Wednesday, 25 June 2014

Political economy of debts and deficits (2): Theoretical overview

After a brief intermission it's time to continue with the PE of debts and deficits. In today's post I will present a theoretical overview focusing on the common-pool problem and political instability.

According to Persson and Tabellini (2000) high debt and deficit levels appear to be correlated with specific political and institutional features: high debts are characteristics of countries ruled by either coalition or unstable governments. This seems to suggest that institutional factors as well as political factors play an important role in public debt policy. They present a detailed overview of the political economy models of public debts[1]. They survey the literature and present two main types of models explaining the problem of deficits and debt in an economy, from which I will in the following blog post derive the main hypotheses explaining the rising debt levels since the 1970s onward.

Common-pool problem

They focus first on the effects of interest groups and the so-called common-pool problem: smaller groups prefer overspending since each group will internalize the benefits of its own public good but it will internalize only a fraction of the marginal cost of higher taxes (this argument goes back to Olson’s theory of interest groups [2]). In other words one group captures all the benefits from the public good received, while the cost is shared across the entire society via higher taxation, or if unfeasible according to the tax smoothening hypothesis, via higher borrowing.

In systems with dispersed political power government size increases primarily because of powerful interest groups which tend to bias the majority of the government spending towards themselves. This will in effect create even higher incentives to borrow and increase the size of government under the persistent pressure from interest groups demanding budgetary concessions and giving political support in return (via campaign contributions for example; see Mueller, 2009, ch. 20). Such a dynamic common-pool problem leads to myopic (short-sighted) policies, and new research has shown it too can be linked with rising inequality.

In this case higher spending and borrowing are caused by a flawed budget process in which each group (whether geographically or ideologically determined) is given a too high decision-making authority over the budgetary procedure. 

Institutional reforms can be used to solve this problem by centralizing decision-making (or perhaps via reforming the electoral system to make majority governments rather than coalition governments). If a single party fully controls all spending decision it would appropriately internalize costs of overspending and overborrowing. However this too can be abused. Theoretically such a group can seek to allocate the entire spending towards itself (the moral hazard problem of political agency models), which would imply that the allocation across groups is extremely uneven, even though the allocation of spending would be Pareto optimal.

Institutional checks and balances could solve this problem. Increased transparency of the budget process in addition to closer public scrutiny at both the national and a local level lowers the incentives for overborrowing. In addition fiscal rules are arguably the most successful way of lowering the debt burden and closing the deficit (if implemented correctly, i.e. if the punishments for breaking the rules are enforceable and credible). This however refers to the issue of how well defined the basic institutions are within a country. 

If a particular political system leads to inefficiently myopic policies, normative arguments speak in favor of institutional constraints such as balanced budget rules. But since the failure involved has a political origin, a balanced budget constraint must be constitutionally (or supernationally) enforced, for there will always be a simple legislative majority in favor of repealing it. A balanced budget constraint may impose other distortions, however. It has been noticed that many EU states have cut public investments to cope with the constraints on budget deficits imposed by the Stability Pact. The parties in power will be reluctant in cutting funding to their own “constituencies”, i.e. support groups. But again the role of institutions is crucial in solving this problem.

Empirical evidence [3] points out to certain features of the budget process which decrease the likelihood of debt problems in countries. One is the extent to which power is centralized in the hands of the Prime Minister or the Treasurer, while another is whether the budget is subject to transparent sequential decision making. Naturally this too is linked to the strength of domestic institutions, where countries with strong institutions will be less subject to abuse of centralized political power.

Furthermore, Kontopoulos and Perotti (1997, 1999) use a panel data set including both public spending and debt issuance in 20 OECD countries from 1960 to 1995. They relate a country’s spending and debt to the type and structure of government in that country and find that spending and debt issuance correlate positively and significantly with two features: the number of coalition partners in government, and the number of ministries in government. 

Political instability

In addition to the common-pool problem a politically unstable system can also increase public debts to above sustainable levels. This argument revolves partially around the idea that debt can be used strategically between two interchanging parties (the US case). But this can easily be extended to a country with well-defined permanent coalitions (e.g. where liberals usually collide with conservatives, while the greens usually collide with social democrats).

