The new German economic reforms
Earlier in December Germany passed some much-needed economic reforms. Germany hopes to avoid its growing reputation as the “sick man of Europe.” It has been plagued by slow growth and double-digit unemployment for decades now. The key measures of the reform included the following:
1. An $18.9 billion tax cut, adding $11 billion to a previously planned cut. Note that this is a tax cut, not a spending cut.
2. A weakening of job protection rules, especially for firms of less than ten people. This is the best element of the package.
3. Stronger financial incentives for the jobless to take work. That being said, most of these changes are small adjustments in the numbers rather than a real kick in the pants.
4. Consolidation of some unemployment and social help benefits. Nowhere do I see this described as a real spending cut, although perhaps it will eliminate some costs of administration in the long run.
5. Restrictions on various tax exemptions and a greater unification of the tax code. Read: some small tax increases. This includes an explicit tax increase on tobacco, an elimination of tax deductibility for some commuting expenses, and a tax amnesty designed to raise a burst of revenue. Of course the long-term implications of amnesty encourage more tax cheating.
Here is (not very useful) summary in English of the new policies. Here is a longer and more detailed German treatment, also read this from the FAZ as well.
My take: These measures are better than nothing but they address only a small fraction of the German problem. Looking at who voted for them — the Social Democrats — is enough to illustrate their weakness. That being said, Germany appears to be in the midst of a mild recovery of expectations, so if these reforms get the credit all to the better. It might make further improvements possible.
Perusing the German articles is revealing, whether or not you read German. The country has policies called the “Werbungskostenpauschbetrag,” “Vermoegensbeteiligung,” and of course the “Bewirtungsaufwendungen.” As Mark Twain might have suspected, simply pronouncing and spelling out these words is likely to put a dent in your growth rate.
My New Year´s resolutions
1. To learn how to use high-quality, non-stick cookware.
2. To read more in Spanish.
3. Not to blog (much!) on my honeymoon. I´ve put a few posts in the can, so to speak, but for a few days you will be hearing more from Alex and Fabio than from me. I´ll be back in full force soon!
Do we overvalue the difficult?
Experimental subjects consistently value a poem or artwork more highly when they are told it took a long time to produce. See this study by four psychologists. The increase in perceived value is strongest when quality is difficult to judge by other means. Furthermore other research suggests that we value artworks more highly, the more time and trouble it took us to understand them.
What does this mean for the arts? We will tend to overvalue difficult works of high culture, most likely. We also will undervalue that which is accessible. In other words, Seinfeld is better than you think.
The authors note that Jackson Pollock, in his lifetime, was attacked for producing paintings that “anyone could have done.” In reality Pollock’s paintings were the result of a painstaking process, difficult for anyone else to mimic. He often was defended on these grounds. A single painting could require months of hard work. So if you don’t like Pollock, perhaps now you will think more of it.
And this blog, well, this blog just takes forever to write…
10th anniversary for NAFTA
The first of January will mark ten years of NAFTA. There is little doubt it has helped the United States and Canada, but how about Mexico?
Foreign investment in Mexico has increased dramatically. It now stands at $12 billion a year, more than India receives. Exports have grown by a factor of three, up to $161 billion. Mexico’s per capita income has risen 24%, to $4000 a year. All these trends were underway before NAFTA, but NAFTA continued and cemented them. It also is believed that the $40 billion Clinton bailout never would have happened without NAFTA. Finally Mexico has made significant steps toward democratic rule and now holds elections with relative freedom of political entry.
Why then so many complaints from Mexico? First and most importantly, many Mexican exporters have been devastated by competition from the Chinese, who pay much lower wages. To be sure, this is a real problem, but for Mexico to be the high-wage competitor itself says something about how far the country has come.
Second, many Mexican farmers are upset at competition from American pork and corn. Most of these farmers are not mechanized in any way. They push a plow through their fields with a burro or ox. It is hard to imagine how preserving these sectors could benefit Mexico’s future development. I am all for easing the relevant adjustment costs, but trying to keep these jobs would be no different than banning the car to protect the proverbial horse and buggy. The only difference is that many of these farmers don’t even use techniques from the horse and buggy age.
