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 ...