By Rok Spruk, on December 16th, 2009
On Sunday, December 13th, Paul A. Samuelson has died at the age of 94 (link).
He was on the economic giants of the 20th century. His ideas reshaped the economic science and revolutionized the mode of economic thinking around the world. With the mathematical rigour and analytical mastermind, his groundbreaking approach to economic analysis transfored the economic science into a dynamic problem-solving tool. In this short essay, I will present my reflections on the life and contributions of Paul A. Samuelson to the economic science.
I first came across Paul Samuelson in the year before I entered the university. In the first year of the undergraduate class, Samuelson and Nordhaus’s Economics was the assigned reading for the Introductory Macroeconomics. I read the textbook back and forth and I liked it; not because of its simplicity in introducing the analytical framework of economics but rather because of the clarity, intuition and incentives to undertake a rigorous pursuit of analytical economics at the theoretical and empirical level. In addition, Samuelson penetrated the application of linear programming to economic problem-solving.
Together with Milton Friedman, Paul A. Samuelson is the economic giant of the 20th century. Hardly any economist could take the same place in the scope of influence as an economic thinker. He conducted the Neoclassical synthesis. As an interested reader can verify in his Nobel prize lecture (link), Samuelson’s synthesis combined a Keynesian macroeconomics with a rigorous Marshallian microeconomics. In microeconomics, Samuelson extended the Marshallian analysis of partial equilibrium with strong mathematical articulation of demand and supply curves, cost curves and deadweight loss. On the abstract level, together with Abram Bergson, he constructed social welfare functions based on three marginal conditions and extracted from earlier work of Kaldor-Hicks-Scitovsky analysis (link). In macroeconomics, Samuelson further affirmed the dominance of Keynesian macroeconomics with a strong emphasis on the role of fiscal policy in stimulating full-employment output. In addition, he invented the term multiplier and the acceleration, the former relating to the effect of change in exogenous macro variables on endogenous variable (notably, output) and the latter referring to the partial adjustment of aggregate investment to the capital stock. Samuelson-Hansen multiplier-accelerator principles spurred the theoretical foundations of Keynesian economic policy. He also popularized Overlapping Generations Model which later became the corner stone of innovations in the modeling of aging population. In macroeconomics, Samuelson also proposed the so-called “Samuelson-Mishi condition” for the efficient provision of public goods. When the condition is satisfied, it implies that further substitution of private goods provision for public goods will result in a diminishing social utility.
Assuming Pareto efficiency, Samuelson-Mishi condition satisfied the criteria for Lindahl equlibrium. The equilibrium states that when individuals are willing to pay for the provision of public goods according to marginal benefits, it will be Pareto efficient. However, such condition is not compatible with the incentive mechanism since it requires the complete knowledge of individual demand functions for particular public good which could result in the asymmetric distribution of benefits in response to relevation-principled taxation.
As a student of international economics, I came across the influential theoretical work of Paul Samuelson. Modern international economics is a combination of mathematical economics, advanced microeconomics, game theory and international finance. One of the most interesting and penetrating areas of international economics are theorems in international trade. Under particular assumptions theorem postulate axiomatic explanations based on previous statements. Back in 1941, he proposed Stolper-Samuelson theorem together with Wolfgang Stolper. The theorem quickly became a source of academic debate. In its simplest form, the theorem states the following: assuming constant returns to scale and perfect competition, a rise in the relative price of good will lead to higher return on the factor which is used more intensively in the production of the good and to the fall in the return to the other factor. Stolper and Samuelson wrote:
“Second only in political appeal to the argument that tariffs increase employment is the popular notion that the standard of living of the American worker must be protected against the ruinous competition of cheap foreign labor… In other words, whatever will happen to wages in wage good (labor intensive) industry will happen to labor as a whole. And this answer is independent of whether the wage good will be exported or imported.”
The theorem showed that the international trade between two countries could lead to the opposition of international trade since the relative price of labor-abundant good in the high-wage country will be higher than the world price of that good, reflecting the relative abundance of capital or human capital. The theorem quickly became the main theoretical weapon of opponents to free trade. Even today, Stolper-Samuelson is the best explanation of why labor unions in high-wage countries oppose free trade agreements and further economic integration with low-wage countries.
