Month: June 2010

Ruth Richardson and fiscal austerity in New Zealand

Responding to finance minister Ruth Richardson’s May 1991 budget which cut government spending, 15 academic economists from the University of Auckland wrote a letter to the editor of the New Zealand Herald on 6 June 1991. It read: “We wish to state in the strongest possible terms our view that in the present state of the economy, and in the midst of an international recession, the deficit-cutting strategy is fatally flawed. It can only depress the economy further and because of this it will be to a considerable extent self-defeating.”

In fact, strong real GDP and employment growth commenced from the time the letter was written. A 1995 article by Victoria University economists Kunhong Kim, Bob Buckle and Viv Hall dates the June quarter of 1991 as a trough in New Zealand’s business cycle for GDP. Real GDP in 1995 was 17% higher than in 1991. Unemployment fell from 11% of the labour force in September 1991 to 6.1% in September 1995.

Far from being self-defeating in fiscal terms, the outcome of the budget was to turn a deficit of 2.7% of GDP in the year to June 1991 into a surplus of 0.9% of GDP by the year ended June 1994.

That is from Roger Kerr.  For the pointer I thank Steve Hanke and Mark Skousen.  For a different point of view, here is Paul Krugman.

Markets in everything

How much would you spend for a good night's sleep?

Some people
might say $33,000. That's the price of E.S. Kluft & Co.'s
hand-tufted, king-size Palais Royale mattress and box spring, currently
the most expensive American-made mattress set on the market. The company
says it has sold about 100 since introducing it in 2008.

Or maybe
it's $44,000–the price tag on Kluft's Sublime model, which the company
has teed up for a launch later this year.

…Hästens says it takes 160 hours to assemble this mattress entirely by
hand, which has a Swedish-pine frame with thick layers of horsehair,
cotton, flax and wool inside. The company says since introducing the
mattress in 2006, it has sold 250 of them world-wide.

Laugh all you want, but if I were rich, this is something I would spend my money on.  Given how much time we spend sleeping, most people are oddly unconcerned about the quality of their bed, pillow, and so on.

The full story is here and I thank Eric John Barker for the pointer.

Spanish sentences to ponder

El riesgo del sector público es muy superior (marca máximos) al riesgo del sector privado.

Check out the CDS spread, the market is now more worried about a Spanish government default than a default from either Banco Santander or a major telecom company.

And yet we are told there are no market signals that European governments are spending too much.  We are also told that the Spanish government can do OK with its halfhearted austerity plan or maybe they should even be spending more.  Those discussions usually stop at the mention of a single interest rate or perhaps an unemployment figure.

For the pointer I thank Andres A.

The next step in evolution?

This is not exactly my view, but Robin Hanson is always worth reading:

The next big change is likely whole brain emulations (i.e., ems), within a century or so. Profit-seeking investors may make trillions of copies of dozens of most suitable humans, and further select among trillions of ways to tweak each em.  This will allow enormous selection for the most adaptive em minds.  Adaptive behavior in the early em era has high work coordination, accepts more alien bodies and environments, has little interest in kids or hyper-stimuli, and accepts death, high trainee failure rates, long work hours, and near-subsistence wages.  Some of this may be achieved via genuine preference changes, but initially most will be achieved via strong delusory self-control.

There is much more in the post.

Bounty Hunting in Pakistan

Gary Brooks Faulkner, an American citizen who told police he was
searching for Osama Bin Laden, has been arrested in northwest Pakistan
armed with a gun, a sword, and Christian literature.

More here.  Clearly, this guy is a bit of a nut.  Nevertheless, bounties have been quite successful at capturing terrorists.  I'd like to see the $25 million bounty on Bin Laden raised to say $500 million.  We could have avoided several wars at that price.

Previous MR posts on bounty hunting here.

No Keynesianism in the Berliner Morgenpost

Some of you thought that I was making fun of Germans by scrutinizing one of the local newspapers, the Berliner Morgenpost.  Quite the contrary, the paper is more sophisticated than its American equivalents and furthermore I enjoy reading it myself.  What I am making fun of is people who have unrealistic expectations of how Germany can be slotted into this or that academic plan, without recognizing the realities of national and regional cultures.

Other people have suggested that Die Zeit or the FAZ are more representative of German opinion.  Among elites for sure, but if you walk through Berlin for days you will see the Berliner Morgenpost for sale much more often, by an order of magnitude.

Anyway, I noticed a piece in the 12 June edition, entitled "Germany is driving European economic growth."  What's most striking about thie article, and other sources, is how much Keynesianism has failed to influence either German policy or German public opinion.  In the piece, there is no mention of international imbalances or aggregate demand issues, but rather Germany is lauded for exporting so much and for serving as the economic locomotive for European economic activity.  Furthermore this is a news story, not an Op-Ed.

