Showing posts from May, 2012

Good hunches

As opposed to Samuelson’s faulty predictions of the Soviet Union overcoming the US in the late 1990s, another economist with a popular introductory economics textbook provides much better and more precise predictions. I recently read an article by Greg Mankiw from 2006 , written as a prelude to Paulson replacing Snow as the US Treasury Secretary. Mankiw issues a lot of warnings on the sustainability of the US budget back then.  He emphasizes the importance of consolidating the public finances in the long run as a key challenge for Paulson. Even in 2006, where everything was going so well, it was obvious to Mankiw (and many others) that the demographic pressure was placing a huge challenge on the Social Security, Medicare and Medicaid systems. But somehow there was no credible pledge on either sides of the political spectrum to address this concern. This is the problem with short-termist politicians: if things are going good, don’t try to implement potentially painful reforms

Graph of the week: Student loans

As the tuition fees are rising, student loans are skyrocketing. The following graph comes from last year's text in The Atlantic carrying a rather sensational title: "Student Loans Have Grown 511% Since 1999."  Source: Indiviglio, D. "Student Loans Have Grown 511% Since 1999" , The Atlantic, 18th Aug 2011 So which one was the bubble again? Bear in mind that the growth in household debt (blue line) was the one responsible for the housing bubble leading up to the financial crisis of 2007 - 2009 . But this time, absolute terms are actually more important. The total amount of household debt reached almost $10 trillion (making it systematically much more dangerous), while the student loans increased to around $550 billion, or roughly one twentieth of the size of total household debt. But its rapid, almost incredible growth is still worrying.  What will happen to those students which cannot repay the loan? During the mortgage bubble burst, people lost

Achieving political stability – is it possible?

As an advocate of political stability as the crucial starting point which can address the radical dependency problems in Greece and most of Europe, I find it frightening how hard it is to achieve this stability, particularly when the political situation and the currently prevalent opinion among Europe’s citizens is turning more and more radical. The latest article from an excellent political economist commentator Protesilaos Stavrou  illustrates this point for the current political lock-down in Greece. The level of ideological heterogeneity that developed in the Greek society during the sovereign debt crisis is astonishing. From right-wing nationalists and neo-nazis, to radical socialists and communists - it seems that every option apart from a liberal one has entered parliament in the May elections. Naturally, the inability to form a government was the only possible outcome. Protesilaos describes the micro-political factors behind the inability to consolidate and points out to f

The Argentine example isn’t helpful to Greece

Or to anyone else for that matter. A lot of times during the past months I came across the idea that Greece should follow the Argentine 2001 example and devalue its currency. This would imply leaving the euro and returning to Drachma, followed by a series of bank runs and capital controls to prevent capital flight. But, crucially, the currency devaluation would cause a boom in Greek exports and sustain an investment-led growth. I covered this fallacy in a text on currency devaluation earlier in November, claiming that no devaluation will help the Greek economy, as it won’t address the structural problems this country is facing. Here’s an excerpt of what I wrote back then : "...there are many other indirect effects that are likely to completely crowd out any positive effects of currency devaluation...The Greek people and businesses were, just like the Greek government, running high debts and used them to fuel their consumption previous to the crisis. An increase of th

Graph of the week - Remittances

From the Economist comes the following figure on remittances: Source: The Economist , 28th April 2012 Remittances are an interesting economic phenomenon as they can offer a much broader and more precise insight into a nation’s relative wealth and income. They are hardly accounted for when calculating the GDP per capita or national income data, but they do provide significant funding to domestic residents, and they can have a strong positive impact on consumption, and hence aggregate demand in an economy. They could also imply that the relative size of the gap between rich and poor countries in terms of income per capita is lower than perceived. This doesn't imply that it doesn't exist but it paints a different picture for the recipient country's population. Also it can tell us a lot about the recipient country, in particular its institutions. Countries which have a lot of emigrated workers that send home incomes to their families are usually poorer than countrie

