Month: November 2011

Assorted links

1. Why you should visit Morocco (it’s always Tagine o’clock).

2. Argentina may face 70 percent chance of recession.

3. From IHS, www.theihs.org/hsf, Humane Studies Fellowships, application discount with code HSF25MR.

4. “I do kind of want to get maced” or, a behavioral theory of college and its effects.

5. Good, biting review of the new Niall Ferguson book, with one or two major lapses, Ferguson response at the end of it.

6. Spain is doing better than Italy.

The McRib Arbitrage

Why does the McRib appear and disappear at seemingly random intervals? An excellent post at The Awl has a plausible answer:

The McRib’s unique aspects and impermanence, many of us believe, make it seem a likely candidate for being a sort of arbitrage strategy on McDonald’s part….

If you can demonstrate that McDonald’s only introduces the sandwich when pork prices are lower than usual, then you’re but a couple logical steps from concluding that McDonald’s is essentially exploiting a market imbalance between what normal food producers are willing to pay for hog meat at certain times of the year, and what Americans are willing to pay for it once it is processed, molded into illogically anatomical shapes, and slathered in HFCS-rich BBQ sauce.

…The blue line is the price of hogs in America over the last decade, and the black lines represent approximate times when McDonald’s has reintroduced the McRib, nationwide or taken it on an almost-nationwide “Farewell Tour” (McD’s has been promising to get rid of the product for years now).

See the post for other theories.

What should the ECB do?

In the comments, Gareth writes:

Target nominal GDP growth of at least 5% for all EU countries, and back it with a threat of unlimited QE. Italy needs a primary surplus of 6%+ with current yields. That drops to around 3% if NGDP growth rate goes up from predicted 2.5% to 5%.

And back in reality, they could at least raise the inflation target to 4%.

I don’t think he and I disagree on the underlying economic theory, but I suspect this would be too little.  At zero growth, that means five percent price inflation a year and basically an open fire hose to the Italian Treasury.  That also means they never reform, noting that I accept the Keynesian point that at this time horizon fiscal reform is counterproductive.  But “no reform” is counterproductive too!

In my view, the growth simply isn’t there, not now, not even with looser monetary policy.  Eurozone inflation is already about three percent, and while I understand the Sumneresque credibility point at current margins nothing seems credible for the eurozone, there is only the present.  Why should another two percent inflation a year turn the tide?  The inability to implement any kind of credible rule means that the “in the moment” solution has to be all the stronger.  So the “answer,” if that is the right word, is ten percent inflation a year for the eurozone — plus the firehose to Rome — to get the real value of those debts down and quickly.  Maybe twelve.

I don’t feel like debating whether this would be better or worse than the status quo; I am content to suggest it probably won’t happen, not even if German and French leaders understand the gravity of the situation, which I suspect they do.  (The Germans, believe it or not, “do gravity well” and have for some time.)  It’s a common meme these days that the German leaders “don’t get it,” but I view it in reverse: they’re the ones who understand how grave a problem it is, and how truly hard to fix it would be, which is why they are not doing more.  They don’t see the point in pulling out the peashooter against the elephant, and the blunderbuss is not yet available, if it ever will be.

Addendum: Kevin Drum comments.

Why Italian fiscal austerity won’t work

Not now, at least.  You don’t have to buy into the more extreme forms of Keynesian economics.  In the short run, what the country needs is more revenue, relative to expenditure.  If you cut the government expenditures, in the short run revenues go down, including tax revenues.  Maybe you substitute in some private sector outputs for public sector outputs and furthermore maybe those private sector outputs bring higher utility to the citizenry.  But they don’t bring higher revenue, not in the short run.

The financial crisis, now exacerbated by a revenue shortage, destroys the economy before the potential gains from the expenditure-switching have a chance to kick in.  Furthermore, if the broader economy is dysfunctional, the gains from expenditure-switching to the private sector may not show up even in the medium run.  Growth-enhancing reforms can take many years to pay off, as we see from the histories of New Zealand, Chile, or the ex-communist countries.  Yet even the Italian two-year note shows default risk, yielding twice as much or more as the American 30-year bond.