Germany, of course, is one of the most successful countries in the world since its postwar reconstruction.  (You could make a good case for giving Germany the "best country award" for the last fifty or sixty years.)  Yet German policymakers adhere reasonably consistently to the following views:

1. It is the long run which matters and we should be obsessed with the long run consequences of our choices.

2. Economic growth comes from high productivity, most of all in quality manufacturing.

3. Borrowing to finance consumption is a nicht-nicht.  Savings is all-important.

4. If we need to make a big change, we'll all grit our teeth and do it.  For instance Germany has done a good deal, on the real side, to restore its export competitiveness in the last ten years, not to mention unification and postwar recovery.

5. These strictures should be enforced by rigorous rules, to limit temptation, because indeed you will find cases where it appears to make sense to break the rules.  

6. Values matter, as do norms of cooperation.

7. Don't obsess over the creation of too many low-wage jobs, because in the longer run it will be bad for your cultural capital.  If need be, pay people to be unemployed, but hold high human capital.  In the longer run, try to educate them up to higher productivity and thus employment.

8. Be obsessed with self-improvement, most of all at the personal level.

(If you're wondering, the recent talk about coalition collapse is not challenging these basic principles.  There is talk about not cutting some kinds of government spending, or raising taxes on the wealthy, or whether the ruling coalition can get things done, or whether the draft should be abolished, or whether Germany has mishandled the Euro crisis.  German politics produces a lot of government spending, and that is part of the above vision, but there is a great concern about whether it is paid for in the proper way.)

Most Keynesian economics makes good sense to me, especially at the methodological level.  But when it comes to principles for guiding a country…?  The numbered items above are not exactly my preferred list (especially not for the United States), but they have worked out very well for Germany.  I would not so lightly toss them away.  Might these principles be better, all things considered, than the Keynesian alternatives?

I'm a fan of the northern European social democracies, but in part they succeed because those countries don't follow all of the prescriptions you might hear coming from their boosters in the United States.  For instance American liberals often admire the activist government in such countries, but it's built upon a very different set of cultural foundations.  I hear or read liberals calling for the comparable interventions but usually remaining quite silent about the accompanying cultural foundations or in some cases actively opposing them.

The cultural elements of the current Keynesian debates remain underexplored in the United States, but they are fairly well understood in Germany.

Credit crunch in Spain

Government bonds were sold off sharply as the Spanish Treasury secretary and a leading banker admitted companies and banks were having difficulties raising funds.

Francisco González, chairman of BBVA, Spain’s second-biggest lender, said: “For the majority of companies and Spanish financial firms, international capital markets are closed.”

Carlos Ocana, treasury secretary, said the credit freeze affecting Spanish banks and corporations was “definitely a problem”.

The article seems to blame this outcome on Spain's fiscal austerity drive; I'll note that's not the only possible interpretation of the data.  El Pais for instance suggests that not enough fiscal austerity has been forthcoming and they seem to be working with the same sources but with more detail.  In any case, markets are demanding something.  By the way, the Spaniards are planning a general strike for September; I'm sure the markets found that reassuring.  This German article, from FAZ, suggests that something will need to be done about Spain very soon.

P.O. O'Neill, by the way, has a good post comparing Spain and Ireland.

Health care policy in Rwanda

Also, the co-pays can be overwhelming. Even $5 for a Caesarean section can be too much for people as close to the edge as the Yankulijes, who live by growing beans and sweet potatoes and wear American castoffs (Mrs. Yankulije’s T-shirt read “Wolverines Football”).

Apparently there is 92 percent coverage, through a government plan, backed by NGOs, for a premium of $2 a year.  It is estimated that the total Rwandan health care bill, in a year, is $307 million.  The article is interesting throughout.  I liked this part:

“If people pay the $2 and then don’t get sick all year, they sometimes want their money back,” said Anja Fischer, an adviser to the Health Ministry from GTZ, the German government’s semi-independent aid agency.

Does Germany or Greece leave the Euro first?

I've heard (non-serious) talk that Germany should leave the Eurozone instead of Greece.  The Euro would then fall in value and all would be better, supposedly.

That makes some logical sense, but I don't think it can work that way.  Let's say the new DM-euro currency would suddenly be worth fifteen percent more than the now-depreciated new euro.  Everyone would want to claim that their "old euros" should count as DM-euros and it would be very hard to suddenly introduce a border-defined scheme of money stamping.  The problem would be Germany's to solve.  Yes they could survive a massive inflow of currency from around the Eurozone (presumably checked by bank holidays elsewhere), but why would they wish to court it?  Furthermore they have to count on the other countries to get the bank holidays right, which is likely but hardly certain.

Alternatively, let's say the new Drachma-euro is suddenly worth fifteen or twenty percent less.  Logically that's quite similar to the first case.  Now Greek currency holders would all wish to claim they had "old, real Euros, not the new silly Drachma-euros."  Stamping doesn't arrive quickly enough to demarcate a difference.  Currency will flow out of Greece, and maybe that's bad, but it's Greece's problem not Germany's problem.  Greek-held currency is too small to create a big problem for Germany or elsewhere.

The Germans will strongly prefer that the Greeks leave the currency union and indeed that is how they talk.

On top of that issue, Austria, Benelux and France all pegged to the German mark, with varying degrees of strictness, for some time before the introduction of the euro.  They will want to go with Germany and indeed they probably should go with Germany.  The scenario of "Germany leaving" raises the awkward question of why won't they go too and how to coordinate the entire shift.

