Saturday, December 22, 2012

The Only Real Revolution Ever

According to G. Warren Nutter (HT Cafe Hayek's Boudreaux):
The revolutionary content of the ideas popularized by Adam Smith and implemented by our Founders is to be found in the vision of a complex social order organized not by custom and command, the method of the ages, but by voluntary exchange and association.
Happy Xmas to all!

Thursday, November 8, 2012

Caplan on the Immorality of "Citizenism"

Another excellent post by Bryan Caplan on the immorality that lurks behind nationalistic euphemisms such as "citizenism":
However, if a citizenist recognizes no moral obligations to non-citizens, I can only dismiss him as a monster.  The same goes if the citizenist says he recognizes some moral obligations to non-citizens, but then refuses to specify them or seriously consider whether the policies he advocates violate these obligations.

Monday, November 5, 2012

7th Art: Boss (2011)

I just finished watching the first season of "Boss," a Starz series masterfully directed by Gus Van Sant. I judge it to be the most accurate depiction of politics I've ever seen on screen. It goes beyond the teachings of Machiavelli, becoming ideal groundwork for a series of lectures on public choice.

Advice to watchers: the series starts slowly, but picks up steam during the second half of the first season. It's extremely dark yet plausible. Kelsey Grammer grows in his role as the mayor of Chicago, episode after episode. What I find fascinating is the fact that party colors don't really matter for the story telling: the series works equally well would the mayor be a Democrat and his challengers Republicans or vice versa.

Warning: this series will forever kill any hope you may nourish about supposedly redemptive qualities of democracy and politics. No question that the world would be a better place if we could rely less on political representation and more on direct interpersonal relations and impersonal markets for collective action.

Enjoy the trailer:

Saturday, October 27, 2012

Don Boudreaux on the Keynesian Myth of Debt Totalitarianism

Cafe Hayek's Don Boudreaux echoes James Buchanan and makes an excellent point about the Keynesian myth of debt totalitarianism:
If we regard all humanity as One, then U.S. government debt held by people in China and Finland is debt that, no less than is such debt held by people in California and Florida, debt that “we owe to ourselves.” ... 
It won’t do here, by the way, to object to the previous paragraph by pointing out that Chinese citizens (unlike American citizens) aren’t on the hook to pay the taxes necessary to pay interest or principal on U.S.-government debt.  A central point of Jim Buchanan’s debt-burden case is that even within national boundaries, the individuals whose taxes are raised today to pay interest or principal on a government bond are distinct from the bond holders who receive those payments.  The payer is not the payee, and that the latter might share national citizenship with the former is an economically irrelevant happenstance that cannot possibly make a government-debt burden disappear.

Thursday, October 25, 2012

Native English Is Not the Same as Intelligible Globetrotter English

Browsing through the readers' comments to this The Economist article on English skills across countries I could observe, once again, an interesting phenomenon: that many native English speakers don't realize, from their point of view, that international (globetrotter) English is a language variation in itself, spontaneously developing and adapting according to practical rules of intelligibility. Somebody that speaks Texan or Scottish English, for example, may be well understood in Amarillo or Kirkcaldy, but may also have a significant handicap as a globetrotter English speaker.

Business schools in the US and the UK have not yet, at least to my knowledge, considered international English intelligibility to be a skill that needs to be mastered. In advanced non-English speaking countries, on the other hand, the schools are somewhat aware of the problem, and have been tweaking their globetrotter English training programs accordingly.

