Category: Economics
Southern Italy, Europe’s soft underbelly
Scott Sumner has the scoop:
In one important respect southern Italy is different from Greece. Like eastern Germany, southern Italy is part of a larger and more prosperous fiscal union. For many decades, Italy has been doing the things that American progressives would recommend, pouring lots of fiscal stimulus into the south, to build up the economy. But nothing seems to work. Indeed from Greece to Italy to southern Iberia, the entire southern tier of Europe is doing quite poorly. But why? And what can America learn from the failure of Italian policies aimed at boosting the mezzogiorno?
American progressives will sometimes argue that we have much to learn from the successful welfare states in northern Europe. Perhaps that’s true. But I’d have a bit more confidence in that claim if they could explain what we have to learn from the failed welfare states in southern Europe. Indeed I’d have more confidence in progressive ideas if they even had an explanation for the failed welfare states of southern Europe. But I don’t ever recall reading a progressive explanation. Indeed the only explanations I’ve ever read are conservative explanations, tied to cultural differences.
PS. The mezzogiorno has roughly 1/3 of Italy’s 60 million people, making it almost twice as populous as Greece. In absolute terms, incomes there (17,200 euros GDP per person in 2014) are far lower than among American blacks or Hispanics. In contrast, GDP per person in northern Italy was about 31,500 euros in 2014. And while the gap between eastern and western Germany is narrowing, the gap in Italy is widening. Why?
Why is Obamacare still unpopular?
After all of this and two complete open enrollments, only 40% of those who are eligible for Obamacare have signed up—far below the proportion of the market insurers have historically needed to assure a sustainable risk pool.
If this were a private enterprise enjoying these kinds of benefits [ namely legal coercion], and only sold its product to 40% of the market, its CEO would be fired.
Looking at this picture, only 20% of those eligible for Obamacare, who make between 251% and 300% of the poverty level, bought Obamacare. Why?
The Obama administration will in fact be increasing the subsidies it will pay to insurance companies.
The legal problem with the blockchain
“The law will not treat a ledger record as authoritative if everyone knows that the current longest chain contains blocks generated by an anonymous attacker who replaced a bit of history that was chronologically prior,” he says. “In financial markets there’s always a mechanism to correct an attack. In a blockchain there is no mechanism to correct it — people have to accept it.”
That is an FT quotation from Robert Sams, the article is interesting more generally, focusing on Wall Street’s attempt to incorporate the blockchain in settlement in some manner.
The Battle for Greece
The Greek story is being framed as a battle between the Greeks and the Germans and thus between spending and austerity. But this frame can’t make sense of the fact that, win or lose, large numbers of Greeks will vote for austerity on Sunday.
To understand what’s really going on, listen to this remarkable interview between NPR’s Robin Young and Nikolalos Voglis, a restaurant owner in Athens. The interview begins with a discussion of the crisis. No one has cash or credit and Voglis’s restaurant is basically shuttered. Young then asks Voglis how he will vote on Sunday and he replies, “Definitely, Yes.” Young is surprised, she tries to clarify, you will vote, “even for more austerity?” “That’s right,” he replies.
Following the conventional frame, Young finds this difficult to understand and she pushes back against Voglis with all the conventional arguments. She quotes Paul Krugman saying that the problem isn’t really Greece’s doing, that the IMF and EU are being too tough on Greece, that Greece has done a lot of cutting already and so on. Voglis responds:
We are on the right track but unfortunately the job wasn’t completed. We are a country in the European Community which has the biggest public sector in Europe. And all of us in the private sector spend millions to support the situation. So the only way that Greece can become a true Western country…is to make these reforms.
…Look the main problem in this country is the public sector. There is no other problem. Entrepreneurs here are very, very competitive. We have to let this thing, this monster that we call the public sector, it has to go, it has to finish. This is the main issue.
Many Greeks are sick and tired of the bloated public sector and its corruption, inefficiency and waste. In this frame, the Greek story is not fundamentally about Greeks versus Germans it’s about the Greek people versus their government–the Germans have simply been the vehicle that has brought the Greeks to their kairotic moment. The Greeks want normalcy, as the Poles did after communism. If the Yes vote wins on Sunday it will be the Greeks voting not just against the current administration but against the entire state apparatus.
A better player for a bad team?
Kevin Love, in his infinite wisdom, decided to test the free agent market. At least for a while, it seemed to raise the possibility that he wouldn’t return to the Cleveland Cavaliers with LeBron James.
Courtside critics of Love frequently cite the Coase theorem, especially when criticizing his play this last year for Cleveland. Arguably Love is a better player on a bad team than he is on a good team. He scores a lot, but only if he is the primary option on offense; you can see this by comparing his numbers on Minnesota, a poor team where he was a big star, with his numbers for Cleveland, where he was the number three scoring option. He needs a lot of touches to hone his shooting, which is a kind of scale effect. He also pulls in a lot of rebounds by neglecting his duties on team defense. For a poor team, maybe that is OK, because the team defense had serious holes anyway. For a good team it can wreck the entire plan.