The party (or coalition) deciding on public policy in the current period is aware that with some probability it will not hold office in the next period. This may induce too much borrowing, because the costs in terms of future spending cuts are not fully internalized. An incumbent government may also want to choose debt issuing strategically for another reason, however, namely to influence its likelihood of reelection.

The empirical prediction is that countries experiencing political polarization (i.e., sharp disagreement between the majority and the opposition) and political instability (i.e., frequent government turnovers) should accumulate more debt. A more precise prediction is that a lower perceived probability of reelection should cause any government to issue more debt.

If we introduce probabilistic (as opposed to deterministic) voting models, which assign probabilities of winning with respect to specific support gained by a political party within a particular group (geographically, economically, or ideologically speaking) the party with the fewer swing voters (i.e. the party with more ideologically unified voters) accumulates more debt.

This implies that if a government is supported by a unified ideological base big enough to secure its reelection, it worries less about the negative effects of its overborrowing. The party in power creates a big enough “constituency” that will ensure its reelection. In electorates where ideological issues override the economic ones during political campaigns voters are less likely to control the budgetary transparency of the party in power. Ideological battles will polarize the electorate and as a consequence lead to more debt.

[1] Persson and Tabellini (2000) Political Economics. Explaining Economic Policy. MIT Press. Chapter 13.
[2] Olson, Mancur (1971) Theory of Collective Action. Harvard University Press
[3] E.g. Alesina, Hommes, Hausmann, and Stein 1996

Friday, 20 June 2014

"Capitalism for the people"

This week I was in London where I attended the Margaret Thatcher Conference on Liberty (follow the Twitter feed on #Liberty2014) organized by the Centre for Policy Studies (CPS) (here's a link to some blog posts I wrote for them). It was an international conference held in London's historical Guildhall to celebrate the 40th anniversary of the foundation of the CPS by Sir Keith Joseph and Lady Thatcher.

It featured a series of world class speakers; from professors such as Niall Ferguson, Luigi Zingales, Deirdre McCloskey, Richard Epstein, Deepak Lal, Art Laffer, to former and current politicians such as Australia's ex-PM John Howard, Estonian PM Taavi Roivas, Polish Minister of Foreign Affairs Radoslaw Sikorski, British MEP Daniel Hannan, UK Secretary of State for Education Michael Gove, retired US army General Petraeus, and a number of journalists, businessmen and the like. And of course the CPS chairman Lord Saatchi who presented a new policy aimed at restoring Britain's growth potential - #thePolicy - a suggestion aimed at abolishing the corporate tax rate for SMEs. However I still feel the suggestions I made in my ASI paper (where the key is to abolish employer's NIC among a number of other things) would boost SMEs more than abolishing their corporate tax rate. The conference was opened by British Nobel prize winner in literature - V S Naipaul. The full list of speakers is here

It was a conference celebrating the achievements of the Thatcher-Reagan revolution of the 1980s. Its emphasis has been on issues that are mostly overlooked by the critics of the so-called "neoliberal doctrine" - a focus on Capitalism for the people, a moral case for capitalist democracies, a way of thinking highly advocated and practiced by Lady Thatcher (and consequently a title of prof Zingales's new book). I have emphasized this every time I wrote a piece on Thatcher - she "strongly opposed the accumulation of power by the elites and the consequential rise of cronyism. She advocated wealth creation and the principle of property ownership. But as much as she supported wealth creation, she was against wealth expropriation. She knew of the distinction of being pro-business and being pro-market. One does not imply the other. Being pro-market meant supporting competition and equal opportunity, not creating monopolies or picking industry winners." This is what the governments that succeeded hers have forgotten. The banking and media elites whose power was only partially exposed by some of the recent UK scandals (the Leveson inquiry, LIBOR) would never have been able to accumulate so much political clout if Britain truly continued down the path set by Lady Thatcher. The extent of their cartelisation was clearly shown in Lord Saatchi's presentation: 
Source: Saatchi (2014) "The Road from Serfdom", pg.8
And in addition he pointed to a survey which showed that 70% of Britons don't trust neither big government nor big business. The direction of policy proposals should be quite obvious in this case.

