Friday, December 31, 2010

My New Year's Wish

My new year's wish: shall 2011 be a more enlightened year than 2010 was.

You know that not all is well when an influential member of main media outlets says things like this among chuckles:
It has no binding power on anything... The issue with the Constitution is that the text is confusing because it was written more than 100 years ago.
No, this isn't a prank, here's the video:

I wonder what Cato the Younger would have to say about the current state of ideas.

Have you all a great 2011 anyway!

Tuesday, December 21, 2010

George Ought to Help

Nice video on the non non-agression principle (HT Cafe Hayek's Don Boudreaux). Enjoy!

Monday, December 6, 2010

Rosling's 200 Countries, 200 Years, 4 Minutes

Fantastic graphic depiction of humanity's health gains during the last 200 years by Han Rosling for BBC (HT Mankiw). Enjoy!

Monday, November 15, 2010

John Taylor on the G20 Meeting

John Taylor offers a precise analysis of the US administration's unconvincing performance during the G20 meeting:
But the insertion of QE2 into the negotiations was not the reason that the United States came away with so little at the G20 meeting in South Korea. The same thing happened at the previous Q20 meeting in Canada and there was no QE2 then. As I wrote at the time of the Canadian finance ministers and central bank governors meeting, the problem with the U.S. position then and now is that the idea that more deficit spending stimulus is needed to increase demand is an idea that other countries strongly disagree with, and in my view they are right. Indeed, the G20 has been getting on the right track despite the U.S. position. The United States was able to sell stimulus packages to the G20 in early 2009, but most see that it has not done much good and has made the debt higher. The way to have a more successful G20 meeting in France next year is for the United States to go with a credible plan to reduce the budget and stop increasing the debt.

Monday, October 25, 2010

Economics Bloggers Pessimistic According to Latest Kauffman Survey

The new Kauffman Quarterly Survey of Leading Economics Bloggers (of which I'm part) is out. According to the press release:
For the fourth quarter in a row, the nation's top economics bloggers have conveyed a steadily deteriorating view of the U.S. economy in responses to a Ewing Marion Kauffman Foundation survey released today. In the fourth Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers respondents' outlook on the U.S. economy is more pessimistic than in any previous quarterly survey in 2010, with 99 percent saying that conditions are mixed, facing recession or in recession. When asked about the probability of a double-dip recession in the United States, the average response is a 41 percent probability; two-fifths see a 20 percent probability, and opinion declines toward higher probabilities.
The majority of bloggers is betting that the American economy will experience a combination of higher inflation and real interest rates and positive but slow growth on a three-year horizon:

Saturday, October 23, 2010

Thursday, October 21, 2010

Guy Sorman on What the News Doesn't Tell You About the French Strikes

I've been writing a series of articles (in Portuguese) for that discusses differences between freedoms in the US and in France. In the latest article I talk about how the most important trend in European countries after the Second World War, including France, is characterized by continuous and unstoppable market liberalization. Sorman, who is among the most knowledgeable observers of these two societies, independently arrives to similar conclusions in this Wall Street Journal article. He concludes:
To conclude that France never changes ... would be slightly mistaken. In spite of a Napoleonic right and a Marxist left, the French economy has become much more market-oriented than it was 20 or 30 years ago. The best and the brightest now want to become entrepreneurs, not top bureaucrats. Such an evolution was not desired by political leaders but instead has been forced on French society through the liberating influence of globalization and the European Union. This confrontation between Mr. Sarkozy and the unions doesn't mean much compared to those historical trends.

Tuesday, October 19, 2010

Guy Sorman on the French Fondness for Strikes

Guy Sorman explains the French fondness for strikes to Americans:
A l'inverse , on me demande aux Etats-Unis, d'expliquer les grèves françaises, vécues par les Américains comme un vent de folie et une atteinte inacceptable aux libertés individuelles. Il me faut alors rappeler combien en France, on aime jouer la Révolution: l'Histoire se répète en farce , écrivait Karl Marx. Toute farce n'est cependant pas drôle.
I translate:
On the other hand, they ask me in the US how to explain the French strikes, seen by Americans as a wave of madness and an unacceptable attack on individual freedoms. I am obliged to remind them of how much in France we love to reenact Revolution: history repeats itself as farce, has written Karl Marx. But not every farce is entertaining.

Rachman on How France Ignores Its Fiscal Reality

Here's an extract from a Financial Times article by Gideon Rachman on how hard it is for the French government to make the French welfare system more sustainable and to turn it into less of an economic burden for future generations and for the French economy through the reduction of entitlements:

The French seem to enjoy strikings. Last week there was a slightly festive air – with flags, drums, torches, chants and even fancy dress on display. There is something faintly ridiculous about schoolchildren striking to protect their pensions, which makes it tempting to dismiss all this as street theatre and to assume that the real decisions will be made elsewhere. But that would be a mistake. The French strikes are causing serious disruption to the economy, with a threat that the country could soon run short of petrol...

