By Thersites, on January 7th, 2010
In tomorrow’s episode of John Stossel’s new show on Fox Business, he will address the question, “Who is Wesley Mouch?” in speaking to the parallels between Atlas Shrugged and contemporary America. As one might expect, in my view it seems as if almost all businessmen (given their predilection towards using government to destroy markets to their own advantage) in one way or another embody the qualities of Wesley Mouch.
One exception who will be on Stossel’s program is John Allison, an executive at BB&T Bank, who staunchly opposed TARP, has repeatedly refused to use the law to plunder the property of others and as one might guess is an ardent Austrian-school libertarian. In a scene reminiscent of the smoke-filled rooms of Atlas Shrugged, Allison divulged at an NYU lecture this past fall that the Feds threatened to go in and audit any bank that wouldn’t take government funds, forcing healthy banks to comply so as to cover for the fact that the government was only propping up a select few sick ones (at the expense of the solvent I might add).
In response to Stossel’s call in the aforehyperlinked column for suggestions for a follow-up show on “crony capitalism,” I posted:
John,
If you want to talk about crony capitalism, it may pay to have Burton Fulsom who wrote “The Myth of the Robber Barons” on the program. I think the key is to delineate between political entrepreneurs and market entrepreneurs, something which he does astutely in that book.
Political entrepreneurs seek to use government decrees to profit, largely by cartelization, monopoly advantages and other barriers to entry, while market entrepreneurs generally seek to win profits in the market by merit – by producing the best product at the cheapest price.
More generally, the Mouch problem lies in the fact that while initially businessmen extol the virtues of little regulation, low barriers to entry and minimal governmental interference generally, once they become successful, out of self-interest they support any and all legislation that will cement their position in the market. They support all of those things anathema to the free market that they had used to their advantage in the first place.
This is akin to the economic plight of America as a whole. While up until the early 20th century (though some libertarians will argue that it was really only up until the time of Lincoln), America functioned under a largely laissez-faire economy, with the wealth and progress generated by this economy, we forgot about the virtues that led to our success and rewarded those tending towards failure. We created a welfare state from the riches of a relatively free state, throwing under the bus the very principles that elevated to us to our position as a great nation.
By Eldon Mast, on January 7th, 2010
Global factory activity continues to accelerate. According to business managers worldwide, manufacturing vivification is now at the highest rate in nearly four years and new orders growth is now at a rate not seen in more that five and a half years.
The global PMI index is produced by JP Morgan with input from research and supply management organizations around the world. The firm’s report on its PMI was released on Monday and combines survey data from countries including the United States, Japan, Germany, France, Britain, China and Russia.
“December PMI data indicate that the global manufacturing sector approaches 2010 on a positive footing,” said David Hensley of JP Morgan.
The global employment index has also moved into positive territory for the first time since March 2008, indicating net job growth on a global scale.
Earlier on Monday additional data showed Chinese manufacturing activity expanded at the fastest rate on record in December.
Also on Monday, the Institute for Supply Management said the U.S. manufacturing sector grew for a fifth month in December, with the index hitting its highest level since April 2006. If the ISM’s PMI for December is annualized, it corresponds to a 4.6% increase in US GDP annually.
Perhaps the best news in the ISM report is new orders level which — despite a run of very strong gains in prior months — jumped again. The new order strength points to continued rising activity in the US manufacturing sector in the months ahead.
Production continues to show strong monthly gains and firms now report adding to their workforces again.
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By Claus Vistesen, on January 6th, 2010
This is really a follow-up on my earlier piece today and my last 2009 piece on Eurozone imbalances and internal devaluation. In particular, I want to point you towards two things. Firstly, Edward has, no doubt after a long hard thought, come to the conclusion that Greece should be sent to the IMF or rather that it is ok to ask the fund for help in order credibly sort out the mess in Greece (and possibly Spain). This is not news as such since the proposition of sending ailing Eurozone countries to the IMF has been on the table for a while now. The main question basically is, as it has always been, whether the program proposed by Greece in conjunction with the EU and set in relation to what ever we might have left of the stability and growth pact (SGP) is really credible as a working solution.
