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Showing posts from January, 2013

Huge budget deficits are the result of bailouts

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Note: This text was also published as an article for the Adam Smith Institute, on 08th February 2013. For the rest of my ASI writings, click here.

Among Keynesian economists there is a resilient opinion on how the current large budget deficits shouldn't be thought of as a serious problem to the economy, since they are ultimately a result of a depressed economy. Here's the main advocate of such an approach, Paul Krugman"It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers: Revenue will rise while some categories of spending, such as unemployment benefits, will fall. Indeed, that’s already happening. (And similar things are happening at the state and local levels — for example, California appears to be back in budget surplus.)" Disregard for a …

Don't lose hope just yet

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Just before the beginning of the Davos 2013 World Economic Forum last week, Bloomberg had a good text on the faulty predictions given in the previous Davos Forum, in particular concerning the Greek exit out of the euro, and the euro failure itself:
The parade of economists and investors led by Nouriel Roubini predicting Greece’s ejection by now from the euro zone failed to appreciate the resolve of European policy makers to protect their union and the amount of pain Greeks are willing to stomach. ... Joining him in questioning whether the 17-nation euro region was built to last and declaring Greece’s departure imminent, inevitable or in its interest were hedge-fund manager John Paulson, Goldman Sachs Group Inc. President Gary Cohn, Nobel laureates Paul Krugman and Joseph Stiglitz, Pacific Investment Management Co. Chief Executive Officer Mohamed El- Erian, Kenneth Rogoff and Martin Feldstein of Harvard University and Citigroup Inc. chief economist Willem Buiter. Watch the video for their…

Graph of the week: sovereign debt distribution

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From the IMF comes a text on what demand for government debt can tell us about future risks of an economy. This basically means that the risk of potential default depends very much on who's holding the government debt, foreigners or domestic investors. Here is the paper, and this is their most interesting finding: 
HT: The Economist 

In Quadrant I we have countries with high debt but resilient to a run. In the second quadrant, we have countries with high debt and a high risk of a run (the worse combination). The third quadrant features countries with low debt and resilience to a run (the best combination), while in the fourth are countries with low debt, but prone to a run. The two measures used in designing the investor base index are the demand-side risk indicator (on the horizontal axis), and the supply-side risk indicator (on the vertical axis). And while the supply side indicator is simply a measure of debt-to-GDP, the demand-side indicator looks at ownership of debt (the in…

The Sir Humphrey Appleby paradox?

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Financial Times has an interesting story on within-government politics, by turning to the example of the 80s British political sitcom, "Yes, Prime Minister". The sitcom revolves around the relationship and conflicts between government ministers and civil servants (bureaucrats), whose main incentive is to preserve the status quo and disable ministers from large and abrupt changes. Much like Niskanen's model of bureaucracy, the bureaucrats are pictured as self-interested utility maximizers, hesitant to change, and maximally engaged into preserving their status and increasing their salaries, perks and office sizes.  "British civil servants have been described as the envy of the world but to many ministers they are little more than a block on their most coveted policy ambitions. Yes, Prime Minister, the sitcom that personified the devious and obstructive mandarin in the character of Sir Humphrey Appleby, returned to British television this week after a 15-year gap. And, …

In honour of James M. Buchanan

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The Economist's Free Exchange column has a very good eulogy for the late Nobel-prize winning James Buchanan, entitled the Voice for Public Choice. I suggest you read the whole thing. 
Here's a particularly good excerpt from the follow-up text:

"Public choice suggests that politicians are influenced by the incentives around them and aren't simply members of a priestly class dedicated to advancement of the public interest. That, of course, means that swapping one set of politicians for another without changing the institutional incentives will have a minimal effect on governing behaviour. Not no effect, of course; different parties are in hock to different interest groups. But the op-ed pages of America overflow with demands that politician x behave better or party y pay less attention to interest group z. Ultimately, if you're unhappy with the outcomes of political business as usual you need to reflect on and argue for reform of the underlying institutional, or con…

Graph of the week: World's highest tax rates

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From a report done by KPMG that came out last week, comes the following chart on "the highest effective personal tax rates in the world": (click to enlarge) 
HT: Business Insider