The French people ... still do not seem to realise the potential gravity of their situation. Their government’s proposal to raise the retirement age from 60 to 62 is an extremely mild reform – certainly compared with the cuts in wages, pensions and services that are being forced through in other debt-stricken European countries such as Greece, Spain, Ireland and even Britain. And yet France’s proposed reforms have brought millions of demonstrators on to the streets.

It may need a genuine fiscal crisis finally to persuade the French that, as Margaret Thatcher once put it: “There is no alternative."

It's interesting to notice however that while France is at least fighting its way back into long-term solvability, the US continue to develop an entitlement culture and to do all they can to bankrupt their own welfare system.

Monday, October 18, 2010

A Tale of Two Continents

Consider these latest news about the economy in the US and in Europe:

United States:
1. Bernanke Signals Intent to Further Spur Economy - New York Times, (Ben Bernanke), October 15, 2010
2. U.S. Posts Second-Largest Annual Budget Deficit on Record, Economy, October 15, 2010
3. 'Liquidity Trap' Plagues U.S., More Stimulus Is Required, Fed's Evans Says, Economy, October 16, 2010
4. Dollar Declines for Fifth Week on Prospects of More Monetary Easing by Fed, Economy, October 16, 2010
5. Current Deficits Are Not the Problem, Brookings Institution: Recent Research and Commentary, October 15, 2010

1. Trichet Says Raising ECB's Inflation Target Would Have 'Disastrous' Effect, Economy, October 16, 2010
2. ECB's Trichet: Euro zone needs stricter fiscal reforms - Reuters, (Jean-Claude Trichet), October 16, 2010
3. Basel III must not sacrifice economic growth - Lagarde - Reuters India, (European Economy), October 15, 2010
4. Speech Jean-Claude Trichet: Global economic governance 
and euro area economic governance, European Central Bank: Press Releases, October 16, 2010
5. 15Oct/Jean-Claude Trichet: Europe's frameworks for macro-prudential oversight and economic governance, Bank for International Settlements: Central Bankers Speeches, October 15, 2010

Two regions with similar (although unidentical) problems, and two opposite diagnostics and sets of solutions. Time will show that only one path was right. Which one? If you read my blog, you know what's my guess.

Saturday, October 16, 2010

Benoît Mandelbrot Passes Away at 85

When the weather changes, nobody believes the laws of physics have changed. Similarly, I don't believe that when the stock market goes into terrible gyrations its rules have changed.

Benoît Mandelbrot

French-American mathematician Benoît Mandelbrot passed away in Cambridge, MA. He became famous for his studies on fractal geometry (HT De Gustibus Non Est Disputandum).

Quote of the Day

Utopia is exempt from any obligation to produce results, that its only function is to permit its champions to condemn that which exists in the name of that which does not.

L'utopie n'est astreinte à aucune obligation de résultats. Sa seule fonction est de permettre à ses adeptes de condamner ce qui existe au nom de ce qui n'existe pas.

From Jean-François Revel's Last Exit to Utopia (HT Rodrigo Constantino).

Friday, October 15, 2010

The 300 Foot Rule, or How the City of Duluth Is Helping Me to Lose My House to Foreclosure

To those who haven't ever lived in Duluth, Minnesota, I must explain it first. The 300 foot rule is a regulation passed a few years ago by the City of Duluth that impedes any kind of leasing of a dwelling in a large region around campus when there's another leasing inside a 300 foot radius from it.

It means that, in the case of my house (picture on the side), which is currently for sale in Duluth, I've been impeded by the rule to rent it not only to students but to single families too. By the way, renting to students wouldn't be economical to me. Things look a little bit more absurd considered that my house is located in a single-family only street, 10 minutes away from campus.

The house is probably going to foreclosure soon due to lack of buyers. I don't think this is going to help the City of Duluth neither the homeowners in the neighborhoods affected, which by the way may one day find themselves in the same conundrum. In other words, the solution that the City found for its law enforcement problem was to transfer its cost to the citizens that need to sell or rent a house in a sour market.

More interesting is the fact that the city warns me ex ante that my house is going to be policed and I'm going to be fined if I defy the rule. Well, if I'm going to be policed anyway, wouldn't it be more logical for the city instead to make sure that students don't party or that the houses are rented only to single families?

What amazes me the most however is the fact that it was exactly in America where I couldn't exercise my property rights to such an extent for the first time in my entire life.

Thursday, October 14, 2010

The Economist on the Demonstrations Against Retirement Benefits Reform in France

Here's an interesting segment from a well-written short article that appeared in the The Economist on the demonstrations against the much needed retirement benefits reform proposed by the French administration (italics are mine):

... First, although the numbers on the streets are high, it is the strikes, not the demos, that have the power to disrupt. Thanks in part to a law designed to ensure minimum service in schools and on public transport during strikes, and to the fact that workers are no longer paid when they walk out, strikes do not paralyse the country in quite the way they once did. (French commuters have also learned to take one of their numerous days off during strikes, reducing the pressure on trains.)

At the same time, public opinion has shifted. This is not immediately clear from polls. Some 70% of respondents to one said that they backed the strikes, more than the 54%-62% in favour in late 1995. Yet this may be precisely because strikes are less intolerable now for those who do try to get to work. And for all the drama on the street, in the same poll 53% said that the raising of the retirement age was "acceptable" and 70% that it was "responsible vis-à-vis future generations". A silent majority seems to know that demography and economics make pension reform inevitable.