Meanwhile, Danske Bank had a very interesting research note out today by economists Gustav Smidth and Frank Øland Hansen on the sovereign situation in the Eurozone and the potential for correcting not only in the immediate short term (i.e. preventing a collapse), but more importantly how to get debt to GDP ratios back on a solid footing within, let us say, a decade or so. As it turns out this is very difficult.
These are challenging times for public finances across Europe. Reducing debt to the Stability and Growth pact’s upper limit of 60% of GDP will not happen any time soon for most euro area member states. Indeed, even 100% of GDP appears an immense task for several countries. The situation is most dire in Greece and Ireland, which are to be found in the fast track lane for default in our mechanical “no change scenario”. However, it is still not too late to avoid default. If the plans put forward by Greece and Ireland are strictly adhered to, it would stop the debt-to-GDP ratio from sky-rocketing.
Now, Danske Bank’s argument is based on some simple algebra of the government’s budget constraint and some equally simple, one would presume, arithmetic. Basically, the gist is as follows and for all the attacks on Neo-Classical economics accounting, this argument is actually pretty solid.
Therefore, high nominal GDP growth and low interest rates on sovereign debt allow a country a larger deficit-to-debt multiple without increasing the debt-to-GDP ratio. A country with nominal growth lower than the interest rate level will on the other hand have to run primary surpluses in order to keep the debt-to-GDP ratio steady.
This is an important point to take away. Basically, it means that if you can maintain a high level of nominal growth (and what ever amount of primary deficit you run (in principle!)) the debt-to-GDP ratio can be kept in check. We don’t need to entertain this possibility a lot here I think and simply note that this is not likely to be relevant for many of the Eurozone economies going forward. This goes especially for those who are in the biggest trouble right these very days. In fact, the whole rigamole begins by taking to heart chart 4 and 5 in Danske’s research note which shows that while Eurozone economies, in a pre crisis context, enjoyed high GDP growth (nominal) and low funding costs it is expected to be the exact opposite going forward.
This represents a gordian knot since it means that not withstanding the extremely tough austerity that Greece, Ireland and Spain (etc) now need to take in order to get the ship back into the wind through forced primary deficits, they cannot be sure that this in itself will bring the debt to GDP back on track. Much will of course depend on global yields here and the general discourse on fiscal adjustment and how sovereign risk (rising across the board) will quantitatively be reflected in bond yields.
Yet, I don’t want to focus so much on bond yields (although I do think they are important); rather I would like to focus on the other part of the equation as it were, namely that of nominal GDP. You see, this is where it not only gets complicated but also outright problematic. Consequently and since Greece, Spain, and Ireland are members of the Eurozone, the have no independent currency and thus the nominal exchange correction that would almost certainly had occured had these economies had a floating exhange rates now must occur through internal devaluation or outright price deflation.
So this is not only about public debt but also about net external borrowing which these economies now have to shed in order to become competitive and essentially in order to achieve growth in nominal GDP. However, in order to reach this point they need a large and severe bout of deflation exactly, one would imagine, brought about in part by running primary surpluses to simply shock-force the economy onto a more sustainable path. Notwithstanding the obvious cost on the employment from this process it has another very tangible costs. Price deflation thus, through its effect on nominal GDP, increases the real value of the debt and it is exactly this mechanism and how it intersects with the perspective offered by Danske Bank which is so damn important to understand here. And incidentally, as an aside, it is this point which Edward has been desperately trying to pass on during the past two month’s worth of writing (see overview from link above).
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PS1: I am lining up a paper on Eurozone imbalances (quantifying them essentially) which will also tackle the issues mentioned above in some detail.
PS2: Danske Bank’s piece is worth reading in its entirety.
By Ajay Shah, on January 6th, 2010
In recent years, an empirical literature has begun to prise apart the management process of universities, seeking to identify the features which cater to excellence. In a previous blog post I summarised five useful ingredients that enable successful universities, from a working paper by Philippe Aghion, Mathias Dewatripont, Caroline M. Hoxby, Andreu Mas-Colell and Andre Sapir:
- No government approval required for budget; budget-making happens at the university and university alone.
- Reduced government role in the core funding of the university.
- High inequality of wages: two academics of the same seniority and rank should get different wages.
