The Political Economist

Last year, a few days before the year ended I embarked in a bold quest of making predictions on economic and political outcomes in the year to come, facing the risk of making a fool of myself by completely misfiring. Luckily, I was actually rather close in most of the predictions made. Before I start evaluating my performance, I would just like to make a quick digression on the precision of forecasting. Why do we make predictions? Because we're facing an uncertain future. Our decisions today depend on the expectations of what the future will bring and how our decisions will be affected by it.  So how can we be sure that a forecast will actually turn out to be correct? We cannot. We can evaluate someone's past performance in predicting things like real economic variables or political outcomes and based on this alone determine how good he or she is in making a correct prediction. But in general we can never be certain. I read somewhere of an experiment done back in the 8...

The Economist  ends the year with a series of eye-catching charts characterizing the state of last year's recovery.  We are all still aware of the recovery being a slow and painful one (in some places more than in others), but what's even more interesting is that some of the negative effects of a poor response to the aftermath of the crisis are already being visible.  For example, in the private sector stock indices are booming, but corporate debt issuance is higher than ever, as the companies are taking advantage of the historically low interest rates and using this mainly to refinance their debts (see graphs below). Interestingly enough, the stock market indices are far above their pre-crisis peaks. Many like to point out that this is a signal of another potential bubble rising on the stock market, but I would beg to differ.  Source: The Economist The Dow is higher than its 2007 pre-crisis peak, but so is the US GDP (see below). Does this mean the U...

All too often during poor economic times many debunked economic fallacies of the past get reinvented. The reason is simple: a search for ideas and solutions alternative to the "mainstream" (however we define it) allows those who succumb to these fallacies to repeat the ancient errors classical economics was hoping to get rid of. The short-termism of politics plays a crucial role in the process of persistent perpetuation of such fallacies. This is why in times like these it is essential to go back in economic history and debunk some of the ideas that tend to surface repeatedly. In the following couple of posts, I attempt to do just that.  Misunderstanding trade  One of the most misunderstood areas of economics is international trade. More precisely, the idea that if we were to boost net exports - by subsidizing exports and constraining imports - we can achieve higher GDP growth. If one looks at the simple arithmetic of a standard Keynesian macro model: Y=C+I+G+NX, the...

All too often during poor economic times many debunked economic fallacies of the past get reinvented. The reason is simple: a search for ideas and solutions alternative to the "mainstream" (however we define it) allows those who succumb to these fallacies to repeat the ancient errors classical economics was hoping to get rid of. The short-termism of politics plays a crucial role in the process of persistent perpetuation of such fallacies. This is why in times like these it is essential to go back in economic history and debunk some of the ideas that tend to surface repeatedly. In the following couple of posts, I attempt to do just that.  My previous post on the benefits of the Industrial Revolution  briefly touched upon the issue of the so-called Great Divergence. The Great Divergence isn't a fallacy, it is a fact, but understanding the reasons as to why it emerged is often subject to false interpretation. As I've pointed out previously, after the Industrial Re...

If one were to ask a question "What was the greatest achievement of mankind?" what would the logical answer be? The invention of electricity (light bulb)? The internal combustion engine? Penicillin? The internet? Airplanes and cars? The development of the scientific method? Improved methods in agriculture? Or would we say something ancient such as the wheel or learning to control fire? Or the printing press? All of these are certainly groundbreaking achievements, but if I had to chose I would go for the one thing that links most of these together = the Industrial Revolution . All the enormous wealth we enjoy today, all the things mentioned above (apart from the wheel, the press and fire) could not have been possible without the onset and the long shadow of the Industrial Revolution. During the relatively short period from 1800s until today, we created a wider variety of goods than ever before, and consequently have achieved tremendous increases in wealth, prosperity, an...

Flying back home from my honeymoon, I had to catch a connecting flight in Istanbul where at the airport I noticed a very interesting billboard. Here's what it said:  "Want to cut costs? Invest in Macedonia! 0% tax on retained earnings / competitive labour costs / access to 650 million customer base / foreign entities buy property freely / skilled workforce" These are just some of the many benefits the " Invest in Macedonia " campaign is promoting. They offer a 10% personal and corporate income tax rate, an 18% VAT (lower than anywhere else in Europe with the exception of Luxembourg's 15%), and a series of low property, sales, and inheritance taxes declaring themselves the new business heaven in Europe . The 650 million customer outreach is based on trade agreements Macedonia has with the EU, CEFTA and EFTA plus two bilateral free trade agreements with Ukraine and Turkey. It has set up a One-Stop-Shop that enables registering a company for ...