Monday, October 11, 2010

Nobel Prize in Economics Goes to Diamond, Mortensen & Pissarides

The Nobel Committee recognized this year the very important contributions to macroeconomics of Diamond, Mortensen & Pissarides:
This year’s three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
It's interesting to notice that earlier this year the US Senate controlled by the Democratic Party rejected the nomination of Diamond for the Federal Reserve Board due to the obstruction of a Republican Senator who declared that "Professor Diamond is an authority on tax policy and Social Security. It is not clear, however, that his background is ideally suited for monetary policy, especially given the current challenges facing the Fed."

I'd say revenge is a dish best served cold.

Economics Nobel Laureate Maurice Allais Has Died at Age 99

Maurice Allais has died in Paris at age 99 (HT Marginal Revolution's Alex Tabarrok). A polymath that has contributed to physics among other fields, he won the Nobel Prize in Economics for his work on the theory of markets and the efficient utilization of resources.

Saturday, October 9, 2010

This Year, a Peace Nobel Prize that Isn't a Bad Joke

Congratulations to the Peace Nobel Committe for choosing this year someone that really did something at his personal cost for peace and in particular for the cause of freedom: prisoner of conscience Liu Xiaobo. It partially redeems the Committee from its many past mistakes.

Thursday, October 7, 2010

Mario Vargas Llosa Wins the Literature Nobel

Seeking to impose a cultural identity on a people is equivalent to locking them in a prison and denying them the most precious of liberties — that of choosing what, how, and who they want to be.

Mario Vargas Llosa

The Nobel Committee for Literature was very graceful again this year by recognizing the work of Mario Vargas Llosa. Indeed a well-deserved prize.

Wednesday, October 6, 2010

Is "Nudging" Nothing Else than Newspeak for "Influencing"?

It's very fashionable these days to talk about "nudging," a concept promoted most famously by Richard Thaler, an eternal and strong candidate for the Nobel Prize in Economics. But isn't "nudging" maybe nothing else than "influencing", fancifully disguised as a tool to be used solely for "good," in an example of age-old newspeak? "Nudging," by the way, has also been called, in a way that looks to me suspiciously "newspeakish," "libertarian paternalism" or "choice architecture."

This post about "Nazi nudging" by Marginal Revolution's Alex Tabarrok, and the discussion that follows in its comments section, is quite elucidative. Thaler himself said this about "nudging":

BuzzFlash: Nudges by your definition are well intentioned. Benevolent nudgers “are self-consciously attempting to move people in directions that will make their lives better.” Can you contrast that to a more nefarious choice architecture?

Richard H. Thaler: Nudgers CAN be well-intentioned but can also be self-interested. We are being nudged all the time by marketers, religions, spouses, etc. Sunstein and I did not invent nudging! Our goal is to give benevolent nudgers an instruction manual. The evil nudgers have already mastered most of these tools, alas.

It looks to me like there's a large component of wishful thinking and not much public choice theory substance in the way Thaler looks at his own "creation."

PS: I'd like to add the following.

It's not only that "nudging" may lack originality and economic soundness as a concept. There's also a potentially very significant moral issue behind Thaler's interpretation of its own ideas. I'll explain with an example: Coke is not telling you that "it's doing marketing for your own good" when it tries to convince you to drink more Coke. Any adult in control of his or her mental faculties can understand Coke's motivations, and can choose to let himself or herself "go with them" or "avoid them."

Moreover, it would be absolutely disingenuous if Coke would tell you otherwise. Thaler's definition of "evil nudging" therefore should, in most circumstances, be easily recognized as "influencing" by mentally capable people. On the other hand, trying to pass "influencing" by governments, or by anyone in a position of authority, as "well-intentioned nudging" is to me the same as trying to hide the fact that the authority is just using its powers to influence people's decisions and choices according to what the authority believes to be right or according to the self-interested motivations of the authority.

What I mean is that, once the newspeak is peeled off, "nudging" looks a lot like the defense of the right of people in positions of authority to influence other people's choices. If this is the case, then why not just call a spade a spade?

Friday, October 1, 2010

The New NRC Ranking of US Economics Graduate Schools

The new NRC ranking of Ph.D. programs in economics in the US is out (HT Mankiw). It shows a very significant jump ahead of my doctoral alma mater, the University of Wisconsin - Madison. Maybe the result of departmental changes that took place in part while I was studying there? Or would it just reflect changes in ranking criteria? Anyway, way to go Badgers!

Wednesday, September 29, 2010

Brazil's Evil Red Star

Brazilians will vote for president on Sunday, Ocober 3. The list of candidates is dismal; nonetheless they will probably, as usual, elect the worst among them all.

Let Rush's Starman be a symbol of what Brazil now stands for (original art by Hugh Syme, many thanks to my son Alex for skillful photoshopping).

Thursday, September 23, 2010

What Should Have Been the Government Response to the Crisis?

