Further results in Austro-Italian business cycle theory

You may think this is from the Journal of Masonomics, but no it is an NBER Working paper:

Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

The authors are Gita Gopinath, Sebnem Kalemli-Ozcan, Loukas Karabarbounis, and Carolina Villegas-Sanchez.  You don’t have to be a hard-core Austrian to think that malinvestment is the most under-used word in contemporary macroeconomics.


Austrian style malinvestment? Caused by the inability of relative prices to adjust due to fixed exchange rates, a fundamentally Keynesian story?
Its almost as if reality doesn't like to fit in our neat and tidy little theoretical boxes.

Try thinking outside the box. It is commonly called good money chasing after the bad. This is old old old stuff, lessons learned the hard way by thousands of people every since there was trade.

Essentially the price of money was fixed below market value. People who usually paid a high premium when they borrowed money due to perfectly predictable risk were sold money at a very low cost. The results were perfectly predictable.

don't forget how the size of the firms plays a role! If it were just CHEAP MONEY FOR EVERYONE it would be a little different.

Only perfectly predictable "after the fact" as this model is nothing more than a fancy form of back-fitting data with a model.

Recall that "emerging markets" look promising ex ante; it's only 'ex post' that they reveal their 'true colors'.

I myself invested in BAA, a promising Congo gold junior (it's still listed, and it's still promising). Needless to say...I lost 90% of my money (luckily it was just a token, for play).

Can someone please tell me what Masonomics refers to?

The belief that the GMU econ dept is an ideologically motivated source of faux research supporting pre-conceived beliefs comes to mind, but then, this is a satire web site with an unparallelled talent for self-parody.

Masonic lodge onomics is what I thought.

Masonomics is a nickname the GMU economics dept gives its way of looking at economics which briefly stated draws on Hayek, Schumpeter, Irving Fisher, Hyman Minsky and a little on behavioral economics and in brief holds that economies are too complex and gigantic to be managed by government but is more cynical about private firms than standard free market ideology and also doesn't posit that humans are classically rational agents. Masonomics believes that firms often screw up (e.g., "malinvestment") because the economy is so complex and people running them are not supercomputers. It posits also that firms try to co-opt government to insulate themselves from that risk and the political class is as susceptible to being purchased as any other source of labor. It holds that decentralized activity and decisionmaking is the best available alternative because constant experimentation will reveal what works best and what works worst and that information can be transmitted thru the economy to increase general welfare, whereas big bureaucratic organizations tend for the self-interest of those running them to suppress experimentation and thus generate less useful information; as well they are inherently susceptible to rent-seeking and conflicts of interest.

So, they included a non-euro, oil exporting Scandinavian country just to see if anyone was paying attention?

Very good this early in the morning.

I don't want to read this paper right now but I wonder how the vacation home real estate market fits into this.

not just in contemporary macroeconoics. malinvestment is universal.

No no no. Capital is capital is capital. A farm tractor is completely interchangeable with an office building or container ship. Just boost aggregate demand so the excess production will be consumed.

This idea is quite common in the firm dynamics literature, both theoretical and empirical. Usually the word used is "misallocation".

Truly hard core Austrians don't believe in macroeconomics.

they do if they are maximizing their academic social network effects.

but even so, the line if a criticism

The paper is gated, but I would expect it to confirm what seems obvious: that capital is "malinvested" in speculative assets, real estate in the South region of the Eurozone and financial assets elsewhere (including the U.S.), as the rate of return on capital (r) has fallen and wealth is measured in (speculative) asset values rather than the return on productive capital. This phenomenon is consistent historically with high levels of inequality but for reasons that aren't clear. The Mice would blame government for the "malinvestment" (C + I + G = Baloney), the remedy for which would be to let markets be markets, wherever (or however low) the markets take us in order to reset savings, investment, and r. Whether one follows the Mice, the reset would reset more than S, I, and r, as it would reset speculative asset values and "cure" excessive inequality. Mortals might refer to such a reset as a depression, but the Mice know a thing or two about semantics (or propaganda if you aren't sympathetic).

The depression is inevitable. At one point the 'authorities', whoever they are, run out of money to prop the whole mess up, the only difference is the collapse and readjustment takes lots of time and sheds lots of blood, far longer and far more dangerous than the constant corrections that a free market provides.

Throughout all this the very basic function of a free market is lost. It isn't allocating capital, it isn't freeing the innovative brilliance of people. It is a simple and effective way to stop stupidity. Anything at all that interferes with bad ideas forcing out of business the people with bad ideas creates a market failure; monopolies, subsidies, price fixing. No matter what the source is, the only benefit of a free market gets short circuited.

I say the only benefit because it is bloody, messy, ugly, unfair. And any alternative at all, no matter how short sighted or unworkable is better than the workings of a free market, especially to those who are participants in it, meaning everyone. Except that we know what the alternatives look like.

The managed markets in the south of Europe end up looking very similar to or even worse than the fascist or communist dictatorships that characterized that region up till less than half a century ago. At least the world had the sense to hang or shoot those scum. How about shooting a bureaucrat from Belgium, or a central banker?

A critic of the Mice would point out that a foolish consistency is the hobgoblin of little minds. But what's worse: to be consist or to be erratic. I've commented many times that inequality is a problem only if it's an economic (as opposed to social) problem, the evidence for which is financial instability. Whether that's true (i.e., whether it's the inequality or the erratic policies that cause the instability) becomes a moot point if a "foolish" consistency replaces the erratic policies because, as I mentioned in my first comment, the reset would "cure" the inequality. What I expect to happen in the reset, however, is a conversion not unlike that of Paul on his way to Damascus as assets values plummet and Mice and Mortals converge and "save" the owners of speculative assets from their irrational ways.

I have a hard time understanding what kind of thick old greaseball NBER has working for them who thinks that asking $5 for paper downloads is a good idea in this day and age, but you know there's this really helpful free service called Google, which finds: http://econweb.umd.edu/~kalemli/capital_allocation_productivity.pdf

This is straight-up Austrian theory, only using "misallocation" in place of "malinvestment." And there's truth to it, though sector-level misallocation was probably more important than firm-level. Using TFP is one way of looking at it, but I think the cycle is more specifically in the expectations of financiers of capital expenditures.

Journalists, politicians, and most non-First-World countries always get NBER paper access for free. The potential for piracy here is enormous.

This is an interesting paper for sure, but in practice people are under weighting the importance of political economy. In economies like Italy established firms are very well integrated with government officials, look no further than Berlusconi's empire.

Yup. Italy v. Japan: RGDP per worker gap with U.S. 1=Peak
Italy's decline actually began one year before its Euro peg, although this might just be the U.S. computer revolution at work.

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