Monday, October 15, 2012

Nobel Economics Prize Goes to Roth and Shapley

Their work allows for example for market solutions to be applied in cases where monetary transactions are traditionally considered to be unappealing, like in dating, marriage, education and organ donation. Levitt offers a good explanation of the contribution:
The type of economics [Roth] is best known for is what is called “Market Design.”  Essentially, it means bringing market-type thinking to areas in which historically non-market allocation mechanisms have been used.  A few examples of the areas Roth has explored are matching fledgling doctors to hospitals for their residency, matching students to public schools in school choice programs, and matching kidney donors with those who need a kidney. ... 
An example that we’ve written about here at the blog is Roth’s work on kidney transplants.  As much as economists think we should just have a market for kidneys, the rest of the world hasn’t quite caught up to that idea.  So Roth came up with a different scheme – one that involves barter — that takes into account the real-world constraints that people aren’t allowed to pay for kidneys. So instead he developed a clearinghouse for connecting chains of pairs in which there is both a person who needs a kidney transplant and a person willing to give one, but who is not a good match medically to donate to his or her loved one.  The key is that the potential donor is a good match for someone, just not for the loved one.  But, if you can make a chain in which it all balances out: each donor matches with someone willing to donate, then it works out for everyone.

Friday, October 5, 2012

Tuesday, October 2, 2012

The Neglected Strengths of the Euro

With very few exceptions, the literature about the euro produced outside of Continental Europe, since its inception, suffers from a striking amount of selective bias. The literature also suffers from a tendency to rely heavily on association fallacy, attributing almost automatically to the euro the responsibility for any problem that is common to countries in its area, such as the difficulties created by fiscal excesses of welfare states. Evident strengths of the euro institutions, on the other hand, are simply ignored or waved away as trivial.

The selective bias manifests itself sometimes as the omission of relevant positive information. An example is the recent announcement by the French socialist government that it is now committed to austerity. This is coming from a government that had heavily campaigned against austerity just a few months ago.

Such a political overturn would be an extremely improbable event in countries with national central banks. It is entirely driven by the restrictive framing built into euro institutions, framing that the UK, for example, has always rejected. In my fiscally conservative opinion, this is an incredible social and economic achievement for the euro economies, one that cannot be reproduced, at this moment, in other advanced economies because they remain stuck in the age of monetary nationalism.

Monday, October 1, 2012

TIPS Funds, a Risky Bet

This excellent Vanguard article must be read by anyone investing in TIPS (inflation-protected securities) funds. Here's the deal: investing in TIPS funds isn't the same thing as buying TIPS. Differently from bonds, TIPS funds cannot offer nominally-guaranteed payouts at maturity. And TIPS funds have high duration and are significantly affected by TIPS yields (a proxy for expected real interest rates), as seen in this graph (copied from the article):

By historical standards, TIPS yields are extremely low at this point (graph from Vanguard's article):

Meaning that those who invest in TIPS funds today are exposed to high downward risk and low expected rates of returns for a long period of time. The article concludes with a very clear warning:
Considering that the best long-term predictor of bond returns is the starting yield, with TIPS real yields near zero today, the long-term expected real return of TIPS would also be near zero. From a nominal return standpoint, if current break-even rates of inflation between 10-year TIPS and 10-year nominal Treasuries are about 2%–2.5%, adding that inflation expectation to the zero real-return expectation puts the long-term expected nominal return of TIPS at 2%–2.5%, unless there is a significant upward or downward movement in inflation. Those expectations are much lower than past returns... As with most investments, the short-term performance of TIPS, both positive and negative, is an unreliable basis for long-term return expectations. Given the current low-yield environment, the return outlook for TIPS (as with most U.S. bond investments today) is muted and likely to be more volatile than in the past.
In other words, betting on TIPS funds at this point can only be a winning strategy if you believe that real interest rates will continue to fall deeper into negative territory. Given that nominal rates cannot fall further, this is the same as to believe that inflation will rise and central banks won't respond by increasing nominal rates accordingly. Not impossible, given the extent to which central banks have departed from sound monetary principles since before the crisis, but yet extremely improbable, no matter how reckless they have become.

Friday, September 28, 2012

Curiosity Finds Evidence of an Ancient Riverbed on Mars

Here is the astonishing photographic evidence:

Larry White on Market Monetarism

Larry White disagrees with market monetarists like Scott Sumner and suggests that the economic problems faced by the US today (and I'd say that the same applies to many advanced economies) won't be cured with "nominal aspirins":
The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty. To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.