This situation differs from the traditional O-Ring model (clever link there), in which the lesser talented workers hold the more talented worker back. Here the lesser talented workers allow a flawed, attention-demanding competitor to flourish.
It may sound negative to say a player is more valuable on a bad team, but that is a skill too. These individuals are perhaps no less virtuous or hard-working than those who are better on a good team. Michael Adams was better on bad teams (and he played on lots of them), but was hard-working and non-selfish and also widely admired, even though he was too short and weak to hold the line in a good defensive set-up.
There are analogues in business. Some managers may have special talents in bringing out the best in less talented workers. Or they may make better decisions when they get to be the real boss of just about everything. They may need a lot of unfettered experience to refine their skills, and perhaps they’re not so good at collaboration anyway.
Some politicians may be better at running chaotic countries; Nelson Mandela would have been wasted as Prime Minister of Iceland.
Some economists may be of more value in weak departments than in strong departments. Their generalist skills fill in a greater number of gaps, and perhaps they can bring out the best in weaker students, when better students would find their lack of specialization a bigger drawback.
What are other examples of this phenomenon?
Given that Kevin Love is indeed re-signing with Cleveland, does this mean the knock on him is wrong? Or is the equilibrium that the Cavaliers will become a worse team? Or maybe virtually all players are good bargains the year before the salary cap will go up a lot? Maybe Cleveland re-signed him…because they can? The rumored deal is for $110 million, tell Coase about that.
Fear the multiple marginalization
Upcoming Conversations with Tyler
The next three will be with Luigi Zingales, Dani Rodrik, and Clifford Asness, you will find the details here, all coming this fall!
More on Asteroid Defense
In a very good piece on the risk from asteroids the Washington Post quotes me going all crunchy-granola:
Tabarrok says his hope is that private efforts in space will one day soon focus on mining asteroids for valuable resources. If you have miners and private developers working with asteroids in space, that could inadvertently make it easier to defend the planet against an asteroid collision.
And of course, there is the option that people on Earth could somehow get the motivation to work together, and asteroid defense might ultimately be a reason for unifying the world, says Tabarrok.
“The idea that the whole planet is potentially under threat from an asteroid does make us think that the world is our home, and we’re all in this together – Spaceship Earth, to get a little crunchy granola. And that makes us think a little more about our fellow travelers, our fellow world residents, that we’re all in this together.”
I may have to turn in my hard-headed economist card.
China and the high cost of hiring labor
…[recent developments] may well mark the beginning of an important longer-term shift in China’s labor market and policies: the State Council lowered employers’ required contributions to two social insurance programs, injury and maternity insurance, a move it said would save firms 27 billion renminbi a year (see the China Labour Bulletin for an English-language summary). Yes, I know this sounds boring and technical, so why is it important? Because it starts to address one of the biggest but least-known issues in China’s job market: the very high costs employers face to hire workers.
It is not a very well-known fact that China has some of the toughest labor regulations in the world, and some of the highest required contribution rates to social insurance programs. As a result, the “labor wedge”–the percentage of the total cost of an employee that comes from things other than wages–in China is around 45%, as high as in a number of European countries (this is according to an estimate by John Giles in a World Bank paper;…
This fact does not square with the widespread perception of China as a nation of sweatshops employing hordes of migrant workers, and indeed is a relatively recent development stemming from the 2008 Labor Contract Law. But China’s problem with these generous worker protections is ultimately the same one that many other developing countries have encountered: strong legal protections and generous insurance programs are so expensive that in practice they only become available to part of the workforce. Effectively China has two labor markets: one for urban white-collar jobs with all the legal protections, and one for blue-collar jobs held by rural migrant workers that generally lack the full set of benefits.
That is yet another neglected China story…
The view from Vilnius, part II
When Greece’s finance minister, Yanis Varoufakis, in an early round of negotiations in Brussels, complained that Greek pensions could not be cut any further, he was reminded bluntly by his colleague from Lithuania that pensioners there have survived on far less. Lithuania, according to the most recent figures issued by Eurostat, the European statistics agency, spends 472 euros, about $598, per capita on pensions, less than a third of the 1,625 euros spent by Greece. Bulgaria spends just 257 euros. This data refers to 2012 and Greek pensions have since been cut, but they still remain higher than those in Bulgaria, Lithuania, Latvia, Croatia and nearly all other states in eastern, central and southeastern Europe.
There is more from Andrew Higgins in the NYT here.
Planetary Defense is a Public Good
Today is Asteroid Day, the anniversary of the largest asteroid impact in recent history, the June 30, 1908 Siberian Tunguska asteroid strike. The Tunguska asteroid was only about 40 meters in size but the impact was 1000 times more powerful than the Hiroshima nuclear bomb.
