Category: Current Affairs
The January test for the eurozone
Portugal was on Wednesday forced to pay big interest rate premiums to borrow from the markets in the country’s first test of sentiment of the new year.
Lisbon had to pay 3.68 per cent in yields for six-month loans, a jump from 2.04 per cent compared with a similar sale in September and 0.59 per cent a year ago.
One strategist said: “This is ominous. Portugal is heading towards a bail-out as the country’s borrowing costs are continuing to rise. This is unsustainable.”
The article is here, there is more to come in what will be an active month for European bond issues.
Drinks are on the House
…in terms of breadth of interest in economic subjects, literature and ephemera, Marginal Revolution is like nipping into a world-class local bar, where the drinks are always perfectly mixed, the atmosphere is relaxed and civilized, while intelligent conversation and serendipity are available on tap. The comments tend to be of unusually high quality too.
From Alen Mattich's writeup of the best economics blogs in the WSJ. Congrats and thanks to all our commentators.
Women and alcohol
Is there a better blog post title? Here is the abstract of a new paper, "Women or Wine, Monogamy and Alcohol":
Intriguingly, across the world the main social groups which practice polygyny do not consume alcohol. We investigate whether there is a correlation between alcohol consumption and polygynous/monogamous arrangements, both over time and across cultures. Historically, we find a correlation between the shift from polygyny to monogamy and the growth of alcohol consumption. Cross-culturally we also find that monogamous societies consume more alcohol than polygynous societies in the preindustrial world. We provide a series of possible explanations to explain the positive correlation between monogamy and alcohol consumption over time and across societies.
That's by Mara Squicciarini and Jo Swinnen.
Wishing Happy Holidays to All Our Readers
China sentence of the day
When my turn to talk about American politics came, and I tried to explain the Tea Party movement’s goal of “getting government off our backs,” I was met with blank stares and ironic smiles.
The full article is here, possibly gated (TNR), by Mark Lilla. It concerns the high and rising popularity of Leo Strauss and Carl Schmitt in China. Another excerpt:
Schmitt was by far the most intellectually challenging anti-liberal statist of the twentieth century. His deepest objections to liberalism were anthropological. Classical liberalism assumes the autonomy of self-sufficient individuals and treats conflict as a function of faulty social and institutional arrangements; rearrange those arrangements, and peace, prosperity, learning, and refinement will follow. Schmitt assumed the priority of conflict: Man is a political creature, in the sense that his most defining characteristic is the ability to distinguish friend and adversary. Classical liberalism sees society as having multiple, semi-autonomous spheres; Schmitt asserted the priority of the social whole (his ideal was the medieval Catholic Church) and considered the autonomy of the economy, say, or culture or religion, as a dangerous fiction…Schmitt saw sovereignty as the result of an arbitrary self-founding act by a leader, a party, a class, or a nation that simply declares “thus it shall be.” Classical liberalism had little to say about war and international affairs, leaving the impression that, if only human rights were respected and markets kept free, a morally universal and pacified world order would result. For Schmitt, this was liberalism’s greatest and most revealing intellectual abdication: If you have nothing to say about war, you have nothing to say about politics. There is, he wrote, “absolutely no liberal politics, only a liberal critique of politics.”
Seth Roberts offers a Chinese economics joke.
Social Security prediction
Here is a related Paul Krugman post. In my view, Obama may propose slowing the rate of benefit increase, but he won't propose an actual cut in Social Security benefits. Use of the word "cuts" is thus likely to prove misleading. I've already argued it is better to cut Medicare than Social Security (in-kind vs. cash), but it shouldn't come as a shock if reindexing benefits is part of a bipartisan budget deal. It's an easier policy "to do" than fixing Medicare, though again I prefer the latter.
It's a common argument that we need not cut benefits now, simply to prevent benefit cuts in the future. The reality is that the long-term budget (don't look at SS alone) is way out of whack, and reindexing now is one way to get larger spending cuts in the future than could be done on a one-time basis. Unless you do reindexing of something, at some point in time, it is very very hard to institute large spending cuts on a dime.
Reindexing is one signal of a longer-term political time horizon.
*The Year in Ideas*: Informal audit of past issues
The New York Times Sunday Magazine asked me to reread through all the previous issues of their "The Year in Ideas" feature and write down my impressions. The piece starts like this:
The editors asked Tyler Cowen, the economist who helps run the blog Marginal Revolution, to read the previous nine Ideas issues and send us his thoughts on which entries, with the benefit of hindsight, struck him as noteworthy. Do any ideas from this year’s issue look promising? “I recall reading the 2001 issue when it came out,” he says. “And I was hardly bowled over with excitement by thoughts of ‘Populist Editing.’ Now I use Wikipedia almost every day. The 2001 issue noted that, in its selection of items, ‘frivolous ideas are given the same prominence as weighty ones’; that is easiest to do when we still don’t know which are which.”
In the piece I select the best ideas, the most prescient picks, the most oversold, and so on. The most "off" picks were:
2001: “The ‘X-Files’ Conspiracy Trope is Dead“, and 2001: “American Imperialism, Embraced”
This project was fun. It was striking to me how many of the items in the series concerned information technology, how few concerned formal education, and how few of the non-internet items involved actual improvements in our living standards.
Why wages are sticky
Bloomberg: Greek unions grounded flights, kept ferries docked at ports and shut down public services today to protest wage cuts as the government sticks to conditions of an international bailout. Protesters clashed with police in Athens.
Air-traffic controllers walked off the job, canceling all flights to and from Athens International Airport. Public transport workers, whose salaries were cut 10 percent under a bill approved early today in parliament, worked on and off between 9 a.m. and 5 p.m. to carry protesters to rallies.
