The Political Economist

A bit of international relations and foreign policy this time (a slight digression from economics). Consider the following recent events: A passenger flight  gets shot down by a surface-to-air missile in the middle of Ukraine by pro-Russian separatists amid growing concern and discontent over the country's future. The global superpowers have been flexing their muscles over Ukraine far too long without any positive solution near the horizon. The EU and US are blaming and sanctioning Putin, with further frictions bound to happen. Israel is issuing a full-blown attack on Gaza aimed at destroying the Palestinian terrorist group Hamas, with again hundreds of civilians being killed in rampant bombings . Israel seeks to destroy underground Gaza tunnels , frequently used by Hamas for terrorist attacks. Almost 90% of Israelis support the attacks. The situation in Syria is still far from being resolved, Iraq and Afghanistan are in shambles for the past 10 years, Iran's nuclea...

Recently I came across a new interesting index  of economic development measuring the opposite of the usual wealth, prosperity, happiness and income p/c. This one ranks countries in reverse order, it measures their relative "misery" with respect to their unemployment situation, inflation and bank lending - so all the stuff that makes people poor and hence miserable.   Steve Hanke of the Cato Institute  and John Hopkins University, used the data from the Economist Intelligence Unit ranking 89 countries. He applies a very simple methodology: sum of inflation, bank lending and unemployment rates minus year-by-year per capita GDP growth (so as to offset the temporary negative effects of the former variables). He got the intuition from Arthur Okun and Robert Barro who used things like inflation, unemployment and government bond yields to measure relative misery levels in the US during different Presidential administrations. The first apparent criticism to such an approa...

In last week's issue of the Economist there is an excellent piece linking the usage of ideology in political rhetoric and rampant corruption. Kleptocrats like to (need to) use ideology to either justify their political goals or to distract voters from the real issues at stake or from their corrupt activities.  They use the example of two leaders who enjoy expressing their autocratic power over their respective countries, even though they are formally presiding over democracies. You might have guessed it - they use Russia's Putin and Turkey's Erdogan as examples (in addition to China's corrupt ruling elites). Both of them like to present themselves as leaders which can bring back the glory to their once great nations. They use conservative ideology to establish themselves (albeit unsuccessfully) as moral high-grounds in their countries, while at the same time their cronies continue without any restriction to expropriate their nations' wealth.  This could eas...

According to the classical international trade theories of Adam Smith and David Ricardo countries specialize in producing those goods and services in which they have a comparative advantage . Comparative advantage simply means that some countries can produce certain goods more efficiently (at a lower cost) than others. Be it geography, climate, or the presence of certain key resources (land, raw materials, oil, quality labor, capital), each of these may carry a potential advantage making one country relatively better than other countries at producing a particular good.  Relative is the key word here as comparative advantage doesn't imply absolute advantage. Some countries can probably produce all goods better than other countries, but this doesn't mean they have to. They can specialize in what they do best (with respect to all other countries) and leave the production of things they are relatively less good at to other countries and import it from them at a lower cost....

The fourth (and final) part of the PE of debts and deficits closes with the last three hypotheses explaining debt accumulation in the past 40 years in many industrial economies. In the end it includes the suggested literature used in all four posts: Intro , Theory , Hypotheses pt 1 . 4. Models of distributional conflicts Theories about distributional conflicts suggest that delays in addressing the deficit issue reflect war of attrition among parties that cannot agree on the distribution of the fiscal burden required for consolidation. Such situations could occur particularly in weak coalition governments that do not share the same distributional agenda. For example, when an external shock influences the government budget so as to increase the deficit, the social planner government (a standard benchmark assumption in political economy models) would immediately choose to close it either via revenue increases or spending cuts (he would enact a stabilization effect), but a coali...

Continuing with the overview of the politics behind debt and deficits, in this post I present the dominant hypotheses aimed at explaining the vast debt accumulation on the past 40 years in many industrial economies.  The debt dynamics in the past few decades has prompted a new stream of research that focused on political economy of public deficits and debt. A useful overview of this literature can be found in two papers by Alberto Alesina and Roberto Perotti (1994) "The Political Economy of Budget Deficits", and Alesina and Perotti (1996)  "Budget Deficits and Budget Institutions". The following six groups of models (presented in the above-mentioned papers) try to explain the political economy of the budget process: Models that focus on opportunistic behavior of policy-makers and the naivety of voters, who are subject to fiscal illusion;  Models of intergenerational redistribution;  Models of the public debt as a strategic variable;  Models of distri...