The conference thus presented a realistic view of capitalism. The speakers quickly and precisely recognized all its problems: cartelisation, cronyism, corporatism, clientelism. These are essentially the reasons behind rising inequality and low social mobility. Lack of opportunity leads to negative selection. As powerful interest groups have captured and redistributed most of the public spending towards themselves, less and less is left for the poor ends of society particularly in terms of schooling and health. Inequality is a product of a faulty, captured, crony capitalism. Not its liberal alternative. Which is why the methods, or if you want instruments, to deal with inequality are not policies aimed at imposing higher tax burdens - these are very short-sighted solutions, and in most cases can be very counterproductive.

To deal with the problems of Western capitalism, we (and here I essentially mean our governments) must impose more competition in other to dissolve the highly accumulated political power of big business, and offer more incentive-based policies aimed at helping the poor. Capitalism was designed to work for the people - it was aimed to alleviate poverty. Being pro-market or pro-capitalist does not imply being anti-equality. On the contrary, the point of the capitalist system is to offer everyone the same opportunity for success. Liberalism achieved within capitalist democracies implies the freedom of opportunity. Every other system know to man (socialism, national-socialism, feudalism, etc.) fails to offer such incentives, since it lacks the prerequisite of political inclusivness. They also lack the one important thing that makes capitalism strive - trial and error.

Essentially one should always think of the capitalist democracy as a trial and error process. When cronyism prevails we are obviously in state of error. But via scrutiny, innovation, and a persistent exchange and competition of ideas we are able to fix the faults of the system. This is, in fact, what Thatcher and Reagan have done after the stagflation of the 1970s. The answer is always more competition and more innovation. The same way they've cleared the path for the beginning of the third (IT) industrial revolution, we need ideas and leaders that will remove all obstacles from the still ongoing technological revolution. The Liberty Conference was the first step in the right direction.

Addendum: China is a friend not a foe 

Each session was very interesting and though provoking (see the full list here); I particularly enjoyed the panel on "Big Government and Big Corporations" featuring Art Laffer, professors McCloskey, Zingales and Lal, and the Economist's editor-in-chief John Micklethwait. It was in my opinion the central event of the conference. However each session had at least something to say about China. In the opening part of the conference the mainstream view on China was presented, partially under the influence of Ferguson's hypothesis of the forthcoming Chinese dominance. However in the panel called "After America, What?", featuring John Howard, Dr Keyu Jin and General Petraeus, the Chinese economist Dr Jin (she holds a PhD from Harvard and works at LSE) presented a very realistic portrayal of China and particularly the Western perception of China. She stated that China's economic development is still far below what the western media headlines would lead us to believe. She emphasized several times that China is still a poor country with major issues, where a lot of people are still far below a decent living standard. China has yet to figure out its development model, and the West should cooperate and help them, not constantly feel threatened and flex its muscles in front of them. Trade is the key word here. 

I couldn't agree more. China's state capitalism is being given way too much praise than it deserves. It is certainly much more fragile than perceived (cronyism is rampant as is high inequality), and the Chinese themselves realize this. With respect to its forthcoming financial crisis, China has yet to face major fiscal sustainability issues. Another big problem is a huge ageing population. As the crisis hits and as the middle class expands China will be forced to change from state capitalism to liberal capitalism. If it maintains good relationships with the West it may endure this transition less painfully and with more resilience than any other country. This is its advantage but at the same time a big political risk. 

Monday, 16 June 2014

"The Course of Empire": How long do Empires last?

Having finally finished Niall Ferguson's "Civilization", I got very amused with his portrayal of the life cycle of an Empire. After writing very interesting and engaging books on the rise and fall of the British Commonwealth ("Empire: How Britain Made the Modern World"), and then a year later the United States hegemony ("Colossus: The Rise and Fall of the American Empire"), "Civilization" represents a summation of his central argument where he lays out a prediction of a possible end to a 500 year era of Western dominance. 