Wednesday, September 26, 2012

Hamilton on China's Demographic Transition

Malinvestimentghost cities and condos, combined with an inevitable rise of the dependency ratio is a state-engineered recipe for trouble:
And China has more 45- to 50-year-olds today than it has 5- to 10-year olds. That means that in another decade or so, the number of people retiring will be greater than the number of new young people coming into the labor force. For the last ten years, the number of new 20-year-olds was greater in each succeeding year. For the next ten years, the number of new 20-year-olds is going to be fewer in each succeeding year.

Forgotten Monetary Lessons from Zatoichi the Blind Swordsman

In Zatoichi Meets Yojimbo, Zatoichi asks the rich merchant:
"People have been concerned about the quality of the currency. What do you think?"
Merchant: "For a merchant like me, the quality of the currency is crucial."
Zatoichi: "And what do you think of the the current currency?"
Merchant: "Not good, really. When its quality lowers, prices rise."
Zatoichi: "And when prices rise, the poor become even poorer... Am I right?"
Merchant: "Absolutely, you know things."
Zatoichi: "[Laughing] No, not really..."

Imagine (There's No YouTube)

Gangnam Style!

Sunday, September 23, 2012

Why Does France Reject Multiculturalism?

Because Reason (La Raison), despite repeated assaults, remains deeply rooted and central in its republican traditions (below, Liberty armed with the Scepter of Reason blasts Ignorance and Fanaticism, drawing by Boizot, engraving by Chapuy).
La Liberté armée du Sceptre de la Raison foudroye l'Ignorance et le Fanatisme

Friday, September 21, 2012

Pascal Salin on Fiscal Hells

Pascal Salin, former president of the Mont Pelerin Society:
"Fiscal paradises only exist because of fiscal hells" ("s’il y a des paradis fiscaux, c’est qu’il y a des enfers fiscaux").

Thursday, September 20, 2012

Paul Samuelson, the Gullible and Unrepentant Socialist

In a recent paper, historians of economic thought David M. Levy and Sandra J. Peart show that [Paul] Samuelson and other American economics textbook authors of the 1960s and 1970s kept forecasting rapid Soviet growth through their books’ successive editions, even while their own updated numbers clearly showed that the growth forecasts in previous editions had been too high.  In the seven editions of his textbook published from 1961 to 1980, Samuelson kept including a chart indicating that Soviet output was growing faster that U.S. output, and predicting a catch-up in about twenty-five years.  He repeatedly had to move the predicted catch-up date forward from the previous edition because the gap had never actually begun to close.  In several editions he blamed low realized Soviet growth on bad weather.  As late as the 1989 edition, he and coauthor William Nordhaus wrote: “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.

Sunday, September 16, 2012

The Law of Unintended Consequences: Alive and Well in Spain

A new university promotion system in Spain exemplifies Bastiat's lessons:
To reduce favouritism in university promotions, Spain recently introduced a centralised system with random assignment of evaluators. This column presents evidence from a unique data set showing that favouritism still matters. Prior connections between candidates and evaluators have a dramatic impact on promotion. The net result is that outcomes are more random and candidates with many connections and from large universities benefit the most.

Saturday, September 15, 2012

Falling Fertility Rates in the Americas

One of the most persistent public misconceptions of our era is the notion that countries with the largest populations in the Americas (such as the US and Brazil) enjoy solid population growth while major European countries' populations have been collapsing. The Economist throws some welcome light on the subject:
So it comes as something of a shock to discover that in 2011 America’s fertility rate was below replacement level, and below that of some large European countries (see chart). The American rate is now 1.9 and falling. France’s is 2.0 and stable. The rate in England and Wales is 2.0 and rising slightly.
By the way, the differences in fertility rates among immigrant and nonimmigrant families in France is not as high as imagined by most people outside of France.

Brazil's total fertility rate (TFR), like America's, has also been falling very fast, down to 2.2 in 2011. Most estimates indicate that it will continue to fall significantly during the next decades.