Another important contribution of professor Samuelson is the so called Ballasa-Samuelson effect which states that higher growth productivity growth rate in tradable goods relative to non-tradables will lead to the real exchange rate appreciation. Balassa-Samuelson effect also went through numerous time-series regression. The effect has been tested 60 times in 98 countries. Cross-section regression studies of Ballasa-Samuelson effect were analyzed in 142 countries. In a vast majority, the empirical evidence of Ballasa-Samuelson hypothesis was supported. The main empirical findings emphasize that productivity differential between tradeable and non-tradable sector is positively correlated with differences in relative prices. The empirical evidence also supported Samuelson’s initial proposition that productivity differentials translate into higher purchasing power parity through real exchange rate appreciation.
In finance, Paul Samuelson penetrated the analytical aspects of lifetime portfolio selection. In 1972 he published The Mathematics of a Speculative Price which later became the ground of option pricing. Based on discoveries of Bachelier’s pioneering work, he laid the foundations of stohastic price movements and random forecasting matches. His pioneering work in financial theory of speculation and random walk (stohastic) movements in stock prices became the underlying theoretical foundation in the emerging financial industry. In an article entitled Probability, Utility and the Independence Axiom (Econometrica, 1952), he discussed the role of probability models in measuring the overall utility. In this sense, he relied on Keynesian defence of subjective theory of probability and argued that the subjective perception of probability does not inhibit the proper functioning of financial markets. In 1965, he published A Proof that Properly Anticipated Prices Fluctuate Randomly where he provided the foundation of the efficient market hypothesis that has been further developed by Eugene Fama and other scholars. For a detailed discussion of Paul Samuelson’s contribution to financial economics, see Merton Miller’s contribution in Britannica (link).
In addition to his theoretical and empirical work, he is the founding member of the Econometric Society and its president in 1951. In 1961, he was the president of American Economic Association. In the political sense, Paul A. Samuelson influenced the economic policy of the Kennedy Administration. In 1960, the U.S headed for the recession. President Kennedy, following Samuelson’s advice, enacted tax cuts and a balanced budget. In 1964, when Kennedy tax cuts were enacted, top marginal tax rate was reduced from 91 percent to 70 percent. The economic reasoning behind tax reductions was firmly laid in the Keynesian multiplier (1/(1+c)(1+t)). Paul Samuelson and Walter Heller (Chairman of Council of Economic Advisers during Kennedy Administration) argued that lower tax rate would stimulate consumption spending and boosted output and employment. Throughout the 1960s, the U.S economy experienced one of the longest periods of stable economic growth, favorable employment outlook and balanced federal budget. Here is how JFK, following Samuelson’s advice, supported the tax reduction (link). Also, David Greenberg’s article on Kennedy tax reduction is a worthy source of further information on that topic (link).
On Sunday, the economic titan passed away. He not only revolutionized the field of economic science but also spurred the interest for economics and popularized it in a manner that turned dismal science into a problem-solving science based on theoretical foundations and empirical verification of theoretical postulates. His approach to economic analysis combined Marshallian microeconomics and Keynesian macroeconomics which he joined together after the WW2 in a Neoclassical synthesis. Compared to other economic thinkers, he knew how to formulate theoretical postulates in a manner that stimulates the research interest for further investigation.
He will be missed and remembered as the giant of the economic thought and a titan of economic theory.
By Eldon Mast, on December 15th, 2009
And what a dead cat bounce it has been so far.
Since March the bull market run has continued swift and steep leaving many in the dust. On Monday the Dow plowed ahead and closed up 3,954 points higher than its low in March.
For those with the guts to invest with Warren Buffet early in the year, they have seen their portfolio now up over 60%. And it appears that the markets are just getting warmed up.
Despite high unemployment, consumers seem to be in a merry mood this year. As they look to 2010, they see a jobs picture improving and an economy that seems to be back on track.
Perhaps this is just a dead cat bounce. But it is doubtful that many have seen a deceased feline bounce this high this fast…
(Click to enlarge chart)
By Ajay Shah, on December 15th, 2009
I wrote two columns on trade liberalisation in Financial Express:
Also see:
By Claus Vistesen, on December 15th, 2009
If Friday was the day Macro Man had to pay for a wet evening in the company of alcoholic beverages, it was my turn yesterday as I spent the day trying to recover from a night where the amount of alcohol consumed had been beyond excessive. Thus, as I woke up, in agony, some time in the early Sunday afternoon feeling like the bloke below, I was initially filled with self-pity which gradually gave way to the realization that I had it coming [1].