As he states in the final chapter of the book, no one better depicts the life cycle of an Empire than Thomas Cole's five paintings entitled "The Course of Empire".

So here's some fine art for the first time on the blog (it may become a new fad). 
Note: When viewing the paintings, I recommend playing in the background the following melody: R. Strauss: "Also Sprach Zarathustra"

The first one is called the Savage State, depicting the "dawn of man", with an early morning, daybreak theme. 

The second is the Arcadian or Pastoral State, with a somewhat morning pre-noon theme.

The third is the Consummation of an Empire - the Empire at its peak. Time of day: 1-2 pm.

The fourth is Destruction. Time of day: afternoon.

While the final is Desolation. Time of day: evening.

Powerful images indeed.

Will the West be replaced by the Rest anytime soon?

So is the West up for desolation? Usually, or so the story goes, when an Empire reaches its zenith, corruption, greed and cronyism take over, setting a stage for its decay, making the Empire more vulnerable to outside and inside shocks (whether it being wars, diseases, or financial crises).

However even though this constitutes a fascinating historical tale, it need not necessarily hold with respect to Ferguson's scenario predicting the era of Western predominance subject to being replaced by China. He doesn't believe nor predict that the West will fall (after all Britain is still a very wealthy, prosperous country, despite the fact that its international superpower status has ended quite some time ago) - he simply believes that China and the so-called "Rest" will take over sooner rather than later. 

He bases this prediction on the six "killer apps" that made the West powerful and which the Rest are now copying. Essentially these are six institutional features which could all be linked to the initiation and preservation of the legacy of the Industrial Revolution: Competition, Science, Property (Rule of law), Modern medicine, Consumption and Work ethic

Each of these can easily be "downloaded" by the Rest, which are now emulating the success of the West. However, not all apps are being downloaded and applied simultaneously. While competition is certainly there in Asia, as well as science, medicine, a Western-style consumer society, and particularly an amazing work ethic (greater than that of the Western Protestantism, thus denouncing Max Weber's argument), one important thing that's missing is the rule of law. Even though political stability exists, which is an important prerequisite of the rule of law, private property rights - the proper incentives for innovation and progress - still lack in countries like China and disable them from creating a full proof development model. 

Ferguson however cleverly lists and then denounces all the possibilities of what could go wrong and prevent China to achieve its new global superpower status. The first are the similarities with Japan and how it was a matter of time before it would overtake the US (this is the dominant myth of the 90-ies). However ever since its bubble burst and financial crisis followed by a prolonged 20-year stagnation, the Japan prophecy has failed. Japan will recover at one point, but there is no denial that it has been successful in achieving prosperity and high living standards for its people. Failing to kick-start growth for 20 years is not such a big problem if the country is rich. The reason why Ferguson believes China won't succumb to this scenario is its relative independence from the US; something Japan never had, as they became a US military base after the war and started copying the US in almost everything; from culture and consumerism to science and economic policy. 

Other scenarios that may prevent China's ascent are social unrest - based on a rising power of the middle class empowered by technological progress, and an antagonistic relationship with its neighbors. Each is unlikely in any due course of time particularly if living standards in China continue improving, and its wealth keeps rising. 

...Not likely

What is missing are four lines of argumentation: (1) lack of political inclusivness (the Acemoglu-Robinson argument), (2) lack of incentives to produce an open-access society (the North-Wallis-Weingast argument), (3) lack of innovation (the Schumpeterian argument), and (4) lack of the trial-and-error process. The consequences of these shortcomings are mounting problems of inequality, elitism and cronyism. In terms of the North, Wallis and Weingast (2009) theory, they still resemble a natural state society, where political development is constrained, and the civil society is virtually nonexistent.

In addition, as I've pointed out earlier, China is facing a forthcoming financial crisis. It very well may follow the trajectory of Japan, where its reaction to the slump of its shadow banking sector will depend on the response of its consumers. If the Chinese start spending more and boost consumption, the shock may be averted with relatively more ease than in the West. However the same was predicted for Japan whose consumers actually did have some savings, but it still made them reluctant to engage and start spending. 

