Month: December 2011
I very much enjoyed this book — which is detailed and entertaining and conceptual all at once — and I wrote a lengthy review of it for National Review (not on-line that I can find, issue of 11/28). It’s a model of how to write popular history of economic thought, and still teach professional economists at the same time. Excerpt from my review:
For all his brilliance, Hayek didn’t — at the critical time — have a good enough understanding of the dangers of deflation. He didn’t realize the extent of sticky wages and prices and, more deeply, he didn’t see that ongoing deflation would render the “calculation problem” of a market economy more difficult…
Hayek’s biggest [recent] intellectual victory probably has come in the aftermath of the Obama fiscal stimulus. A lot of the modern-day Hayekians, most notably Mario Rizzo of New York University, predicted that the stimulus would not provide lasting aid to the economy but rather would impose an artificial boom-bust structure on the economy. The early spending of money would boost measured national income, but eventually those jobs would prove unsustainable: the stimulus funding would run out, the jobs would disappear, and the economy would slow down once again. That is exactly what we saw in the spring and summer of 2011.
A Hayekian perspective leads one rather naturally to the view — now quite vindicated — that the aid to state and local governments would preserve some jobs but the spending projects would mostly fail, including when it comes to sustainable job creation. It’s often neglected that Hayek’s macro is a general perspective which goes well beyond the particular cyclical story involving the time structure of production.
In the review, loyal MoneyIllusion readers will enjoy my discussion of Scott Sumner and how he fits into these debates (“These days I cannot go anywhere in the world of economics, or blog readers, without hearing his name.”).
You can buy the book here.
Addendum: I quite agree with Alex’s take on Hayek, and had drafted a post of my own, saying much the same thing. Eighty or so years later, people are still taking potshots at Prices and Production, among Hayek’s other works. Eighty years into the future, how many current Nobel Laureates will be receiving comparable attention?
1. Coasean sentences from Australia, religion and sex.
2. The UK: even less wealthy than they thought they were.
3. The Bundesbank and its limits, and here (very important), comment from Felix, and Ezra from Germany on Germany, which is probably the best blog post of the day. Willem Buiter has good remarks, the eurozone alone could get its own “Assorted links” column every day.
4. Markets in everything, American horror theatre.
Everyone will be able to afford insurance.
You won’t have to worry about going broke if you get sick.
We will start to bring the cost of health care under control.
And we will do all this while reducing the federal deficit.
It is by far the best book on how to fix our current innovation dilemma and it is entitled appropriately Launching the Innovation Renaissance (Amazon link, B&N for Nook, also iTunes). I’ve read it twice and bought it once, even though Alex might have given me a copy had I asked, and now I am reviewing it once and probably will review it again.
Friedrich Hayek is not an important figure in the history of macroeconomics.
These days, you constantly see articles that make it seem as if there was a great debate in the 1930s between Keynes and Hayek, and that this debate has continued through the generations. As Warsh says, nothing like this happened. Hayek essentially made a fool of himself early in the Great Depression, and his ideas vanished from the professional discussion.
Warsh says much the same thing, adding, I am not making this up, a discussion of Hayek’s divorce. Neither Krugman nor Warsh attempt to argue for their positions, it’s all assertion. Both claim that Hayek is famous only because of the Road to Serfdom.
Let’s instead consider some of the reasons the Nobel committee awarded Hayek the Nobel:
Hayek’s contributions in the fields of economic theory are both deep-probing and original. His scholarly books and articles during the 1920s and 30s sparked off an extremely lively debate. It was in particular his theory of business cycles and his conception of the effects of monetary and credit policy which aroused attention. He attempted to penetrate more deeply into cyclical interrelations than was usual during that period by bringing considerations of capital and structural theory into the analysis. Perhaps in part because of this deepening of business-cycle analysis, Hayek was one of the few economists who were able to foresee the risk of a major economic crisis in the 1920s, his warnings in fact being uttered well before the great collapse occurred in the autumn of 1929.
It is true that many of Hayek’s specific ideas about business cycles vanished from the mainstream discussion under the Keynesian juggernaut but what Krugman and Warsh miss is that Hayek’s vision of how to think about macroeconomics came back with a vengeance in the 1970s.
David Laidler exaggerated but he was much closer to the truth than Krugman or Warsh when he wrote in 1982 regarding new-classical macroeconomics:
… I prefer the adjective neo-Austrian… In their methodological individualism, their stress on the market mechanism as a device for disseminating information, and their insistence that the business-cycle is the central problem for macroeconomics, Robert E. Lucas Jr., Robert J. Barro, Thomas J. Sargent, and Neil Wallace, who are the most prominent contributors to this body of doctrine, place themselves firmly in the intellectual tradition pioneered by Ludwig von Mises and Friedrich von Hayek.
