Category: Current Affairs

The Italian Job

by  Alex Tabarrok in

NYTimes: With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.

The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.

“Jobs like these have kept this city alive,” said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. “You see, here we are at the bar, we support the economy this way.”

Lunch conversation on Iceland, wealth mark-downs, and national unity

by  Tyler Cowen in

A NYT piece from yesterday noted that Greece still may require a forty (!) percent mark-down in wealth/perceived wealth.  Measured per capita Greek income is about 30k, for Bulgaria 14k, can Greece really be so much wealthier?  It is no wonder that Greek politicians are reluctant to default and/or leave the eurozone.  No matter how inevitable such courses of action may be, they are not political winners: “We pledge to cut your standard of living by forty percent, but unlike the other party, we’re going to do it right now!”

It was debated how high the mark-down must be for the United States; there was an estimate of 7-8 percent and another estimate of 3-4 percent.  Ireland will have ended up facing quite a large mark-down.

How much of a mark-down has Iceland seen?  I mean in terms of wealth not just per capita income.  Do any of you know of figures?  Their ability to “get their mark-down over with” is one fundamental reason for their turnaround.  The loss is large but it is now behind them.  Floating exchange rates don’t hurt either.  As a quite small, fairly unified, previously used to hardship and bad fermented foods, extremely nationalist self-identifying kind of place, it is no surprise that Iceland has handled the markdown issue so well.

I find it useful to think about places in terms of how well they handle the issue of the wealth mark-down and how quickly they can get it behind them.

The anticipated Der Spiegel article on Greece leaving the eurozone

by  Tyler Cowen in

It’s now up.  Maybe it’s “old news” by now, but the chances of the eurozone holding together have never looked smaller, even since two or three days ago.  It’s clear, if anyone had doubts in the first place (I didn’t), that no eurobond and no major package of truly committal aid will be forthcoming.  The next question is, when Greece goes, how strong a pledge do the remaining nations receive for EU/German aid?  “Not so strong” is my current prediction, in which case we will work our way through a few dominoes, for better or worse.  In that case, I wonder if Spain and Portugal would do better to leave with Greece or shortly thereafter.  I don’t imagine that the treatment of “the Greek precedent” will make anyone have a warm and fuzzy feeling about the process of transition.

Don’t forget to note the remarks about Ireland on p.2.

Cities as hotels

by  Alex Tabarrok in

Earlier this year I posted about India’s private city, Gurgaon. Gurgaon has grown from nothing to a city of 1.5 million people in just 30 years and it has done so based almost entirely on the private provision of public goods, including transportation, utilities, and security. Gurgaon is a desirable place to live in India but it has grown haphazardly as a city of private oases, rather than as an integrated city. As a result, Gurgaon has not enjoyed all the benefits of economies of scale in infrastructure provision or the benefits that come from internalizing externalities–the types of benefits that are possible with a single owner or integrated political system. As Matt Yglesias explained at the time:

Imagine if someone owned all of San Francisco and leased the land and structures out. Well obviously he’d want to have some kind of fire department and building standards to protect his investment. And he’d want to have a security force, since crime would reduce the value of the rent. And he’d want there to be some parks, because people like parks and their presence will increase the rent he can charge. (Indeed, my building includes a small private park). And obviously he’d need schools and really all the rest. …But in order to internalize the benefits of privately provided infrastructure, parks, public safety, etc. the scale of the enterprise would have to be really big. Like the size of a whole city.

Gurgaon, however, is not unique. Private cities are growing throughout the developing world and some of them are quite large.

Renaissance Partners, the investment unit of Moscow-based Renaissance Group, plans to build a 6,400- acre city in the Democratic Republic of Congo as it seeks to benefit from Africa’s urbanization.

The Russian firm is working on a master plan for the new urban center after securing the land outside Lubumbashi, the country’s second-largest city… Renaissance is considering similar projects in Ghana, Nigeria, Senegal and Rwanda, he said.

