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Showing posts from March, 2012

An evening with Elinor Ostrom

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Last night I attended the Annual IEA Hayek Memorial Lecture delivered by the brilliant Nobel prize winning economist Elinor Ostrom. The subject was one of my favourites; Market Failure and Government Regulation. To be more precise, the title was "Future of the Commons: Beyond Market Failure and Government Regulation". Steve Davies of the IEA has the summary here.



Elinor was amazing. Despite her age and a lovely-old-grandmother appearance she seems so vivid and sharp. This should hardly come as a surprise since most groundbreaking economists live up to be over 90 years old (Mises - 92, Hayek - 92, Friedman - 94, Samuelson - 94, North - 91, Tullock - 90 Buchanan - 92, Coase - 101; bear in mind that the last 4 of the list are still alive and active) without losing a bit of their brilliance or sharpness. In fact, I remember Paul Samuelson had an article on the current crisis published in a newspaper about two weeks before he died.
Anyway, her Nobel prize winning research concer…

The US budget focus

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I got hooked up looking at budgets this past week, so now I'll divert my attention to the American budget, or at least a proposal for the American budget. 
Since I didn't go into analyzing the Obama budget as I did with the UK Budget (even though I did refer to it in one post on the US debt and deficit where I call on the Bowles-Simpson report), I decided to give some attention to the Paul Ryan Budget proposal (the Republican chair of the House Budget Committee in Congress). I'll try to draw comparisons with the Obama budget to see which one of these is a pro-growth and pro-reform, if any.
Note: Next year, I'll make sure to give the US budget the equal amount of attention as I gave to the UK one. Also, I'm removing the 'Red book' from the blog and posting it as a link to the post on the budget .
One one side there is President Obama's budget focused on higher taxes (on the rich to lower inequality), higher spending (on entitlements to keep his voter sup…

Graph(s) of the week: Budget numbers

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Still on the UK 2012 Budget. From the Budget 'Red book' and the OBR report, I have found a few interesting graphs.
First one is from the OBR, showing the UK output gap:

Is the shock that hit the UK economy in the crisis permanent or temporary? In other words, is the GDP trend line for the UK going to readjust to a lower steady state level, or is the GDP growth expected to bounce back shortly? Perhaps according to this the UK GDP is likely to return to its pre-crisis trend line, however in a much longer time span than anticipated. This only shows the size and effects of the distortion created during the crisis and the fiscal shocks (internal and external) that hit the country and reduced its productive economic capacity. Looking in the long run, any shock is temporary, even though a longer recovery will shift the medium term trend line a bit downwards. A completely different question is whose fault is it that the recovery is so long or whose fault is it that the output gap is …

UK Budget 2012 - the analysis

The UK budget was announced today.

The OBR also published its economic growth forecasts in which it revised the UK growth upwards, to 0.8% this year, and 2% the next. Available here.
The initial reactions were mixed. Some policies are welcomed, some are long overdue, some are still not good enough, and some are bad. I've split them into three categories: the good ones, the bad ones and the 'limbo' - or those in between. The evaluation of the policies is based on the previous blog post on budget expectations, and whether they have meet the expectations. 
Good
Corporate taxes to go down even faster - to 24% immediately, and to 22% in 2014. A good policy that will benefit the British business. There is strong reason to believe it can be deemed credible. It would be better to reduce it even further all the way down to 20%, but this is a start. At least the business expectations on corporate taxes can be adjusted in the right direction. 
Transparency - Tax statement to be relea…

Budget expectations

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This week is Budget Week in the UK, so I'll focus the writings mostly around that. It's scheduled to be announced on Wednesday, but since many of the policies are already anticipated well in advance, I'll give out my own view on some of them. Many claim that this is the Chancellor's last chance to boost growth before the next election. And yet, everything seems to already be known. So let's examine this apparently crucial budget and see whether the UK will continue its Keynesian path, or will it turn to a supply-side pro-growth reform?
First off is the anticipated abolishment of the 50p tax rate. The prediction is it will go down to 45p (cautious) or even 40p (optimistic). This is long overdue. It fails to raise any significant revenue for the Treasury, it discourages high achievers, fails to attract and keep talent, discourages investors, and constrains jobs and growth. It was designed as a simple way to show that the government is determined to fight inequality,…

Private equity - friend or foe?