- Full flexibility in recruitment of students.
- A big role for competitive processes for gaining funding for research.
Today, on voxEU, I read an article by Amanda Goodall which identifies a sixth beneficial feature:
6. It helps if the university president has strong scientific accomplishments.
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By Eldon Mast, on January 6th, 2010
China’s manufacturing sector has likely grown to the fastest pace in more than five years, a December survey of purchasing managers reported early Monday.
The HSBC Holdings Plc and Markit Economics purchase manager’s index rose to a seasonally adjusted 56.1 from 55.7 in November. It was the highest reading for the index since April 2004.
The report sees China’s growth accelerating to 9.4% this year from an estimated 8.5% in 2009 as the Chinese government continues its stimulus and other world economies recover from the 2008 financial credit crisis.
Lu Ting of the Bank of America-Merrill Lynch in Hong Kong said, “China’s strong recovery momentum will boost manufacturers’ confidence and improved earnings will help them to increase investment and output.”
Chinese manufacturing firms’ profits rose 7.8 percent in the first 11 months of last year to a record $379 billion.
Like the US Federal Reserve, China officials have pledged a policy that will not make the mistake of ending stimulus policies too soon — a stance that continues to contribute to the record growth acceleration.
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By Claus Vistesen, on January 5th, 2010
I am rushing this week so I won’t have time for long and analytical pieces (no doubt to the joy of many  ), but I would be remiss if I did not point out this one for my readers which highlights the predicament Greece currently finds itself in even if a private bid is not significant in itself.
(quote Bloomberg)
Greece may borrow privately through banks by the end of January, the second such transaction in as many months, following cuts to the government’s credit ratings, according to the country’s debt manager. The decision on whether to use a private placement will depend on reaction to the country’s stability and growth program, Spyros Papanicolaou, the managing director of Greece’s Public Debt Management Agency, said today. The country had earlier considered offering bonds through a syndicate of banks.
“We are yet to decide whether to go ahead with a syndication,” Papanicolaou said today in a telephone interview from Athens. “We might do a private placement instead. It will depend on how the stability and growth program is received by the European Commission and the markets.”
Greece, whose credit grade was lowered by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service last year, sold 2 billion euros ($2.9 billion) of floating-rate notes through a private placement in December. The government hired National Bank of Greece SA, Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA and Banca IMI SpA for the transaction, which Finance Minister George Papaconstantinou said was part of the country’s financing program for this year. In private placements, issuers offer securities directly to chosen investors rather than sell them through an auction or via a group of banks in a syndicate.
The main question is of course. Who holds the bid in these private auction and will they remain bidders as we move forward?
By Ajay Shah, on January 5th, 2010
Many people believe that the exchange rate regime (i.e. the monetary policy regime) of each country is its own sovereign choice.
In the Great Depression, we saw the harmful effects of the exchange rate mercantalism that is feasible with fiat money. This was a key motivation for Keynes and others in their design of the post-war order. The IMF was supposed to be a multilateral body that would help bring pressure on countries to move towards good sense through `ruthless truth-telling’. This didn’t work out too well. The IMF got itself into a box where it would not say anything about exchange rate regimes. To some extent, by standing ready to help countries that got into a currency crisis, it has helped perpetuate exchange rate pegging.
For the present discussion, I want to emphasise the distinction between small countries who can pretty much do as they like as opposed to systemically important countries where actions have a significant impact upon the world economy at large. In this approach, the four interesting questions are:
- In the selfish maximisation of one country at a time, what is the optimal choice of monetary policy regime / exchange rate regime?
- What the mechanisms and empirical magnitudes through which the exchange rate regime choice of one country imposes externalities on others? I.e. what is the consequence of the Nash equilibrium?
- What is an ideal solution for the world, which combines optimality for the local economy with good system outcomes?
- What international institutional arrangements can help push the system towards the right solution?
On the first question, some people believe that exchange rate mercantalism is good for the country. You don’t find much of this amongst professional economists.. As Merton Miller said: If devaluations could make a country rich, Argentina would be the richest country in the world. For a careful rebuttal of this loose thinking, done by one of the world’s top economists, see these discussant comments by Michael Woodford about a paper with this view by Dani Rodrik. As Andrew Rose said in a discussant comments at the Neemrana conference about a similar paper by Surjit Bhalla: This is either a home run or it’s totally wrong.