Here's the answer according to John Taylor:

I am frequently asked what I would have done differently. It turns out that I testified before the same Senate Budget Committee two years ago in November 2008 and recommended a specific four part fiscal policy response to the crisis. The response was based on certain established economic principles, which I summarized by saying that policy should be predictable, permanent and pervasive affecting incentives throughout the economy.

But this is not the policy we got. Rather than predictable, the policy has created uncertainty about the debt, growing federal spending, future tax rate increases, new regulations, and the exit from the unorthodox monetary policy. Rather than permanent, it has been temporary and thereby has not created a lasting economic recovery. And rather than pervasive, it has targeted certain sectors or groups such as automobiles, first time home buyers, large financial firms and not others. It is not surprising, therefore, that the policy response has left us with high unemployment and low growth. Given these facts, the best that one can say about the policy response is that things could have been even worse, a claim that I disagree with and see no evidence to support.

Friday, September 17, 2010

Central Banking Gone Fishin'

Who was responsible for the economic crisis? Evidence points to discretionary central bank policies (once again...) according to Raghuram Rajan (HT Cowen):
It is true that the European Central Bank was less aggressive, but only slightly so; It brought its key refinancing rate down to only 2 percent while the Fed brought the Fed Funds rate down to 1 percent. Clearly, both rates were low by historical standards. More important, what Krugman does not point out is that different Euro area economies had differing inflation rates, so the real monetary policy rate was substantially different across the Euro area despite a common nominal policy rate. Countries that had strongly negative real policy rates – Ireland and Spain are primary exhibits – had a housing boom and bust, while countries like Germany with low inflation, and therefore higher real policy rates, did not. Indeed, a working paper by two ECB economists, Angela Maddaloni and José-Luis Peydró, indicates that the ultra-low rates by both the ECB and the Fed at this time had a strong causal effect in relaxing banks’ commercial, mortgage, and retail lending standards over this period.

Friday, August 27, 2010

Kling on What's Wrong with the Fed

Arnold Kling wrote what is to my knowledge one of the best passages on the monetary policy mistakes in the US since the beginning of the crisis:
I think that the main effect of the Fed's "non-traditional policies" of the past two years has been to transfer wealth from ordinary citizens to bank shareholders and executives. I do not think that the bailouts undertaken by the Fed and the Treasury helped the overall economy. I think that the message of the markets to the financial sector in 2008 was, "Shrink!" The Fed has been doing its best to fight against that message, in part because of institutional bias in favor of big banks, and in part because of a misguided analogy with the 1930's, when the demise of banks hurt the economy. This is not 1932. In 1932, the banking sector shrank too much. In 2009, it shrank too little.

Tuesday, July 20, 2010

Taylor on How Cartoonish Keynesianism is Prolonging the Crisis

John Taylor explains how cartoonish keynesianism has been making things worse in this post:
In my view the best stimulus right now would be a clear and credible plan to reduce the deficit and bring down the growing debt.

Tuesday, July 13, 2010

Becker on the Mistakes of the Financial Reform Bill

Economics Nobel Prize winner Gary Becker explains in this post why the financial reform bill won't do much to solve any of the problems that caused the financial crisis, and may in reality make things even worse in the future:
Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.

Friday, July 2, 2010

Monday, June 28, 2010

"Legal Tender" by Merle Hazard

Merle Hazard and the Carroll Family revisit "Love Me Tender" in this song about money (HT Mankiw):

Sunday, June 20, 2010

Hamilton on Long-Term Inflation Risks in the US

Hamilton summarizes the main argument for the rise of long-term inflation in the US that has been ignored by inflation doves:

The source of my concern about long-run inflation comes not from the expansion of the Fed's balance sheet, but instead from worries about the ability of the U.S. government to fund its fiscal expenditures and debt-servicing obligations as we get another 5 or 10 years down the current path. Just as many analysts have had trouble seeing how Greece can reasonably be expected over the near term to move to primary surpluses sufficient to meet its growing debt servicing costs, I have similar problems squaring the numbers for the U.S. looking a little farther ahead.

The way that I would envision these pressures translating into inflation would be a flight from the dollar by international lenders, leading to depreciation of the exchange rate, increase in the dollar price of traded goods, and possible sharp challenges for rolling over U.S. Treasury debt. We've of course been seeing the exact opposite of this over the last few months, as worries in Europe and elsewhere have resulted in a flight to the dollar and the perceived safety of U.S. Treasuries. That appreciation of the dollar has been one factor keeping U.S. inflation down. So any inflation scare is clearly not an incipient development, but instead something we'd possibly face farther down the road.

Tuesday, June 8, 2010

The Problem with Outcomes Assessment in Higher Education

I don't think I've ever met a teaching faculty member in my life that hasn't at least once thought that the current system of outcomes assessment used by American universities is a waste of time and effort. Pontuso and Thornton explain its problems in this Thought & Action article:

There is a very simple way for accrediting agencies to assess whether students are learning. Rather than reinventing the wheel by using slick language (such as “student outcomes”) that doesn't mean anything, they should look at randomly selected course syllabi, reading assignments, term papers, tests, and student evaluations. It would be more work for assessors, since they would have to learn something about fields of study not their own, but it is a more effective way to judge whether students are learning. There may be an added benefit to this method: perhaps evaluators will discourage the grade inflation that has become the other scandalous bane of higher education. ...