The idea of hangover as repayment is not, as it turns out, an entirely useless allegory in the context of the themes that dominate the discourse on global markets and the economy moving into 2010.
The Eurozone’s Cracking Periphery
Last week we consequently saw the issue of Greek sovereign debt race to the forefront of the agenda with Fitch handing the Greek government an early ill-wanted Christmas present in the form of a downgrade from A- to BBB+ which saw yields rise significantly as well as it brought all kinds of nasty (but important) questions in relation to the Eurosystem/ECB. Firstly, it essentially raised the question of who exactly is going to pay for Greece should push come to shove and secondly; it raised a more technical question of eligible collateral at the ECB and whether the downgrade could, in the event it was followed by the other rating agencies, mean that Greek government bonds would loose their formal standing as eligible collateral at the ECB.
(quote: Bloomberg)
Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Papandreou’s two-month-old government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade.
The yield on Greece’s 2-year bond has surged 127 basis points to 3.15 percent this week, driving it above Turkey’s for the first time.
Edward has already discussed the significance of this Greek tragedy extensively and I really encourage you to carefully read his posts since I can say with the utmost objectivity that they offer the best current round-up of the flurry. Especially, the link between the ECB’s decision to withdraw enhanced credit support and the widening spreads in an intra-Eurozone context is absolutely crucial to understand in this case. The following is then a key point;
Well, using ECB facilities made sense for Greek banks for a number of reasons. In the first place, ECB funding is relatively cheaper for Greek banks than for their European peers since the ECB makes no adjustment to the rates charged for the perceived higher risk of the Greek banks. As Goldman Sachs point out a Greek bank operating in Greece pays the same price as a French bank in France, even though the French bank operates in a lower risk environment and should, in theory, be able to finance at lower rates in the market. But this is what enhanced liquidity support is all about, if only those responsible for the financial and economic administration of Greece understood the situation.
Secondly, the current spreads on Greek government bonds (around 200 base points over German 10 year equivalents) offer Greek banks an exceptional arbitrage opportunity, since by taking advantage of the uniform ECB liquidity rate Greek banks can buy higher Greek government bonds with a much higher yield than the government bonds which their French or German counterparts buy. Regardless of the risk implied through by the Greek CDS spread, Greek government bonds carry a zero risk weighting when calculating riskweighted assets for capital purposes. So for Greek banks this arbitrage carries no capital impact whatsoever. That is to say the Greek banks have been doing very nicely indeed out of the Greek sovereign embarassment, thank you very much. Hence it is not difficult to understand the ECB’s growing sense of outrage with the situation.
(…)
So to be absolutely clear, the Greek banks have been making money from arbitrage on ECB exceptional liquidity funding and in the proces financing the Greek government to carry out spending programmes while at the same time basically hoodwinking the European Commission about what it was they were actually up to. That is to say, the ECB has been effectively paying to lead the EU Commission straight down the garden path.
Needless to say, the ECB is not stupid and even if I, and others, have had hard time showing the direct link between ECB financing and government deficit spending, the situation described above is another matter. Yet, and for all the outrage the ECB and the commission must feel towards Greece (and perhaps Spain and Italy) the obvious problem is naturally what will happen to government yields in the Eurozone once Enhanced Credit Support is wound down.
Comments made last week by ECB Executive Board member Gertrude Tumpel-Gugerell suggest that while the ECB is indeed ready to play hard ball when it comes to normalization, it also looks with worry at the prospects of sharply rising bond yields going into 2010. It would then seem that normalization of monetary policy without a subsequent normalization of fiscal policies that would take the latter on to a more sustainable path entails huge risks for government finances. Moreover, and as Edward has already eloquently detailed, the ECB will not simply sit back and play ball through the continuation of liquidity provisions. And so, we end up with the overall problem with the Eurozone that one set of policy tools for a lot of diverse economies simply do not work and although the ECB may very well “agree”, they are not able nor willing to implement special policies for Spain or Greece.
Thus and in my opinion it is, by now, really a question of whether the commission/EU has the needed force and will to force upon Spain and Greece what would effectively be extreme harsh policies in terms of fiscal austerity. Such drastic prospects handed to SSpain and Greece by part of their very own brethern could only work if they also came with some form of guarantee from Germany and France that they would help with “help” here being a very clear commitment to . What you need to understand here is then that if the for example Greece and Spain were forced (committed) to move just within the boundaries of the growth and stability pact that stipulates a running fiscal deficit of no more than 3% of GDP, the subsequent deflationary impact would be massive and destructive; and while this may indeed be the inevitable route we much travel here it would be best, I think, realizing that this is exactly the case in a transparent fashion. So far though, both in Spain/Greece and the EU itself the recovery is “on track” and the longer we continue to believe this to be the case the harder it will to reverse. In line with the theme cast above, rising bond yields in 2010 may prove a timely wakeup call.
