Month: November 2011
How Mario Monti can solve Italy’s immediate fiscal problems
Italy has a lot of debt, but also lots of wealth. There is, however, no need to sell off the Pieta. More than half of Italian government bonds are held domestically. Apply a wealth tax and use it to pay off all of the domestically held bonds; in essence the government takes the wealth with one hand and mails it back with the other. The debt/gdp ratio is more than cut in half and the announcement to do so comes immediately. The Italian citizenry is not poorer, although they are required to recognize losses which already have been incurred. The Italian government also can do some fraction of this, and retire part of the domestically held debt, rather than all of it.
NB: I am not predicting this will happen! And while it would not cure Italy’s underlying growth problems, and could make some of those problems worse, it would buy them time.
What’s scarce in this situation is trust. Why should Italian taxpayers think they will get the money back? And the intra-Italian redistributions of wealth — from homeowners to bondholders most likely — won’t be popular.
A riskier version of the same idea — not recommended but an instructive point of comparison — is to simply default on all domestic debt and be credible on foreign-held debt to the hilt, maybe sending the foreign debt holders Perugia chocolates in the mail.
The Germans of course understand this logic, which is one reason why they are not going to set up a Eurobond or sign off on ten percent inflation. Rightly or not, they actually have the gall to expect Italy to pay for the money it has borrowed. (Like so many bloggers, they tend to frame the issue very much in moral terms, though from a Germanic point of view, instead of fully blaming the ECB.) Italy can indeed do it.
Can.
Will? I don’t know. I’m not counting on it.
Assorted links
1. Dwolla, credit card killer (?), twenty-five cents per transaction.
3. Liquidity premium exceeds carrying costs, photo, or is it the other way around?
4. What is peacekeeping good for? (pdf)
5. There is no great stagnation.
6. EFSF buying up its own bonds, not a good sign.
Cosmopolitan Rangoon
A largely English administrative class presided over the colonial apparatus; Scots dominated trade. The big companies of the day…were all in Glaswegian hands.
…In the early twentieth century, Burma enjoyed a higher standard of living than India and was far less densely populated. And as the economy grew, there was a need for cheap labour as well as entrepreneurial and professional skills. all this came from India, with movement into Burma unchecked and for a long time positively encouraged. By the late 1920s Rangoon even exceeded new York as the greatest immigrant port in the world and this influx turned Rangoon into an Indian City, with the Burmese reduced to a minority. There was a mingling of peoples from every part of the subcontinent, from Bengali schoolteachers and Gujarati bankers, to Sikh policemen and Tamil merchants. There were Chinese too, and smaller communities of Europeans, Americans and even Latin Americans (the Chilean poet Pablo Neruda lived in Rangoon briefly in the 1920s). The Cambridge political economist and long-time Burma civil servant J.S. Furnivali invented the term “plural society” to describe Rangoon’s mix of nationalities. Steamships fastened Rangoon to Calcutta and then, with the start of air travel, Rangoon became a hub for all of Asia…World-class schools and a top-notch university helped create a cosmopolitan and politically active middle class.
That is from the new and interesting book Where China Meets India: Burma and the New Crossroads of Asia, by Thant Myint-U.
Turning the dialogue from wealth to values
My latest column is about the top one percent, and OWS, here are some paragraphs, including the last three:
The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth. Furthermore, the best approach for fighting poverty is often precisely not to make fighting poverty the highest priority. Instead, it’s better to stress achievement and the pursuit of excellence, like a hero from an Ayn Rand novel…
But how is that playing out in practice?
For one thing, today’s elites are so wedded to permissive values — in part for their own pleasure and convenience — that a new conservative cultural revolution may have little chance of succeeding. Lax child-rearing and relatively easy divorce may be preferred by some high earners, but would conservatives wish them on society at large, including the poor and new immigrants? Probably not, but that’s often what we are getting.
In the future, complaints about income inequality are likely to grow and conservatives and libertarians won’t have all the answers. Nonetheless, higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.
It remains to be seen how many of us are up to its demands.
It will be very interesting to see, if labor market polarization continues, what kind of disciplinary alternatives will be offered. How about a boot camp, or a neo-Victorian boarding school, to turn your kid into a successful engineer? My admittedly counterintuitive view is that growing income inequality will provide a big boost to cultural conservatism, and perhaps political conservatism too, albeit at levels which are often rhetorical rather than real.
There is much more in the column itself, including a discussion of what Stiglitz, Sachs, Ayn Rand and modern American conservatives get right and wrong. I’m a big fan of the pro-wealth, pro-discipline ethic, although I don’t think that current intellectual discourse is serving up an especially palatable version of it.
I should add that for this column I am grateful for a conversation with John Nye.
Addendum: Mark Thoma comments, as do his commenters, always worth reading.
Labor markets in everything
What does it take to be a Victoria’s Angel?:
She sees a nutritionist, who has measured her body’s muscle mass, fat ratio and levels of water retention. He prescribes protein shakes, vitamins and supplements to keep Lima’s energy levels up during this training period. Lima drinks a gallon of water a day. For nine days before the show, she will drink only protein shakes – “no solids”. The concoctions include powdered egg. Two days before the show, she will abstain from the daily gallon of water, and “just drink normally”. Then, 12 hours before the show, she will stop drinking entirely.