Wednesday, September 12, 2012

The Foolishness of New-Keynesianism According to Garett Jones

Garett Jones makes mainstream new-Keynesian macroeconomists and central bankers look like idiot savants with this bright observation about one of the main failures of modern applied macro:
Any force strong enough to fight against the power of prices should be a strong force indeed, strong enough for all to see. But when economists talk about the "frictions" that keep gluts alive, we usually talk about "sticky prices" and "sticky wages" and cultural norms and public sector unions and a few other forces. Strong forces, yes, and forces I believe in, but stronger than creative destruction and supply and demand? For years on end?

Here's my favorite friction, one that exists by force of contract, not because of worker sociology: Debt. Debt in the household, debt in the firm, and--for state and local governments at least--government debt. Irving Fisher beheld debt destroying a deflating economy, and he wrote an excellent paper about it in Econometrica v.1 back in 1933--a theory of depressions better than anything I've seen in Keynes's General Theory.

Monday, September 10, 2012

Biggs and Mayer: How Central Banks Created the Crisis

Modern central banks love bubbles, as they explain in a article:
Growth in line with potential was associated with an ever increasing debt-to-GDP ratio. What might have appeared to have been a sustainable growth path from an output gap perspective was a growth path that gave rise to unsustainable debt dynamics. In short, the application of the Taylor Rule by the US Federal Reserve would have paved the way towards excessive debt accumulation, financial instability, and the subsequent financial crisis.

Tuesday, August 21, 2012

Economic Bloggers and Nominal Rates of Return in the US

I had the opportunity to ask major economic bloggers (in the latest Econ Blog Survey) about their long-term expectations regarding nominal rates of return for low-risk assets in the US. Below you'll find a summary of their answers.

It's interesting to notice that a large majority of the bloggers do not think that we'll see, at least in the short term, a reenactment of the historical pattern observed since the creation of central banks, that is, they usually increase short-term interest rates (and by arbitrage nominal rates of return for low-risk assets) fast and frequently after losing control of inflation rates.

Wednesday, August 15, 2012

Caplan on Bastiat's Differential Ideological Appeal

Caplan writes an excellent post about the tendency of many intellectuals to minimize the fundamental contributions to economics of Frédéric Bastiat:
This is the real root of Bastiat's differential ideological appeal. Friends of the free market love him because Bastiat destroys the inane arguments that make the modern welfare state popular. Once you deprive the median voter of these inane arguments, friends of the modern welfare state have to resort to intellectually serious arguments to make their case. Alas, these arguments are utterly beyond the median voter's comprehension. Most college students can't even grasp them.

Thursday, May 24, 2012

The Misunderstood Monetary Union

One of the fields where mainstream economics is unable to match history and current events is in its applications to monetary unions. Much has been said for example about the Eurozone these days that is not only wrong but that is so evidently "selectively forgotten" when applied to equally imperfect currency areas such as China, Brazil and even the US. Berka, Deveraux and Engel provide more evidence on how clueless pop economists have been:
"It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence suggests that real exchange rate movement within the Eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the Eurozone. This interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods."

Wednesday, May 16, 2012

Guy Sorman on the Political Throwback into the Sixties

Guy Sorman, less optimistic than usual, discusses the French election in the context of political trends in Europe and, I would add, in the rest of the world too:
In other words, Hollande will try to entice other European leaders with a vision for a world that no longer exists. This politics of nostalgia is troubling, not only because France and Europe confront severe economic challenges, but also because France and other democracies are confronted with real challenges to their legitimacy.

Monday, May 14, 2012

Too Big to Fail and Moral Hazard

JP Morgan gambles with other people's money because it's sure that it's "too big to fail," meaning, that governments will come to its rescue whenever needed.

Those who yet believe that moral hazard in banking is not important or does not even exist should listen to James Hamilton:
In any case, we would want to weigh any potential social benefits of such trades against their possible social costs. Is JP Morgan "too big to fail"? I think so...
If nothing else, this week's news should remind us that more needs to be done to ensure financial stability and that the incentives of private participants align with the public's best interests.