…Other groups taking part in today’s strike include bank employees, doctors, teachers and employees from state-controlled Public Power Corp., which supplies electricity in the country of 11 million people. Taxi drivers turned off their engines from 10 a.m. to 2 p.m.
Bus, train and subway workers plan a 24-hour strike tomorrow, the third in a week since plans to decrease their wages were approved by the cabinet…
The story also illustrates how aggregate demand shocks can generate aggregate supply shocks.
Fill in the blank
Does this story sound familiar? Perhaps it is more familiar than you think. Which country is this article excerpt about?
Rising debt charges are forcing [???]…to reshape its…economy…[a] congress, scheduled for April, will discuss and likely ratify policies that are already starting to be implemented. These include cutting 20 per cent of state workers, cutting social benefits, eliminating state subsidies, improving [the] trade balance and liberalising rules for small business and foreign investment.
No peeking. The answer is here, the article is here, and the leading creditor is…here.
The inequality that matters
Here is a new and longish piece by me, on the inequality debates, in The American Interest. It's about which kinds of inequality matter and which do not. Most of them do not:
A neglected observation, too, is that envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers–not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on.
Furthermore there is a natural rising inequality in a world of strivers and slackers. But some forms of inequality are more dramatic and are associated with unstable incentives:
If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets…The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.
An understanding of the Black-Scholes idea of synthetic positions drives home the point that such strategies are very hard to stop by regulatory means. Furthermore politicians have incentives to play the very same socially risky strategies; if things are "good now" they will get reelected and they pay few penalties for the severity of their eventual mistakes. The fight against excess leverage is probably a non-starter (who now wishes to "slow down" the recovery?). It is possible that our current system of state capitalism is "Arrow-Hahn-Debreu gameable" and that the financial sector has opened a hole in the proverbial bathtub and is sucking on a very large straw.
There are many other points about inequality in this piece which I have not presented on MR.
*The New Lombard Street*
The subtitle is How the Fed Became the Dealer of Last Resort (home page here) and the author is Perry Mehrling. The entire book is good but the paydirt comes in the last two chapters, where we are treated to a persuasive and original account of what the crash- and post-crash Fed is all about.
Mehrling tells us that the Fed is now committed to supplying liquidity in money markets through its role as a dealer, on both sides of its balance sheet, and that is a critical shift in the nature of central banking. He discusses (pp.126-127) how the collateral behind the shadow banking system relied on CDS markets for its pricing. In Mehrling's account, insurance companies (including AIG) were indirectly serving as dealers of last resort, believing that they held invulnerable positions but nonetheless exposed. Investment banks, on their side, thought they held matched books but the higher and lower CDO tranches turned out to be less similar than they had been expecting, based on historical price risk. None of these expectations survived contact with the reality of the crash.
Now it's the central bank which sells AAA protection because eventually, in Mehrling's view, this activity cannot forever remain a private function (for a start, which insurer is itself safer than AAA?). A good and indeed central question to ask anyone who is proposing a financial system is to ask who will sell AAA insurance.
To quote Perry, the new Fed principle seems to be: "insure freely but at a high premium."
Mehrling also suggests that looking at the Fed's balance sheet, or its transactions, is misleading. The key question is what kind of liquidity dealing option the Fed is promising to the market.
I continue to ponder Mehrling's main claims, but in any case this is an important book about the new Fed.
Peter Orszag update
Former Obama administration budget director Peter Orszag is joining Citigroup's global banking division, the bank said Thursday.
Orszag will hold the title of vice chairman, and has been tapped to serve in the bank's Senior Strategic Advisory Group, which includes some of Citi's (C, Fortune 500) most senior bankers.
The story is here; didn't he used to own them? I guess labor is the more lucrative class after all.
What’s the best predictor of sex partners?
Restrict the inquiry to heterosexual men in the United States. To be sure, famous rock stars have a lot of opportunities, but that is just one small corner of the distribution. Which variable is the best predictor for the population as a whole? Patrons of prostitutes do not count.
You might rush in and claim "income" or "status" and maybe those are the correct answers. But we're talking unconditional predictors here, and men with high income and status are a) often older, and b) often busy working. I'm not ready to sign off on those answers and anecdotally, when I think of the people I know, I don't quite see it. (It may be more true in Latin America, for instance, and that is one reason why visiting American tourists don't always succeed there. They first need to be certified by a local of high income or status, but instead they make some kind of foolish direct charge.)
"Facility with women" is too vague empirically and in some cases verges on the tautological. Maybe this is the most powerful variable but then I wish to re-ask the question and consider what variable predicts facility with women.
Any takers?
How An Economist Explains Hanukkah
From Seth Gitter at the Blog of Diminishing Returns.
How rich was Ireland really?
Not as rich as they thought. I've been reading Fintan O'Toole's excellent Enough is Enough: How to Build a New Republic. Mostly it is an expose of Ireland's crony capitalism and bad political institutions. On economic issues, chapter five offers up the following:
1. During the boom years, property accounted for 72 percent of all assets.
2. For infrastructure, Ireland ranked 26 out of 28 OECD countries.
3. Ireland had a higher share of slow fixed internet connections than in any other comparable country.
4. In terms of R&D or patents, Ireland was well below the OECD average in per capita terms.
5. In the OECD "human and income poverty" rankings, Ireland was 23 out of 25 countries, sandwiched between the United States and Mexico.
6. The country's health care and educational systems are considered subpar.
The author asks: "Did anyone seriously believe the Irish were sixty percent richer than the Germans?" Income is not wealth.
Unfortunately, the second half of the book collapses into polemics and generalities, but some of the earlier discussions are useful, important, and not available in most other sources. Here is a review of the book.