I feel that exporting is great for growth, but only when this exporting involves genuinely facing the market test of the global market. If a country exports based on subsidies of some sort – which I term `fake exports’ - then the gains in productivity and capability do not come about (link, link). My sense is that in China also, intellectuals no longer buy the `distort everything for exports’ idea.
As with every other export-subsidy or protectionist scheme, this has more takers amongst non-economists than amongst economists. It’s slow hard work, banging these down over and over.
On the second question, see Paul Krugman: link, link.
On the third question, I have a comment on `global imbalances’. Some people see big numbers for current account surpluses/deficits as being intrinsically flawed. I look upon them as being the success of globalisation, as a repudiation of the Feldstein/Horioka problem. It is in an autarkic world that you see Feldstein/Horioka problems, where capital flows are not large. If we are to get beyond the Lucas paradox, and get back to the massive `development’ capital flows of the First Globalisation, it’s going to require large sustained BOP surpluses in some countries and deficits in others.
As an example, the best deal for ageing OECD is to buy securities in young countries like India today, thus spurring their growth today. Over the next 50 years, these securities would yield a flow of widgets back and thus support consumption of their elderly.
Hence, I would say the question is: How can the world be made safe for large BOP surpluses/deficits? This is a more interesting and important problem, instead of saying to ourselves: How can the world eliminate large BOP surpluses/deficits.
By Eldon Mast, on January 5th, 2010
A 48-hour New Year’s eve free-will offering netted a Southern California mega-church $2.4M to close their books on 2009.
Pastor Rick Warren of Saddleback Church posted his URGENT LETTER on the church website on Wednesday and by close of business Thursday church members had stepped up to close their critical budget deficit of $900,000.
Warren’s Wednesday morning letter stated, “With 10% of our church family out of work due to the recession, our expenses in caring for our community in 2009 rose dramatically while our income stagnated.”
But by Friday morning, the pastor was humbled and amazed: “In spite of a media culture that thrives on bad news and is typically clueless about how churches actually work, and in spite of hatefulness and insults by some who immediately jumped to the wrong conclusion – the church of God marches on, and once again God surprises all of us.”
The letter outlines the church’s accomplishments in 2009 and details how the donations would be used, including the church’s food pantry, homeless ministry, counseling and support groups.
“This is pretty amazing,” Warren told his congregation during a Saturday service. “I don’t think any church has gotten a cash offering like that off a letter.”
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By Ajay Shah, on January 4th, 2010
On 5 October 2007, I had written a blog post Does urban India favour liberal economics?, where I had used survey data released by the Pew Institute, which measures attitudes of roughly 45,000 people worldwide with roughly 2,000 in India. Their sampling mechanism has an urban bias.
Today, I saw current information, and cross-country comparisons, on their website.
Support for the free market
The wording of the question was: Please tell me whether you completely agree, mostly agree, mostly disagree or completely disagree with the following statements: Most people are better off in a free market economy, even though some people are rich and some are poor. `Agree’ combines “completely agree” and “mostly agree” responses. `Disagree’ combines “mostly disagree” and “completely disagree.”
The results, showing the proportion of those polled who `Agree’:
In 2002, India was halfway in the list with 62% support. In 2009, India is at the top of the list, with 81% support.
Support for international economic integration
The wording of the question was: What do you think about the growing trade and business ties between (survey country) and other countries – do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?. `Good Thing’ combines “very good thing” and “somewhat good thing” responses. `Bad Thing’ combines “somewhat bad thing” and “very bad thing.”
The results:
Here also, India is now at the top of the list in terms of support for plugging into globalisation.
Why is this happening?
I think there are three factors at work.
First, everyone in India instinctively knows that when we tried our hand at socialism, GDP growth crashed, and vice versa:
| 1950s |
3.59 |
| 1960s |
3.96 |
| 1970s |
2.94 |
| 1980s |
5.58 |
| 1990s |
5.68 |
| 2000s |
7.22 |
The worst of India’s years — 2.94% average GDP growth with a fast growing population — were in the peak of Indira Gandhi’s socialism of the 1970s. As India stepped away from that, things got better. This process began with the Janata Party in 1977, was carried forward by following governments, and yielded results from the early 1980s onwards.