Large asteroid strikes are low-probability, high-death events–so high-death that by some estimates the probability of dying from an asteroid strike is on the same order as dying in an airplane crash. To mark asteroid day, events around the world, including here at the observatory at George Mason University, will discuss asteroids and how we can protect our civilization.
Tyler and I are signatories to the 100X Declaration which reads in part:
There are a million asteroids in our solar system that have the potential to strike Earth and destroy a city, yet we have discovered less than 10,000….
Therefore, we, the undersigned, call for…A rapid hundred-fold acceleration of the discovery and tracking of Near-Earth Asteroids to 100,000 per year within the next ten years.
I am also a contributor to an Indiegogo campaign to develop a planetary defense system–yes, seriously! I don’t expect the campaign to succeed because, as our principles of economics textbook explains, too many people will try to free ride. But perhaps the campaign will generate some needed attention. In the meantime, check out this video on public goods and asteroid defense from our MRU course (as always the videos are free for anyone to use in the classroom.)
By the way, can you identify the easter egg to growing up in the 1980s?
The Anne Krueger report on Puerto Rico
You’ll find it here (PDF), co-authored with Ranjit Teja and Andrew Wolfe. Here is a bit of the introductory summary:
Structural reforms
Restoring growth requires restoring competitiveness. Key here is local and federal action to lower labor costs gradually and encourage employment (minimum wage, labor laws, and welfare reform), and to cut the very high cost of electricity and transportation (Jones Act). Local laws that raise input costs should be liberalized and obstacles to the ease of doing business removed. Public enterprise reform is also crucial.
Fiscal reform and public debt.
Probably the most startling finding in this report will be that the true fiscal deficit is much larger than assumed. Even a major fiscal effort leaves residual financing gaps in coming years, which can be bridged by debt restructuring (a voluntary exchange of existing bonds for new ones with a longer/lower debt service profile). Public enterprises too face financial challenges and are in discussions with their creditors. Despite legal complexities, all discussions with creditors should be coordinated.
Institutional credibility.
The legacy of weak budget execution and opaque data – our fiscal analysis entailed many iterations – must be overcome. Priorities include legislative approval of a multi-year fiscal adjustment plan, legislative rules on deficits, a fiscal oversight board, and more reliable and timely data.
If I were a Puerto Rican considering statehood…I know how I would vote.
For the pointer I thank Felix Salmon.
Grist for Robin Hanson’s mill
It is hard to advise Greeks how to vote on July 5. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shriveled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.
By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.
I know how I would vote.
Is there economic hope for men?
Allison Schrager has a new piece on that topic in Playboy, and with a new (old) idea, here is one part:
Harvard economist Lawrence Katz thinks that when the economy shifts, those who lose out experience “retroactive unemployment” in pursuit of jobs that no longer exist; however, he anticipates a bright future for men in the new economy. As an expert in the ways technology affects the middle class, Katz predicts the rise of the “new artisan” as a substantial trend in middle-class employment.
His theory holds that technology will commoditize and cheapen products in all industries but that artisanal workers will offer a superior interpersonal experience coupled with unique goods and services, commanding premium prices in turn. Men, he notes, are especially well suited to such roles. “These kinds of jobs go back to colonial times,” Katz says. “Individuals brought their own ingenuity and creativity to provide small-scale, high-quality products. In the 19th century they were displaced by mass production, but technology is already bringing a resurgence of this type of work.”
…If Katz’s prediction about new artisans comes to pass, the ways men and women fit into the economy will come to complement each other. Their roles will change, in some ways becoming more traditional and in others less: Women may be likelier to spend their careers in nine-to-five corporate positions, enjoying the regular hours, benefits and predictable pay those jobs entail. Forty-nine percent of women already work in firms with more than 500 employees, compared with 43 percent of men, and their share of the corporate pie is growing. That certainty will empower men to take on less predictable but possibly higher-paying work in self-employment.
A world in which men strive to learn new skills and take on riskier, entrepreneurial household roles may even prove more fulfilling than office work—but this requires changing our definition of a “good job.” Expecting men to be better-educated, office-work-oriented breadwinners is an outmoded idea. The artisan of the future will still be skilled and possess just as much potential to provide for his family. The technological revolution is yet another turn in the cycle of economic progress, and workers of both genders must learn to adapt. The end of men is not nigh; the end of our dated notion of work, however, is.
I believe the link would count as “safe for work,” but do note you may get a Playboy pop-up as I did, and there are sidebar ads, no full nudity but still this is Playboy beware if need be.
Tweets to ponder
The main euro Q is whether the problem is Greece (so kicking them out solves problem) or is misaligned exch rates (so someone will be next)
That is from Austan Goolsbee.