Current Affairs

The New England Conference of United Methodist Churches, a group of 600 churches, has issued a resolution calling for an end to the war on drugs. The resolution draws on ethical principles and also a remarkably astute reading of economics and social science:

Whereas: The public policy of prohibition of certain narcotics and psychoactive substances, sometimes called the “War on Drugs,” has failed to achieve the goal of eliminating, or even reducing, substance abuse and;

Whereas: There have been a large number of unintentional negative consequences as a result of this failed public policy and;

Whereas: One of those consequences is a huge and violent criminal enterprise that has sprung up surrounding the Underground Market dealing in these prohibited substances and;

Whereas: Many lives have been lost as a result of the violence surrounding this criminal enterprise, including innocent citizens and police officers and;

Whereas: Many more lives have been lost to overdose because there is no regulation of potency, purity or adulteration in the production of illicit drugs and;

Whereas: Our court system has been severely degraded due to the overload caused by prohibition cases and;

Whereas: Our prisons are overcrowded with persons, many of whom are non-violent, convicted of violation of the prohibition laws and;

Whereas: Many of our citizens now suffer from serious diseases, contracted through the use of unsanitary needles, which now threaten our population at large and;

Whereas: To people of color, the “War on Drugs” has arguably been the single most devastating, dysfunctional social policy since slavery and;

Whereas: Huge sums of our national treasury are wasted on this failed public policy and;

Whereas: Other countries, such as Portugal and Switzerland, have dramatically reduced the incidence of death, disease, crime, and addiction by utilizing means other than prohibition to address the problem of substance abuse and;

Whereas: The primary mission of our criminal justice system is to prevent violence to our citizens and their property, and to ensure their safety, therefore;

Be it Resolved: That the New England Annual Conference supports seeking means other than prohibition to address the problem of substance abuse; and is further resolved to support the mission of the international educational organization Law Enforcement Against Prohibition (LEAP) to reduce the multitude of unintended harmful consequences resulting from fighting the war on drugs and to lessen the incidence of death, disease, crime, and addiction by ending drug prohibition.

What depresses us is how little attention has been paid to one major area of Greek government spending that seems ripe for the ax: defense spending.  Greece spends a whopping 2.2% of GDP on defense, more than any NATO member-state save the United States and France.  Bringing Greece into line with the NATO average would alone achieve ¾ of what the IMF is demanding through pension cuts.

There is more here from Benn Steil and Dinah Walker.  And here is further discussion of the issue.

Oddly, we probably owe the confederate flag removal to polarization. Could never get done when both sides competed for rural whites.

That is from @SeanTrende.

A Supreme Court ruling could gut an important facet of the Affordable Care Act as early as this week, but you wouldn’t know it from what the Republican presidential candidates have been talking about.

In the lead-up to the key 2012 Supreme Court ruling on health care reform – in which the justices decided the penalty paid by anyone without health coverage was a tax, and therefore constitutional – Republicans were abuzz about the possibility that the law could be overturned, and the issue featured prominently in campaign trail rhetoric.

But this time the GOP candidates for president have uttered barely a peep, even though the high court could decide the federal government cannot subsidize health insurance purchased through the federal exchange, which would leave millions of people without insurance and effectively unravel Obamacare as we know it.

That is from Rebecca Berg.

“Fiscal austerity” is a clever label that somehow has stuck, but I think it is misleading. What has really been going on that Greece has been spending borrowed money, and they kept borrowing at a faster clip than what is sustainable. Suppose you do that as a household. What has to happen? At some point, you need to stop borrowing, you need to live within your means, and you have to either try to repay your debt or default. Everyone would like to spend more than what they receive! And, of course, it limits “growth” if you can no longer do that. But who is supposed to give you the resources for living beyond your means? What gets forgotten with the “fiscal austerity” label is this. Greece is free to borrow as much as they want on private markets, but private markets were no longer willing to lend to Greece. If Europe and the ECB had not stepped in and replaced much of that lost lending, if the debt terms would not have been renegotiated, it would have had a much more drastic effect on fiscal resources in Greece. So, one could argue (and I think it is fair to argue), that the European policies actually were the opposite of “fiscal austerity” compared to the benchmark case of only borrowing on private markets.