Keep in mind that free trade in food will be a windfall for Mexico’s urban poor. Furthermore many indigenous farmers grow food for their own consumption, not for sale to outside markets. Cheap American imports can’t make them worse off, since they can always continue their current time allocation if they wish. More likely, they will start buying more cheap foodstuffs and look for a different line of work.
NAFTA was far from a perfect treaty, but let us offer three cheers in its favor. It may well go down as the most lasting legacy from the Clinton administration.
A recent World Bank report confirms this positive view: “without NAFTA Mexican exports would have been around 25 percent lower than the actual numbers, foreign direct investment would have been around 40 percent less and the country’s per capita income in 2002 would have been up to 5 percent lower.” Here is a summary of the report.
By the way, did you know the Mexicans are the world’s biggest drinkers of Coca-Cola in per capita terms, exceeding even Americans?
The earlier figures in the post, as well as the Coca-Cola information, come from Business Week.
How much do Freddie and Fannie Mae save homeowners?
Freddie Mac and Fannie Mae receive numerous state privileges, including tax-exempt status for their securities. Many investors believe that the U.S. government would guarantee the debts of the agencies, should a crisis arise. Not surprisingly, there has been recent talk of making the agencies operate on a level playing field.
The agencies, in response, argue that they have lowered the cost of homeownership significantly. But by how much?
Wayne Passmore of the Board of Governors did a study, here is one summary. Here is the bottom line:
The report says that because of their government-sponsored status, Fannie Mae and Freddie Mac were able to borrow at lower interest rates than private sector firms by an average of about 40 basis points from 1998 through the end of this year. However, most of this benefit is passed on to stockholders not to homeowners, the report says. The effect of these two enterprises buying and repackaging mortgages has reduced interest rates by only about seven basis points.
“The GSEs’ implicit subsidy does not appear to have substantially increased homeownership or homebuilding because the estimated effect of the GSEs on mortgage rates is small,” Passmore reports.
Furthermore it is estimated that the legal subsidies account for as much as 81 percent of the value of the traded companies. Not surprisingly, the agecies have been critical of the study.
My take: A common sense understanding of tax incidence favors Passmore’s conclusions. Humongous is the right word to use in describing American capital markets. If you let one entity borrow at lower rates, there are two primary options. First, that entity makes profit without lowering overall rates much. Second, and less likely, that entity becomes big enough to lower mortgage rates by some amount. But to the extent the entity becomes large, there is a significant tax or guarantee cost associated with its size. In other words, the government would be pushing down real interest rates by subsidizing capital accumulation, which cannot generally be done at low cost.
The importance of status in business
Gregg Easterbrook directs our attention to the following two anecdotes about business, both taken from Art Kleiner’s Who Really Matters:
Why, for example, does Coca-Cola insist on keeping its original formula in a safe-deposit box that only a few top executives are allowed to open when at this point any cola company could reverse-engineer the ingredients? It’s done, Kleiner says, to make the Coke “core group” feel important. Another great anecdote: When former ITT CEO Rand Araskog published an as-told-to book of self-praise in 1989, ITT public relations panicked on learning that almost all copies were going to be remaindered. Araskog would be furious if he walked past the Strand, New York’s famed used book store, and saw his book on sale for $1. So ITT contracted for another company to buy up thousands of copies of the book and quietly destroy them.
Here is a brief review of the Kleiner book, here is Kleiner’s home page. The remainder of Easterbrook’s post contains brief reviews of other recent books of note.
Laughter
There is no doubt that laughter is a social activity. “Laughter evolved as a signal to others – it almost disappears when we are alone,” says Robert Provine, a neuroscientist at the University of Maryland the author of Laughter: A Scientific Investigation…most laughter comes in polite response to everyday remarks such as “Must be going”, rather anything remotely funny. The idea that laughter works as a kind of social glue fits with some other other observations. A baby’s first giggle comes at around three or four months, which also happens to be the time the baby starts to recognise individual faces. And the way we laugh depends on the company we’re keeping. Men tend to laugh longer and harder when they are with other men, perhaps as a way of bonding. Women tend to laugh more [almost fifty percent more] and at a higher pitch when men are present, possibly indicating flirtation or even submission.
Here is a brief on-line summary of Provine’s ideas. Oh yes, by the way, when the boss laughs, everyone laughs. Note also that smiling may be easier to fake than genuine laughter, which would suggest one reason why laughter evolved to signal social bonds.