By examining China more closely it hardly gives the impression of a country ready to overtake world domination. Rather, it resembles an Empire in decay, overtaken by corruption and cronyism, with a worrying scenario over how it will react to its unavoidable financial crisis. Which mix of policies will it apply from its state capitalism system: those of the interventionist state or those of free market capitalism? And more importantly, how will the markets react to this blow and subsequent response of its policymakers? If an improper solution is applied which will put China in more pain, they risk to be yet again marginalized by West in their geopolitical status. Without a doubt China's wobble will represent a shock to the entire global economy (like the Asian crisis of 1997), but it will hardly be of the magnitude of the US financial crisis, meaning that investors will realize that the Western financial system is still the spiritus movens of global capitalism (after all, New York and London are arguably the two financial capitals of the World - cities like Hong Kong, Singapore, Tokyo, Shanghai or Dubai are closing in, but are far from achieving that status). It will shift their attention back to the West. 

Democracy always wins

The true strength of an Empire is measured in its robustness to shocks such as crises or military or terrorist attacks. The US has withheld these shocks quite successfully so far. The Great Depression and the Great Recession have been the biggest threats to the Western model of capitalist democracy. In as much as after the Depression of the 1930s, national-socialism, the greatest enemy of our time, was born. Today we've learned from the lessons of history, and we've learned never again to succumb to such atrocities. This is the reason behind an enduring success of the West: trial and error

Trial and error is a inherent characteristic of a democracy. It helps a failing empire (or society) consolidate and fix itself. The downfall of historical empires has always been the lack of individual freedoms, never too much of it. Looking at the ancient civilizations like Rome (which certainly provided inspiration to Cole's paintings), after the Senate lost power and dictators took over, following a period of even higher military expansion and wealth, corruption, decadence and decay soon took over and Rome was doomed. An outside shock in terms of a foreign enemy only quickened their downfall. Other civilizations were also doomed as they failed to adapt or as they restricted freedom - examples range from the Mayan city-states to Venice to almost all middle-ages pre-Industrial Revolution empires. In that respect Britain hasn't decayed, it has just been replaced by a country where freedom flourished more, combined with the downfall of Britain's military power and the process of decolonization of the modern post-WWII world. Britain's power was always in its colonialism. After the end of that era, Britain's supremacy ended, but this is far from Britain ever declining in wealth or living standards. 

The bottom line is that an authoritarian system, regardless of whether at one point it was ruled by a benevolent dictator, never outperformed a truly democratic one. And it never will.

Thursday, 12 June 2014

Graph of the week: World Cup fever

The football World Cup is at our doorsteps and the fever is certainly there, at least in the nations which have qualified. So I think it's only appropriate to follow this up with a quick post - don't forget that the football World Cup is the most viewed sporting event in the world (yes, even more than the Olympics and the Super Bowl). Perhaps a more interesting economics-based introduction to the WC2014 would be to talk about the money revolving around the event, or the vast infrastructure spending done by the Brazilian government that triggered country-wide protests that still threaten to undermine the event (even though they would certainly be justified as the amount of potential corruption arising from all those infrastructure projects is massive), or even to discuss the likelihood of winning with respect to a whole variety of factors (FYI, the Economist has already done a very interesting estimation of the winning probabilities).

What caught my attention was a study done by YouGov which asked fans from 19 countries to rate the chances of the teams featuring at the World Cup (including their own) in addition to a number of other things (reported by the New York Times):
Source: NYT
The first interesting take from this is that fans from almost all the nations surveyed seem to think Brazil will win it (even the Spanish, Argentinian and the obviously delusional US fans which all put their team as the favorites, set Brazil as the second choice). Another thing Brazil is leading in is the perception on playing the most beautiful soccer. Spain is a close second. 

