The Political Economist

As 2014 is coming to an end, this is a good time to wrap up the year and look back at some of the events that passed us by, but most importantly it's a good time to present a quick overview of  the predictions I've made in the beginning of the year and assess how good they were.  I actually had quite a lot of hits, and only a few misses this year. I won't be modest in saying that I'm getting pretty good at this. Perhaps reading Bueno De Mesquita's "The Predictioneer's Game" , and Nate Silver's "The Signal and the Noise"  rubbed off some of its magic on me?   Here goes ( the predictions for 2014 were made on January 2nd 2014 ): The Hits:  1. "next year a stronger recovery should finally kick off in most of the Western world. Emerging markets will grow too, however less dynamically than before...In America the energy boom will reignite the recovery momentum...America's stronger growth will rub off on Europe as wel...

As I've stated in an earlier post , my recent trip to Germany has been full of positive experiences. Most importantly I gained insight into why Germany (i.e. its formal institutions) feels so strongly about the agenda for structural reforms and why it opposes any alternatives, particularly looser monetary policy and the idea that Germany should stimulate its economy to raise European aggregate demand. A country that was once called the " Sick man of Europe ", was the first to undergo painful reforms. Back in 2003 they started with preparation and implementation of the so-called Agenda 2010, which I covered on several occasions in the blog (see here or here ). The Agenda carried a series of reforms, but the most notable and important ones were the labor market reforms (i.e. Hartz reforms), because of which Germany was able to cushion the blow of the 2008/09 crisis. Germany had the lowest increase in unemployment (virtually none) of all European countries during the cr...

I've spent the entire last week in Germany, as a part of a delegation of Croatian economists and economic experts, organized by the  Konrad Adenauer Stiftung  (KAS). The idea was to visit the main economic and political institutions in Germany and open a dialogue on the problems facing Croatia, but primarily to learn about the experiences of the German solutions/responses to the crisis through the conceptual framework of their Social market economy (i.e. the German ordoliberalism ). We have visited a series of institutions, starting with the Bundesbank and the ECB in Frankfurt, and ending with the Ministries of Finance , Economy and Energy , Labour and Social Affairs , and even the Office of the Chancellor , all in Berlin. In the middle we visited a series of other noteworthy institutions like BaFin (the regulator of financial services), the Council of Economic Experts, DIW institute, the banking association, a few members of parliament and so on. I plan to write a separate...

The Atlantic had a very interesting recent text on the "Mysterious Death of Entrepreneurship in America" where they tell the tale two breads of entrepreneurs, one thriving and the other one hopelessly failing. At the same time when Silicon Valley entrepreneurs are soaring, the smartphone app market is booming, pages like Kickstarter are redefining the the very supply and demand for funding (providing a very interesting alternative to all sorts of traditional lending schemes), but on the other hand business dynamism overall is declining. Mom and Pop stores are dying out. BLS has the data:  Brookings has produced a study describing the very same process of entrepreneurial decline, where the declining business dynamism is obvious across all sectors of the economy. As I've written before, the  process of creative destruction  in the US has halted in the past years. And why is this worrisome? Because of the effect on job creation. No longer are US SMEs the key...

This weekend Germans celebrated the 25th anniversary of the fall of the Berlin Wall. A symbolic event that represented the end of an era (both the Cold War and communism in Eastern Europe were finally over); followed by a stream of euphoria and triumphalism from all sides. Looking back, 25 years later, some might say that the euphoria was misplaced: the world yet again resembles a Cold War status quo, where old foes are once again flexing their muscles in foreign territories. On the economic side, some Eastern European countries are arguably better off than before, while others remain in shambles of a failed transition.  In Germany, at first sight the convergence wasn't as successful as initially hoped. 25 years later the western Germans are still living better than their eastern compatriots. GDP p/c in east Germany is still 2/3 of that in the west, unemployment is higher, its demographics is worse, and net migration is still positive from east to west, leaving many eastern ...

