Category: Current Affairs
Did Iceland reject fiscal austerity?
Scott Sumner serves up the appropriate links. He cites Mark Sadowski, who tells us:
…Iceland’s general government budget ran a surplus equal to 1.8% of GDP in 2014, or a change in fiscal stance since 2009 equal to 11.5% of GDP. This can be found on Table A1 of the April 2015 IMF fiscal Monitor.
…Table A3 shows that Iceland’s general government cyclically adjusted balance rose from a deficit of 10.0% of potential GDP in 2009 to a surplus of 2.7% of potential GDP in 2014, or a change of 12.7% of potential GDP…
But even this tends to understate the amount of fiscal austerity that Iceland has engaged in. This is because it includes the increase in spending attributable to rising interest payments on the national debt. To get a proper idea of the amount of fiscal austerity that Iceland has engaged in (i.e. cuts in direct spending and increases in taxes) one has to look at the general government cyclically adjusted primary balance which can be found in Table A4. Iceland’s general government cyclically adjusted primary balance rose from a deficit of 6.9% of potential GDP in 2009 to a surplus of 6.2% of potential GDP in 2014, or a change of 13.1% of potential GDP.
…By this standard Iceland has done about 30% more austerity than Ireland, over double that of the UK, roughly two and a half times as much as the US, and approximately five and a half times as much as Latvia. The only country that has done more fiscal austerity is Greece.
None of this should come as a surprise. When nearly all the other OECD members were busy implementing fiscal stimuli in early 2009, Iceland (joined only by Ireland) was engaged in a massive fiscal consolidation.
Scream it from the rooftops: massive fiscal austerity in Iceland. (Or should that be something like “gegnheill ríkisfjármálum austerity á Íslandi!”) There is plenty more detail and argumentation in Mark’s post. Here is my previous post on Iceland.
Has fiscal conservatism met an impasse at the state level?
The latest from Louisiana is that taxes are going up, but in a strange way that won’t be called a tax increase:
One of the most critical parts of the budget plan, and the part that attracted most of the debate, would raise no revenue and lighten no one’s tax burdens. But because of a complicated arrangement of tax credits, this plan could, by some interpretations, allow Mr. Jindal, a Republican, to say that despite millions coming in from cigarette tax hikes and tax break rollbacks, the state had technically not raised net new tax revenue.
Read the whole article, it is even weirder than that sounds. Combine that with the recent fiasco in Kansas, where the strongly Republican state government will be reversing earlier tax cuts.
It seems to me that, whether we like it or not, fiscal conservatism has been stymied at the state level. No, that’s not true for Illinois, New York, or California, but it does seem to be true for many other states, especially those governed by Republicans. (And yes, state pension obligations still do need to be reigned in and made subject to proper accounting.) More concretely, trying to cut taxes at the state level doesn’t seem like a useful or productive way forward.
If you have a better revisionist take on Louisiana and Kansas, please do put it in the comments, I would gladly read it, and if you have something really good I will pass it along. But I see myself as stating what has to be the default hypothesis for the time being — should we not all come out and admit this?
In Baltimore Arrests are Down and Crime is Way Up
A debate forum at the New York Times begins:
A rise in gun violence in New York, Baltimore and other cities after months of angry protests over police killings of unarmed black men, have led some to see a ”Ferguson effect,” in which police, spooked by criticism of aggressive tactics, have pulled back, making fewer arrests and fewer searches for weapons.
But has a wave of murders and shootings brought an end to the long drop in crime?
I don’t think that we will see a sustained increase in crime at the national level. But there is no question that we are seeing a Ferguson effect in Baltimore–more precisely a Freddie Gray effect. Arrests in Baltimore have fallen by nearly 40% since Freddie Gray’s funeral and the start of the riots on April 27. In the approximately 3 months before the Gray funeral police made an average of 87.7 arrests per day, since that time they have made only 54.6 arrests a day on average (up to May 30, most recent data).
As Peter Moskos argues:
In Baltimore today, several police officers need to respond to situations where formerly one could do the job. This stretches resources and prevents proactive policing.
Not all arrests are good arrests, of course, but the strain is cutting policing across the board and the criminals are responding to incentives. Fewer police mean more crime. As arrests have fallen, homicides, shootings, robberies and auto thefts have all spiked upwards. Homicides, for example, have more than doubled from .53 a day on average before the unrest to 1.35 a day after (up to June 6, most recent data)–this is an unprecedented increase–and the highest homicide rate Baltimore has ever seen.