Teachers assess all the time. They read student papers and exams to discover if students have learned. They ask questions in class and engage students in discussion. They look over student evaluations to see if the way they are interacting with students is being well-received. They are always trying to find better ways to help students grasp the material.Why do they need to spend time in another elaborate and meaningless type of assessment? For good teachers, outcomes assessment is mostly a distraction; for bad ones, it provides a bureaucratic cover to validate what they are doing.

Monday, June 7, 2010

Rogoff's Predictions Were on Target

About one and a half years ago, according to BusinessWeek, Harvard economist Kenneth Rogoff made the following prediction during the 2009 AEA Meeting:
... Rogoff was more pessimistic: At lunch on the first day he predicted that "what we will see next is a wave of sovereign defaults." He also pointed out that government debt historically increases by 86% in a crisis, in real terms. If the U.S. follows the same pattern, that would mean roughly $6 trillion in budget deficits over the next three years as tax revenues drop and government spending rises.
His predictions, at least when it comes to order of magnitude, were on target, see for example the graph below representing only the federal deficit.

Tuesday, June 1, 2010

Red Moon over Lake Superior

A beautiful nightscape of Lake Superior showing the moonrise, as viewed from our deck.

Tuesday, May 25, 2010

Tell Me Who Your Friends Are

Even Newsweek, an admirer and supporter of the Brazilian socialist administration, has finally become aware of its disastrous foreign policy (HT Escolhas e Consequências). According to this article by Mac Margolis:

Only a year ago, president Luiz Inácio Lula da Silva was widely feted as the man who had turned Brazil into a competitive powerhouse, the China of Latin America. That's not what has tongues wagging now. Rather than using Brazil's prominence to press outlier regimes to respect human rights and comply with international rules on using nuclear power, Lula suddenly seems bent on ducking controversy and accommodating demagogues. He routinely trades bear hugs with Hugo Chávez, even as the Venezuelan leader silences the media and harasses opponents. Brasília's diplomats abstained on a vote "deploring the grave, widespread, and systemic human-rights abuses" in North Korea. Lula canceled a visit to the tomb of Zionist founding father Theodor Herzl but found time to garland Yasir Arafat's grave. And in February, Lula posed for a photo op with Fidel Castro as protesters a few kilometers away mourned the death of Orlando Zapata Tamayo, a political dissident who died after an 85-day hunger strike in a Havana jail. ...

Now, as Lula's swagger grows bolder, the risk is that he is sending foreign policy on a political jag with little coherence, thereby squandering the remarkable legacy of pragmatism and evenhandedness that have been the country's anchors for the most of the last decade.

Monday, May 24, 2010

Cowen on Countries Living Beyond Their Means

In this interesting NYT article (HT Escolhas e Consequências), Tyler Cowen explains how the citizens of countries such as Greece, the UK, Italy and the US will need to accept sooner or later that they are poorer than they think they are:
GREECE is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of G.D.P., and Italy has a debt-to-G.D.P. ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and we face significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think.

Friday, May 21, 2010

O'Grady on Greece and Venezuela

The WSJ has a good article by Mary O'Grady on the state of monetary mayhem created in Venezuela by its Bolivarian leader, Hugo Chavez:

Critics of the euro seem to think the Greek tragedy vindicates their view that each country should have its own currency and monetary policy. But that wouldn't solve a thing. Let's face it: If Greece weren't today's Argentina, it would be Venezuela. In that country, which has sovereign money—the bolivar—and no monetary rule to prohibit the central bank from financing the government, inflation is now spinning out of control. ...

The lesson here is that without political will, fiat money in any form—be it in a monetary union, anchored to a reserve currency or run by the sovereign—is unreliable. As Messrs. Steil and Hinds note, "money untethered to a commodity gives rise to inflation when managed by corrupt, irresponsible or incompetent rulers," thereby covering Greece, Argentina and Venezuela in one breath.

Harkening back to the wisdom of a 15th century Spanish canon lawyer, the authors capture today's fiat currency problem: "The ruler's power to create value from the valueless by designating it 'money' was bound to lead to inflation."

Thursday, May 13, 2010

Sen on Smith's "The Theory of Moral Sentiments"

Here's a good article by Economics Nobel winner Amartya Sen on the misconceptions regarding one of the founding fathers of Economics, Adam Smith (HT Escolhas e Consequências), who wrote not only The Wealth of Nations but also the extremely important The Theory of Moral Sentiments. Sen explains:
Beyond self-love, Smith discussed how the functioning of the economic system in general, and of the market in particular, can be helped enormously by other motives. There are two distinct propositions here. The first is one of epistemology, concerning the fact that human beings are not guided only by self-gain or even prudence. The second is one of practical reason, involving the claim that there are good ethical and practical grounds for encouraging motives other than self-interest, whether in the crude form of self-love or in the refined form of prudence. Indeed, Smith argues that while "prudence" was "of all virtues that which is most helpful to the individual", "humanity, justice, generosity, and public spirit, are the qualities most useful to others". These are two distinct points, and, unfortunately, a big part of modern economics gets both of them wrong in interpreting Smith.