More on austerity

Note: This post was also published on the Adam Smith Institute blog on Thursday 24th May, titled "Austerity or bust" . For all my other ASI writings see here . The debate on austerity v stimulus is again the main focus of attention. Particularly due to the recent results of the Greek and French elections where opposition to European "redistributive austerity" is gaining strength. Even though they don't refer to it as redistributive austerity, but as "painful cuts that are hurting growth". Even in the very phrasing of the debate as 'austerity v growth', it is obvious that people don't really understand what austerity is, and even less what their governments are doing.  The recent texts from the Mercatus Center , Cato institute , Tyler Cowen and many others shed some light on this and have pointed out to a controversial yet very true fact that there is no real austerity in Europe, at least not the type that could theoretically he

Brace yourselves, there’s another bank holiday coming

Note: This post was also published on the Adam Smith Institute blog , on Wednesday, 16th May 2012.  Last year in the UK there was a lot of fuss about the Royal Wedding in economic and political circles. It was led to believe that because of an extra bank holiday for the Royal Wedding last year, and for the Diamond Jubilee this year, the economy slipped back into a recession. An extra bank holiday was apparently the reason why the second quarter of 2011 had negative growth (-0.1%, see graph below). And it will probably be why the UK will have a negative growth in Q2 2012 too, making it three consecutive negative quarters. Things were just starting to look better, didn’t they? The impressive  growth of 0.2% in Q1 2011 was totally offset by the Royal Wedding.  Btw, the UK didn’t slip back into a recession – it never actually got  out of one.  Source: Trading economics If only the British were working on those days, everything would have been different. Instead o

VoxEU debate on austerity: "Time to reform institutions"

The famous  CEPR  economic research policy portal  started a debate last month on austerity, entitled " Has austerity gone too far? ", with a leading comment from the moderator Giancarlo Corsetti , from the University of Cambridge. This was followed by an article from Alesina and Giavazzi  (Harvard and Bocconi), making the case in favor of austerity measures, and a counter-argument from Brad DeLong  (Berkeley). The debate has since featured many prominent economists (from the IMF, EC, German Bundesbank, LSE, Chicago, NIESR etc.) and I am grateful and honored to be among them.  Here is an excerpt from my contribution to the debate , entitled "Time to reform institutions" : " Europe needs to move on beyond austerity and stimulus, and focus on reforming its institutional system that will address the misplaced incentives and the dependency mentality, and restore proper market signalization that will enable new patterns of specialization and increas

Graph of the week: Big Mac Wages

You've surely heard of the Big Mac Index – it’s an interesting way to measure the plausibility of the law of one price, or to be more precise the purchasing power parity ( PPP ). It’s published by the Economist on an annual basis. Acording to the PPP theory "in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries."  With the Big Mac Index, they compare how much is a currency overvalued with respect to the dollar (taken as the basis currency, i.e. the basis price of a Big Mac in America).  The Big Mac Wage Index is a bit different. Source of graph: WSJ blog .  It tells us how many minutes of work does it take for a McDonald’s employee in a given country to earn enough money to buy a Big Mac. Basically it’s a measure that compares real wages across countries.  "A real wage rate is a nominal wage rate divided by the price of a good and is a transparent measure of how much of the go

Persistent fallacies

Note: This post was also published at the Adam Smith Institute blog, on 12th June . For all my Adam Smith Institute texts, click here .  Whilst reading Acemoglu and Robinson's insightful and exhilarating book , I ran across a stunning fact. In the Chapter 5 of the book, entitled "I've Seen the Future and It Works" they talk about why economic growth cannot be sustainable under a set of extractive political institutions. They mention the case of Soviet Russia and emphasize how their rapid growth during the 50-ies and the 60-ies was unsustainable since it wasn't supported by economic dynamism or innovation, i.e. there were no forces of creative destruction. They managed to achieve growth simply by reallocating a huge number of people from under-productive agriculture into industry. It was only natural that rapid growth would follow since productive resources (labour and capital) could now be used in a much more efficient way, and close to full capacity. However, wh