Thus, Hayek was an important inspiration in the modern program to build macroeconomics on microfoundations. The major connecting figure here is Lucas who cites Hayek in some of his key pieces and who long considered himself a kind of Austrian. (Indeed, to the great consternation of some of my colleagues, I once argued that Lucas was the greatest Austrian economist of the 20th century.)
One can also judge Krugman’s claim that “the Hayek thing is almost entirely about politics rather than economics” by looking at who other Nobel laureates in economics cite. Is Hayek ignored because he is just a political thinker? Not at all, in fact in an interesting exercise David Skarbek finds that Hayek is cited by other Nobel laureates in their Nobel talks more than any other Nobel laureate with the exception of Arrow. (The top six cite-getters are Arrow, Hayek, Samuelson and then tied in citations for fourth place are Friedman, Lucas and Phelps.)
With clouds over Europe darkening, managers like Mr. Burnstein are increasingly turning their long-term focus to places with stronger currencies, like South America, Southeast Asia and Australia. When Metallica ended their “World Magnetic” tour in Australia a year ago, they played not just Sydney and Melbourne but also harder-to-get-to Perth.
“We’re a U.S. export the same way Coca-Cola is,” he said. “We look for the best markets to go to.”
“Right now Indonesia is on my watch list,” he smiled.
And get this:
Eight months before Metallica takes the stage in Germany, Mr. Burnstein decides whether the band should be paid in dollars, euros or a combination of the two. If exchange rates swing in a way that hurts Metallica’s earnings, he buys derivative financial instruments to lock in a preferred rate. Sometimes ticket prices are hiked to compensate for possible currency-related losses, though Mr. Burnstein shuns this strategy.
“Nobody is looking to make a foreign-exchange trade to make money, but you don’t want to be a loser,” the scraggly bearded manager said.
Here is one conclusion:
“A weak dollar is the best thing for American rock ‘n’ roll,” said Bill Zysblat, partner at RZO Productions, which has handled tours for the Rolling Stones and the Police.
The article is here, interesting throughout and for the pointer I thank Kanishka Kacker.
The $950bn worth of gold held by Indian households is the equivalent of 50 per cent of the country’s nominal GDP in dollar terms. All those gorgeous necklaces and other extravagances weigh 18,000 tonnes, or 11 per cent of the world’s stock, according to the report.
India imports 92 per cent of its gold, making it the third largest of its merchandise imports behind crude oil and capital goods. Gold made up 9.6 per cent of imports so far for the year ending March 2012 – significantly expanding the current account deficit.
On a different but related front, here is an overview of the ongoing deterioration of the Indian economy, still an underreported news story. Here are some economic lessons from Indian retail, a sector which is underperforming.
You will find it here, much better than all of this talk about the euro.
Or should I have titled this post “The Show So Far”? How about “Meet the New Boss, Same as the Old Boss”?
Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits.
The changes will include more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be overturned if a qualified majority of eurozone countries agrees to overturn it.
Merkel says the bondholders of the troubled nations won’t bear losses, although there is no German or other guarantee of the debt. It is hinting at the prospect of a guarantee without actually making one. The NYT summarizes the whole thing:
The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.
Only the last one on that list means anything. They might as well try to fool the markets this way. The positive scenario is: 1) fool the markets, 2) give Italy breathing room, 3) Monti restores growth and sound finances in Italy, and 4) things aren’t so bad anymore.
There aren’t really any better (and feasible) ideas on the table.
In my book (Amzn, Nook, iTunes) I discuss the stagnation of STEM majors in the United States. According to a new report something similar, although somewhat less pronounced, has been happening in Britain over the last decade:
In fact, overseas students accounted for more than 100 per cent of the increase in student numbers between 1996/97 and 2006/07 in engineering and technology. This means the total number of British engineering and technology students fell during the period.
3. How doctors die.
6. A total coincidence, but here is a list of the most corrupt eurozone countries. And I am still skeptical, but it seems markets really like the new Italian austerity plan.
You will find it here, I was happy with how it turned out.
Wolfgang Münchau has a nice update:
Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.
That is another absurd “solution” that has no chance of working, unless of course the critical countries simply recover on their own. (Why does it remind me of “Don’t mistreat the Abos! (if anybody’s watching)”? Don’t forget this:
Andrew Duff, a member of the European Parliament, last week provided a very useful guide to the distance the eurozone is from where it would have to be if it were a proper fiscal union. He drew up a list of all the changes in the European Treaties that would need to be amended to achieve that. It includes changes to 23 articles and five protocols.