Wednesday, May 12, 2010

Got Coffee? Not in Bolivarian Venezuela

Ah, the miracles of Bolivarianism... This political fad was able to transform one of the largest producers of coffee in the world into a country uncapable of providing even for its own domestic demand. Another excellent example of extreme government failure. As Mary O'Grady summarizes in this WSJ article:

The late Milton Friedman once quipped that "if you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand."

Friedman was using hyperbole to make a point about central planning. Or so I thought until Hugo Chávez put himself in charge of Venezuela's coffee sector. Last year, for the first extended period of time in the country's history, Venezuela did not produce enough of the little red berry to satisfy domestic demand. It has now become a coffee importer and is facing serious shortages.

Tuesday, May 11, 2010

Neil Gaiman Knows the Economics, but the State of Minnesota Doesn't

Neil Gaiman of Sandman fame understands the economics behind the value of his work (and leisure) time. On his website he makes some interesting points about the most absurd public demands on a celebrity writer and on what some people consider to be exorbitant talk fees (HT Mankiw): $45,000 per talk.

On the other hand, I can only shake my head in disbelief when I realize how badly my Minnesota taxes are used by our government. This all happens while the University of Minnesota has been cutting back salaries and some arguably more important programs (although, to be fair, some salaries and nonessential programs deserve to be cut - but the pearls go with the waste). File this one under government failure, big time.

Monday, May 10, 2010

Ferguson on Posner's "The Crisis of Capitalist Democracy"

Here's an excellent review by Niall Ferguson of Richard Posner's latest book The Crisis of Capitalist Democracy that appeared in the NYT (HT Escolhas e Consequências). Ferguson summarizes the problem with Posner's arguments in this paragraph:
Posner makes it clear that he understands the risks the United States now faces as the crisis of private finance continues its metamorphosis into a crisis of public finance: an exploding debt relative to gross domestic product; larger risk premiums as investors prepare for higher inflation or a weaker dollar; rising interest rates; a greater share of tax revenues going for interest payments; a diminishing share of resources available for national security as opposed to Social Security. “As an economic power,” Posner concludes, “we may go the way of the British Empire.” Indeed. It seems not to have struck the judge that British decline and the rise of Keynesianism went hand in hand.

Friday, May 7, 2010

More on the Kauffman Survey of Leading Economics Bloggers

As a nice follow up to my last post, the new Kauffman report just came out, including answers to new survey questions. Among them, I found these to be interesting:

Leading bloggers think that budget deficits and inflation will increase in the short term. I assume that the answers are based on the notion of structural deficits (meaning, discounted the temporary effect of bailouts and the stimulus on the deficit) and on the idea that the effects of loose monetary and fiscal policies should start to be felt in a three-year horizon.

Here is a surprising one (at least to me):
What? The Brazilian Real is seen by 3% among the leading bloggers as the 2050 reserve currency? No way in hell this is gonna happen. Maybe I find it loony just because I worked for the Central Bank of Brazil for so many years, but those are my two cents anyway.

PS: Oops, my mistake, those 3% among the bloggers voted for the EU Euro, not for the Brazilian Real. A more sensible result, although clearly biased by the Greek crisis.

Thursday, May 6, 2010

The Kauffman Economic Bloggers Survey

The Ewing Marion Kauffman Foundation conducts a survey of leading economic bloggers, in which I now participate. It's a great initiative, the results of the first quarterly survey can be found here.

One of the main results of the latest survey is that there's a substantial consensus among top bloggers that supporting entrepreneurship is fundamental for a strong economic performance. On the other hand, most also agree that excessive budget deficits, like the ones we're seeing now, are one of the main factors that will negatively affect economic performance.

The video below explains it all. Enjoy!

Wednesday, May 5, 2010

More on the PBS NOVA Blunder

Here's my latest article (in Portuguese) that delves deeper into the PBS NOVA blunder with the episode Mind Over Money. I translate one of the main passages below:
Caplan's theory of rational irrationality explains the good performance of free economies, where decisions are taken through markets, and the bad performance of socialist and centrally planned economies, where decisions are mostly political. It explains how highly educated Germans could have become infatuated with the madness of Nazism. It explains why the results of behavioral economics are not necessarily in conflict with the results of other economics fields. And, finally, explains why the NOVA episode gives a wrong answer to the question asked in its own title: markets stimulate rational behavior even if humans sometimes act irrationally.

Friday, April 30, 2010

NOVA's Disservice to Science

I couldn't contain my dismay while watching the latest NOVA episode titled "Mind Over Money." The subtitle of the program, "can markets be rational when humans aren't?", is the kind of statement that you would normally file under "drivel by some ignorant antiscience lunatic." It's however a statement made by a show that is supposed to be the "highest rated science series on television."