The full interview is here, via Garett Jones.  And here is your Greece fact of the day:

The Greek banks might be able to survive [under Grexit] depending on what happens to their liabilities to the Eurosystem but it isn’t encouraging that more than half of their regulatory capital comes from deferred tax assets, which only have value if the banks are profitable and the Greek government has cash to pay.

That is Matthew C. Klein, from a longer post on the pros and cons of Grexit.  And here is my earlier post Is Greece Really Going to Leave the Eurozone?, still a good guide.

In today’s illustration of Cowen’s second lawhere is a paper on what happens to wages when a worker’s subjectively reported race changes:

In Brazil, different employers often report different racial classifications for the same worker. We use this variation in employer-reported race to identify wage discrimination. Workers whose reported race changes from non-white to white receive a wage increase; those who change from white to non-white realize a symmetric wage decrease. As much as 40 percent of the raw racial wage gap is explained by the employer’s report of race, after controlling for all individual characteristics that do not change across jobs. The results are consistent with workers manipulating perceived race in an environment where racial classification is subjective, but discrimination persists.

Hat tip: Scott Cunningham.

You can see a tightening labor market, and some of this you might interpret in terms of a growing skills gap:

filljob

The national time-to-fill average rose in February to the highest level in 15 years.

Sponsored by the career sites publisher Dice Holdings, the Dice-DFH Vacancy Duration Measure says it took an average of 26.8 working days to fill jobs in February. In January, according to the report, the average (as revised) was 25.7 working days.

“We are continuing to see signs of a tightening labor market,” said Michael Durney, president and CEO of Dice Holdings. “Unemployment rates are declining across several core industries, such as tech and healthcare, and the time-to-fill-open positions has hit an all-time high in the 15 years the data has been tracked.”

Jobs in the financial services sector took the longest to fill, averaging 43.1 days. Healthcare jobs averaged 42.6 days to fill. Both are historic highs for their respective industry sectors.

The full article, by John Zappe, is here, via David Wessel.

By the way, the skills mismatch hypothesis (not a substitute for AD hypotheses, let me stress) is stronger than you think.  Catherine Rampell writes:

Companies themselves are indeed reporting difficulty acquiring talent. Nearly half of small and medium-size businesses with recent vacancies say they could find few or no “qualified applicants,” according to the latest monthly survey of the National Federation of Independent Business. Over the past couple of years, firms have also become increasingly likely to say that “quality of labor” is the “single most important problem” facing their businesses.

I have generally been skeptical of the “skills mismatch” story, mostly because wage growth has been so pitiful during this recovery. If qualified applicants were really so scarce, businesses should be bidding up the salaries of the few hot commodities available. But Steven J. Davis , an economics professor at the University of Chicago’s Booth School of Business and one of the creators of the vacancy duration metric, says it’s unclear how a widespread skills mismatch, if one exists, would actually affect wages. Maybe a shortage of some highly desirable skill would lead employers to bid up the price of that qualification, he says, but that same scarcity might also lead firms to instead settle “for workers who have less of [or] lower-quality versions of the desired skills.” That could, in theory, cause hourly wages to fall overall. Robust research on the connection between skills mismatch and wages is in short supply.

This point from Davis is appreciated only rarely.

China fact (?) of the day

by on June 17, 2015 at 6:10 am in Current Affairs, Economics | Permalink

According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%.

Meanwhile, over the course of 2014, the value of stocks, bonds and other tradable securities owned by listed Chinese companies rose by 946 billion yuan ($152.4 billion), a 60% increase, according to an analysis by Mr. Zhu.

The trend is starting to worry Chinese regulators, who have been trying to make sure that banks and the stock markets ultimately channel money into parts of the economy that create jobs.