Put differently, the unrest in Baltimore and subsequent reduction in policing is responsible for roughly twenty “excess” deaths. (so far)
It’s not just homicides, the number of shootings in Baltimore has more than tripled. Shootings increased from .82 a day before the unrest to just over 3 a day. Since the onset of the riots there has hardly been a day without a shooting.
Robberies are up from 8.1 per day to 13.25 per day on average.
Even auto thefts are up from 9.6 per day to 13.6 per day on average.
The increase in homicides and other crime is terrible and it is also putting a strain on police resources.
Police Commissioner Anthony W. Batts said the rise in killings is “backlogging” investigators, just as the community has become less engaged with police, providing fewer tips.
With luck the crime wave will subside quickly but the longer-term fear is that the increase in crime could push arrest and clearance rates down so far that the increase in crime becomes self-fulfilling. The higher crime rate itself generates the lower punishment that supports the higher crime rate (see my theory paper). In the presence of multiple equilibria it’s possible that a temporary shift could push Baltimore into a permanently higher high-crime equilibrium. Once the high-crime equilibrium is entered it may be very difficult to exit without a lot of resources that Baltimore doesn’t have. I have long argued that high-crime areas need more police but the tragedy is that they also need high-quality policing and that too is made more difficult to achieve by strained budgets and strained police.
Is the Icelandic response to financial crisis generalizable?
Paul Krugman describes their policies as a mix of “debt repudiation, capital controls, and massive devaluation.” Matt Yglesias refers to putting some of their bankers in jail. But I say there is not a generalizable formula here.
Neither mentions that a major part of the Icelandic recipe was letting foreign deposit holders twist in the wind. That’s a transfer of wealth to the domestic economy and furthermore it was politically palatable; it is also a choice which won’t much help any larger country where most of the deposit holders are domestic. It is noteworthy that this kind of choice loomed large for Cyprus, another small country with a lot of foreign depositors.
Iceland is also so small that cutting off these creditors won’t much damage the broader global economy or lead to significant contagion. Today, in a much safer macroeconomic environment, we’re not even sure the same could be said for Grexit, and Greece is a pretty small country in economic terms.
On top of all that, not paying back the foreign depositors was a transfer to Iceland. It is easy enough to see why Icelanders might like that idea, but the objective foreign analyst, who ought not favor the more Nordic peoples above the others, also should consider the loss side of the ledger, namely in the UK and Netherlands.
What else?
Don’t forget that the value of the Icelandic stock exchange fell by 90% – how many other countries could endure that or would accept it? That is easier to pull off when there are only six stocks trading on your exchange and those equities are not central to your savings.
Capital controls are also not an option for many economies, including those that are serious about being financial centers or having reserve currencies. More to the point, the flight of foreign capital is very often not a problem in the first place. And we have plenty of experience with capital controls and the overall record is at best mixed; this is hardly a neglected heterodox innovation. The imposition of Icelandic capital controls may well discourage foreign investment looking forward, and so the “record to date” will be misleading in this regard. This is again a way in which Iceland has transferred the costs of its adjustment into the future. On top of that, we still don’t yet know how well the Icelandic removal of capital controls will go.
I’m all for devaluing and accepting higher inflation in a lot of crisis situations. This part of the Icelandic recipe is generalizable. It’s worth noting, however, that the devaluation (especially with capital controls) imposed a harsh and immediate “austerity” on the Icelandic people, namely it was very hard to buy foreign goods for a while. In other words, rapid real wage cuts were imposed on just about everybody. If your country can do that, great, but it needs to be outlined how most economies will manage that trick. See also Scott Sumner’s remarks on whether Iceland avoided traditional fiscal austerity.
Given some very tough circumstances, Iceland also did a reasonable job of “ring-fencing” its banks and separating the good from bad assets. That may be generalizable too, although it doesn’t have the polemic punch of some of their other policy choices.
Overall, the experience from Iceland, upon closer inspection, is not very easily generalizable. I suspect it receives much of its praise for reasons of mood affiliation — what could sound tougher than putting bankers in jail? But overall, Iceland faced very different constraints and opportunities, relative to other countries in the financial crisis.
Addendum: Here are some relevant earlier posts.
Europe facts of the day
“At least half of Germans, French and Italians say their country should not use military force to defend a NATO ally if attacked by Russia,” the Pew Research Center said it found in its survey, which is based on interviews in 10 nations.
There is more here, and so every great moderation must come to an end…
This is also of note:
According to the study, residents of most NATO countries still believe that the United States would come to their defense.
