Month: April 2013

Wolfgang Münchau on wealth disparities in the eurozone

This highly stimulating column — one of the best of this year — may be gated for you (try googling “The riddle of Europe’s single currency with many values”), so let me redo my own version of the argument (modified a bit from his claims):

1. Wealth measures in the eurozone portray Germany as relatively poor.

2. Germany cannot be so poor and Spain and Cyprus cannot be so rich.

3. Therefore there must already be “more than one euro” in the eurozone.

4. Therefore the “value of a euro in Spain” must fall relative to the value of a euro in Germany, so that (eventually) Germany rightfully appears to be the wealthier country.  The single currency has to break up, and/or we need to see a mix of high inflation in Germany (unlikely) or extreme deflation in Spain, Cyprus and other locales.

TC: Now that is either somewhat false, or perhaps a new and Nobel-worthy theory of exchange rate movements, with added oomph for the wealth and perceived relative wealth variables.  Since I do think the euro is likely to split into pieces, I do not disagree with the conclusion, but I am less sure about this stated reason. Here is one excerpt from the article:

Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year-in, year-out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan.

You will note, by the way, that this differs from the usual story of these economies being whacked over the head with the deficient aggregate demand hammer (thank goodness we are getting away from that distorting obsession, though let’s not throw out the bebe with the bathwater).

In any case, I would redo the argument with these:

5. The extent of labor migration from Spain to Germany will be high and is being underestimated, precisely because Germany is so cheap in some parts.

6. Spain, Cyprus and other countries are not as wealthy as is currently measured by market prices.  The world has (perhaps) not yet seen that those locales are due to lose a permanent 15% to 20% of wealth or more, relative to current measurements.  How does this sound: “We are not as wealthy as the ECB research department thought we were”?

6b. Average, marginal, total, private vs. social value, what do those home prices really mean? Keep in mind that varying home ownership rates are driving the varying wealth measures.  Recently I read this: “German house prices are actually lower in real terms than they were in 1970” and thought it was a sign of German wealth and wisdom rather than poverty.  I thought it was a sign that in Germany the young are not merely in thrall to the elderly.  The correct metric here is lifetime consumption and by that measure I strongly suspect the Germans come ahead of most of the other European nations.  Still I find it a residual puzzle that the higher Mediterranean wealth measures do not get converted into higher lifetime consumption (if indeed they do not).

7. Most wealth is held in the form of human capital, and that is another unmeasured plus for Germany.  (By the way, there is a recent claim that the Irish are the most educated people in the EU.)  Let’s compare two societies.  In one you move to Stuttgart to learn how to become a Flugzeugmaschinenmechaniker.  In the other you hang around Genoa to rent-seek and make sure you inherit Daddy’s paid-off house.  The latter may produce higher measured net median wealth, but the resulting society will be less flexible and produce lower positive social externalities from such “labor market decisions.”

8. #5-7 together.

9. We badly need new theories of how Mediterranean Europe can have positive inflation (for the most part), nominally overinflated wealth levels, and yet be crushed by some kind of destructive economic process that we don’t yet have a good enough label for.

10. Wolfgang Münchau, despite his considerable plaudits, remains a remarkably underrated columnist.  There is no one better to read.

Addenda: Don’t forget pension funds, and also that German households start earlier, which makes the median poorer.

The Randall Collins theory of ritual

Much of it concerns the origins and application of violence, but this blog post on Randall Collins and his theory of ritual, by Xavier Marquez, is interesting throughout.  Here is one excerpt:

The (relative) insignificance of ideology. Taken in its strongest terms, Collins’ theory seems to suggest that ideology is generally unimportant. Whether a symbol acquires socially motivating value depends much less on its “generalized” meaning than on its place within chains of interaction rituals; we are not generally the dupes of rhetorical framings and persuasive strategies except in the context of successful ritual situations. (Collins notes, for example, that most advertisement seems to be unsuccessful at actually persuading people to buy products, and is mostly intended to preserve attention space against competitors). From this perspective, the decline of labor movements worldwide, for example, may owe less to any ideological changes (“persuasion” and “manipulation” taken in a very broad sense) than to (intentional or unintentional) changes in the conditions for the ritual production of solidarity. Chris Bertram recently mused on the occasion of Margaret Thatcher’s death that UK society used to be socially more class-differentiated (there were strong institutions where class solidarities and roles were produced) but is now less so (since these institutions have vanished), despite very low levels of economic mobility and higher levels of economic inequality; many people now “feel” that there is more equality. From the interaction ritual perspective, these changes are not the result of the working class becoming simply convinced of lies due to clever persuasive strategies by elites, but of the less central place of rituals and symbols reinforcing class solidarity in their lives. This is in turn due to any number of causes: laws that made labor unions more difficult to organize, structural changes in employment patterns, the decay of rituals of deference, the emergence of rituals focused on celebrities that cut across social class, etc.

Collins is one of the most important social scientists in the world today, though in many circles he remains underdiscussed.  You will find previous MR coverage of him here.  The pointer is from @HenryFarrell.

From Estonian Rhapsody to Estonian Opera

Estonian Rhapsody was the title of Paul Krugman’s 2011 blog post which argued that Estonia’s austerity program and rapid recovery wasn’t all it had been cracked up to be. The post led to a surprisingly nasty series of tweets from none other than Toomas Ilves, the President of Estonia. Krugman’s arguments against austerity and Illves response have now been turned into a real rhapsody, well, an opera to be precise. As noted on Fareed Zakarias’s GPS Blog:

The “cantata” premiered this week before a live audience in Tallinn and then was shown – all 18 minutes of it – on Estonian state television.  The first act lays out the Krugman argument – even more sparingly than Krugman laid it out himself.  Then the real drama begins in the second act with Ilves’ stinging response.

Why opera?  Why song?  Well, singing is in Estonians’ blood and has helped write their history. After all, the nation’s unraveling from the Soviet Union is known as the Singing Revolution. The Soviets had banned Estonia’s national songs and in the late 1980’s Estonians began to gather in ever increasing numbers to sing those songs as a sign of protest.  By 1988, hundreds of thousands of people were gathering in a country of little more than a million. In November of that year, Estonia declared its sovereignty; three years later, it declared full independence.

How are American parents different?

The biggest difference between American parents and their counterparts in Europe might be that they are far more relaxed about enrichment than we are, according to a study released this week by Sara Harkness and Charles M. Super at the School of Family Studies at the University of Connecticut.

Not only are Americans far more likely to focus on their children’s intelligence and cognitive skills, they are also far less likely to describe them as “happy” or “easy” children to parent.

“The U.S.’s almost obsession with cognitive development in the early years overlooks so much else,” Harkness told Slate .

For part of their research, the authors focused just on parents in the United States and the Netherlands. The differences are stark: American parents emphasized setting aside “special time” with each of their children, while Dutch parents spent a few hours each day together with their kids as an entire family.

…American parents were the only ones to consistently mention their children’s advanced intellect, while other countries focused on qualities like “happiness,” being “easy” to manage, or the even more zen-like “well-balanced,” in Italy. (Italians also used the word simpatico, a group of characteristics suggesting social and emotional competence).

The article, by Olga Khazan, is interesting throughout and for the pointer I thank an excellent and loyal MR reader.

*On Politics, book one*, by Alan Ryan

I picked up these two volumes on the basis of a very favorable review reproduced on The Browser, by Noel Malcolm.  Yet the books sat around the house for months.  I figured this was another overwrought survey by a famous person, valuable mainly as an introduction for those who don’t know much about the topic.  The subtitle of volume one, by the way, is A History of Political Thought Herodotus to Machiavelli. Volume two picks up from there.