“The West has peaked in terms of economic growth and the new markets are in Africa,” Meyer, 39, said. “And the main drivers of this growth in Africa are going to be cities.”

Renaissance’s Lubumbashi project will be more than double the size of Tatu City, the $5 billion center that the Russian firm is building from scratch outside the Kenyan capital of Nairobi. The Moscow firm, headed by Stephen Jennings, plans to take advantage of Africa’s economic growth and emergence of a growing urban middle class demanding better infrastructure.

6,400 acres is a small city, about the size of Apple’s home of Cupertino CA (pop: 58,000), but it is big enough that Renaissance partners will have an incentive to build public goods such as city-wide sewage, parks, roads (congestion pricing!), an electric plant and grid and so forth, exactly as Matt argued (see also The Voluntary City).

Private cities are happening now for a reason. Africa, India, and China are urbanizing more rapidly than has ever occurred in human history. In Africa, the number of urban dwellers is projected to increase by nearly 400 million, in India at least 250 million will move to cities and in China more than 400 million will move to cities in just the next 20 years. Not all of these people will move to older cities, which are not always in the right places and which rarely possess anything like the right material let alone the right political infrastructure. The rising middle-class want to live in first-world cities and in many of these countries only the private sector can deliver those cities.

The rapid urbanization of the developing world is an opportunity to remake cities anew. Private cities as hotels on a grand scale.

Predictions on Greece and Germany

by  Tyler Cowen in

From Yanis Varoufakis:

Greece will not be allowed to default before Germany first puts in place a decent plan for splitting Greece’s monetary system from that of the surplus countries. But if I am right that such a plan cannot involve the mere expulsion of Greece from the euro, as it will kick off a chain reaction that will eventually knock France out for a sixer before returning to Frankfurt and Berlin to haunt the ‘planners’, the only logical conclusion that I can come to is that, behind all the talk of a German plan to contain a Greek default or to push Greece out of the euro, lies the groundwork for a pragmatic plan that sees Germany bailing itself out; a plan according to which Germany will round up countries it truly deems worthy of sharing its new currency with (the other three surplus countries of the existing eurozone plus perhaps Poland, the Czech Republic and even Estonia) and exiting in the most orderly manner possible; offering, for example, to the eurozone countries that will be left behind (fretting France in particular) a few gifts (e.g. Germany may choose to foot the bill for existing bailouts), an illusion of unity (e.g. suggesting that the new Germanic currency is also minted and administered by the ECB – which will now be responsible for more than one currency at once), and some vague promises (of possible fusion of these currencies, once the ‘right’ discipline has been knocked into the hearts and minds of the undisciplined).

Here is more, interesting throughout.  Maybe the Germans who resigned from the ECB basically see something like this coming, and wish to husband their political capital with the hard money factions of German politics.

Here is Yanis on Twitter, he covers Greece.

Showdown at Bern Gulch

by  Tyler Cowen in

Hedge funds are considering ways to mount a counterattack against the Swiss National Bank, whose attempt to wrest control of the surging franc caught investors off-guard…

“People don’t know what to do with the Swiss franc right now, but the general consensus is that a central bank acting on its own will have a difficult time,” Mr. DiRusso said. “It’s going to take some time for the market to get on it, but there is definitely going to have to be a defense” of the 1.20 level, he said.

Here is more, hat tip to Dave O.

Turnitin: Arming both sides in the Plagiarism War

by  Alex Tabarrok in

The internet has made plagiarism much easier and by most accounts plagiarism is increasing rapidly. As a result, over a million instructors now use services like Turnitin, a plagiarism detector that compares submitted manuscripts against a large database of material, including previously submitted manuscripts.  What is less well appreciated is that Turnitin also sells its services to students. In fact, students whose professors use Turnitin are encouraged to pre-submit their work to Writecheck which will analyze and “verify” for the students that their paper has “properly quoted, summarized or paraphrased” previous work and it will also relieve students from “worrying that their paper will be recycled without their knowledge.” Uh huh.