Meanwhile:
Eighty-eight percent of Russians said they had confidence in Mr. Putin to do the right thing on international affairs…
Solve for the equilibrium, as they like to say. It is much easier to stabilize a conservative power (e.g., the USSR) than a revisionist power (Putin’s Russia).
It is also worth thinking about how this entire state of affairs has come to pass.
China (India) facts of the day
The ratio of incomes gives a sense of the relative differences in productivity between the cities and countryside. For China, this ratio is 3.2 – the highest in world. On average, urban workers are more than three times as productive as rural workers and are being compensated accordingly. No wonder some 270m migrant workers have flocked to the cities to secure better paying industrial jobs. For India, the same measure gives a ratio of 1.6, one of the lowest for emerging market economies, indicating that urban productivity is only moderately higher than in rural areas, and cities do not offer such a magnet of higher earnings.
The other key indicator is the relative difference in property prices in China versus India. China’s mega-cities have seen a five-fold increase in property prices in renminbi terms, or nearly seven-fold in US dollars over the past decade. No wonder concerns about a possible property bubble in China dominate global financial news. Yet despite these astounding increases, property prices in Beijing and Shanghai are still only half those of their Indian counterparts of New Delhi and Mumbai.
…India’s excessively high property prices reflect a combination of two archaic practices. One is the legacy of its colonial past in reserving large parcels of valuable urban land for government use, including sprawling and wasteful estates for civil servants and military cantonments. The other comes from outdated and overly rigid building codes that discourage concentrated development of commercial activity and housing in the core of its major cities. This pushes development to the outer suburbs, making it difficult to realise the agglomeration benefits that drive productivity gains.
That is from Yukon Hwang at the FT.
Nevada enacts school choice
On Tuesday night, Nevada governor Brian Sandoval signed into law the nation’s first universal school-choice program. That in and of itself is groundbreaking: The state has created an option open to every single public-school student. Even better, this option improves upon the traditional voucher model, coming in the form of an education savings account (ESA) that parents control and can use to fully customize their children’s education.
…As of next year, parents in Nevada can have 90 percent (100 percent for children with special needs and children from low-income families) of the funds that would have been spent on their child in their public school deposited into a restricted-use spending account. That amounts to between $5,100 and $5,700 annually, according to the Friedman Foundation for Educational Choice. Those funds are deposited quarterly onto a debit card, which parents can use to pay for a variety of education-related services and products — things such as private-school tuition, online learning, special-education services and therapies, books, tutors, and dual-enrollment college courses. It’s an à la carte education, and the menu of options will be as hearty as the supply-side response — which, as it is whenever markets replace monopolies, is likely to be robust.
The pointer is from Adam Ozimek.
What if the Export-Import Bank expires?
Politico is now reporting this is very likely to happen. That does not distress me, but if it bothers you I have a simple offset: a looser monetary policy.
The biggest recent “tax” on our exports has been the strong and rising U.S. dollar. So a simple way to boost exports would be to depreciate the dollar. Even a slight depreciation likely would offset the effects of Ex-Im expiration by more than a factor of one hundred, perhaps by more than a factor of one thousand. Ex-Im is a relatively small program and it has nothing to do with more than 98 percent of American exports. Many of its foreign beneficiaries, such as Pemex and Chinese state-owned enterprises, don’t need the subsidy to fund their imports. Boeing is still reporting a robust demand for its planes.
Inflation has now undershot the Fed’s target for what — 36 months in a row now? So a looser monetary policy will hardly bring hyperinflation down upon our heads.
Again, I am not saying we need to do this. I am simply saying we could, and, if necessary, we could wash away all of your Ex-Im tears, just like that.
Sentences to ponder
Over the past 5 years, productivity has risen by less than 3%. That might not seem so bad, except I’m referring to the total increase, not the annual increase. Again, get used to 1.2% RGDP growth; it’s the new normal, the new trend line.
That is from Scott Sumner.
A tweet in the form of a blog post, with an addendum, #Paulson, #Harvard
Until “effective altruism” figures out what drives innovation, those recommendations simply aren’t that reliable.
Addendum: John Sterling just wrote this in the MR comments section:
I think Steven Landsburg made the definitive “pro-Paulson gift” argument in his classic Slate piece defending Ebenezer Scrooge. Paulson could have pulled a “Larry Ellison” and built himself a $200 mm yacht. He decided to forgo (some) of his conspicuous consumption and instead let the Harvard Management Company steward some additional capital.