And in Japan …
On the back of the BOJ’s emergency meeting which effectively re-instigated QE with the promise to provide funding to commercial banks and where the BOJ was also, more or less, arm-wrestled by the MOF into committing to buy additional government debt notes, it seems that the mounting debt is beginning to worry parts of the new government. Consequently, Japanese Finance Minister Hirohisa Fujii was quoted last week of saying that government should “cap” bond sales next year at 44 trillion yen ($495 billion);
(Quote Bloomberg)
Japanese Finance Minister Hirohisa Fujii said the government must cap bond sales at 44 trillion yen ($495 billion) next year, in contrast with Prime Minister Yukio Hatoyama, who indicated he is prepared to abandon the pledge.
“Such a figure doesn’t need to be seen as a big problem for the Cabinet,” Fujii said at a news conference in Tokyo today. “We have to do it,” he said of the bond limit, which was the amount that the previous government budgeted for the current fiscal year ending in March 2010.
Naturally and with some knowledge of the general government debt situation in Japan which will at some point result in a prolonged hangover in the form a debt restructuring, one finds it hard to see this talk of a cap as nothing more but a proverbial drop of water in the ocean. However, it does signify that Mr. Fujii is tuned in to the likelihood that governments will struggle to maintain the fiscal tap open throughout 2010 even if you, in the case of Japan, is likely to be shouldered by a BOJ that stands ready to print the JPYs necessary to soak up large parts of the nominal supply. The point here is simply that Japan won’t naturally be immune to a general tendency in which governments will stand to face an increase in their financing costs in 2010.
The 2010 Debt Hangover
Given my emphasis above, it should be no surprise that I agree, at least in part, with Morgan Stanley’s Joachim Fels, Manoj Pradhan and Spyros Andreopoulos who recently rolled out the banks’ 2010 themes of which the main points are posted over at the GEF. Especially, I like the idea that as exit from monetary QE measures will not be synchronous with the scaling back of fiscal deficit spending, bond yields (especially in key economies) are likely to react as they are no longer supported by the bid from central bank funded liquidity be it from direct or indirect demand. This is interesting since if the former is a prerequisite for the latter we are likely to observe a battle (like the one currently observed in the Eurozone) in which policy makers will be prone to pushing central bankers into supporting deficit spending through outright government bond purchases or other liquidity measures.
Morgan Stanley for their part focuses on the likelihood that QE exit strategies will exactly be halted in their tracks in this context, something which there is ample precedent for in e.g. Japan.
(…) markets are likely to increasingly worry about longer-term fiscal sustainability, and rightly so. Importantly, the issue is not really about potential sovereign defaults in advanced economies. These are extremely unlikely, for a simple reason: most of the government debt outstanding in advanced economies is in domestic currency, and in the (unlikely) case that governments cannot fund debt service payments through new debt issuance, tax increases or asset sales, they can instruct their central bank to print whatever is needed (call it quantitative easing). Thus, in the last analysis, sovereign risk translates into inflation risk rather than outright default risk. We expect markets to increasingly focus on these risks in the year ahead, pushing inflation premia and thus bond yields significantly higher. Put differently, the next crisis is likely to be a crisis of confidence in governments’ and central banks’ ability to shoulder the rising public sector debt burden without creating inflation.
I agree that this would definitely imply an increase in the focus on government finances and most definitely provide a push to bond yields although I could easily imagine a situation in which bond yields of key economies were to rise regardless of the bid from central banks. Moreover, I have another rather large qualifier here. Consequently, and while I can see this kind of dynamics taking place in the UK, the US and especially in Japan (at least potentially), the Eurozone is an entirely different case. In fact, when MS notes that “they can instruct their central bank to print whatever is needed (call it quantitative easing)”, this categorically does not apply to the Eurozone where the ECB has pretty much made it clear that in terms of providing some form of “special” support to some economies this is not going to happen.
So what happens then? Well, we will see won’t we. One thing is for sure; just as I spent Sunday regretting decisions the night before, so will some economies likely face equal regrets in 2010.