That said, more government spending probably won’t work either, unless you think that spending is extremely effective in targeting unemployed resources, which in Italy I believe it is not.  Neither contractionary nor expansionary fiscal policy will succeed.

The only answer, if that is the right word, is a central bank.  Right now central banks need to be doing everything they can to avoid a second Great Depression.  I talk to many smart people, and I am continually surprised how many of them do not realize the urgency of the current situation.

By the way, some of the worst features of the Italian economy — paying people to do nothing, or to do the wrong thing — can in the abstract be described as “automatic stabilizers.”  Automatic stabilizers play an important and largely positive role in macroeconomic response, but if not designed properly they too can bring or hasten downfall.  The automatic stabilizers in Italy have thwarted productive incentives and thus lowered the growth rate.  And furthermore, dismantling some of those automatic stabilizers eventually needs to be done, but in the short run again could hurt revenue.  When a country uses automatic stabilizers for growth-damaging ends, it paints itself into an especially difficult corner.  How to move forward?

The economic policies of the Nordic countries look better all the time, and actually you can add the United States to that list, believe it or not.

Italy fact of the day

A 2007 PwC/World Bank report tried to estimate the total net tax burden on companies in different countries, original study here (pdf).

Italy has a total net, real corporate tax rate of 68.6 percent, see p.30 for the derivation and the list of all the constituent taxes, such as stamp duties, chamber of commerce duties, real estate taxes, fuel taxes, and regional taxes, as well as the more traditional corporate taxes and taxes on the employment of labor.  (NB: not all those taxes are enforced, or borne by the corporation, still it is a grim picture.)

That’s the worst in all of Europe, see p.33.

On p.34 you’ll see the numbers for Africa, somehow Democratic Republic of the Congo gets above three hundred percent.  There is much of interest in the entire study.

For the pointer to the study I thank the excellent Economic Lessons from Scandinavia (pdf), by Graeme Leach, from the Legatum Institute.

Not From the Onion: The Christmas Tree War

Illustration by Mark Alan Stamaty. Click image to expand.
From Slate

The war between artificial and natural Christmas trees has been going on for years and the artificial trees are winning. The National Christmas Tree Association, the association of natural trees, has been trying to fight back with “information” campaigns like What You Might Not Know About Fake Christmas Trees. Some samples: they are made in China, by exploited workers, with lead!  And my favorite:

…fake trees were invented by a company who made toilet bowl brushes…regardless of how far the technology has come, it’s still interesting to know the first fake Christmas trees were really just big green toilet bowl brushes.

The National Christmas Tree Association, however, has a problem. Christmas trees are produced in a competitive industry with many small firms so there’s no big firm willing to bear the costs of a national ad campaign. (The artificial tree lobby group, The American Christmas Tree Association has a noticeably more professional website and a better name.)  Thus, following the lead of milk, cotton and California raisin producers, the natural Christmas tree industry lobbied the Dept. of Agriculture to create the Christmas Tree Promotion Board. The DOA agreed and authorized the board to create a “program of promotion, research, evaluation, and information designed to strengthen the Christmas tree industry’s position in the marketplace,” to be financed by a tax on Christmas tree producers (=>500 sales) of 15 cents per tree.

The Christmas tree tax outraged conservatives such as David Addington, formerly Cheney’s chief of staff and once called “the most powerful man you’ve never heard of.” Addington argued:

The economy is barely growing and nine percent of the American people have no jobs.  Is a new tax on Christmas trees the best President Obama can do?

Not surprisingly other conservatives labeled this a Grinch tax and a tax on Christmas. Other people (liberals?) attacked the tax as promoting Christianity which I find strange since I always thought of the Christmas tree as a pagan symbol. Oh well.

Finally, the Obama administration put the program on hold. (Amateurs – don’t they know taxes are raised after elections not before?). So there you have it, American politics in a nutshell.

Hat tip: Joshua Hedlund.

Addendum: Here is Rush, The Trees, just because.