I’ve sometimes wondered whether the Harvard endowment is the ultimate way to be an “effective altruist” for an Austrian-leaning type. If you believe, like Baldy Harper did, “that savings invested in privately owned economic tools of production amount to … the greatest economic charity of all.” then the Harvard endowment makes a pretty interesting beneficiary. I can’t think of another institution in the world today that is more likely to hold on to its capital in perpetuity than the folks in Cambridge.
I am not saying he is right, just don’t be so quick to conclude he is wrong. By the way, I do not in fact donate my own money to Harvard.
Did the Wisconsin state system just abolish tenure?
I don’t think so, not really. Here is one explanation:
The proposed changes would also remove tenure protections from state law. Darling and Harsdorf both said that Wisconsin is the only state that enshrines tenure in its statutes.
The GOP proposal puts the decision of whether to have tenure and how to define it in the hands of the Board of Regents.
“We believe in empowering the Board of Regents and the chancellors throughout the state of Wisconsin to be able to manage the System,” Nygren said. “I think this is a tool to enable them to do that.”
Cross and Board of Regents vice president Regina Miller pledged to uphold the tenets of shared governance and tenure in their policies.
For sure that is a decline in the relative status of tenure, but not an end to tenure itself.
By the way, I’ve seen so many criticisms of the $400 million Paulson gift to Harvard, almost making it sound worse than if he had kept the money for himself, as most people do with $400 million. Without a well-worked out theory of university endowments, and their importance and function (they do seem to matter), I don’t see a hard and shut case for condemning this gift. At the very least, it is likely to boost investment’ note that about 15% of Harvard’s endowment goes to private equity or venture capital. I do understand however that this gift sends an anti-egalitarian message about status relations and where investment should go.
Who is the best gun salesman in the whole world?
Emilio Depetris-Chauvin suggests a possible answer:
Using monthly data constructed from futures markets on presidential election outcomes and a novel proxy for firearm purchases, this paper analyzes the response of the demand for guns to the likelihood of Barack Obama being elected in 2008. Point estimate suggests the existence of a large Obama effect on the demand for guns. This political effect is larger than the effect associated with the worsening economic conditions. This paper presents robust empirical evidence supporting the hypothesis that the unprecedented increase in the demand for guns was partially driven by fears of a future Obama gun-control policy. Conversely, the evidence for a racial prejudice motivation is less conclusive. Furthermore, this paper argues that the Obama effect did not represent a short-lived intertemporal substitution effect, and that it permanently affected the stock of guns in circulation. Finally, states that had the largest increases in the demand for guns during the 2008 election race experienced significant changes in certain categories of crime relative to other states following Obama’s election. In particular, those states were 20% more likely to experience a shooting event where at least three people were killed.
The published paper is here, via Kevin Lewis.
Greece fact of the day
By contrast, Greek households own more foreign assets than they owe in liabilities to foreigners. Exiting the euro area would immediately make them wealthier, although, perversely, the stimulus would be most potent the longer the government waits for citizens to pull their savings out of the banks.
That is from Matthew C. Klein at the FT.
Tyrone says the Chinese stock market is not a bubble
James Surowiecki writes:
Of seventeen hundred stocks on the Shenzhen Exchange, only four have fallen this year, and more than a hundred have seen their shares rise more than five hundred per cent. The Shenzhen Index as a whole has doubled since January, and is up more than two hundred per cent in the past year. The action on China’s other major stock exchanges—in Shanghai and Hong Kong—hasn’t been quite as torrid, but they’ve had their share of extraordinary winners. The Shanghai Composite Index has risen a hundred and forty per cent since this time last year. In Hong Kong, Jicheng Umbrella Holdings (which makes, yes, umbrellas) went public in February: its shares are up almost seventeen hundred per cent.
Tyrone, Tyler’s evil twin, says buy, buy buy! Borrow to buy, and then borrow to borrow! Tyrone has read so many people in the last week calling the Chinese stock market a bubble, so the contrarian in him thinks you simply need to take the plunge as soon as possible.
Direct foreign investment has been allowed only as of late 2014:
The Shanghai-Hong Kong Stock Connect program will allow all investors to buy shares on the Shanghai Stock Exchange, while also permitting wealthy investors in mainland China to buy stocks listed in Hong Kong. The move allows investors access to companies with an overall market value of roughly $2 trillion.
“We think it is very significant. We plan to participate,” said Gary Greenberg, head of emerging markets at Hermes Investment Management in London, which managed $46.9 billion in assets as of June 30.
That’s a lot of foreign capital to push up the value of Ma and Pa Tofu, and indeed that flood of capital will validate your early investment. And who amongst us is not tempted to diversify just a wee bit into the world’s second largest economy, indeed the very largest by PPP measures? Surely the coming tidal wave of foreign liquidity will push aside all present minor worries.