There is some real wisdom in this passage:

“Manufacturing is a very hard business these days,” said Mr. Dong, chairman of the company. “I want to make some money from the stock market and use the profits to restart my manufacturing business later, when the economy turns for the better.”

That is from the WSJ, covered by FTAlphaville.

TPP

by on June 17, 2015 at 1:57 am in Current Affairs, Economics, History, Law, Political Science | Permalink

“If this [TPP] collapses, Pacific Rim countries will be aghast,” said Shunpei Takemori, a professor at Keio University in Japan, the largest economy in the would-be trade zone after the United States. “China is pushing, and if the U.S. just stands aside, it would be a tragedy.”

And:

“If you don’t do this deal, what are your levers of power?” Singapore’s foreign minister, K. Shanmugam, said in Washington on Monday. “The choice is a very stark one: Do you want to be part of the region, or do you want to be out of the region?”

He argued that “trade is strategy” and that without economic leverage, the United States was left with only military clout in Asia “and that’s not the lever you want to use.”

“It’s absolutely vital to get it done,” he added, referring to the bill’s passage.

The full article is here.  I find the willingness of progressiveness to toss this bill into the wind, for the purposes of indulging the usual memes, to be one of the most depressing features of American political life in years.

You will find an alternative perspective from David Henderson here: “If the U.S. government is a “less reliable ally,” that could be a good thing.”  I don’t think they feel that way in Singapore, South Korea, or Taiwan.

By the way, the fourth edition of Doug Irwin’s trade book is coming out.

Bitcoin surged by as much as 7 percent on Tuesday and was on track for its longest winning streak in 18 months, as concerns that Greece could tumble out of the euro drove speculators and Greek depositors into the decentralised digital currency.

I am fine with this, I should add.  But no, I don’t think it represents the onset of a new monetary order.  In case you doubt what is going on here:

Scigala said over the past two months, with Greece locked in talks with its creditors, the company had seen a 124 percent pick-up in inflows from Greek IP addresses—numerical labels that identify computers and other internet-enabled devices.

For the pointer I thank Jerry Brito.  Here is my earlier post on Bitcoin, China, and capital controls.

MR commentator Patrick L. has a go at it:

OK I’ll bite.

In nominal terms, between 2002 and 2012 state receipts grew 50%. Inflation in this period was 28%, and probably significantly lower for Kansas, while population growth has only been about 10% since 2000. Even the “low” 2014 receipts are $1.5 billion more in revenue from when Sebelius first took office and the government started rapidly growing. In the past 15 years expenditures have grown over 50%, exceeding $6 billion today. The shortfall is $300 million, or about 5%. While the growth of the Kansas government in the past 15 years is smaller than other governments in the country, it still explains the shortfall. We can justify this increase by saying that education and health are rising faster than everything else, but that is not a revenue problem. Tax rates have to rise because education and health costs are growing faster than our economies. That says nothing at all about the optimum size of taxation for state governments with regard to growth, jobs, or even revenue. The tax and spending levels Brownback choose would have been adequate ten, maybe even five years ago. With a bit of luck, he could have ignored the shortfall because of variance, which for receipts can be a few hundred million a year.

Republicans should be wise enough to not depend on luck, and they should be wiser predicting how trend lines go. Cutting the size of government was never a serious option.

I haven’t looked at the votes in depth, but it looks like a classic case of urban // rural split that typically troubles the state’s politics. Just under half the state’s population lives around Kansas City or Wichita, which are both five times than the next largest city. These places have as many votes as the rest of Kansas combined, but their needs are radically different.

Rural Kansas has two unique problems. First, there’s the problem of population collapse, which all farm states are seeing. What few children are born move out when they come of age and new people are not moving in. Fixed costs like “We need at least one school building” or “We need at least one teacher per grade” start to add up for small towns of 1000 or less. Those are the obvious problems, not to mention any number of federal or state concerns dealing with food, medical, or disability services that have to be met. As a matter of geography, 98% of the state is rural, and I think I heard 25% of the state is in towns less than 2500 – with over 400 municipal governments servicing less than 1000 people it’s probably the highest per capita in the country (This is FIVE times the national average).