And how about tickling? It is, according to Provine, the origin of laughter and a way for two individuals to signal that they trust each other. This seems excessively functional to a skeptical economist like myself. By the way I hate being tickled.
Thanks to Robin Hanson for the pointer to the 20 December issue of New Scientist, from which the opening quotation is taken.
Fountain of youth?
Scientists are making some progress on this difficult problem:
Human embryonic stem (ES) cells can give rise to almost all of the body’s different cell types. They could eventually provide patients with replacement tissues – but there are some roadblocks that currently prevent researchers from putting the cells into patients’ bodies. One problem is that scientists don’t yet know how to control the cells’ transformations into other types. Another is that the cells cannot be grown without help from mouse cells, which means that they could be contaminated with mouse proteins. Ali Brivanlou of Rockefeller University in New York says that he and his colleagues may have found a partial solution to these problems. Brivanlou treated ES cells with a chemical, nicknamed BIO, from a sea snail.
Being 41, I don’t expect to enjoy the fruits of this research. But today’s children may live for a very long time indeed. That being said, my chance is not zero, so the return to exercise and good eating just went up.
Against sunset laws
Sunset laws don’t get legislation to be reevaluated anew. The laws simply stay on the books, due to inertia. Here is the full analysis, with many examples of how sunset laws have failed. So if you feel a need to constrain government, look to other tools. Thanks to Chris Mooney for the link and pointer.
The ten greatest business movies
According to Forbes, that is. Here is the list:
Citizen Kane, The Godfather: Part II, It’s a Wonderful Life, The Godfather, Network, The Insider, Glengarry Glen Ross, Wall Street, Tin Men, Modern Times.
Most of these movies portray business in a negative light. See a short comment from Professor Bainbridge and a long comment from Larry Ribstein.
Addendum: Here is some good commentary and some different picks, including a favorite of mine, Joe vs. the Volcano.
Calendar facts
1. The U.S. calendar industry accounts for $1.2 billion a year.
2. The average American buys 2.5 calendars.
3. Dog calendars are especially popular. Bush and Britney Spears calendars have not been selling well.
4. The 2004 Nuns Having Fun calendar is now sold out.
5. Women prefer larger calendars than do men.
6. 70 percent of all calendar business is done in December, talk about seasonal business cycles.
7. Many calendar prices are cut in half on December 26.
8. Many calendars cost no more than a dollar by the end of January.
9. Less than one-third of Americans plan their workday in writing. One CEO of a time management firm reports: “Most people walk into work and don’t have a plan.”
From USA Today. If you are wondering, I bought my 2004 calendar in October and it portrays Hokusai prints.
Luck and entrepreneurship
If you have been a lucky person in the past, good things will happen to you in the future. Or is it enough simply to think that you were lucky in the past? Relaxed, confident people may find it easier to discover subsequent opportunities. Read about some interesting experiments on the lucky. The bottom line: “Unlucky people are generally more tense than lucky people, and this anxiety disrupts their ability to notice the unexpected.”
And what about practical advice? It is suggested that visualizing yourself as lucky, in advance of a challenge, will improve the course of events.
Should you wait or go?
You are waiting in line, and must decide whether or not to stick it out or bolt. How do you choose?
Most people look back and see how many people are behind them in line. If the line behind them is long, they tend to stay in line and wait. And if they do quit, they are most likely to quit in the first three minutes.
Making this kind of comparison could be economically rational. A long line means that if and when you have to come back, you will be forced to wait anyway. So why not just get the waiting over with? (Note that the researchers try to control for this effect, although imperfectly.) A long line also suggests that many other people value the good or service, which again implies that waiting is worthwhile.
But that is not the primary hypothesis of the researchers, nor is it how I think. When I look back and see many people behind me, I feel that my lot in this matter is not so bad, and that I should stick it out. So I do.
The short article on this research is from the December issue of Psychology Today, but the article itself is not yet on-line. Here is the home page of one of the researchers, including a full citation to the article in Journal of Consumer Research. Here is a on-line summary of the work.