Thursday, May 3, 2012

John Taylor on the Folly of QE

Excellent interview with John Taylor where he uses plain old good sense to explain how the foolishness of current monetary policies will cost us dearly later:
You don't believe purchases by the Fed have any long-lasting influence?

Let's suppose something even more misguided: For QE3, the Fed decides to buy the stock of publicly traded companies in order to lift stock prices. Equity prices would rise. But how long could that last, unless the earnings of these companies rise proportionately? Price-earnings ratios would become unsustainably high, and the market would soon correct for the Fed's aberrational influence. The same dynamics work for the bond market.

Apart from not helping, quantitative easing has also hurt?

Speaking of the stock market, notice that stock prices have become sensitive to whether or not the Fed will implement QE3. I see no reliable relationship between equity prices and quantitative easing, but the fact that many people believe in it is at least a source of concern. Another important concern is just how the Fed will manage to sell off all the mortgage-backed securities and medium-term government bonds it now holds on its balance sheet without causing disruptions in the market.

Sunday, April 29, 2012

The Uncharted Territory of Debt Mismanagement

Debt mismanagement has become a transatlantic problem, and rule by leftist governments appears to make the problem worse, according to Alesina:
By the spring of 2010, California’s sovereign spread relative to Virginia’s grew by almost 150 basis points while Greece’s spread relative to Germany’s grew by almost 1000 basis points. The spreads in Europe are larger but even in the US they are not insignificant (see Figures; note that the scales are different). ...

Unexpected deficits are correlated with higher state bond yields. After the 2008 credit-market seizure, however, the effect interacts more intensely with interstate variations in political institutions. Specifically, the higher-yield effect is larger for states with left-leaning political systems.

Thursday, March 29, 2012

Solution to the Sound Blaster X-Fi Go! Pro Buzz (Hiss) Problem

This hack solved the buzzing (hissing) noise problem that I was having with the Creative Soundblaster X-Fi Go! Pro USB Audio Card. The problem, noticeable as a bug-like high-frequency harmonic distortion associated with bass frequencies from 50 to 150 Hz during otherwise silent musical segments, is caused by impedance mismatch between headphones and the device output circuit. My Sennheiser HD 518 was particularly affected.

The solution was to introduce a 100 ohm resistor connected in series with the left output line and another matched resistor in series with the right output line. I used a 3.5 to 6.35mm headphone adaptor internal space to hide the resistors and forge a damping device (see the picture below).

The increased output circuitry impedance lowers power delivered to the headphones but solves the output impedance mismatch. No more buzzing or hissing. Sound levels remain high enough for my needs. After the fix, the sound card deserves five stars for sound quality, specially considered the convenience of its size and the quality and flexibility of the surround processor. I can only wonder how their engineers let this gremlin pass through QC.

Sunday, March 18, 2012

No Solution for Greece Outside of the Eurozone

Miranda Xafa makes the point very clear for those who won't see it:
A return to the drachma would be all pain, no gain (Eichengreen 2007). Exiting the Eurozone would only add to the debt burden without resolving Greece’s competitiveness problem, which stems primarily from regulatory barriers to competition, restrictive labour practices, and red tape that raise the cost of doing business. Greece ranks 100th in the World Bank’s “Doing Business” report and 119th in the Heritage Foundation’s Index of Economic Freedom, behind several sub-Saharan countries. Staying in the Eurozone, on the other hand, raises the question of whether Greece’s post-Soviet economy can deflate itself back to competitiveness. The answer is probably not, because real rigidities prevent the adjustment process from working. What Greece needs is what the IMF calls “growth-oriented structural reforms” – greater reliance on market forces and the rule of law. ...

What led Greece into this mess is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favours to special interest groups in exchange for vote-buying. If you offer the printing press to this political system, it will just go back to business as usual. It is by cutting off their access to cash, by remaining in the euro, that you can force political change along with economic change.