Overall I have been pleasantly surprised.  When it comes to readability, interest, and integration of the intellectual narrative with actual history, I give volume one an A or A+.  Along multiple dimensions, it would count as the very best book of the year.  I do, however, have one major reservation.  Whenever Ryan writes about a deep political philosopher, such as Plato, he makes that thinker sound prosaic and thus seem second-rate and shallow.  Not terrible, just ordinary.  Reading Ryan only, you would never know what all the fuss is about.

It is thus hard to assess the book as a whole, but I will continue with volume two.  Ryan himself is a fairly deep thinker.  Allan Bloom was a less deep thinker, and yet perhaps for that reason Bloom much better captured the depth of Plato.

Natural rates of interest, simple or tricky?

Krugman offers a full argument with graph, which you should read in total, but here is one bottom line summary:

When I say that the rate is too high, I mean relative to the rate that would produce full employment, which is, as Brad reminds us, Wicksell’s “natural rate”.

And here is his opening bit:

One of the baffling aspects of economic debate during this Lesser Depression, or so it seems to me, is the apparent urge of many economists to shy away from straightforward conclusions, the urge to make the simple complicated and the clear blurry.

If you’re asking what is at stake, it is whether we should be confident or even mildly confident about any predictions made through a liquidity trap model.  I’ll stick with a few points, which I will put under the fold…

1. I am persuaded by Scott Sumner that, at least these days, the interest rate channel is not very important.  Given that, one still can favor looser money, or at the very least think that tighter money would make things worse, even if the gains from looser money have by 2013 mostly come to an end.

2. I am struck by the remarks of Angus that:

Again and again I see the economy’s problem described along these lines:

“At the ZLB (zero lower bound), the real interest rate is too high to get us to the optimum. The nominal interest rate cannot fall any further by definition. So to get to the optimum the expected rate of inflation must rise.” Those are Simon Wren-Lewis’ words (they appear in a comment at the link), but Krugman and many others tell roughly the same story.

As always, I have questions.

In the IS/LM framework many (not Wren-Lewis) are using, doesn’t this mean that we are getting “growth” by firms investing in projects with a negative NPV now made profitable by an even more negative discount rate?

Second, how is that inflation expectations rise and the nominal interest rate remains unchanged?

Brad’s rather abstract talk about “lower” interest rates does not deflect me from recognizing this visceral wisdom from Cherokee Gothic.   I am sorry, but on this one I have to vote for “complicated,” not “simple.”  I will gladly admit that I do not myself have the final answers here.

3. It is not always useful to talk of “*the* interest rate” and apply that across both Treasury securities and the private sector.  Our government can borrow at some negative real rates, but are we really to think that the private sector is looking at negative rates of return in the United States?  Hardly.  Wicksell, yes, but in this case we need some Sraffa too.  Some kind of asset segmentation is going on, as David Beckworth and others have stressed, and that segmentation does matter a great deal for the transmission belt of monetary policy, at least to the extent you believe in an interest rate mechanism.

4. This is a side point, but it is Brad who doesn’t get Wicksell and Wicksell’s theory of the natural rate of interest.  Brad blogged:

The large demand for relatively safe assets like U.S. Treasury securities means that the interest rate consistent with full employment–the “natural” interest rate, in Wicksell’s terms–is lower than normal, and the natural rate is in fact less than zero.

On the natural rate of interest, what did Wicksell actually write?:

There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital.

That’s from the beginning of chapter eight.  Now it’s more complicated than that, as Wicksell juggles and sometimes equates three or four different definitions of the natural rate of interest, not to mention the contrast between the natural rate of interest and the normal rate of interest.  David Laidler once referred to the “Wicksellian muddle.”  Still, DeLong is barking up a different tree.

Brad also chides me for neglecting “basic Geldzins und Guterpreis”, but speaking of basics he neglects the umlaut and also the plural on “price”, so it should be “Güterpreise“, the German-language title then being translated somewhat inexactly into “Interest and Prices.”

