Month: November 2007

The best two sentences I read this morning

Charge 80% per year on a loan in the U.S. and you’re called a usurer.  Charge 80% on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

That is Dean Karlan and Jonathan Zinman, in today’s WSJ, "In Defense of Usury," p.A18.  Karlan and Zinman discuss their study showing that micro-credit borrowers in South Africa are better off for receiving the money, even when they pay very high interest rates.

Are Soviet-style price controls returning?

As the New York Times noted last week,
food prices have been on a tear in Russia.  With elections approaching,
Vladimir Putin decided pricey potatoes and pierogies just wouldn’t do.
The solution: Soviet-style price controls.

I am a fan of Daniel Gross’s Slate writings, but I don’t think that claim is quite correct.  What made Soviet-style price controls Soviet-style was the absence of normal residual claimancy.  As David Levy has shown, the resulting incentive was to lower prices to deliberate shortage-inducing levels.  Managers would then sell access for favors, often access to goods and services elsewhere.  Therefore the incentive was to enforce the price control and limit access to the good.  Shortages were virtually everywhere and much of the economy reverted to barter.

Today most Russian firms are private or at least involve residual claimants, and both managers and owners wish to accumulate money not favors.  The incentive is to evade price controls, or to adjust the quality of the good to match the new specified price.  Most markets will still clear, albeit in inefficient ways.  These price controls are hardly a good idea, but their impact won’t be one tenth as bad as the price controls of the older regime.  Often the goal of such price controls is simply to lower the measured rate of inflation, or to allow the government to claim it is doing something rather than nothing.  I’d be surprised if shoppers at the major Moscow supermarkets notice a major difference.

Rorschach Economics

Gregor Smith of Queen’s University has discovered an amazing new relationship, Japan’s Phillips Curve Looks Like Japan.  John Palmer of EclectEcon believes that the result may be systematic as he has discovered that Canada’s Phillip’s Curve looks like Canada.

Obviously these people are crazy.  Smith and Palmer clearly do not understand Marshallian
macroeconomics – everyone knows that the Phillip’s Curve looks like this country.