Just think about it: if humans are really as irrational as NOVA says they are, why should we limit the effects of irrationality to the domain of economics and markets? Why pretend that political behavior is less irrational (when it's exactly the opposite) and that government is the solution to the problem? Is NOVA implying that those supposedly irrational humans shouldn't be allowed to engage in demanding rational tasks such as to vote in a democracy?

I'm not alone in this negative assessment of the show. Nancy Dewolf Smith does an excellent job describing how bad this NOVA episode is in this WSJ article, how it's filled with intellectual dishonesty and grocery counter magazine sensationalism. She says:

... It's disappointing, part-way into "Mind Over Money," to see the show staggering toward a pit of ancient dung about an alleged struggle between economists who believe in efficient markets and study price signals, and behaviorists who study examples of seemingly nonrational economic behavior, such as "present bias." The "NOVA" episode even trots out the likes of the University of Chicago's Gary Becker for the efficient marketeers and Chicago's behavioral economist Richard Thaler for the other team. Journalists have been trying to whip up a war between these two groups for what feels like decades. But the dogs won't fight because their paths toward finding explanations for market outcomes usually run parallel, not at cross purposes.

As it turns out, "Mind Over Money" isn't really on either of those paths anyway. Like many in Washington these days, producer, writer and director Malcolm Clark appears to believe that the free market shouldn't really be free. But he's not out to skewer Wall Street. Instead, he pounces on us, the fragile humans who can't be trusted to look after ourselves and every century or so do stupid things like pay too much for tulips.

In the world according to "NOVA," the story of what's wrong today goes like this: For the past 50 years, our economy has been driven by disciples of a guy named Adam Smith, who believed that human beings always seek to act in their own best economic interest, and can detect and serve that interest best in markets free from government interference. A few decades ago, the potted historical narrative continues, some free marketeers developed a giant mathematical equation which has been used to run the economy ever since.

But the recent crash in housing prices and subsequent crises proved that the formula was wrong because it did not predict that people can be crazy and panic and do dumb things with their money. Actually, we're told, many years ago, a wise man named John Maynard Keynes did figure all this out, but he didn't have a giant equation so nobody listened to him. But fortunately there are other brilliant seers among us now, including Yale's Robert Shiller...

It's really sad stuff. Obviously, NOVA totally ignored experiments that show how markets can be extremely efficient, like the ones that I run in my classes, and that, I suppose, are also run by thousands of other professors of economics around the world every semester.

The lack of intellectual integrity and the ideological bias of this show is absolutely shocking. If NOVA can misrepresent an entire field of science so blatantly, what does it tells us about the scientific standards that they apply to every other show they produce?

Thursday, April 29, 2010

Laying the Path to Fiscal Responsibility - Really?

Here's a paragraph from a White House OMB announcement by Orszag regarding the National Commission on Fiscal Responsibility and Reform, which came out yesterday:
Recognizing the fiscal future that we face, the Administration has taken major steps to restore fiscal responsibility. The President’s Budget includes more deficit reduction than proposed by a President in any budget in over a decade; by 2015, it would cut the deficit from 5 percent of GDP to 4 percent of GDP.
Should I be impressed? It will only take eight years for the federal debt held by the public to balloon to 100% of the GDP with a 4% deficit!

From 1947 to 2008, the US federal deficit was higher than 4% (and not by much) only in 7 years: 1976, 1983, 1984, 1985, 1986, 1991 and 1992. It was equal to 9.91% in 2009 and is projected to be equal to 10.64% in 2010.

Anyone knows of a trusty rocketship leaving to a colony in Mars?

Monday, April 26, 2010

The Bailout Bill

The American has a good article by Phillip Swagel on how bailouts are about to become the law with the administration's financial regulation bill (HT Mankiw):

Markets participants will understand that the Senate financial regulation bill allows for bailouts, and this will give rise to riskier behavior that in turn makes future bailouts more likely. ...

A particularly misleading claim from the administration is that the bill is not a bailout because any losses would be recouped through taxes on banks after the fact. The intervention itself is the essence of the bailout, not whether there are losses to the government. Imagine if the Troubled Asset Relief Program was to end up with a profit—not just recouping the money put into firms over the past two years but actually making a return for taxpayers. No one would suggest that the TARP is then somehow not a bailout. Recouping funds after the fact might be a good way to protect taxpayers, but it is preposterous to claim that this makes the Dodd bill anything other than a bailout. The ability of the government to put money into a failing firm and make payments to counterparties at its discretion is what makes the Dodd proposal a permanent bailout authority, not the issue of who pays after the fact.

Sunday, April 25, 2010

Ostrom on Free Riding

Yes! Magazine has an interesting interview with latest Nobel Prize in Economics winner Elinor Ostrom (HT Selva Brasilis). Here's what she has to say about free riding:

Fran: But what about the “free-rider” problem—where some people abide by the rules and some people don’t? Won’t the whole thing fall apart?

Elinor: Well if the people don’t communicate and get some shared norms and rules, that’s right, you’ll have that problem. But if they get together and say, “Hey folks, this is a project that we’re all going to have to contribute to. Now, let’s figure it out,” they can make it work. For example, if it’s a community garden, they might say, “Do we agree every Saturday morning we’re all going to go down to the community garden, and we’re going to take roll and we’re going to put the roll up on a bulletin board?” A lot of communities have figured out subtle ways of making everyone contribute, because if they don’t, those people are noticeable.