How’s the Argentina recovery coming along?

They are probably in bigger trouble than the European periphery.  Why hold them up as a model?  Why not instead obsess over the quality of a country’s institutions?  They get a D.  Here is the latest:

As Greece and Italy go to hell in a hand basket, down here in the Banana Republic of Argentina we’re seeing a déjà vu of the 2001  collapse. The government imposed a “green” corralito by which through  one excuse or another the American currency is being unofficially but effectively banned. The US Dollar was the way in which Argentines  protected their savings from the even more volatile funny money that is the Argentine peso. With the new restrictions, before buying dollars you have to be authorized by the AFIP, the Argentine version of the IRS.  Through a complex system that not even themselves understand, they check  how much money you earn, what are your expenses, how much you may have  saved based on that, and only then do they somewhat estimate what you  should be allowed to buy. There’s people that own big companies that aren’t even allowed 50 USD.

…So yes, these are interesting times to say the least. Lots of rumors, lots of desperate people out there.  People that were just about to travel and needed dollars but can’t buy them, people about to close business deals in dollars but can’t get the money either. USD accounts being closed, Pesos accounts being closed as well out of fear and the too vivid ghost of 2001. Interest rates have doubled in banks in the last few days and everyone is just waiting, and I guess that the key word in today’s article. Waiting, staying put to see what happens. What happens when the economy is about to collapse, or just collapsed?  Everyone waits. I saw the exact same thing 10 years ago. No one buys anything or sells anything unless they really have to.

Here is more, and I thank Matthew Weitz for the pointer.  There is mounting capital flight, and multinationals are seeking to repatriate capital.  A confiscatory devaluation may be in the works.  Yes I do know all the good numbers they have put up in the last few years, but I also know Austro-Chinese-Soya business cycle theory!  It’s also the case that Argentina will send economists to jail for trying to calculate the correct rate of inflation.

In short, I am crying for Argentina.

File also under “Yet another reason not to take IS-LM models too seriously.”

And the actuaries shall eat

In the debate on unemployment, Ryan Avent makes a common move (related post from Matt here, and Fabio here and Adam here), though I think an incorrect one:

It is remarkable to me how readily old, successful professionals dismiss the labour-market difficulties of young adults as the product of their poorly-chosen majors and general lack of ambition, and on what flimsy evidence they’re prepared to base these views. There are now 3.3m unemployed workers between the ages of 25 and 34. That’s more than twice the level in 2007. There are over 2m unemployed college graduates of all ages; nearly three times the level of 2007. There are many millions more that are underemployed—unwillingly working less than full-time or unwillingly working in a job outside their field which pays less than jobs in their field. As far as I know, the distribution of college majors didn’t swing dramatically from quantitative fields to art history over the past half decade.

The general form of the argument is: “only x changed, therefore x is the cause.”  A supply and demand graph, with the shift of one curve, shows that argument to be false.  The net effect of the shift will depend, for one thing, on the slope of the other curve, plus whether the other curve has been shifting (more slowly) all along.

A similar kind of argument is applied to the eurozone.  Since “things were fine” in year ????, the current crisis can’t be about structural problems in the underlying European model, yet in part it is, for reasons of resiliency and robustness.

Going back to unemployment, labor market opportunities for college grads have been eroding — except for the elite — in absolute terms since 1997-2000, well before the collapse in AD.  If those same grads are highly willing to be geographically mobile, highly willing to consider actuarial training, and highly willing to take tougher courses and study where the jobs are (doesn’t have to be tech subjects, some of those are failing too), the unemployment response to a given AD shock will be much lower.  But they aren’t, so it isn’t.  I’ve seen only small adjustments in the ambition and flexibility of college goers, not enough preaching about TGS I suppose.

In an era where both monetary and fiscal policies have underperformed, looking at both sides of the market is essential.

You can even give this all a Keynesian take (though I would prefer a TGS framework).  Since 1997-2000, there is downward pressure on lots of wages, but morale matters and labor market incumbents retain a favored position.  Though some wages fall, employers resist that downward pressure, and pass along a lot of the burden of adjustment to new job seekers.  Even if that original downward pressure on wages is smallish, new job seekers have to make big adjustments in their career plans, majors, ambitions, etc. to get through the door at all.  They didn’t.