One way or another, Greece leaves first, if indeed the Eurozone breaks up.

The economic legacy of the Holocaust in Russia

Daron Acemoglu, Tarek Hassan, and James A. Robinson have a new paper and the abstract is this:

We document a statistical association between the severity of the persecution and mass murder of Jews (the Holocaust) by the Nazis during World War II and long-run economic and political outcomes within Russia. Cities that experienced the Holocaust most intensely have grown less, and both cities and administrative districts (oblasts) where the Holocaust had the largest impact have worse economic and political outcomes since the collapse of the Soviet Union. Although we cannot rule out the possibility that these statistical relationships are caused by other factors, the overall patterns appear generally robust. We provide evidence on one possible mechanism that we hypothesize may link the Holocaust to the present — the change it induced in the social structure, in particular the size of the middle class, across different regions of Russia. Before World War II, Russian Jews were predominantly in white collar (middle class) occupations and the Holocaust appears to have had a large negative effect on the size of the middle class after the war.

Hat tip goes to Chris Blattman on Twitter.

The blockade of Gaza and the ongoing relevance of Edmund Silberner

This is not a surprise, but it is worth keeping in mind:

The blockade has also decimated Gaza's private sector, key to weaning the territory from its dependence on imports and aid. The merchant class here has long provided a chunk of Gaza's employment, and it is one of the few sectors that fostered constructive contact with Israel, through trade.

"This is like a death penalty for us," says Mohammed Al Telbani, chief executive of Al Awda Factories Co., a cookie and ice-cream maker.

Businesses can't import raw materials or export finished goods. Since the blockade, more than 3,000 private-sector enterprises, including factories and small businesses, have closed, contributing to an unemployment rate of 44%, according to the United Nations Relief and Works Agency in Gaza.

Many of the businesses that have managed to stay open have turned to smugglers to bring in machines, spare parts and raw materials from Egypt, severing trade ties between Gaza and Israeli manufacturers and traders.

All this has bolstered Hamas, businessmen here and aid agencies say. Hamas exerts oversight over the tunnels and their operators. It has expanded its own public-sector payroll, earning local praise for creating new jobs. It has also extended economic tentacles into new businesses.

Yaser Alwadeya, chairman of Alwadeya Group, a 54-year-old trading and manufacturing conglomerate, calls the new economic reality here "the Hamas private sector." Before the blockade, his company made 171 different brands of food, including chips and candy. Some 60% of his products went to Israel or the West Bank.

Much of his manufacturing line was destroyed by Israeli airstrikes during the December 2008-January 2009 Gaza war, he says.

Facilities that survived are now starved of basic raw materials like cocoa powder, reducing his product line to just 11 items. That includes ice cream sold in clear plastic bags, because, Mr. Alwadeya says, Israel won't allow in proper packaging.

He no longer exports anything, and he now employs 45 people, down from 276 before the blockade. "Where do you think they are?" asks Mr. Alwadeya of the employees he has had to fire. "Either on the streets or with Hamas."

Edmund Silberner's classic treatment of trade and war remains relevant and of course he was also a prominent Zionist, albeit a mostly forgotten one today. 

Most journalistic coverage, by the way, focuses on diplomacy and negotiations. Perhaps it refers to concepts such as "strengthening the hard liners," but often it goes no further.  Yet frequently the real action stems from how policies shift the relative balance of power among interest groups, a point which Silberner understood well.  There is much related information here, from The Jerusalem Post, which notes that 95 percent of the factories and workshops in Gaza have had to close.  Furthermore:

Before 2007, 70 trucks laden with export goods such as furniture, clothing and produce left Gaza daily for Israel. Now, only the export of strawberries and flowers to Europe is allowed in certain instances…

I wonder if anyone in Israel right now is reading or citing classical liberal Edmund Silberner.  Here is a good, short piece on Silberner (in German), although it focuses on his work on socialism and anti-semitism rather than the roots or war.

Markets in everything

This one is from Australia:

Chef Yukako Ichikawa has introduced a 30 percent discount for diners who eat all the food they have ordered at Wafu, her 30-seat restaurant in the Sydney suburb of Surry Hills, that describes itself as "guilty free Japanese cuisine."

"To contribute toward creating a sustainable future we request a little more of our guests than most other restaurants," she says in a list of her restaurant's policies that is pinned on the door to the eatery.

This list includes finishing all dishes ordered which are organic and free of gluten, dairy, sugar and eggs and the chef and her staff tell people who don't clear their plates to choose another restaurant next time.

"Finishing your meal requires that everything is eaten except lemon slices, gari (sushi ginger) and wasabi," says the menu.

"Please also note that vegetables and salad on the side are NOT decorations; they are part of the meal too."

The link is here and I thank Mein Lindenbaum for the pointer. 

Of course one economic effect is to discourage diners from ordering more food.  That means, ceteris paribus, higher prices.  If you wish to cast a non-crazy gloss on this, think of it as one way to signal and precommit to higher quality!  Have any of you eaten there?