The most interesting for me is the middle column where the fans were asked who they will root against, i.e. which team they prefer the least (or dislike the most). Now these answers were driven by non-sporting motives - politics and neighboring rivalries mainly. The South American teams will root against Argentina, while the Argentinians' first nemesis is still England. The US seems to be very unpopular, particularly in Mexico, Russia, Italy, Chile, Colombia and yes - the US itself. This is purely to do with politics as the US football team is terrible and has no sporting chance. The US fans know this and couldn't care less. The US is also unpopular in Greece, whose first negative choice was - surprise, surprise - Germany. The hostility towards Iran is somewhat surprising given the heterogeneity of countries rooting against them, such as Australia, Germany, Italy, Mexico, Holland and Spain. I assume it has to do with religion. A reemergence of old political rivalries is the US-Russia and Japan-South Korea, where in all 4 cases the fans will root against their own country and the biggest rival. How strange. 

It is also interesting to notice that Brazilians picked Brazil as the second answer as to who they'll root against. Perhaps this has to do with the protests and the general dissatisfaction with the organization of the tournament. Or this could just be that part of Brazil which doesn't care about football at all, and are annoyed with all the fuss. A third option as to why they wouldn't want a Brazilian victory is the boost of popularity their President Dilma Rousseff would receive, which would be a cleaver diversion from Brazil's real problems (as Jorge Videla attempted to do during the 1978 World Cup in Argentina, which Argentina won amid controversy regarding their final group game win which launched them into the final - the effect didn't last for very long). 

Anyway, regardless of the motives, the controversies and the scandals, let's enjoy the 20th football World Cup! May the best team win!

Saturday, 7 June 2014

Political economy of debts and deficits (1): Introduction

In a series of texts I will touch upon some of the theoretical and empirical factors explaining the expansion of debts and deficits in many of the World's economies in the past 40 years. This has been adapted from my 2014 Public Finance lectures, and can serve as a reminder to my students. Today's post will provide and introductory overview of the argument, the next one will be focused on the common-pool problem and political instability, while the third one will present some of the main hypotheses explaining the rise of debts and deficits in the past 40 years. 

The rise of debt

Government debt, much like government size, has increased in the past 40 years in many industrial economies. The rise of public debt has mostly been attributed to the rise in government size, and in particular running persistent budget deficits. The real question, for which we need to apply a political economy analysis, is why this was so?

The traditional theory of public debt was based on the argument of tax smoothing. Assuming that a country faces a transitory sharp increase in spending, the question arises whether it should be financed by increasing taxes so as to keep the budget balance unchanged, or should it be financed by borrowing, which would spread the increased tax burden over a longer period, assuming that the population does not want to leave all of the debt to its children. A trade off arises between a burden imposed on current voters or future generations. Given that taxes cause distortions which in most models are proportional to the square of the tax rate, it is better to finance the transitory spending by borrowing, and only modestly increasing taxes so as to cover interest costs and ensure repayment over a long period. 

Essentially politicians can keep their promises of higher concessions to certain groups in three ways: higher taxation of current voters (unpopular), shifting spending from one group to the other (unpopular for the losers), or increase debtwhich is essentially taxing the future generations. Increasing debt (borrowing) is the easiest outcome available since voters suffer from a fiscal illusion and tend to act rather myopically (shortsightedly), and will be less inclined to punish politicians immediately for accumulating debt (they are unaware and not well informed to punish such policies). 

Wars are perfect examples of temporary spending pressures for which the tax smoothing argument makes sense (see Figures 1 and 2 below). As a result, the historical pattern of public debt dynamics in the past was a surge during a war, and then a gradual decline after the end of the war. Notice the effect of WWI and WWII in the UK on its debt-to-GDP levels, as well as the WWII effect in the US. Also notice how the current debt-to-GDP levels for the US are almost as much as they were during the war. That is indeed a reason for concern. 
Figure 1: UK Debt-to-GDP ratio, 1900-2016
Figure 2: US Debt-to-GDP ratio, 1900-2016. The blue line
represents state-level debt, red line local, while green is
federal (national) debt. 
Since the 1970s, contrary to previous trends, public debt ratios in most advanced economies started to rise, despite the fact that there were no major wars in that period, and that GDP growth performance was quite strong (a high denominator should have lowered the total ratio, not increase it). Debt dynamics for selected countries can be seen in Figure 3.