–
[1] – Pictures taken from http://im.rediff.com and http://abhishekkatiyar.files.wordpress.com
By D H Smith, on December 14th, 2009
Via the terrific Girl on the Right Blog, these helpful suggestion from A. Nonymous:
Most of us are not doing God’s work trading credit derivatives at Goldman Sachs. You may be stunned when I tell you this, because I sure as heck was when I found out: the TARP program covers none of our credit card bills. Like, zero. All of that means another tough, tough Christmas, money-wise. The desperate economy calls for desperate measures to economize at Christmas. Here are twelve ways for the twelve days:
1. The first thing to do is to keep doing more of what you’re already doing: bitching and complaining. Cry poor mouth to everyone. Tell everyone you know how tough it is. Make a Bill Clinton face while you share people’s pain and make them feel yours. Next you say, “You know, let’s make it easy this year, you don’t have to buy me anything.” Of course, that means you don’t have an obligation to buy them anything! That works with everyone except your kids.
2. Tell your young kids Santa’s not real. Kids as young as four are old enough to get real in this day and age. In Indonesia and Pakistan kids are out sewing soccer balls to support a family at that age! So just explain to them that it’s all a scam meant to con them into good behavior, tell them how much you know they wouldn’t want to connive in such a fraud, and assure them you know they’ll behave perfectly well without bribery. They’ll thank you. Someday.
3. What about the older kids? They’re all so eco-conscious these days, and that’s an opportunity for the canny cheapskate. Just tell them instead of lame games for Wii and Xbox this year, you’re saving the planet on their behalf by planting a tree with their name on it in the Amazon! You can even work up some kind of authentic-looking certificate on the computer! People in the carbon-credit business are becoming billionaires doing just that, by the way.
4. You still feel you need some real gifts? Well how about re-gifts? You’ve been given things you never opened — herbal soap, crème brûlée mix, thermal bags for keeping wine cold — pass the parcel! Just try to remember not to give it to the person that gave it to you!
5. Books are such a popular item at Christmas. So many books can be had for free! Libraries put out boxes of new, unread, unmarked books that they want to get rid of. These include books about business, money, and investing that are still very attractive and were timely when they were published last year, but are entirely irrelevant under current conditions. Also look for container-loads of books about the Bush and Clinton administrations, and anything by Dick Morris. I don’t normally advocate illegal behavior, but one exception could be Saul Alinsky’s Rules For Radicals. Bookstores are full of this one – it’s the Obama playbook! Somehow it just seems right to go in there and liberate a copy or three, comrade!
6. One of my cheap-ass friends used to always joke, “I wanted to buy you a big plant for Christmas, but GM wouldn’t sell.” What a laff riot, and it got him off the hook for ever buying anything! Of course, now GM desperately wants to sell all its plants, so the 2009 revision of that joke is, “I wanted to buy you a big plant for Christmas, but the Chinese bought them all!” Ha ha! Your friends
will be falling over, and they won’t even notice you didn’t buy a round of drinks!
7. Speaking of drinks, ‘tis the season to bend the elbow, so herewith some recommendations from Chateau Wang. First, drink cheap beer. The cheapest stuff in my local is also the original and greatest . . . it’s Miller at $3.99 a six-pack, compared to $5.29 for Miller Light. That make any sense to you? Me neither, they take stuff out and charge you more? Forget that! Next, drink cheap wine. André’s Cold Duck is back, it’s $4.99, and it’s as good as it was when you were fourteen and sneaked it in the kitchen after the Thanksgiving dinner was cleared away. (You know you did.)
8. As for food, the trick to economizing on food is not to cook any. Instead, head over to your brother’s house and scrounge Christmas dinner there. You need to go unannounced, early in the day, in case they have the same idea of coming over and scrounging from you. If that was the plan and your sister-in-law makes no move to put a turkey in the oven, give her one of your Miller’s and she’ll at least come through with some Dinty Moore. Note: If you were to show up on the doorstep at 7:00 AM, there are secondary benefits – you can reconnect with the Christmases of your childhood, when you punished everyone by getting up too early, and you’ll get breakfast too.
9. Here are the hard liquor recommendations from Chateau Wang. You want to drink cheap, cheap liquor too. The venerable and cheap bourbons and ryes from Old Huckaby, Rebel Heaven, and Elihu Walton lack the sophistication of single-malt Scotch, but they have all of the wallop! Also consider cheap and nasty tequila like Don Cheech and Señor Pepe brand – they mix great with green Gatorade!
