The Political Economist

Relating to a graph of the week from two weeks ago, I again turn to the Economist and its interactive feature comparing the performance of  past elected Presidents  in their failed or successful re-election bids. What is really interesting is that President Obama seems to, on average, have much worse economic results than most other Presidents who failed to be re-elected, particularly in the disposable income category (third graph). The other two categories (GDP and unemployment) also look disturbing, where Obama's current performance is worse than an average failed re-election bid. Having all this in mind, it's interesting to see how a lot of economists still think he's the right man for the job (at least according to the partially biased survey described in an earlier post ). It is true that the President found himself in the middle of a huge wealth shock to the public and is facing massive develeraging (see second graph ) for the whole economy. Ther...

A recent blog post by Brian Caplan reminded me of a great post by Scott Sumner from a about month ago about the issue of an optimal size of government. He compares the Scandinavian model, which to a narrow conservative mind presents somewhat of a paradox where a large size of government coexists with high levels of economic freedom, to the current US system of relatively smaller government, but decreasing economic (and personal) freedom . Brian Caplan has the story where he disagrees with Sumner’s distinction between the terms 'size of government' and 'market freedom'. Where Sumner makes an important difference, Caplan thinks market freedom cannot be achieved with a high expenditures to GDP ratio within an economy. Sumner responded to this soon enough , saying that expenditure to GDP ratios "vastly overstate the difference between the Nordic and Singaporean [for example] models. That's why I focus on variables like MTRs [marginal tax rates] and tax ...

FT Alphaville has got a new graph from Credit Suisse: Source: FT Alphaville ; HT: Tyler Cowen Observe the changes in nominal wages in the pre-crisis decade (grey columns). It reminds me of a graph I've had before in the text on Sweden , where unit labour costs were compared across the Eurozone periphery to Sweden and USA, with respect to German labour costs. The effect on competitiveness was more than clear from that graph. This one shows a similar convergence picture, where Greek, Irish and Spanish nominal wages were adjusting to equate the Eurozone 'average' (there was another similar graph which measured real disposable income  for various EU economies).   Germany, on the other hand, in the same period experienced a significant nominal wage decrease partially as an effect of the unification in the 1990s, but mostly because of their labour market reforms which have ensured a long period of wage moderation. As I've shown in a previous text , t...

Today, the Adam Smith Institute published my paper on the deregulation of UK small and medium-sized businesses (SMEs), entitled " Unburdening Enterprise. Reducing regulation for small & medium businesses ".  The paper received coverage in the Financial Times , The Times  (both require subscription access), Conservative Home , Politics (where in both, ASI's policy director Sam Bowman wrote good pieces outlining the main proposals of the report), and many others.  Here is a blog post I wrote for the ASI to sum up the report. I will quote it in full:  "Regulatory confinements very often result in wrong policy perceptions and adverse policy conclusions. In an attempt to create a safer environment they impose a number of rules, procedures, and amendments to these rules that eventually end up stifling companies and diverting their resources away from productive activities. This is particularly endangering for small and medium-sized businesses (SMEs), ...

From Wikipedia : "Confirmation bias is a tendency of people to favor information that confirms their beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. For example, in reading about gun control, people usually prefer sources that affirm their existing attitudes. They also tend to interpret ambiguous evidence as supporting their existing position." Source In other words when one person thinks his or her opinions are based on years of rational and objective analysis, but in reality they are the result of years of exposure to information that only confirmed his or her prior beliefs, while any information that was challenging the predetermined opinion was being ignored and/or rejected.  Why am I referring to this psychological phenomenon? Because I'm starting to enjoy reading behav...

The Economist  recently had a story on the survey conducted among America's economists on  how they feel about the current recovery, and how they assess each of the two Presidential candidates. It should be said that the whole survey was a bit biased towards President Obama, since 45% of the respondents rated themselves as Democrats, while 7% were Republicans. According to this it's even more surprising that the Romney campaign attracted over 600 US economists  (6 Nobel prize winners) to sign up for the Hubbard-Taylor-Mankiw plan. I'm guessing not all of them responded in the survey. It attracted only 312 NBER research associates and 51 NABE forecast panel members (which is actually a fair sample).  It's not that economists have any influence on who turns out to be the electoral winner, but it's interesting to examine how they feel on things they are supposed to be experts on, like the recovery. Even though they rarely agree with each other.  ...