This is a non-trivial growing problem related to scale government services that has been an issue of intense legal debate in the state. Wichita School District’s scale is such it can use its buses to deliver free or low cost lunches to children in the summer. Small cities don’t have buses. Is that fair? How should taxes be structured to compensate? The only political viable solution to this problem has been to spend more money. If all the small towns could magically consolidate into a super smallville, taxes would (back of the envelope) be 10-15% lower.

Government services to low population areas are subsidized by high population areas, and it costs much more to deliver the same services to small towns. The US Postal Service paid for delivery to small towns across the country by charging monopolistic prices on first class letter mail in cities (Which cost almost nothing to deliver). NPR’s national budget mostly goes to setup stations in small towns. The small towns in Kansas are both relatively and in many cases actually getting smaller, older, and poorer. They are costing more and delivering less.

The other problem is that some rural areas are *growing*, but they’re growing because of immigration attracted to the agriculture and food packaging industries. Which is not the same as growing from a resource boom which can be taxed heavily to compensate. Liberal, KS is the largest per capita immigrant community in the United States. While this influx of people is necessary for the health of these places, the new population has more expensive demands on government services and pays less in taxes. Some of these small towns are the same ones that a decade ago were collapsing. Services and infrastructure might have been allowed to lapse or removed, and now rapidly needs to be replaced. That’s expensive! In the long run this problem might replace the first problem, but for now it’s the worst of both worlds.

The economy of the small cities is based largely around food production, which mostly can’t move, and food packaging, which probably can’t for logistical reasons. These places are poorer, getting relatively poorer per capita, and demanding more in services both directly (immigration / aging) and through scale issues. Their populations are either getting very old or very Hispanic, or both.

In contrast, Kansas City is a stable metropolis whose economy depends on manufacturing is built around a national centralized hub for trains. It also has some finance and telecom sprinkled in, though those guys can probably go anywhere. Wichita, is a moderately growing city based around aircraft manufacturing. When state taxes can’t provide enough government services, local taxes for these areas easily rise to compensate. Their economic concerns are how to stop businesses from going across the border to Omaha, Oklahoma City, Tulsa, Springfield, or Kansas City, Mo – places which are functionally identical and just as close. Given their dependence on manufacturing, they also have to consider movement across international borders to China and Mexico. Their demography is much closer to the national averages rather than the extremes. They are large enough that they can take advantage of scaling for government services, without being so large that there is decreasing actual returns. I don’t have figures, but I’d guess income rates in the urban areas to be between 150 and 200% those of the rural areas, which are themselves typically around 2/3rds the national average. This is an industry effect, a farmer in Kansas City and an aeronautical engineer in Greensburg, KS would not make much money. The cities are richer, but they’re richer because they have industries that are becoming increasingly easier to move.

On a political level, normally cities become more liberal, and poorer as you go deeper into the city – a leftover of 19th century industrialization competing against 20th century transportation. Deep urban cores produce these deep blue constituencies that act as checks on conservative suburban rings. In some states this manifests itself as a coalition between the poor rural areas and the poor urban areas against richer suburban areas allowing normal American class politics to balance itself. Cities produce political equilibrium: The richer and denser it becomes, the more liberal, which pushes more money and voters to suburbia, diluting the power. In short, declining rural power (D) and rising urban power (D) offset each other, but rising urban power (D) enhances suburban power (R), and so at a state level you get a balance.

The problem is that the inner core of Kansas City is in Missouri, so Kansas only gets the rich (Republican) suburban ring and a tiny blue part. Typical democratic concerns like maintaining a progressive tax structure can’t really find a foundation. While Wichita also has an urban core that does provide a Democratic representation, the city isn’t constrained geographically by anything (No ocean, mountain, lake, and transportation goes around, not through, the city) means concentration, an ingredient for populist politics, is lessened. The city spreads, and the poor can easily move up the class structure by moving further and further out. Wichita has half the population density of Syracuse and two thirds that of Madison, two close sized metropolitan areas. I haven’t done a county level comparison, but I suspect that Sedgwick has half the density of the ‘average American county with half a million people’ in it. There are other places in America like that, but guess how they vote.

