monetary policy makers should adopt a “tight” monetary policy when inflation is above its target or when the economy is above its full employment level, and a relatively easy monetary policy when inflation is lower than targets or unemployment higher.

According to Nechio’s calculations, the ECB is adopting the policy Taylor Rule says is optimal for the core states (the northern ones), but for the peripheral countries (that some call in a derogatory and unjustified way the “Club Med countries” implying –wrongly – that people there do not work) the current target rates are far above where the Taylor Rule would recommend. For these countries (Greece, Ireland, Portugal and Spain) the policy target interest rate remains deeply negative, which corresponds also to a much lower equilibrium exchange rate vis-à-vis the dollar and the yuan I would like to add.

As Nechio writes:

“From the inception of the euro to the 2008 financial crisis, the actual ECB policy rate was below the rate predicted by the Taylor Rule for the peripheral countries and more in line with Taylor Rule recommendations for the core euro-area countries. During the financial crisis in 2008, the peripheral countries fell into deep recession, which was followed by a debt crisis from which they have yet to recover. … These events reversed the historic pattern and positioned the ECB policy rate above the Taylor Rule recommendation for the peripheral countries.”

Let’s add that the depth of the 2008 recession in these countries has been magnified by the previous excess activity and speculation that the much too low (for them) interest rates fostered before the crisis. This is quite compatible with an Austrian view of the business cycle and the fault is that of the eurozone unitary monetary policy.

To summarize, the ECB’s actual rate has been either much too low for the economic health of the periphery (thus explaining the real estate booms in Ireland and in Spain before the crisis) or much too high after the crisis (thus accentuating the recession already severe in the periphery, and especially in Ireland, Greece and Portugal).

“In other words, if you are a country in the peripherals, the ECB’s monetary policy has been consistently wrong” writes John Carney in CNBC’s “NetNet” here.

The problem is that there can be only one monetary policy in a monetary union, and that one policy cannot fit simultaneously all member economies. At the limit “one size fits none” but here the monetary policy is aiming at the current conditions of the sole core (northern) members.

No wonder that Greek and Spanish citizens are in the streets in protest against their government budgetary policy which further restricts the economic activity (under pressure from the ECB, IMF and northern governments) and push their economies into a deeper recession at a time when ECB’s monetary policy is already much too tight for them.

The ECB’s inadequate interest rate policy exacerbated the bubbles in the periphery before 2008 and now it exacerbates the severity of the recession. It is a recipe for instability. Moreover the governments of the “core” resist any “haircut” for the creditors of the peripheral governments (mostly French and German banks, as well as the ECB) and insist on aggravating the amount of the debts of peripheral governments through more loans, ostensibly to “save them”, precisely when the capacity for repayment of these countries’ debt (the level of their GDP) is plummeting. Can you seriously call that “helping Greece”?

There is no way out of this mess other than a partial default on debts, and devaluation, that is an exit from the euro. This is what Argentina did in 2001, exiting the dollar zone and defaulting on a large fraction of its debts, with the result of a rather quick return to growth (within months) and a return also to international capital markets. 

The current irresponsible policy of the “core” countries of the European Union, which consists in making Greek citizens pay for the euro disaster (and for their own banks), will only make matters worse. It will hasten secession from the eurozone, but fortunately for a better future.

The Nechio paper is well worth reading here .

Monday, June 13, 2011

Is the ECB trying to Break the Eurozone?

David Beckworth wonders why the Frankfurt bank is tightening monetary policy, thus increasing the fragility of southern members’ banking systems and the burden of adjustment for Greece, Portugal and Spain.

Now most commentators have been (finally) recognizing the obvious: the zone is not an optimal one and specific (and often diverging) monetary policies are required for different members. But the ECB responds only to the German economy’s conditions. Do they really want to get rid of the Eurozone periphery (maybe with the blessing of the German government)? An hypothesis not to be lightly discarded.

Read the post here

Sunday, June 5, 2011

Why Ms. Lagarde Will Run the IMF

Simon Johnson, who was chief economist there, explains it all. Delightful …

Read his post here .