The Millennium Challenge Account
The Bush administration is proposing to increase our foreign aid budget by 50 percent over the next five years. A new bureaucracy, the Millennium Challenge Corporation, would be created. Here is a summary from Slate.com:
In response to U.S. government development-assistance directive drift and to the Republican perception that aid has been hijacked by touchy-feely liberals, in March 2002 the Bush administration proposed the creation of the Millennium Challenge Account, which would be distributed via the Millennium Challenge Corp. In contrast to USAID, which administers funds to developing countries of pretty much every stripe and inclination, MCA moneys would be allocated only to those nations judged to be most committed to promoting economic freedom, governing fairly, and investing in education and health–based on scores in 16 quantitative areas (such as government effectiveness, primary education completion rate, inflation, etc.) using data collected by the World Bank, the International Monetary Fund, and other third parties. In order to qualify for MCA funds, a country must score above the median of all candidate nations in half the individual criteria in each of the three broad categories, and above the median in a corruption indicator–unless, of course, it is given a bye by the administration.
Under the current foreign aid regime, the U.S. government, often through USAID, crafts developmental priorities and projects, usually in conjunction with local governments, and oversees their implementation through mostly American contracting organizations. One of the key innovations of the MCA will be to give recipient governments a larger role in designing development programs and make them accountable for achieving results.
I remain to be convinced that this is a good idea. The countries that are truly reforming need foreign aid the least. The plan works best if you think that politicians want to push more reforms, but lack the cash to pay off special interests. The plan also works if you think that we can bribe politicians to reform. The plan works worst if you think that foreign aid leads to corruption and inferior policy. In that case we are penalizing the success stories and pushing them in the wrong direction. Of course, the very push for reforming foreign aid implies there is some truth to the latter possibility.
The real motive might be to bypass multilateral institutions and use foreign aid to reward potential allies in our foreign policy struggles. It is then Machiavellian to market this as an aid program.
If we wish to reform foreign aid, have we considered the cost-effectiveness of the alternative strategy of simply dropping dollar bills from a helicopter? No, this is not a purely facetious suggestion. After all, the Bush people tell us that we can spend our money more effectively than the government can for us. Given the lower quality of government in poor countries, we might expect private spending to be a better option there as well.
If we are going to have criteria for aid allocation, perhaps we should try to predict future growth potential, rather than looking at past reforms. Societies that are starting new investments in health care, education, and intermediate social institutions might be the promising recipients of aid dollars. If you know of any good studies on what predicts future (not current) growth, in the Granger-causal sense, please let me know.
The Slate article also notes the following:
…annual U.S. private foreign aid–via foundations, private voluntary organizations, corporate charity, religious organizations, and, most important, remittances sent home by emigrants and their descendants in the United States–amounted to roughly $35 billion in 2000, or more than three and a half times the aid handed out by the U.S. government. Private aid, like private enterprise, tends to be more focused on the bottom line of success–so the chances are better that (unlike, all too often, development funding from governments) a delivery mechanism or program that isn’t getting the job done will be replaced, pronto.
Here is a link to the relevant research on private foreign aid.
Liability and flu vaccine
Liability law appears to be a critical factor behind the vaccine shortage:
As legal liabilities have chased many vaccine-makers out of the market, there are fewer manufacturers. This means less overall ability to produce additional doses, and less investment on new, faster ways to make vaccines.
In the US about 185m people risk serious flu-related illness each year.
At one time the US had 20 flu vaccine manufacturers. Today there are just four: Aventis, GlaxoSmithKline, Merck and Wyeth.
After the second world war the science of cell cultures led a boom in vaccine production. But gradually profit margins thinned on vaccines, as the government became a big buyer of them. Increasing legal liability drove many makers out of the vaccine business.
Today smaller biotech companies have entered the game. But they lack the capacity and the distribution to solve near-term shortages, experts say.
“One of the problems with vaccines is you put them in healthy people,” says Louis Galambos, history professor at Johns Hopkins University and an expert on vaccine manufacturing. “Now we’re in a situation where we have too few producers.”
Congress passed a law in 1986 to limit liability on vaccines for children. There are no such liability limits for adults, however.
Pharmaceuticals companies are inhibited by the particular structure of the US vaccine market, experts say. The US government is a large buyer of vaccines, leaving relatively poor profit margins on vaccines.
Here is the full story from The Financial Times.