These changes were big enough and rapid enough that they are as persuasive as a natural experiment. Comparing socialist India vs. unsocialist India is almost as persuasive as comparing East Germany vs. West Germany. So the ordinary citizen, who does not know the GDP data, knows in his bones that getting away from a big State made sense.
The second factor is that a random sample of India has a lot of young people in it, who are less influenced by our socialist baggage. When you look at the political leadership, bureaucracy, academics or media, the views of old people have a lot more importance in shaping positions and the external perception. Old people in India seem to have more socialism, autarky, and unconfidence. Opinion polls show an unfiltered picture of India as it is.
Here is some data, from the CMIE household survey database, about the age distribution of Left supporters:
The CMIE data, with a tiny share of the population which supports the Left, is consistent with data from election vote shares and the Pew data. All three information sources thus increase our confidence in the basic message.
In your mind’s eye, you need to think that India is a young population, with a lot of people below 30, and declining cohort sizes beyond. So the early years in the graph are disproportionately important.
In the overall population, Left support stands at 5.36%. India’s future is young and urban — but these two regions are where the Left support is the weakest.
However, another hypothesis can be cited: Maybe it is the experiences of young people which convert some of them from being un-Left when young to being Left supporters in middle age. Maybe political attitudes are not stable through time; maybe the young of today will turn left when they reach their late 30s and early 40s. In coming years, as the data of this survey builds up, we’ll be able to evaluate this hypothesis.
The third dimension is about the welfare state. India does not have a welfare state and is unlikely to build one.
Voters do not seem to want a large welfare state. Political scientists say that a homogeneous population is more likely to support population-wide welfare programs: Each voter intuitively feels that the benefits of the program go to people-like-him. In countries with heterogeneity along the lines of ethnicity, class, religion, etc., voters are less inclined to favour population-wide welfare programs, because the picture in their mind of a recipient of welfare is not a person-like-them.
The intellectuals are not pushing a welfare state. In Western Europe, in the 1930-1960 period, the best intellectuals pushed the welfare state as an antidote to the brutality of the communist or Nazi ideologies. That sort of problem has not been an issue in India, where support for communism seems to be ebbing away.
The implementation capability is weak. When politicians have tried to setup large systems — SSA or NRHM or NREG come to mind — the limited administrative capacity has come in the way.
The bottom line is that India has a small expenditure/GDP ratio, and there is no welfare state that is under stress. Elsewhere in the world, there is a conflict between retaining the welfare state vs. plugging into globalisation. The gains from international economic integration are weighed against the perpetuation of the welfare state. In India, that conflict of interest is absent: people only see the gains from globalisation.
By Russ Nelson, on January 4th, 2010
I’ve been rude to a friend of mine (Simon Phipps) on Twitter. On the one hand, why should I be rude to a friend of mine? On the other hand, if I don’t call him out for quoting stupid things (as if he agrees with them), then how much of a friend do I consider him? If I’m not willing to be harsh with him, then I can’t value his friendship much. If I’m not able to be harsh with him, then he doesn’t value my friendship much.
In particular, I feel very strongly that the wealthy should be responsible for the poor. “Responsible” means several things. First, it means only lending aid appropriately. “Give a man a fish and you have fed him for a day. Teach a man to fish and you have fed him for a lifetime.” It also means charity should only be for the deserving. “Give an ailing man a crutch and you have gotten him back on his feet. Give a healthy man a crutch and you have taken away his ability to walk.”
Responsible also means not using the power of wealth against him. This is a tough one. It’s very easy to look at someone who is not as wealthy as you, and decide how they need to be helped. Everyone who has more than someone else can fall into this trap. Certainly my country does it all the time, sending food aid to countries that can’t use that food, or to countries where their competitive advantage is that food.
And responsible means consistently advocating for free markets (not using the power of wealth) and private property. When my friends harm that cause, I get very upset. I can understand my enemies, and the people that hate me advocating for coercion. But my friends? That cuts me to the quick.
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