Tuesday, February 28, 2012

The Return of Confiscatory Taxes

Every economic crisis feeds populism. And one of the most immoral and violent populist electoral tools is the imposition of confiscatory taxes. Socialist presidential candidate François Hollande thinks that receiving a majority of valid votes gives him the right to decide how to spend 75% other people's fortunes:
SOCIALIST presidential candidate François Hollande says he would introduce a top tax band of 75% for incomes of more than e1 million a year. ...

Hollande added: "How can we accept that? It's not possible to have this level of remuneration" he favoured a "simple rule: income from capital should be taxed like the income from work".

The 75% tax rate would be the top band, with an additional slice of 45% on incomes above e150,000 a year.

Friday, February 10, 2012

Switzerland Shows the Way

At least when it comes to government budgetary decisions, direct (plebiscitary) democracy may be the best choice, according to Funk and Gathmann:
The current debt crisis in Europe and North America raises the question of how to impose spending discipline on governments and politicians. A country with historically low government spending is Switzerland, which many argue is related to the high use of direct democracy. Direct democracy is also prevalent in other countries such as the United States, where more than two thirds of the population lives in a state or city with a popular initiative. Comparing data on postwar spending in states with more or less direct democracy, the empirical evidence points to a strong negative correlation between a region’s spending level and the existence of direct democracy in both the United States and Switzerland (Feld and Matsusaka 2003, Matsusaka 2004).

Taleb and the Ketchup Bottle

Taleb on The Spectator. Perfect, so no further comments:
The basis of Sir Mervyn King’s plan for printing money on this scale is that the effects of QE can be carefully controlled. But this, says Taleb, is the biggest mistake of all. ‘It’s like a ketchup bottle. You try to pour money out of the ketchup bottle: nothing comes out, nothing comes out — and then everything splashes. This is how it works. Inflation doesn’t arrive in a nice, manageable way, so don’t mess with it. Every single person who has tried QE, or a form of printing money, has effectively lost the argument. Turkey had it, Brazil had it, Argentina had it, Italy had it when they debased the lira. Even Weimar Germany claimed that QE made the government rich. There’s always an argument to print money.’

Wednesday, February 8, 2012

The Economic Irrelevance of a Single International Language

One superficial and misguided statement that you routinely hear in large monolingual countries such as the US and Brazil is that a common language is an almost necessary condition for economic progress. The idea will usually be presented attached to silly examples such as "look at poor India, they have to deal with so many languages, for sure it's one of the main reasons why they are so poor," or "look at the European Union, such a political mess, they speak too many languages."

My reaction is always to point out that one of the most developed nations in the world, according to any standard of choice, Switzerland, is a small country with four official languages. Most rich nations are found in Europe despite its Babelic network of languages. And you can find many examples of large but mostly monolingual nations and regions such as Brazil that didn't do nearly as well as their Babelic peers.

Victor Ginsburgh presents the point scientifically in this interesting article and uses the opportunity to make fun of a recent demonstration by Harvard's Larry Summers of typical monoglotic arrogance:
In 2005, Larry Summers, then President of Harvard University, outraged 50% of the world by claiming that women are not as talented as men in science and mathematics. This time, he has outraged some 94% of the world’s population by suggesting that native speakers of English should forego learning other languages since, anyway, the rest of the world will soon become fluent in English (Summers 2012). ... However, and interestingly enough, Melitz ... shows that English as an OCC is no more effective than other European languages in promoting trade.

Thursday, February 2, 2012

Not What Keynes Had in Mind

Keynes didn't consider the concept of liquidity trap to be too relevant in practice. He knew that, in the case of near-zero interest rates, the speculative demand for money would be infinite, the demand for bonds would be null, and borrowing would increase, so interest rates would probably rise and take the economy out of the trap (a good summary of this point is provided in Handa's Monetary Economics).

And this is exactly what happened during the early stages of the current financial crisis. People who believe that the US found itself in a liquidity trap should at least acknowledge that this was the artificial creation of a central bank subservient to a prodigal treasury operating in a financially repressed economy.