Nor are either cities big university cities, like Madison or Boston. The two big universities in the state are in the small towns of Lawrence and Manhattan, which are quite separate from the rest of the state. Urban centers are places of “Commanding Heights” industries, like health and education that can’t easily move, but Wichita and Kansas City are based around manufacturing.

The political outcomes are not that surprising at all. There is nothing ‘the matter with Kansas’. The power structure easily shifts between slim majorities formed from predominately suburban populations who are wealthier, and whose jobs are most likely to move, and slim majorities formed from the small urban cores and rural parts of the state.

There’s no possible political coalition that you could form that would pass a constitutional amendment allowing a floating balanced budget over a 10 year period. Nor are the populist pressure strong enough to push against regressive taxation. You have ‘fiscal hawks’ in the rural areas who never vote for cuts, and suburban conservatives who never vote for taxes. When the storm gets too bad, they vote a nice moderate democrat in to raise taxes and crack down hard on whatever (Non manufacturing / agricultural) big business they can put pressure on. Obviously something that can’t move easily like Health Insurance.

In summery, this really is an issue of Urban vs Rural politics. Unlike other cities, the kind of industries around Kansas City and Wichita can move. The jobs in the rural areas can’t. The rural areas require more per capita government services, and the urban areas have more money. They both have half the vote. Solve for equilibrium.

== As for the deal:

It’s mostly a .4% sales tax increase, which is less than some of the more fanciful projects done by local governments in the past 15 years, which have included sports arenas, loans to movie theaters, and waterfront improvement. A half cent increase in sales tax does move the state into the top 10 for the country, but the overall tax burden is still quite low. The real problem is that city/county sales taxes are a function of distance from Wichita, and the inverse of population. The smaller your city, and the farther you are from Wichita, the more the county depends on sales taxes. In places like Junction City, this could put the sales tax close to 10%! The real disparity is going to be at the border towns: After the change there will be a .7% difference between KC, KS and KC, MO, though I bet the Missouri side will raise taxes to compensate. After the increase, there’s a 1.5% difference between Pittsburg, KS and Joplin, MO – big enough that I could see some people consider driving for purchases more than $300 (Biweekly grocery shopping for a large family?), especially if retailers on the Missouri side are not dumb. As a general rule, the money and the shopping is on the Kansas side of the border, so stuff isn’t going to transition immediately, but I expect some Laffer curve effects here for local governments, and I would hope they’ll respond by dropping taxes to compensate.

This is probably WHY such a deal was able to pass. Most of the damage goes on the poor and rural parts of Kansas, which is where most of the balance budget hawks are. The rich living near Kansas City will have the easiest time dodging the increase and avoid it more often. A regressive tax, but an efficient one.

As for the other parts of the deal, $90 million in itemized deductions are being removed. I don’t actually think this will amount to much, since there aren’t many itemized state deductions left. What remains are things like adoption, historical preservation, or disabled access. I don’t see much money coming in this way, and the state will almost certainly reverse itself the first chance it gets (As it did the last time it got rid of the adoption credit).

Whew!

Scott Sumner serves up the appropriate links.  He cites Mark Sadowski, who tells us:

…Iceland’s general government budget ran a surplus equal to 1.8% of GDP in 2014, or a change in fiscal stance since 2009 equal to 11.5% of GDP. This can be found on Table A1 of the April 2015 IMF fiscal Monitor.