10. You don’t feel you can scrounge 100% at your sister-in-law’s house? Try this recipe that will cost about 25 cents: Mix two cups of flour with a quarter teaspoon each of baking power and salt, and add up to two cups of water to make a heavy dough. Add a few raisins if you have any, tie it up in a clean handkerchief, and boil it in water until it’s time to go home. Then discard it. Tell them it’s the dumpling Oliver Twist had in the workhouse at Christmas. Your brother’s family doesn’t read! They won’t know! Ha ha! Give them a copy of Rules For Radicals.
11. Christmas trees are $60 at the VFW, and wreaths are $20. That make any sense to you? Me neither, so here you have many ways to go. You could wait until 4:30 on Christmas Eve, by which time the guy working at VFW will have gone home and abandoned whatever Charlie Brown Christmas trees he has left. Freebie! Option two, you may live in a place where trees are plentiful all around – neighbor’s yards, parks, and so on, if you “catch” my “drift” (wink wink!) Freebie! Another idea, if Border’s Bookstore actually survives far into this Christmas season, you may be able to buy one of the jokey artificial trees they had there last year – these things were some kind of intellectual joke, made with like a few bare wires covered in tinsel; this choice shows a certain post-modern hauteur which goes very well with Dinty Moore and Cold Duck. It’s about $5.99. But you can make it yourself, using wire coat-hangers, spray adhesive, and metallic flock or confetti. That’s a good thing!
12. Finally, we have to get control of this holiday again. Twelve days my wonderful arse! Our Jewish neighbors get by with just eight nights for Hanukkah, and even that is way too much noodle pudding. Let’s do away with this business of Christmas as a 3-month long retail opportunity. The retailers have been unloading container loads of useless crap from Yiwu, China into their Christmas displays since just after Labor Day! With the cheap and nasty Christmas I have outlined here, we can let them know that that is just not the way we want to be living anymore.
Have a happy.
By Winton Bates, on December 14th, 2009
This follows on from my last post: Do all well-being indicators tell similar stories about human flourishing? The indicators that I looked at did tend to tell similar stories – countries that have high average income levels also tend to have high rankings on other well-being indicators.
The purpose of this post is to extend the analysis to consider the institutions that are associated with human flourishing. There is a great deal of evidence that economic freedom is associated with high income levels and other aspects of human flourishing such as health and education. Evidence on the effects of democratic institutions is less clear, although the opportunity for citizens to participate in political processes may itself be viewed as an aspect of human flourishing.
A recent study by Michael Stroup (‘Economic freedom, democracy and the quality of life’ World Development, 35(1) 2007) has examined interactions between economic freedom and democracy on measures of health, education and disease prevention. The study found that while greater economic freedom consistently enhances a range of well-being measures, democracy has a smaller positive influence.
I accept that leaders (and potential leaders) of non-democratic countries with low levels of economic freedom may need to consider whether they should give higher priority to democracy or economic freedom when devising strategies to improve the well-being of citizens. There are good reasons, however, why democracy and economic freedom should be viewed as complementary rather than competing objectives. For example, rule of law is less problematic if there is a mechanism for political leaders who are suspected of considering themselves to be above the law to be voted out of office. Similarly, control of corruption is easier in a democracy where the public has power to dismiss corrupt leaders. It is possible for democratic rights to result in greater rent-seeking and less economic freedom, but non-democratic rulers do not necessarily promote economic freedom and widespread prosperity – some seek to benefit themselves and their cronies by impoverishing the general public.
The following table presents indicators of the performance of various societies in relation to two indexes of economic freedom and the World Bank’s governance indicators. As in the table in the preceding post, countries have been ranked by per capita income levels. The ratings of countries with performance in the top quartile for each indicator are shown against a green background, those for the second quartile are shown in yellow, the third quartile in orange and the fourth quartile in red.
The table shows that all the institutional indicators tend to tell a similar story about performance of various countries. There are, however, a few exceptions for ‘Voice and accountability’, reflecting particularly an absence of democratic institutions in some high-income and upper-middle income countries. In the case of United Arab Emirates and Kuwait this is associated with relatively poor performance in a range of well-being indicators, but that is less evident the case in Singapore and Hong Kong (as can be seen by comparing information in this table with the one in the preceding post).