The chart shows only the top 40 countries with high income tax rates. The US is 55th on the list, while the UK made it in the top 40 (it's 37th). Click here to see the rest of the rankings. 
Let's focus only on the international competitiveness side of the story, setting aside the fact that high income tax rates demotivate successful and talented individuals from staying in the country (yes, by talent I also imply acting and the case of Gerard Depardieu). 
When talking about international competitiveness income tax rates also play an important role, sometimes even more important than corporate tax rates. I'm particularly happy with this graph as it included employee social security rates to calculate the overall burden, which are often overlooked but still play an important decision-maki…

It's tough being an academic economist these days

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A new working paper on NBER is entitled "Nine facts about top journals in economics", by David Card and Stefano DellaVigna.
It's a descriptive paper presenting the trends around submissions and publications of journal articles in the top five economic journals (as picked by the authors): American Economic Review (AEA), Econometrica (Econometric Society), Journal of Political Economy (Chicago), Quarterly Journal of Economics (Oxford/Harvard), and Review of Economic Studies (Oxford). 
Here are some of the most interesting findings:  "First, the number of yearly submissions nearly doubled from 1990 to 2012..."
"Second, the total number of articles published in the top journals declined from about 400 per year in the late 1970s to around 300 per year in 2010‐12. The combination of rising submissions and falling publications led to a sharp fall in the aggregate acceptance rate, from around 15% in 1980 to 6% today. The increasing difficulty in publishing in the t…

CPS: "Thatcher’s lessons forgotten"

I wrote another text for the Centre for Policy Studies, on Margaret Thatcher's legacy in the UK:
Vuk Vukovic, lecturer of Political Economy and Principles of Economics at the Department of Economics, Zagreb School of Economics and Management (ZSEM), writes on Margaret Thatcher's role in the specialisation of the UK workforce and its benefits, and points out her successors failed to understand the lessons she provided.  Click here to see the rest of my CPS writings.

Here's the whole text
"Many leftists in the UK tend to search for a deeper cause of the current recession. For them, it wasn’t the irresponsible spending and a large welfare state creating a dependent economy during New Labour (and particularly their response to the crisis in 2008), but rather it was the “Big Bang” of 1986 and the abolition of exchange controls in 1979 made by Margaret Thatcher that led to a rapid accumulation of risk and power to the banking industry. Little do they know that these two po…

Why Krugman should NOT be the US Treasury Secretary

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There was an article in the Guardian over the weekend endorsing Paul Krugman to become the next US Treasury Secretary. Apparently the initiative came from actor Danny Glover who started a petition online. 
Here are a few central points in favour of prof. Krugman's candidacy:  "Krugman would be tough to oppose on any substantive grounds. He has a Nobel Prize in economics (also the John Bates Clark award for best economist under 40). The New York Times columnist is probably the best-known living economist in the United States, and perhaps the world." What credentials! If only the author has explained which are these substantive grounds? Liquidity-trap economics I presume? 
He continues: "Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. A few examples: he wrote about the housing bubble before it collapsed and caused the Great Recession..." (continued below)  So have Shill…

Graph of the week: inter-bank transactions

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Transactions between Eurozone banks shows an interesting pattern (click to enlarge):


It looks like the banks are taking cash away from the PIIGS, Belgium and France, and are moving them mostly to Finland (!?), Germany and the Netherlands. The Finland issue is particularly interesting. Perhaps this has something to do with it: Moody ranked Finland's banking system the strongest in the EU. 
No wonder these countries are having trouble kick-starting their economies; their banks are shrinking assets and are thus lowering the possibility for further credit and deposit creation. As an effect of high risk and uncertainty money is leaving the countries (recall the Spanish situation from June last year) and is further strangling the system. The ECB's help is also pretty useless in this case since the banks are not losing money; they are transferring it to a lower risky environment. Does "doing whatever it takes" by shoveling them with more money (which they end up moving abro…

The day after

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The fiscal cliff has been averted, for now. It appears that the commitment device I was referring to in the previous text was strong enough after all. My argument was that the Nash equilibrium of the bargaining game will prevent an outcome and force the US down the cliff. I modeled it as a weak commitment device, without time discounting, and without having written down any of the parties' utility functions. Having included these parameters, the game would have given a scope for a cooperative equilibrium, however with a lower probability than a non-cooperative equilibrium. This can be extended in a lot of ways. 
Anyway, I wasn't all that wrong, since the budget cuts deal was put off for two months (so no deal was reached here - the model didn't account for extending the deadline), there were no reforms to entitlement spending and there were no reforms of the complex tax code. The tax rate deal was reached, taxing only individuals earning more than $400,000 p/y (at 39.6%, …