…Table A3 shows that Iceland’s general government cyclically adjusted balance rose from a deficit of 10.0% of potential GDP in 2009 to a surplus of 2.7% of potential GDP in 2014, or a change of 12.7% of potential GDP…

But even this tends to understate the amount of fiscal austerity that Iceland has engaged in. This is because it includes the increase in spending attributable to rising interest payments on the national debt. To get a proper idea of the amount of fiscal austerity that Iceland has engaged in (i.e. cuts in direct spending and increases in taxes) one has to look at the general government cyclically adjusted primary balance which can be found in Table A4.  Iceland’s general government cyclically adjusted primary balance rose from a deficit of 6.9% of potential GDP in 2009 to a surplus of 6.2% of potential GDP in 2014, or a change of 13.1% of potential GDP.

…By this standard Iceland has done about 30% more austerity than Ireland, over double that of the UK, roughly two and a half times as much as the US, and approximately five and a half times as much as Latvia. The only country that has done more fiscal austerity is Greece.

None of this should come as a surprise. When nearly all the other OECD members were busy implementing fiscal stimuli in early 2009, Iceland (joined only by Ireland) was engaged in a massive fiscal consolidation.

Scream it from the rooftops: massive fiscal austerity in Iceland.  (Or should that be something like “gegnheill ríkisfjármálum austerity á Íslandi!”)  There is plenty more detail and argumentation in Mark’s post.  Here is my previous post on Iceland.

The latest from Louisiana is that taxes are going up, but in a strange way that won’t be called a tax increase:

One of the most critical parts of the budget plan, and the part that attracted most of the debate, would raise no revenue and lighten no one’s tax burdens. But because of a complicated arrangement of tax credits, this plan could, by some interpretations, allow Mr. Jindal, a Republican, to say that despite millions coming in from cigarette tax hikes and tax break rollbacks, the state had technically not raised net new tax revenue.

Read the whole article, it is even weirder than that sounds.  Combine that with the recent fiasco in Kansas, where the strongly Republican state government will be reversing earlier tax cuts.

It seems to me that, whether we like it or not, fiscal conservatism has been stymied at the state level.  No, that’s not true for Illinois, New York, or California, but it does seem to be true for many other states, especially those governed by Republicans.  (And yes, state pension obligations still do need to be reigned in and made subject to proper accounting.)  More concretely, trying to cut taxes at the state level doesn’t seem like a useful or productive way forward.

If you have a better revisionist take on Louisiana and Kansas, please do put it in the comments, I would gladly read it, and if you have something really good I will pass it along.  But I see myself as stating what has to be the default hypothesis for the time being — should we not all come out and admit this?

A debate forum at the New York Times begins:

A rise in gun violence in New York, Baltimore and other cities after months of angry protests over police killings of unarmed black men, have led some to see a ”Ferguson effect,” in which police, spooked by criticism of aggressive tactics, have pulled back, making fewer arrests and fewer searches for weapons.

But has a wave of murders and shootings brought an end to the long drop in crime?

I don’t think that we will see a sustained increase in crime at the national level. But there is no question that we are seeing a Ferguson effect in Baltimore–more precisely a Freddie Gray effect. Arrests in Baltimore have fallen by nearly 40% since Freddie Gray’s funeral and the start of the riots on April 27. In the approximately 3 months before the Gray funeral police made an average of 87.7 arrests per day, since that time they have made only 54.6 arrests a day on average (up to May 30, most recent data).

Arrests

As Peter Moskos argues:

In Baltimore today, several police officers need to respond to situations where formerly one could do the job. This stretches resources and prevents proactive policing.

Not all arrests are good arrests, of course, but the strain is cutting policing across the board and the criminals are responding to incentives. Fewer police mean more crime. As arrests have fallen, homicides, shootings, robberies and auto thefts have all spiked upwards. Homicides, for example, have more than doubled from .53 a day on average before the unrest to 1.35 a day after (up to June 6, most recent data)–this is an unprecedented increase–and the highest homicide rate Baltimore has ever seen.

Put differently, the unrest in Baltimore and subsequent reduction in policing is responsible for roughly twenty “excess” deaths. (so far)

Homicides

It’s not just homicides, the number of shootings in Baltimore has more than tripled. Shootings increased from .82 a day before the unrest to just over 3 a day. Since the onset of the riots there has hardly been a day without a shooting.