The period from the 1980s onwards was called the Great Moderation for its low inflation rates and relatively high growth rates. It was a welcomed change from stagflation of the 1970s, however stronger economic performance still went hand in hand with debt accumulation. 

In the current crisis higher debt levels are primarily the result of massive government fiscal stimuli done in 2008/2009 to combat the initial effects of the crisis (bank bailouts in the US, UK, Spain or Ireland are a good example – not shown in the graph). It is primarily because of bank bailouts and other adverse effects of the crisis that most European as well as the US government are facing unsustainable debt burdens in current times (and why their governments are obsessed with austerity, even though it’s being done the wrong way). 

Japan is a case in point and a good indicator of what might be awaiting some European countries for the next few decades (it's debt to GDP is currently over 230%). The bubble burst in Japan in the 1990s triggered massive monetary and fiscal stimuli for the past 20 years which haven’t affected real economic growth at all, while Japan was stuck with a few deflationary episodes in addition to massive increases of government debt.

More recent trends for Eurozone countries appear below. One can see that the average debt ratio was above the Maastricht 60% limit (by about 10 p.p.) even before the very foundation of the Eurozone, which is interesting since the 60% debt-to-GDP limit was a primary condition of membership (in addition to a < 3% deficit to GDP). However countries were allowed to introduce the euro if they have exhibited declining trends of the debt and deficit levels at the time - otherwise Italy and Greece would have never been members in the first place (which in hindsight wouldn't have been that bad).

Tuesday, 3 June 2014

Week links (8)

Another edition of the best from the rest in commentary, op-eds and blogs: 

(1) Beaudry, Galizia & Portier: "Reconciling Hayek's and Keynes' views of recessions", VoxEU. Can this be done? Apparently it can. Just recall the ideas of Austro-Keynesianism

(2) Tyler Cowen: "How is income inequality correlated with wealth inequality", MargRev
Source: Marginal Revolution
"Wealth inequality and income inequality may diverge for at least three reasons. First, savings rates may differ across societies. Second, locally available rates of return may differ. Third, the ups and downs of mobility may mean high income inequality in a given year but overall lower levels of wealth inequality."
(3) Piketty's very detailed response to the FT at VoxEu. He goes figure by figure, handling one mistake at a time. 
"I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive ... corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what the FT suggests. Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least)."
(4) The NYT sums up the whole FT vs Piketty debate by telling the reader everything he/she needs to know.

The Piketty quarrels don't stop there however;

(5) Scott Sumner takes his first two punches - at his own blog Money Illusion questioning not only the logic behind Piketty's argument on wealth distribution, but also the supposed straightforwardness of the data he uses (mostly the wage data in 19th century Britain); while the second punch comes from a guest post of his at the EconLog blog, where he discusses Piketty's misunderstanding of Kuznets

(6) Alex Tabarrok contrasts Piketty's model to Sollow's model on MargRev:

"As g falls Piketty predicts a much bigger increase in the K/Y ratio than does Solow. In Piketty’s model as g falls from .03 to .01 the capital to output ratio more than doubles! In the Solow model, in contrast, the capital to output ratio increases by only a third. Remember that in Piketty it’s the higher capital stock plus a more or less constant r that generates the massive increase in income inequality from capital that he is predicting. Thus, the savings assumption is critical"
(7) On the monetary front, the Fed critics have assembled at a conference at the Hoover Institute, where John Taylor, applying his own monetary rule, claims that the Federal Funds rate should have already been higher. WSJ blog.

(8) And finally, an interesting educational text from the WSJ entitled: "The Wrong Way to Treat Child Geniuses". Just a quick note:
"One of the most painful aspects of teaching mathematics is seeing my students damaged by the cult of the genius. That cult tells students that it's not worth doing math unless you're the best at math—because those special few are the only ones whose contributions really count. We don't treat any other subject that way. ...

... And losing mathematicians isn't the only problem. We need more math majors who don't become mathematicians—more math-major doctors, more math-major high-school teachers, more math-major CEOs, more math-major senators. But we won't get there until we dump the stereotype that math is worthwhile only for child geniuses."