On the domestic front, Chinese savings are currently real-estate intensive, and over time those funds be shifting into equities, especially as Chinese graduate students carry the lessons of Mehra and Prescott back home. As prices fluctuate, the market is assessing how significant these effects will be, just as it once did with subprime.
Besides, the market went up 4.6% on Monday alone, and that is at a time when Chinese manufacturing seems to be slowing. The Chinese government itself proclaimed the stock market to be “healthy,” and indeed many different parts of the government, including the media, have seconded this verdict. Why bet against all of them?
Did you not know that the Chinese debt-equity ratio is too high? Well, higher equity prices will help lower that ratio, as the government intends; new stock issues are being used to buy back corporate debt, some of it dollar-denominated.
If nothing else, return back to some patriotic context. Was it not a good idea to buy American stocks when our country had a per capita gdp of 6-7k, and headed up? With a 20-30 year time horizon, was it not a good idea to buy American stocks even in 1929?
To be sure, the forthcoming liquidity-based, foreign investor-driven price movements imply a non-horizontal demand curve for those stocks, and thus violate the stricter forms of EMH. But who said a demand curve should be perfectly flat anyway? Weren’t the Marxists referring to perfectly flat demand curves when they said competitive capitalism is the absolute loss of freedom? And hasn’t China been moving away from Marxism? Q.E.D. So Tyrone says it is time to borrow to buy. Someone out there — maybe even you — won’t regret it.
“One Belt, One Road”, or the New Silk Road for China?
That is the new China initiative to rebuild the Old Silk Road along modern principles. The plan is a bit of a grab bag, but seems to include the following:
a. A deepwater naval base in Pakistan, plus a $42 billion aid/investment package for Pakistan. Here is some background on what already has been done.
b. A Chinese route to the sea through Myanmar and Bangladesh.
c. Northern shipping routes to Europe, through the Arctic, as the ice melts.
d. A rail line from Zhengzhou through Russia to Hamburg (already running, a 17-day trip).
e. Power stations and manufacturing plants for the Central Asian republics, in return for gas supply. This infrastructure transfer is also supposed to limit excess capacity in China by sending infrastructure abroad.
f. A railway and highway to connect China to the Arabian Sea.
Arnold Kling, telephone! Are these sustainable patterns of trade and specialization? Or are they slated to be proverbial white elephants? Does anyone know? Bueller?
A few points are striking here.
1. Much of this seems to be defensive geopolitics. Most of China’s oil supply, and much of China’s trade, runs through the Straits of Malacca. This plan, assuming it can be well-executed, affords China a good deal of protection. Yet that insurance does not add growth on top of the status quo, which currently is an open, well-functioning (mostly), trade channel at the Straits. At best it would hold a future catastrophe at bay for China.
2. The gravity equation in international trade economics suggests that countries trade much more when they are “near each other.” But what does proximity in this context mean exactly (pdf, an interesting trade paper by the way, on the “death of distance” theme and where it fails)? The most successful gravity models cite “distance between national capitals” rather than “distance between closest borders.” For evaluating this plan, that difference matters a great deal! I say distance between capitals is likely the more relevant variable, all the more for an economy dominated by state-owned enterprises.
3. The idea of easing excess capacity by sending infrastructure to other countries seems unlikely to succeed. Other than gas, how much do these countries currently have to offer China? And how much infrastructure can be transferred how quickly?
4. China’s economic growth has been dominated by the coasts, and the Great Canal, for approximately one thousand years; today Xi’an is a backwater for instance, although in the Tang dynasty it was possibly the most advanced city in the world. Can this now-deeply entrenched pattern — water transport beats land transport — be reversed by a lot of government spending?
5. To date China’s main external ally is North Korea, even though China is the world’s second largest economy. How well will relations with all these other nations evolve, and what does that mean for the value of those investments? Sri Lanka already has decided to redo its deals with China, and it doesn’t seem China can bully them out of that, though read this update.
During my China visit, I heard repeatedly that this New Silk Road plan will limit the pending decline of China’s growth rate. Each time I expressed skepticism about that prospect, my words were met with great dismay and, I felt, disbelief. Yet I do not see how these pieces are supposed to fit together as a growth-boosting enterprise. They do seem well-designed to extend China’s political influence in the western direction, and to transfer more contracts to state-owned firms. But to raise living standards for most of the Chinese people? I don’t see it, or even see it coming close.