More than a decade after Mancur Olson , and almost two years after James Buchanan and Elinor Ostrom , another champion of public choice theory has passed away , at the modest age of 92. Gordon Tullock , together with James Buchanan (both pictured below), founded the public choice school of economics, or as they saw it "the theory of politics without romance". Their legacy still remains the single most influential theory that explains how politics interacts with economics, and how one cannot fully grasp all the economic phenomena and outcomes without understanding the logic of politics. This is Tullock's (and Buchanan's) by far the biggest contribution to economics and even more so to political science. They taught us that politicians should be modeled and observed the same way market agents are modeled and observed; driven by self-interest and self-preservation. Before public choice theory governments were always modeled exogenously as a 'social planner'...

The ECB performed another stress test on Europe's biggest banks. Here is the full report and here is the brief presentation . This stress test represents a yearlong audit of Europe's largest lenders to evaluate their hidden pressures and potential problems that could arise if another recession hits them. The conclusion was that 24 EU banks (out of the 130 tested) are about 25bn euros short of the money they would need to survive another potential financial crisis (this is what a stress test does - it assumes negative economic scenarios such as sharp declines in GDP and in equity markets, or spikes in interest rates, unemployment and oil prices, and then uses a series of simulations to calculate the losses of banks in the next several years to evaluate whether or not they have enough capital to 'weather the storm'). However the ECB has stated that half of these banks which failed the test (12) have already raised enough capital to make up for the shortfall. Wha...

Here is a map showing the service of Amtrak train company , America's government subsidized passenger railroad company. The map depicts Amtrak's stations across the US, where the size of the circle corresponds to the number of passengers circulating on the given station. This was taken from a summer blog at the Economist  (they got it from here ) where they questioned the justifiably of some of Amtrak's regular lines across the country when almost a third of their passengers use the service across only three cities (New York, Washington and Philadelphia).  The Economist concludes: "...Amtrak's long-haul routes (you can see them on the map as the tiny blue dots stretching across most of the country) are money pits . But America's bizarre constitutional structure, which gives outsized influence to states with small populations , creates an incentive for Amtrak to maintain unprofitable services that keep influential senators happy.   If its long-ha...

It's that time of the year again - the Nobel prize announcements. As always, the last in line is the Sveriges Riksbank Prize in Economic Sciences in Memory of Albert Nobel, or colloquially the Nobel prize in economics, awarded yesterday. This year the honorary recipient was Professor  Jean Tirole from Toulouse, France, one of the most cited economists in the World. He is only the third Frenchmen to receive the prize, first one since Maurice Allais in 1988. In addition, this ended an almost 15 year domination of US-based economists (at least one recipient each year was a US-based economist - they still dominate the field, as in every other science btw ). Also he's one of the rare economists who got the honor as a single recipient (which became particularly rare in the past 15-20 years). The award was given for his contributions in the "analysis of market power and regulation". Basically Tirole studied monopolies and oligopolies (since most industries are act...

International trade seems to be one of the most misunderstood areas of economics for the average layman (the leading position of the most misunderstood area of economics is still being held by monetary policy, and the international monetary system in general. Why, I'll never know). People like to simplify things in order to understand them, and by doing so they often look at things from a one-dimensional lens, very often succumbing to Hazlitt's economic fallacies of focusing policy solutions on one area alone without taking into consideration the widespread effect on all groups nor the long-term impact. I've written on international trade many times before, emphasizing its importance in wealth creation, and I've also written on the persistent mercantilist fallacy , where people can't seem to shake off the notion that exports are 'good' while imports are 'bad'. How ridiculous! Almost as ridiculous as claiming that selling is good while buying is...

Back to blogging after a short break. I recently came across an older, 2010 article from Scot Sumner on Econlog , where he discussed the neoliberal revolution that began in the late 1970s. A very good text, explaining first of all the confusion over the term 'liberal' and what 'neoliberal' stands for (it "combines the free markets of classical liberalism with the income transfers of modern liberalism"), the confusion of associating neoliberal policies with right-wing political views (since most European countries that have actually been the best neoliberal reformers were social-democratic Nordic countries like Denmark - all hail the Nordic model !), to the very substantial evidence on how the most adamant neoliberal reformers quickly caught up the lost growth of the previous decades, particularly in terms of income p/c. From Britain's success in Thatcher times (where it grew much faster in the 80-ies and the 90-ies than most other European economies), to...