All the indicators are strongly correlated with per capita income levels. A few countries manage to have high per capita incomes without a high level of economic freedom and good governance – but only by producing a huge amount of oil.
Indicators are defined and information sources are presented below the table. Hint: Click on the table for a clearer picture.
   Notes:
Income index: Real GDP per capita (rgdpl) for 2007 from the Penn World Table, expressed as a fraction of per capita GDP in the United Arab Emirates, the country with highest per capita GDP. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.
Economic Freedom (Fraser): According to the Fraser Institute’s definition, individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Data from the 2009 report (for 2007).
Economic Freedom (Heritage): The Heritage Foundation defines economic freedom as the right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. Data from the 2009 report.
Voice and accountability: Index compiled by the World Bank capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.
Government effectiveness: Index compiled by the World Bank capturing perceptions of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.
Regulatory quality: Index compiled by the World Bank capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.
Control of corruption: Index compiled by the World Bank capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests.
By Eldon Mast, on December 14th, 2009
The majority of US consumers are no longer on the sidelines. On Friday the numbers point to strong retail sales for two months in a row.
Overall US retail sales in November spiked by 1.3% after a healthy 1.1% gain in October. November’s increase was well above the consensus estimates breaking above even the most optimistic estimate. Keep in mind that these numbers are significant components of the overall GDP for the US. When annualized they equated to a heady 13.2% increase in October and 15.6% in November.
Sales were led by a 6.0% month over month jump in gasoline sales with additional strength in electronics & appliances. Auto dealers’ month to month sales were also up 2.0%.
Categories that also rose were building materials & garden equipment, food & beverage stores, health & personal care, sporting goods & hobby stores, general merchandise, non-store retailers, and food services & drinking places.
Friday’s reading indicates the consumer has much more strength than most anybody had previously believed. There is no doubt now that the strong retail sales numbers will result in a Q4 GDP reading well above Q3.
By Eldon Mast, on December 11th, 2009
A lower value of the dollar has continued to improve the competitiveness of U.S. exports. That undoubtedly accentuated the decline in October’s trade deficit to $32.9B. The declined followed a September deficit of $35.7, which was revised even lower than initial estimates given last month.
In more good news, exports jumped. It was their sixth month straight month of increase. The latest figure was quite a bit lower than consensus expectations for a deficit of $37.0B.
But perhaps the best news in Thursday’s report is that exports are benefiting from healthy demand abroad. Exports were led by a $1.2 billion up tick in capital goods in October followed by gains in demand for consumer goods as well as automobiles.
Today’s international trade report continues the string of evidence pointing to a strong Q4 GDP.
By Rok Spruk, on December 11th, 2009
From The Economist (link):
“Nevertheless, it is unclear how a transatlantic row can be avoided along the lines of the spat in 2001, when a planned merger between General Electric and Honeywell caused a stink. The commission worries that a union between Oracle and Sun would reduce competition in the market for corporate databases. Oracle is the world’s biggest seller of proprietary software to run such databases, with a market share of nearly 50%. Sun is the owner of MySQL, the most widely used “open-source” database software, which already competes with Oracle’s products and could become more of a threat in the future. Neelie Kroes, Europe’s competition commissioner, spoke of her “serious concerns” that the deal would reduce choice and lead to higher prices.”
By Trace Mayer, on December 11th, 2009
The FRN$ has been the world’s reserve currency for decades. As a result, the breadth and depth of the capital markets add tremendous liquidity to the fiat currency illusion.
This is one of the reasons the FRN$ is near the bottom of the liquidity pyramid and rises in value with each round of the credit contraction. But as continuing pressure keeps being added to the FRN$ through bailouts, inflation, swaps, etc. it will hasten towards the fiat currency graveyard as commodity currency alternatives gain prominence.
The secular gold bull market has entered stage two and continues pulling in capital. This has led to a large multiple of the gains inverse to the FRN$ decline. But more importantly and more often gold and the FRN$ are strengthening together. This is because of their respective positions in the liquidity pyramid.
So as the FRN$ continues its evaporation the Ancient Metal of Kings will do what it has always done; preserve capital. As it has performed this function over the last eight years it has also increased in purchasing power. As gold enters the third stage of the bull market, which is still likely several years away, it will strengthen even more often while the FRN$ both advances and declines.
HOW TO PREDICT THE PRICE OF GOLD
Jeff Clark, Editor, Casey’s Gold & Resource Report
Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.
The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.
While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.
The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?
And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?
Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.
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