The 2012 Nobel prize in economics has been awarded today to Alvin Roth from Harvard and Lloyd Shapley from UCLA for their contributions in "the theory of stable allocations and the practice of market design". What this means is the following: "This year’s Prize to Lloyd Shapley and Alvin Roth extends from abstract theory developed in the 1960s, over empirical work in the 1980s, to ongoing efforts to find practical solutions to real-world problems. Examples include the assignment of new doctors to hospitals, students to schools, and human organs for transplant to recipients. Lloyd Shapley made the early theoretical contributions, which were unexpectedly adopted two decades later when Alvin Roth investigated the market for U.S. doctors. His findings generated further analytical developments, as well as practical design of market institutions." So it was a successful empirical application from Al Roth, based on a game theory approach from Shapley (somet...

This day a year ago  in London, in a computer room at LSE, I opened the " Don't worry, I'm an economist! " blog. What started off as an idea to educate readers on some basic economic concepts and mechanisms (the opening topics were QE , banking reform , financial transaction tax , credit easing , regulation and the euro break-up ) ended up as a place where I contemplate on any idea I come across, often analyzed from a political economy, libertarian, and institutional perspective (depending on the topic). I am happy to say that the blog has evolved into a platform for my ideas on what caused the crisis (see a summary of my paper on the political economy of the crisis, or an analysis into the causes of the Eurozone contagion, both of which I have decided to make into a special page), and how to start the recovery.  What I hoped to have achieved is to send a message on what is needed to start a recovery - a set of pro-market structural reforms supported by a strong...

Madsen Pirie of the ASI has an excellent 10-point lesson on "very good things" for the economy. I especially recommend his insights on profits ,  bankruptcies  and capitalism (more to follow). However, what I wanna touch upon today are imports : "A common fallacy supposes that nations become rich by exporting more than they import. Many governments make the effort to augment exports and diminish imports. This usually involves subsidizing exports by means of grants and lower taxes, and discouraging imports by means of tariffs.  It used to be thought that a country's wealth was augmented by a positive 'balance of trade,' under which the surplus of exports over imports would bring in more gold and silver than went out, leaving the nation richer. Adam Smith exposed this fallacy [also called the mercantilism fallacy] , pointing out that the wealth of nations consisted in the productive labour of its peoples rather than in bars of precious metals store...

It is often believed that the German labour market has much more nominal rigidities than the US market for example, which is supposed to be more flexible and hence more volatile. However a research by three German economists seems to show otherwise: “business cycle volatility of the labour market is twice as large in Germany than in the US.” They also find that Germany tends to have lower worker flows (longer worker-firm relationships), and point that these are mutually dependent. (see graph) Source: Gartner, Merkl, Rothe (2012) "The German labour market: Low worker flows and large volatilities" VoxEU, August 2012 They do a comparison of the two countries’ labour markets from 1980 to 2004. Read the paper for technical details.  "Our recent research (Gartner et al. 2012) provides a model that shows that low worker flows and large labour market volatilities are two sides of the same coin. The reason is that low worker flows generate long-term worker-fir...

Relating to my previous post on the dangers of low interest rates , here's the debt time series for Japan:  Source:  The Economist , 19th September 2012 Looking at the development of Japanese debt since the 90-ies, we can say that it was one interesting ride. Observe the decade long deleveraging done by the private sector and households. On the other hand government debt rose substantially (as % of GDP). What caused the Japanese economy to undergo such a transition and turn itself into the world's largest debt holder? Two decades of low interest rates (among other things). They made it favourable for the government to use debt financing more and more. The result is the graph above depicting an even worse situation for Japan now than it was 20 years ago. I will repeat my point from the previous post: there is a real threat that today's Western economies follow this path and try to deficit-spend themselves to a recovery. This is proven not to work, particularly in ...

A lot of pro-fiscal stimulus arguments in the US and the UK come from the classical zero lower bound (ZLB) assumption, in which monetary policy is said to be ineffective when interest rates hit zero (the lower boundary). This means that the central bank is basically ineffective in its further monetary operations to kick-start the economy, since it cannot lower rates to negative levels (this is not to be confused with real negative interest rates paid on, for example, German bonds).  So in this situation of the zero lower bound trap (or as Keynes called it the Liquidity trap), the only favourable option is to kick-start recovery via fiscal stimulus. In particular, the fiscal stimulus would include more spending on infrastructure projects and direct packages of support to certain business projects (like the green economy).  (Disregard at the moment monetary stimulus arguments I’ve covered in three previous texts – here , here and here ; ideas such as NGDP targeti...