In other words, WriteCheck will tell students if their essays will pass Turnitin! David Harrington summarizes nicely:

Turnitin is playing both sides of the fence, helping instructors identify plagiarists while helping plagiarists avoid detection.  It is akin to selling security systems to stores while allowing shoplifters to test whether putting tagged goods into bags lined with aluminum thwart the detectors.

Facts about Germany and Europe

by  Tyler Cowen in

The DAX index was down about 4.8 percent today and interest rates for the periphery countries popped up to their highest levels in a month.  The Irish Times reports:

Ms Merkel’s party yesterday suffered its fifth election loss this year after the chancellor failed to sway voters in her home state with a campaign based on her handling of the euro area’s debt crisis.

I do not believe these voters are longing for a eurobond.  Here is more detail on that election, which was held on supposedly friendly turf for Merkel.  The Irish article also reports:

The plans to strengthen the EFSF will empower the bailout fund to buy bonds – in theory relieving the ECB of a task that has provoked the most damaging internal split in the bank’s 13-year history. Euro zone leaders had hoped national parliaments would approve the reforms by early October, but that goal appears to be slipping.

I do not believe these voters are longing for a eurobond.  Back to the Telegraph:

A recent opinion poll found that two-thirds of Germans think their parliament should block any more demands for euro bailouts.

You may recall my prediction from earlier this year:

“Enter democracy, stage right” is the next act in the play.

In 2003, referring to the French and German breaking of the three percent budget deficit rule, I wrote:

The real question is what will happen when one of the smaller nations thumbs its nose at France and Germany someday, over some EU agreement, and then claims exemption from the relevant penalties.

U.S. fact of the day

by  Tyler Cowen in

The US has roughly the same number of jobs today as it had in 2000, but the population is well over 30,000,000 larger. To get to a civilian employment-to-population ratio equal to that in 2000, we would have to gain some 18 MILLION jobs.

Here is more.  People will differ, of course, in terms of how much they see this as growing leisure or stagnation.

By the way, the current unemployment rate for those with a Bachelor’s degree or higher is about five percent.  In which direction does that auxiliary fact push you?

Hat tip goes to Richard Harper on Twitter.

How to annoy Canadians

by  Alex Tabarrok in

After almost a decade of rule, Vancouver has been dethroned as the most livable city by The Economist. One of the reasons for the downgrade was “recent intermittent closures of the key Malahat highway [which] resulted in a 0.7 percentage point decline in the Canadian city’s overall livability rating.” The only problem is that the Malahat is on Vancouver island, a 1.5 hour ferry ride and at least an hour or so of driving from Vancouver. Rating agencies, eh?

Hat tip: Monique van Hoek.

Why didn’t the stimulus create more jobs?

by  Tyler Cowen in

There are many studies of the stimulus, but finally there is one which goes behind the numbers to see what really happened.  And it’s not an entirely pretty story.  My colleagues Garett Jones and Daniel Rothschild conducted extensive field research (interviewing 85 organizations receiving stimulus funds, in five regions), asking simple questions such as whether the hired project workers already had had jobs.  There are lots of relevant details in the paper but here is one punchline:

…hiring people from unemployment was more the exception than the rule in our interviews.

In a related paper by the same authors (read them both), here is more:

Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2).

One major problem with ARRA was not the crowding out of financial capital but rather the crowding out of labor.  In the first paper there is also a discussion of how the stimulus job numbers were generated, how unreliable they are, and how stimulus recipients sometimes had an incentive to claim job creation where none was present.  Many of the created jobs involved hiring people back from retirement.  You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story.  I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

There’s also evidence of government funds chasing after the same set of skilled and already busy firms.  For at least a third of the surveyed firms receiving stimulus funds, their experience failed to fit important aspects of the Keynesian model.

This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great “bang for the buck.”  It raises the question of whether as “twice as big” stimulus really would have been enough.  Must it now be four times as big?  The paper also sets a new standard for disaggregated data on this macro question, the data are in a zip file here.