And this is from MR comments, Ryan Cooper:
Thinking in the short term, obviously the solution involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent’s debt in one way or another. But just past the immediate crisis I don’t see any reason for optimism. If recession really does hit, how are the SPIIG crowd going to get out of the “debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity” cycle? It seems like a 1918-style suicide pact.
The SPIIG governments have to be weighing the costs of cutting their losses and getting out. (Right?) People seem to agree that would be another devastating financial crisis, and thinking selfishly that would be bad, but if I were Spain and it’s a choice between 2-3 years of total chaos and 20-30 years of grinding hopeless misery, I think I’d go with the first option.
Solve for the equilibrium…
Addendum: Ezra Klein offers observations from Germany; they focus on the real side of the economies!
German Economy Minister Rainer Brüderle reacted negatively against what he described as plans by the Spanish EU Presidency to “sanction” member states who do not comply with the European Union’s growth objectives.
…Spanish daily El País writes that little time had elapsed between the entry into force of the Lisbon Treaty and the beginning of the first conflict between federalists – who want a stronger Union – and eurosceptics. On the side of the federalists, El País lists rotating EU President Zapatero, EU Council President Herman Van Rompuy and Liberal group leader in the European Parliament Guy Verhofstadt, who have all spoken in favour of more economic power at EU level with sanctions against those who do not comply.
“This initiative has raised the alarm in Germany and in the UK…”
I’ll put a few of these under the fold…Karl Smith writes:
…the worse case endgame for a Euro failure is collapse of the global capitalist system, the political collapse of the West and the end of the Enlightenment. That’s fairly bad as things go and it could indeed happen.
I can imagine parts of eastern Europe or the Balkans going Fascist, but not Western Europe. The consequences of a euro collapse would be dire, but not nearly that dire. A few nice countries have nuclear weapons and battles over territory are no longer going to happen in that part of Europe. A cynic would add that fascism was also a part of the Enlightenment.
Ezra Klein writes:
…it [the morality play] only works if you think of the European debt crisis as a crisis of Greece, where the governance really was terrible, the economic institutions weak and the labor market coddled. It doesn’t work for Ireland. Or for Spain, which was running a budget surplus as recently as 2005. And is anyone in this conversation really pretending to have deep knowledge of the character of Portugal?
Germans will perceive a moral issue in guaranteeing the solvency of these countries, whether or not they think those countries have “done anything wrong.” My moral view is not exactly theirs (if I may generalize about various German views), but I hardly think such a German response is beyond the pale. You can believe “we are not obliged to bail out a country that won’t pay us back, and with whom we wrote a no bail-out agreement,” without believing “they are morally culpable.”
Matt Yglesias tweets:
If there’s a “reasonable probability” euro crisis will “crush the german economy” that’s a sufficient case for action
Not necessarily, not if the action raises risk and raises the badness of a bad outcome, which indeed it does. Have any of us actually done the decision analysis here? I don’t see it. Note also that Matt has been critical of Merkel in the past; now he is asking her to undertake a course of action which a bad politician would be incapable of seeing through. We will need maestros, and maestras, to get this one right.
Ryan Avent writes:
Sometimes a bank run is just a bank run, and a moralising approach that fails to stop it does nothing but harm millions of innocent bystanders. The desire to stick with the moralising approach may nonetheless prove attractive in Germany and elsewhere.
I think solvency problems are very much on the line here, and a perpetual guarantee of the debts of other economies is not a trivial no-brainer, morally or otherwise. It is doing much more than stopping a bank run, and once the guarantees are issued, through what credible mechanism can the plug ever be pulled on a country such as Italy, given the economic carnage which would result?
Reflecting on these responses in toto, I view these writers are wanting to make it a moral issue: “why can’t the mighty Germany simply solve this problem? What is wrong with them and their moral views?” I view these writers as reacting to my original post — written in multiple voices and with parentheses in the title I should stress — with a bit of mood affiliation. I view myself as trying to explain why moralizing perspectives miss the real difficulties in crafting a solution.
Asher Meir writes to me:
You wrote once that Italy doesn’t have to sell the Pieta to pay off its debts. But maybe it could create a lot of credibility by putting it in hock. In general, a country could create a lot of credibility by issuing bonds backed by various cultural treasures that they would find it plausibly inconceivable to forgo.
Italy could sell “Pieta bonds”.
Of course it could never work, even though it makes economic sense. Italy would feel it is being taken advantage of. Which is precisely the problem behind a lot of other proposed deals too. Under what conditions could the French government actually keep the Pieta and find the benefits from keeping higher than the benefits from sending back?
The entire “tighter sanctions against the fiscal violators” approach, now on the table, encounters exactly this problem. It’s already the case that the eurozone is unwilling to pull the plug on Italy.