Shootings

Robberies are up from 8.1 per day to 13.25 per day on average.

Robberies

Even auto thefts are up from 9.6 per day to 13.6 per day on average.

AutoTheft

The increase in homicides and other crime is terrible and it is also putting a strain on police resources.

Police Commissioner Anthony W. Batts said the rise in killings is “backlogging” investigators, just as the community has become less engaged with police, providing fewer tips.

With luck the crime wave will subside quickly but the longer-term fear is that the increase in crime could push arrest and clearance rates down so far that the increase in crime becomes self-fulfilling. The higher crime rate itself generates the lower punishment that supports the higher crime rate (see my theory paper). In the presence of multiple equilibria it’s possible that a temporary shift could push Baltimore into a permanently higher high-crime equilibrium. Once the high-crime equilibrium is entered it may be very difficult to exit without a lot of resources that Baltimore doesn’t have. I have long argued that high-crime areas need more police but the tragedy is that they also need high-quality policing and that too is made more difficult to achieve by strained budgets and strained police.

Paul Krugman describes their policies as a mix of “debt repudiation, capital controls, and massive devaluation.”  Matt Yglesias refers to putting some of their bankers in jail.  But I say there is not a generalizable formula here.

Neither mentions that a major part of the Icelandic recipe was letting foreign deposit holders twist in the wind.  That’s a transfer of wealth to the domestic economy and furthermore it was politically palatable; it is also a choice which won’t much help any larger country where most of the deposit holders are domestic.  It is noteworthy that this kind of choice loomed large for Cyprus, another small country with a lot of foreign depositors.

Iceland is also so small that cutting off these creditors won’t much damage the broader global economy or lead to significant contagion.  Today, in a much safer macroeconomic environment, we’re not even sure the same could be said for Grexit, and Greece is a pretty small country in economic terms.

On top of all that, not paying back the foreign depositors was a transfer to Iceland.  It is easy enough to see why Icelanders might like that idea, but the objective foreign analyst, who ought not favor the more Nordic peoples above the others, also should consider the loss side of the ledger, namely in the UK and Netherlands.

What else?

Don’t forget that the value of the Icelandic stock exchange fell by 90% – how many other countries could endure that or would accept it?  That is easier to pull off when there are only six stocks trading on your exchange and those equities are not central to your savings.

Capital controls are also not an option for many economies, including those that are serious about being financial centers or having reserve currencies.  More to the point, the flight of foreign capital is very often not a problem in the first place.  And we have plenty of experience with capital controls and the overall record is at best mixed; this is hardly a neglected heterodox innovation.  The imposition of Icelandic capital controls may well discourage foreign investment looking forward, and so the “record to date” will be misleading in this regard.  This is again a way in which Iceland has transferred the costs of its adjustment into the future.  On top of that, we still don’t yet know how well the Icelandic removal of capital controls will go.

I’m all for devaluing and accepting higher inflation in a lot of crisis situations.  This part of the Icelandic recipe is generalizable.  It’s worth noting, however, that the devaluation (especially with capital controls) imposed a harsh and immediate “austerity” on the Icelandic people, namely it was very hard to buy foreign goods for a while.  In other words, rapid real wage cuts were imposed on just about everybody.  If your country can do that, great, but it needs to be outlined how most economies will manage that trick.  See also Scott Sumner’s remarks on whether Iceland avoided traditional fiscal austerity.

Given some very tough circumstances, Iceland also did a reasonable job of “ring-fencing” its banks and separating the good from bad assets.  That may be generalizable too, although it doesn’t have the polemic punch of some of their other policy choices.

Overall, the experience from Iceland, upon closer inspection, is not very easily generalizable.  I suspect it receives much of its praise for reasons of mood affiliation — what could sound tougher than putting bankers in jail?  But overall, Iceland faced very different constraints and opportunities, relative to other countries in the financial crisis.

Addendum: Here are some relevant earlier posts.