That’s the same argument that Keynesians cite and indeed insist upon in other contexts.  It is somewhat harder to see when you start with a slower erosion in real wage opportunities, rather than a sudden AD shock, but it doesn’t make sense for Keynesians to dismiss it.

The real issue, I suspect, is that many people are allergic to arguments which appear to “blame” the job seekers, rather than government inaction, but it’s not about blame one way or the other.  It’s about the desire to have a fuller and better model, with richer causal chains, and to see through all the variations to a deeper level.

To put it rather immodestly, my arguments are a lot stronger than many people think!

Facts about education

Here is one:

In 2003, the first year the Babson group and Sloan-C conducted the survey, 57 percent of academic leaders estimated that learning outcomes in online courses were equal or superior to those of face-to-face courses. This year, the figure was 67 percent.

From Peter Orszag, writing about budgetary pressures, here is another:

Some admittedly imperfect indicators suggest the quality of public higher education is already fading. For example, in 1987, both UC Berkeley and the University of Michigan were included in U.S. News & World Report’s ranking of the top 10 universities. By this year, there were no public universities in the top 10 — and UC Berkeley, the top-ranked public school, had fallen from fifth to 21st.

Put these two facts together, and what is your prediction?

Mario Vargas Llosa on Liberty

Mario Vargas Llosa in the WSJ:

There are those who in the name of the free market have supported Latin American dictatorships whose iron hand of repression was said to be necessary to allow business to function, betraying the very principles of human rights that free economies rest upon. Then there are those who have coldly reduced all questions of humanity to a matter of economics and see the market as a panacea. In doing so they ignore the role of ideas and culture, the true foundation of civilization. Without customs and shared beliefs to breathe life into democracy and the market, we are reduced to the Darwinian struggle of atomistic and selfish actors that many on the left rightfully see as inhuman.

What is lost on the collectivists, on the other hand, is the prime importance of individual freedom for societies to flourish and economies to thrive. This is the core insight of true liberalism: All individual freedoms are part of an inseparable whole. Political and economic liberties cannot be bifurcated. Mankind has inherited this wisdom from millennia of experience, and our understanding has been enriched further by the great liberal thinkers, some of my favorites being Isaiah Berlin, Karl Popper, F.A. Hayek and Ludwig von Mises. They have described the path out of darkness and toward a brighter future of freedom and universal appreciation for the values of human dignity….

Many cling to hopes that the economy can be centrally planned. Education, health care, housing, money and banking, crime control, transportation, energy and far more follow the failed command-and-control model that has been repeatedly discredited. Some look to nationalist and statist solutions to trade imbalances and migration problems, instead of toward greater freedom.

…The search for liberty is simply part of the greater search for a world where respect for the rule of law and human rights is universal—a world free of dictators, terrorists, warmongers and fanatics, where men and women of all nationalities, races, traditions and creeds can coexist in the culture of freedom, where borders give way to bridges that people cross to reach their goals limited only by free will and respect for one another’s rights. It is a search to which I’ve dedicated my writing, and so many have taken notice. But is it not a search to which we should all devote our very lives? The answer is clear when we see what is at stake.

I am thrilled that Mario Vargas Llosa, Lech Wałęsa and economist Robert Higgs  will receive the Alexis de Tocqueville Award from the Independent Institute (where I am research director) at our Gala on Nov. 15, these remarks were written for that occasion.

Assorted links

1. Being and Daddylonglegs (German video), and video of Scott Sumner, and video of the excellent Charles Mann.

2. Cormac McCarthy’s Yelp reviews (is it really him?).

3. The lost decade in pumpkin-throwing.

4. Bionic legs for sale.

5. Why so many female CEOs in Brazil?

6. Interfluidity and also Paul Krugman on stagnationist ideas and negative real rates of return; Krugman gives an Old Keynesian, anti-China spin to the argument.