“No liquids at all so you dry out, sometimes you can lose up to eight pounds just from that,” she says.
The pointer is from Mocost on Twitter.
Horse nationalism
Much like a human athlete who must be a citizen of a country for a required period of time before representing that country in the Olympics, a similar rule applies to horses.
The link is here, hat tip to Michelle Dawson.
p.s. I believe horse nationalism is silly.
Shining a light on solar subsidies
In Why they call it Green Energy: The Summers/Klain/Browner Memo I discussed the Shepherds Flat wind project, a $1.9 billion dollar project subsidized to the tune of $1.2 billion. Today, the NYTimes has a good piece on an even bigger subsidy sucker, a $1.6 billion CA solar project that is nearly 90% subsidized by taxpayers and ratepayers leaving a nice profit but virtually no risk for its corporate backers. The grateful but perhaps overly voluble CEO of the corporation building the project had this to say:
As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity…
“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”
I suspect that he might have continued, “it was like taking candy from a baby,” but that is just a suspicion.
There are good reasons for taxing all sources of carbon and subsidizing cleaner energy sources (especially R&D) but huge subsidies targeted on a handful of corporations without “skin in the game” are a recipe for waste, corruption and abuse. We can only hope that this was just a once in a generation opportunity.
Addendum: The NYTimes usually has great info-graphics but today’s experiment made it more difficult not easier to get to the key information.
Hat tip: Daniel S.
Addendum 2: It’s telling that so many people want to shift the debate away from the advisability of particular solar and wind subsidies to whether I or others have been consistent about coal, oil and nuclear subsidies.
For the record, in this very post I discuss taxing carbon, obviously including oil and coal, so it is clear that I do not favor subsidizing those energy sources. Also, careful readers (most MR readers!), will see that I am especially worried about “huge subsidies targeted on a handful of corporations,” both of those clauses are important. In this case, for example, we are talking about nearly 90% subsidies and they are targeted on a case by case basis; put these two things together and you get waste, corruption and abuse. For these reasons, I am less worried about subsidies to green energy that leave private firms with lots of skin in the game and that are open to any firm.
Sign of the times
A major credit agency warns that Penn State University’s bond rating could be downgraded because of risks to its reputation and finances from a child sex abuse scandal.
Moody’s Investors Service said Friday it has put the university’s Aa1 bond rating under review for a possible downgrade after ex-coach Jerry Sandusky was charged with molesting eight children over a 15-year period.
Moody’s will assess the potential impact on Penn State of risks from possible lawsuits, a decline in students applying to attend the school, loss of donations from philanthropies and changes in its relationship with the state.
Here is the link, hat tip to Michael Rosenwald.
What we’ve learned from the euro crisis, part I
Matt Yglesias serves up a short and partial list, here are some of mine:
1. When the Germans say “no LOLR” they mean “no LOLR”! Especially when they put it into print. I already knew that, actually.
2. It is a disaster and a dead-end situation when a country uses its automatic stabilizers in a manner which supports rent-seeking and harms growth. There is, in a time of crisis, no way out of the resulting trap.
3. The “regulation and labor law will come down really hard on larger firms” approach of Mediterranean Europe is far worse than we had thought, and we thought it was bad in the first place. I can’t stress this point enough. It’s cut those countries off from some major sources of growth and technical advance.
4. Don’t borrow in someone else’s currency.
5. Don’t think that “don’t borrow in someone else’s currency” is the only lesson. Last I checked the Netherlands was doing OK.
6. International coordination doesn’t work very well unless the interests of the various countries are aligned in the first place. If this is what becomes of the EU, what is our chance to save the world’s fish stocks? Protect against global environmental problems? etc. The EU, and the eurozone, is designed for vague statements of consensus that, when faced with real problems, don’t get the job done.
7. We can suddenly imagine the so-called “first world” splitting into two parts, distinguished by the degree of conscientiousness applied to human capital formation.
8. The French-German marriage was never going to last that long anyway. Yet without it, how do things get done in Europe?
9. The Mediterranean social welfare state model, based on lots of inefficient regulation, rent-seeking, reckless borrowing, and privilege within the local professions, is neither resilient nor robust. It is wrong to blame “welfare states,” but it is also wrong to let “welfare states” off the hook altogether. We’re learning a lot about how not all welfare states are created equal.
11. Hayek really was right about French rationalist constructivism (see chapter one). I’m not sure there has been a better example in all of human history.
12. I’ll write more on Italy soon and what we can learn from the country in particular. And I’ve left off some of the now-obvious, such as “no monetary union with a common fiscal authority and bank resolution mechanism,” etc.
Higher taxes fewer witches
We find that regions with higher taxes were less likely to try witches and that the rise of the fiscal state across much of France during the mid-seventeenth century can account for much of the subsequent decline in witch-trials. These results are robust across a range of different econometric specifications and our findings are supported by additional historical and qualitative evidence.