You might have noticed that blogging activity has been slow for the past two weeks. This was due to me getting married this weekend to my, by now wife Barbara. With the honeymoon ahead of us, blogging will be on pause for the upcoming two weeks. 

From TED talks comes this excellent presentation delivered by Hans Rosling , a professor of global health at Karolinska Institute (the institution that decides upon the Nobel prize in medicine). The focus of his talk is on disproving the myths about the developing world, which is, according to Rosling, actually quickly closing the gap with the rich countries and is moving forward the same direction (following the same pattern) of the Western world. They are now where the West was some 40-50 years ago. Basically he claims, and I agree, that we shouldn't generalize aid policies towards one area, since within this area there are huge within and across-country inequalities. The same policy on curing diseases cannot be applied towards the top income groups in South Africa and the low income groups in Nigeria (as he mentions in the video; or in this great slideshow: Africa is not a country! ). There's many more good points being made, so I recommend the video:  He has a few m...

Bryan Caplan found a disturbing graph from Edmund Phelps's new book "Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change" : Source:  Brian Caplan , taken from Phelps: Mass Flourishing  Caplan infers: "At first glance, this confirms a quarter-century of steadily declining creative destruction - falling job creation and job destruction. On closer look, though, there was little trend until the small recession of the early 2000s. Since then, however, creative destruction has relentlessly fallen. Striking fact: The rate of job destruction during the Great Recession used to be perfectly normal! We experienced it as a calamity because job creation not only kept falling, but dipped below expectations." He's right, the trend is obvious only in the pre-crisis decade. One could easily link this pre-crisis decline in job creation to the outsourcing trend or even to the role of technological progress . I've covered this...

In one of last month issues of the Economist , they opened up quite an interesting topic on how the consequences of the financial crisis have affected globalization. As we all know an immediate reaction to the sudden credit stop in 2008 was a strong decline of international trade (see graph below). As jobs in the real economy were being lost, and as many companies went under, a paradoxical solution of many quack economists  and the panicking public was a plea for protectionism of domestic jobs and industries. Even though this wasn't the main debate point at the time, there were indeed strong advocates of this necessity to protect domestic industries via higher tariffs and quotas, among other things. To save domestic industries from foreign competition in these tough times - a campaign well accepted by many interest groups seeking protection.  Data taken from WTO However, despite protectionism being anticipated as a likely outcome (as it happened during the Great Depres...

The newest Doing Business Report 2014  once again sheds light on where in the world opening and owning a business is a welcomed venture, and where you would be better of not being in the private sector at all.  The report is an annual World Bank publication comparing countries in 10 different areas of business regulations such as starting a business, resolving insolvency, getting licences and permits, and even credit availability. It ranks countries based on the ease of starting and handling a business, thereby painting a picture to investors as to which country is more open for investments, i.e. more business friendly. For lower-income countries specific policies aimed at lowering the regulatory burden on businesses will ensure they rise high on the rankings, while for high-income countries, the relative strength of their institutional environment will still keep them on top, despite some of their policies being less business friendly than expected.  For example...

Nassim Nicholas Taleb , most famous for his bestselling brilliant book "The Black Swan" , published a new book last year - "Antifragile: Things That Gain from Disorder" , where he presents a rather interesting argument. I haven't read the new book yet (I intend to), but I came across two interviews he did for Financial Times presenting his argument.  His main point is on political volatility. If I were to ask you a question: "Which country is going to be better of in the future - the one characterized by more political volatility or the one with more political stability?", what would you answer? The first though that comes to mind is that stability is inherently good. But according to Taleb this need not always be the case.  If one  approaches this question through the democracy vs autocracy  debate, where democracies will always carry more political volatility than autocracies, then the argument makes much more sense. A democratic system, ...

This title is actually taken from Paul Krugman . For once I agree with him. Krugman's blog came as a response to a great text by this year's  John Bates Clark medal recipient  Raj Chetty from Harvard. Chetty wrote a column for the New York Times this weekend where he defended the field of economics on the basis of its scientific rigor. His text came as a reaction to many non-economists questioning the recent Nobel prize being awarded to two opposing theorists explaining the same phenomenon ( Fama and Shiller ), but also (I believe) to a series of texts about economics and philosophy started in the NYT back in August, initiated by two philosophers Alex Rosenberg and Tyler Curtain writing a text called  "What is Economics Good For?" . Their main resentment towards economics is the imprecision in its predictive abilities. Or in other words, economics, with all its new modern analytical tools, not only couldn't predict the crisis, but is also failing to solve it...