5. Stephen Williamson has some interesting comments on the issue.  John Cochrane has an excellent post on this entire question, and it will not push you into thinking the matter is simple.   I also recommend these Scott Sumner remarks.

You will recall Cowen’s Third Law: “All propositions about real interest rates are wrong.”

Max wants to know what to do

Max has me stumped.  I promised him an answer months ago, but I’ve come up with nothing of value, other than perhaps citing Adam Smith on alienation and the division of labor.  I’ve felt guilty ever since and I suppose today is the day I fess up to having no good response at all.  Here is his initial email:

1) As a fairly recent graduate of an Ivy League institution (with a bachelor’s degree), most of my classmates seemed to have some idea that career and life path choice should be driven by a “passion” such that the right choice is self-evident to the chooser. What does this belief mean to you as a social scientist?…

For question two, then, you may sense where this is going…

2) Assume I have no such passion. Furthermore, I am a fairly well-qualified young generalist.* What paths should most appeal to me if my goal is to maximize doing “interesting” work? Doing meaningful work? Achieving social status? (Which of these goals should be primary?) Need I try to develop a passion before selecting a life path/career, and if so how do I do it?

All the best,
Max

*Two years out with a BA from an Ivy League school. Top 10% of the class but not an academic rock star. A record of primarily reading/writing-intensive courses, as well as basic to intermediate economics, calculus, statistics, a proofs course. Time spent abroad in study and travel, though no foreign language fluency. Two years in the private sector with a decent amount of analytic and management experience, but without a big name behind it.

Max is hardly doomed.  Still, reading emails such as Max’s makes me more of a determinist.  He seems to have a meta-preference for more career passion, but no way of getting there.  I would tell Max to at least consider the world of consulting (and here is Robin Hanson on same).  I also would tell him that meta-preferences are overrated, as there is no reason per se to side with the meta-preference over the preference.  Passion isn’t a value in and of itself.

What other advice can you all give?

The culture that is Washington

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency.

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates.

The House was expected to pass a similar bill on Friday.

Here is the FT article, here are other sources.  Some officials suggested that transparency “could threaten national security,” more detail on that here.  Here are some further interesting details.

What if we all died at forty?

Akka emails me:

I think one of the things that make planning (and living) life so hard is the combination of the facts  that

  1. Its end date is uncertain
  2. It is rather highly likely that one’s faculties will be duller towards the end.

If it was certain that when we sleep on our 40th birthday, we wouldn’t wake up, how different would the world be? Economically? Culturally? Will it be more peaceful? More left leaning?

One question is how child-bearing norms will evolve.  There will be considerable pressure to have kids at age eighteen or so.  (It might be considered unethical to have a child at age thirty-five, although if the fertility rate falls enough the economy might shift heavily into orphanages and this could be considered virtuous nonetheless.)  I predict many people would become much stricter in their morals and more religious, and they will have children quite early.

Other people would attempt to maintain a collegiate lifestyle through their death at age forty.  There would be a polarization of outcomes and approaches to life.  Old age as an equalizer, and as an enforcer of responsible savings behavior, would be gone.

The likelihood of warfare would rise, if only because the sage elderly won’t be around and male hormones will run rampant.

Credit would be harder to come by and the rate of home ownership would fall.  The rate of voting turnout will go down, as would the degree of wealth inequality and the amount of innovation.  Federal discretionary spending, as a percentage of the budget, would rise.

We can look at data from Huntington’s Disease, for instance see the Oster, Shoulson, and Dorsey paper.  Only five to ten percent of potential carriers choose to learn whether they will have the disease, even though the cost of the test is low.  That suggests knowledge of a finite horizon is itself costly and a source of discomfort.  Those who learn they will encounter bad fates from the disease are more likely to divorce, more likely to get pregnant, and much more likely to report significant financial changes and changes in recreational activities.  Of course these are solo individuals embedded in societies with normal life expectancies; if everyone were to meet an early untimely end I believe the (partial and polarized) shift toward conservative and religious norms would be much stronger.