That is from my colleagues Noel Johnson and Mark Koyama, paper here, Suzy Khimm summary here. And how so?:
Johnson and Koyama argue that regions with lower taxes had less resources to strictly administer legal codes, allowing the trying of witches to flourish. They further note that as France became more unified and its fiscal functions centralized, witch hunts declined just about everywhere. That, however, was not a product of higher taxes but rather of standardization.
Assorted links
2. Via Kottke, Kubrick movies, great bargain.
3. Dallas Symphony to go the route of Greece.
4. Hanson blogs Brooks on inequality.
5. Seeing no evil on the eurozone (John Kay said more or less the same in 2006), and Matt Yglesias is moving to Slate.com, congratulations to him!
A liberal reads conservative books
A guy named Carl T. Bogus (he’s for real) speaks:
One striking difference is that the iconic conservative works are about ideology. By contrast, the most influential liberal books of the era are about policy issues. Those works are Silent Spring by Rachel Carson (1962), The Other America by Michael Harrington (1962), The Feminine Mystique by Betty Friedan (1963), and Unsafe at Any Speed by Ralph Nader (1965), which helped launch the environmental, anti-poverty, feminist, and consumer movements, respectively. Some prominent liberal books of the time were about ideology — such as The Vital Center by Arthur M. Schlesinger Jr. (1949) and The Affluent Society by John Kenneth Galbraith (1958) — but these are exceptions to the rule.
…Conservatives have big appetites for ideology; liberals don’t. There are, of course, taxonomies of conservative schools of thought. People on the right classify themselves as libertarians, neoconservatives, social conservatives, traditional conservatives, and the like, and spill oceans of ink defining, debating, and further subdividing these schools of thought. There is no parallel taxonomy on the left.
True or false? The full article is here, interesting throughout. Hat tip goes to www.bookforum.com.
Addendum: Arnold Kling comments.
Very good sentences
What you see in Italy is hardly ever what you get. This is a country where the pieces never stop moving but where everything remains the same. Remember what the old Prince of Salina says in the classic Italian novel The Leopard: “If we want things to stay as they are, they will have to change.”
Why solar panel prices are falling
The cost of solar cells and microchips has nowhere to go but down because of a supply glut for the commodity they’re made from, a brittle charcoal-colored semiconductor baked in ovens at 600 degrees centigrade.
Polysilicon has plunged 93 percent to $33 a kilogram from $475 three years ago as the top five producers more than doubled output, data compiled by Bloomberg shows. The industry next year will produce 28 percent more of the raw material than will be consumed, up from 20 percent this year, said Robert Schramm- Fuchs and Shai Hill, analysts at Macquarie Group Ltd.
“Polysilicon is a grossly, grossly, grossly oversupplied commodity product,” said Paul Leming, director of research at Ticonderoga Securities in New York.
Perhaps the story can be read either way, but overall it doesn’t sound like good news for the future of the solar industry. It sounds like a glut induced by previously high expectations, which now have been corrected and converted into ruinous excess capacity: “The famine turned to a glut when demand growth for panels slowed as solar-energy subsidies were cut. With plants taking at least two years to build, new factories are set to keep opening.” And this:
Price declines for products at every step in the solar supply chain triggered a 60 percent drop in the Bloomberg Global Leaders Solar Index since February tracking 37 shares. It’s led to speculation that more poly producers and panel makers may either combine or go bust in the coming months. Q-Cells SE (QCE), once the world’s biggest cell maker, has said it’s open to takeovers.
Hat tip goes to on Dan Hill on Twitter. Here is my previous post on the topic. You can read this background as a case for subsidies, but it’s hard to read it as a case for optimism or the expectation of exponential progress.
Addendum: Robin Hanson offers related remarks.
GUSTAV Cassel
That’s how Richard Ebeling used to stress the guy’s name; who knows why? But Richard was right to appreciate Cassel as an intelligent and underrated economist. Doug Irwin, in his latest paper, proves the point. Here is the abstract:
The intellectual response to the Great Depression is often portrayed as a battle between the ideas of Friedrich Hayek and John Maynard Keynes. Yet both the Austrian and the Keynesian interpretations of the Depression were incomplete. Austrians could explain how a country might get into a depression (bust following an investment boom) but not how to get out of one (liquidation). Keynesians could explain how a country might get out of a depression (government spending on public works) but not how it got into one (animal spirits). By contrast, the monetary approach of economists such as Gustav Cassel has been ignored. As early as 1920, Cassel warned that mismanagement of the gold standard could lead to a severe depression. Cassel not only explained how this could occur, but his explanation anticipates the way that scholars today describe how the Great Depression actually occurred. Unlike Keynes or Hayek, Cassel explained both how a country could get into a depression (deflation due to tight monetary policies) and how it could get out of one (monetary expansion).
The links are working funny in the software right now, I’ll work on getting it fixed, in the meantime Doug’s paper is at www.dartmouth.edu/~dirwin/Cassel.pdf.