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Showing posts from June, 2014

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

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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-calle…

"Capitalism for the people"

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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&#…

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

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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 ca…

Graph of the week: World Cup fever

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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 …

Political economy of debts and deficits (1): Introduction

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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 …

Week links (8)

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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
"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 tw…