Friday, April 23, 2010

Regulatory Power - To Fail?

What they've been watching wasn't the screen on the right: SEC officers caught using pornography at the workplace. Would there be a better example of government failure? (HT Selva Brasilis) According to the Washington Post:
Dozens of Securities and Exchange Commission staffers used government computers to access and download explicit images and many of the incidents have occurred since the global financial meltdown began, according to a new watchdog investigation.
The lesson from this episode is that good regulation should never rely on the infallibility of regulators.

Wednesday, April 21, 2010

Captain Kirk and Opportunistic Kantianism

My latest article (in Portuguese) is about Kirk's opportunistic Kantianism, Spock's utilitarianism, and some implications for libertarian thinking. Here's a translated extract:
Given the importance of Hume, Bentham and Mill, among other utilitarians, in libertarian thinking, it surprises me sometimes that many libertarians express notions about freedom and private property that are formulated as if they are Kantian categorical imperatives. When libertarians say that freedom is an end on itself, they are making an absolute moral statement, and rejecting the utilitarian calculation. For me this is a good example of opportunistic Kantianism, since these same libertarians probably reject the majority of the teachings of Kant and his disciples. When libertarians use categorical imperatives, I see Kirk's justification for endangering the lives of his subordinates, even of members of his family, in a risky undertaking that has the salvation of good friend Spock as its ultimate goal. In other words, I see in libertarianism the same elements of opportunistic arbitrariness that are so common in other political philosophies.

Sunday, April 18, 2010

Cowen on the Necessity of Spending Cuts

Here's the summary of a NYT article by Tyler Cowen on the looming US fiscal disaster:

AMERICA’S long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, we’ll likely see a combination of revenue increases and spending cuts. And we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. ...

The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. Their conclusion was based on data since 1970 from the Organization for Economic Cooperation and Development.

The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed. ...

Right now there is plenty of concern about debt and deficits, but little consensus on which expenditures should be cut or reined in. Sooner or later, we’ll have to reconsider virtually every segment of the federal budget.

The issue of fiscal responsibility isn’t going away. So the question is now this: How deeply will we dig ourselves in before we create a more mature and more forward-looking political culture?

Saturday, April 17, 2010

Educators in Need of Public Finance Education

I found this passage on taxes in the National Education Association's Advocate of April 2010:
The share of taxes paid by corporations as a percentage of their profits has declined 50 percent over the last 20 years. Big business gets tax subsidies - without any accountability or regard for their impact on schools and on school-age children.
The NEA doesn't appear to be aware of what public finance educators have to say on the subject. Rosen and Gayer's Public Finance textbook for example explains that:
By drawing a sharp distinction between "corporations" and "people," the statement reflects a common fallacy - that businesses have an independent ability to bear a tax. True, the US legal system treats certain institutions such as corporations as if they were people. Although for many purposes this is a convenient fiction, it sometimes creates confusion. From an economist's point of view, people - stockholders, workers, landlords, consumers - bear taxes. A corporation cannot.
Since the NEA analysis doesn't distinguish between statutory and economic incidence of taxes, its policy proposals could easily have effects that are the opposite of their goals. If the NEA cannot get even such a simple, textbook level, introductory public finance concept right, what to think of their policy proposals on issues that are much more complex than this one?

The Communist Solution to Heterogeneous Preferences

Brought to us by Division of Labour's Art Carden:

A communist revolutionary is giving a speech.

Communist Revolutionary: "After the revolution, the land will flow with milk and honey!"

Audience Member: "But I don't like milk and honey."

Communist Revolutionary: (pause) "Comrade, after the revolution, you will like milk and honey!"

Tuesday, April 13, 2010

Baker on the American Way of Tax

Rosen & Gayer's Public Finance textbook, which I use in my classes, has a box with a classic Russell Baker text that originally appeared in the International Herald Tribune in 1977. It's more relevant than ever. Here's a segment:

“Figg,” he said, “you have made me sore wroth with your way of life. Therefore, I am going to soak you for more federal income taxes.” And he squeezed Figg until beads of blood popped out along the seams of Figg’s wallet.

“Mercy, good tax man,” Figg gasped. “Tell me how to live so that I may please my government, and I shall obey.”

The tax man told Figg to quit renting and buy a house. The government wanted everyone to accept large mortgage loans from bankers. If Figg complied, it would cut his taxes.

Figg bought a house, which he did not want, in a suburb where he did not want to live, and he invited his friends and relatives to attend a party celebrating his surrender to a way of life that pleased his government.

The tax man was so furious that he showed up and the party with bloodshot eyes. “I have had enough of this, Figg,” he declared. “Your government doesn’t want you entertaining friends and relatives. This will cost you plenty.”

Figg immediately threw out all his friends and relatives, then asked the tax man what sort of people his government wished him to entertain. “Business associates,” said the tax man. “Entertain plenty of business associates, and I shall cut your taxes.”

Read the rest here.