Keynes was worried about the hypothetical lack of autonomous demand and how "benign" government debt could be used to compensate for it. Chronic overindebtedness, financial deleveraging and repression, and a central bank that enjoys the role of quasi-fiscal authority were not among his most well-known theoretical concerns.

Sunday, January 22, 2012

Falling Geographic Mobility in the US

I always suspected that this was the case, but here's some quantitative evidence: American internal migration rates have been falling fast, and they have now approached European levels, according to Molloy, Smith, and Wozniak. America could even have become less mobile than Europe since 2007:
Overall, the secular decline in geographic mobility appears to be specific to the U.S. experience, since internal mobility has neither fallen in most other European economies nor in Canada—with the United Kingdom as a notable exception. One caveat to this conclusion is that the publicly available European Labor Force Survey data extends only through 2007, so it is unknown how internal migration in Europe has compared to the U.S. experience during the most recent global downturn.

Tuesday, January 17, 2012

Budget Skeletons in the Closet Not a Figment of Imagination

This has always been my impression, so it's nice to see that the question was finally tackled academically. According to research by Campos, Jaimovich & Panizza:
In Campos et al (2006), we move beyond anecdotal evidence and use data for 117 countries over a period of 30 years (1972–2003) to show that in the average country-year, debt grows 3 percentage points of GDP faster than what is implied by the budget deficit (this value is obtained after dropping outliers; if outliers are included in the sample, the average unexplained change in debt reaches 5% of GDP.

Sunday, January 15, 2012

7th Art: One Way Passage (1932)

I love to watch classic movies among other reasons because of what they reveal about the historical context of the times during which they were made. "One Way Passage" is a great example: the movie is filled up with heavy drinking from the very first scene to the very last. Liquor consumption is so widespread that (SPOILER!) even dead people drink.
And here's the great irony: this Warner Bros. production came to the screens while the American prohibition (Volstead Act) was yet in place. Talk about drinking by proxy!

Sunday, January 8, 2012

The French Tobin Tax Folly

President Sarkozy's populist support of a Tobin tax for the EU prompts me to ask interested parties to read my article about the taxation of bank transactions, which discusses some general principles that also apply to a Tobin tax but are frequently ignored by the public. Among them, it's particularly relevant the fact that this kind of tax can in reality impair the public finances of highly indebted countries:
Levying BAD taxes on government debt transactions impairs net revenue and can lead to potentially misleading deficit accounting. It may cause the government primary deficit of a country to decrease, while causing the operational deficit (which includes real interest expenditures) to increase, creating illusory revenue streams. A sensible government therefore should leave transactions with government bonds out of the tax incidence base, particularly in the case of highly indebted countries.
In other words, Sarkozy's Tobin tax would be for France the public finance equivalent of shooting one's own foot.

Boudreaux on the Myth of Public Debt Irrelevance

In a thoughtful post, Don Boudreaux translates Buchanan and explains why issuance of public debt not only matters but can even be unethical:
Suppose the government of A gives each adult citizen of A between the ages of 18 and 65 the right to force another randomly chosen adult citizen of A to work six months out of every year for the first adult’s benefit. Every adult has this right – which government steadfastly enforces whenever that right is exercised – to command the labor (or the fruits of the labor) of another adult. No adult is exempted from the obligation to labor for another adult.

Would resource allocation be unchanged from what it would be in the absence of this policy of mutual conscription? Does the answer change by recalling that each adult citizen of A, after all, devotes his or her conscripted labor only to another adult citizen of A? What if we specify that the total aggregate labor hours worked under this policy is the same as it would be in the absence of this policy: would resource allocation then be the same as without this policy?

Isn’t deficit financing of government spending equivalent in some essential ways to the above hypothetical? The ability to free-ride on others’ labor (or, more generally, resources) leads to the misuse of that labor (or resources). This fact isn’t altered if those doing the free-riding are citizens of the same country as are those who are free-ridden upon – or by the fact that each free-rider is also freely ridden upon by someone else.