The topic of private equity firms and their role in the economy became increasingly popular during the past few months, particularly in the US. The subject became the main point of discussion due to its linkage to a certain American presidential candidate and to some extent due to the rising importance of the inequality debate and high unemployment in America. The private equity industry is depicted as one the main 'evils' of capitalism. No matter how absurdly this sounds, the people and the media were concerned that the existence of private equity firms can only harm the productive business environment. They are pictured as corporate raiders who "ride on the backs of businesses, ripping them off and earning a profit on their misfortune". The second main criticism is that their executives receive too much money (and don't pay enough taxes). (FYI, in the movie "Pretty Women", Richard Gere portrayed a typical private equity executive - just so you might …

The stimulus debate revisited

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The debate on stimulus vs. austerity keeps covering new grounds. The former debate originated (mostly) between Krugman, DeLong, Thoma on one side, and Cochrane, Fama, Barro on the other. There was also the Alesina case for contractionary expansion and a rebuttal from the IMF with new evidence against expansionary austerity. Even though the discussion of the appropriate policy is a constant question among economists, lately the Harvard debate between John Taylor and Larry Summers and numerous blog posts of Professors Krugman and DeLong on how the austerity is ruining the European and the American recoveries, made it the key talking point once again. The focus of the debate this time is mostly around empirical research on the effects of the stimulus. While some (Talyor, Cochrane) fail to find any data to support the stimulus argument saying it didn’t do anything to help the economy, others (Romer & Romer) claim that without the stimulus, things would have been much worse for the US…

I love civil servants

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Here’s an interesting anecdote I would like to share with you. It’s on the efficiency of UK public servants, namely the staff working at the local council, administrating the council tax. For those who don’t know, the UK has a system of a local property tax called council tax that is levied on each person occupying a property, and it’s supposed to be used to finance local government services. It’s a lump sum paid by the occupier(s) disregarding one’s income or current work situation (e.g. retirement), although exemptions always exist. 
I’m not to rant about its efficiency in the fact that it raises less than a quarter of the funds for the local council, or its unfairness on making it a lump-sum payment regardless of income, or how it’s sometimes used to fund lustrous projects (such as the one on the picture – courtesy of Dan Mitchell), or anything like that. No, I am more concerned on the issue of simple logic in the daily operations of public service. 
In order to see and track your …

Graph(s) of the week: Debt

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This week I'll take a look at the cross country comparison of household, corporate and financial sector debt levels.




It is interesting to notice how the UK ranks top in household debt (almost a 100% of GDP) and financial sector debt (a staggering 220% of GDP), while coming (only) third in corporate debt (still over a 100% of GDP). The pre-crisis growth decade was obviously driven by debt accumulation in Britain painting an highly unsustainable picture of their economy. According to this, the UK could be in much worse shape than imagined. Its financial sector debt can partially be explained by the fact that a lot of financial institutions with London headquarters have global operations (as explained previously) so when they spread out the debt isn't that worrying. However, domestic companies and households were accumulating wealth on debt creation rather than value creation. The US paints a similar picture, with a lot of their household debt being tied up into mortgages. Easy o…

Bashing of the bankers

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Bonuses and performance 

It’s not very popular to be a banker these days.

There have been a lot of attacks against the bankers worldwide. The responsibility for the financial crisis and the recession rests solely on their shoulders (and the rest of the finance industry, but it is less convenient for the general public to call out hedge fund managers) The bankers (mostly investment bankers) took on too much risks, almost ruined their banks, only to be bailed out by the taxpayers, and now, as a result they are stifling lending and thus crippling the recovery. No wonder everyone is mad at them. 
But the story goes a bit different than that. First of all, the bankers only took risks they were allowed or even encouraged to take. It is silly to blame European banks for holding Greek, Italian, Portuguese or Spanish debt since they were instructed to do so by the Europe’s banking regulatory authorities. All these debts were perceived as risk-free assets. The MBSs in the US were given only the…