Year: 2016

What is the anti-austerity recommendation for Brazil?

by  Tyler Cowen in

At 70% of GDP, public debt is worryingly large for a middle-income country and rising fast. Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill. Brazil therefore has little choice but to raise taxes and cut spending.

Too often, at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

Sophisticated analysts of fiscal policy do not make this mistake.

By the way, here is a long study of how Brazilian fiscal policy has been excessively pro-cyclical (pdf).

And how is Brazilian output doing you may wonder?:

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

Don’t forget this:

Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. By 2014 the government was running a primary deficit (ie, before interest payments) of 32.5 billion reais ($13.9 billion) (see chart).

Brazilian commodity prices have fallen 41% since their 2011 peak, so I say Ed Prescott has earned his Nobel Prize right there.

The first underlying article/op-Ed also is from The Economist.  Without intending any slight to their other recent issues, the January 2-8 issue is one of their best in a long time.  I am very pleased to have bought it in advance at the airport rather than waiting to get to my copy back at home.

Ontario fact of the day

by  Tyler Cowen in

Ontario is the largest sub-national debtor in the entire world, just one alarming distinction. Its debt is more than twice that of California, a state with three times the population and one that has its own severe fiscal problems. Its debt is $294 billion, or over $21,000 per capita. Net debt to GDP is up 48 per cent in the past 10 years to almost 40 per cent, second only to Quebec. Last year’s interest obligations totalled $11.4 billion, about the same as the cost of community and social services. I doubt many Ontarians realize how much they are paying just in interest on the provincial debt. It averages $840 per person every year and rising. Not surprisingly, Standard and Poor’s downgraded Ontario’s bond credit from AA- to A+, citing a very high debt burden and very weak budgetary performance.

Not a major cause for concern in terms of systemic risk, but not good news either.

That is from Joe Oliver, via Felix Salmon.

Why not sell a portion of your home?

by  Tyler Cowen in

Mr. [Alex] Rampell sees further opportunities in new asset classes. One example, he said, might be selling an equity stake in homes. “Why not sell a portion of your home?” he asks.

Ample capital exists around the world, as in the deep coffers of the Norwegian sovereign wealth fund, with $870 billion in assets, thanks to North Sea oil and a small population. With the right financial vehicle, Mr. Rampell said, such a fund could invest to co-own houses in, say, pricey Palo Alto, Calif., making it easier for prospective home buyers to make down payments and reduce their mortgage burden. “They could own 10 percent or 15 percent of your house, so you don’t have to borrow as much,” Mr. Rampell said. “I think there’s a lot of room for more of those kind of new asset classes.”

Here is the short NYT blog post.

Are checked bag fees for flights too high, too low, or just right?

by  Tyler Cowen

Air Genius Gary Leff has a take on this, here is the concluding bit:

While checked bag fees are profitable, airlines want passengers to pay lower fares and higher checked bag fees, not price checked bag fees so high that people don’t pay them. That’s because moving revenue out of fares and into ancillary revenue excludes that revenue from the domestic 7.5% excise tax on tickets.

Checked bag fees are in large measure a tax arbitrage play. Eliminate the tax disparity and — since most aircraft don’t max out their carrying capacity — in ten years I’d bet that checked bags get rebundled back into the fare.

Higher checked bag fees may be disadvantageous since charging more for checked bags pushes more luggage to carry on, causing boarding to take longer, and resulting in aircraft not getting scheduled/utilized as effectively.

Do read the whole thing.  Don’t forget — Glazer’s Law!

What was 19th and early 20th century TFP? Which was America’s most inventive decade?

by  Tyler Cowen in

There is a new paper (pdf) on this question by Bakker, Krafts, and Woltjer, here is the abstract:

We present new estimates of TFP growth at the sectoral level and an amount of sectoral contributions to overall productivity growth.  We improve on Kendrick (1961) in several ways including expanding the coverage of sectors, extending estimates to 1941, and better accounting for labor quality.  The results have important implications including that the pattern of productivity growth was generally ‘yeasty’ rather than ‘mushroomy’, that the 1930s did not experience the fastest TFP growth of the 20th century, and that the role of electricity as a general purpose technology does not explain the ‘yeastiness’ of manufacturing in the 1920s.

They instead suggest that TFP growth is rising throughout the 1920s through the 1960s, a view which I cannot quite agree with.  I view the 1960s as a time when previous ideas spread widely, rather than the key years of invention.

My strictly intuitive, historical guess is that TFP growth peaked in the 1890-1930 period, give or take.

More generally, the TFP concept is most useful, and most exact, when TFP growth is low rather than high.  The bigger TFP growth might be, the more you have to worry about unmeasured changes in labor quality, and also worry about what is “technical progress embodied in capital goods” as opposed to “sheer accumulation.”  When there is less progress, these measurement issues are smaller too.

I am most skeptical of TFP estimates for China, even if you believe the underlying statistics.  Compared to “the global frontier,” TFP growth for China has been pretty close to zero, for centuries.  Compared to “the frontier within China”…er…Chinese TFP growth and “embodied accumulation of foreign ideas through savings and investment” become pretty much the same thing.  The distinction theory was trying to create then has been abolished.

So I’m not convinced by the results of this paper, but they are a useful corrective to excess certainty about Alexander Field and the previous view that the peak of American TFP was the 1930s.

In any case, thumbs up to any paper which uses the word “yeasty.”