Category: Uncategorized
Assorted links
1. The economics of video game pricing.
2. What’s possible under the new ECB policy, and good Edward Hugh analysis of the new “deal.”
4. Canadian wolverines are tough.
5. A new constitutional convention is coming, and it’s not for Europe.
Assorted links
1. Private equity and jobs, setting the record straight.
3. Further notes on the new European agreement, if indeed that is what it is, and good comments here, and good tweet in Spanish.
4. The Economist picks best books of the year 2011, including TGS.
5. A professional NHL hockey player speaks to the issue of hockey helmets and collective action problems. Good, thoughtful piece, deeper than a lot of economic treatments of the same issue.
6. “our jet packs are here…”
Assorted links
Assorted links
1. Are school lockers becoming extinct?
2. Resolution of “anti-Muslim” economics lecturer at Harvard.
3. Which TV shows do Republicans and Democrats like?
4. Has the rate of cultural change slowed down?
5. Ryan Avent tours The Economist archives from 1931, and will Eastern Europe be whacked the hardest? And John Cochrane on everything.
Predictions about the eurozone
Charles Calomiris wrote in 1999 that the euro is doomed (pdf). Milton Friedman had some pretty good predictions about the euro. Here are my 2004 predictions about the euro, and here is my bit from 2003 (“The three percent rule is effectively dead…The real question is what will happen when one of the smaller nations thumbs its nose at France and Germany…and then claims exemption from the relevant penalties.”) I have been worried about euro-like arrangements since the late 1980s. Here are Paul Krugman’s 1998 remarks, though I am not sure which are his predictions and which are the scenarios he is distancing himself from; in any case he has been critical of the euro on numerous occasions. In the German language there is Theresia Theurl, among others, and add to that list some number of millions of Brits and Swedes.
How about the course of the eurocrisis? Here is my piece, “Last Man Standing” (jstor), published in The Wilson Quarterly in early 2009, written in 2008:
It has become increasingly clear that the problems in European governance are severe – and I am referring to the wealthier nations, not Bosnia and Albania. The European nations are tied to each other through the European Union and the euro, but they don’t have a good method for making collective decisions in contentious times.
…Spain, Italy, and Greece, which have all lost their premier AAA credit rating, may require some form of financial aid. The Germans might look to spread this burden around Europe, but there are few places to turn. France and the Netherlands could chip in, but the hat cannot be passed very widely.
Part of the problem for Europe is that its biggest banks are very large relative to the economies of their host nations – in other words, its component national economies are too small…It’s not widely recognized that Europe because of its systemic weaknesses, already has required implicit bailouts from the United States.
…Ideally, the ECB should take on a stronger role as lender of last resort in Europe, but the EU does not make such decisions easily. Fundamental alterations would be needed in the bank’s charter, which was written precisely to make change very difficult, in part because Germany…insisted on biasing the ECB toward conservatism and inaction. Even if the bank’s charter were amended, the member nations would surely impede any action by bickering over who would pay the bills for new initiatives. If the ECB is going to run bailouts, decision making will have to become a lot more fluid, and that would require Germany to give up control and the bank to move away from price stability as its sole objective. Since the EU member states have not been able to agree on a reform of the Union constitution, it’s not obvious they will be able to agree on changing the bank’s charter. They’ve had time – and good reason – to do so, yet have taken no serious action.
Roubini predicted the course of the current Italian financial crisis in 2006. And so on.
It is sometimes asserted that the economics profession should lose some status because so few economists predicted the U.S. financial crisis. I’m not sure economists should be judged by their ability to predict asset price movements, but grant the point. The euro crisis is now here, and it seems our profession should win some of its status back.
Deirdre McCloskey’s transition to Austrian economics
Assorted links
1. How the sellers of wedding dresses limit arbitrage, and is the Target 2 debate all screwed up?
2. How to reemploy some ZMPers (an epistolary romance), and British royalty adopt ZMP Greek donkeys.
3. No one has a good theory of collateral.
4. Markets in everything, at two different levels, British royalty edition, via Bob Cottrell.
5. Blog with Perry Mehrling and others.
6. What the Khan Academy is really up to, namely measuring when learning occurs or not.
Assorted links
1. Coasean sentences from Australia, religion and sex.
2. The UK: even less wealthy than they thought they were.
3. The Bundesbank and its limits, and here (very important), comment from Felix, and Ezra from Germany on Germany, which is probably the best blog post of the day. Willem Buiter has good remarks, the eurozone alone could get its own “Assorted links” column every day.
4. Markets in everything, American horror theatre.
Good as gold
Or should I have titled this post “The Show So Far”? How about “Meet the New Boss, Same as the Old Boss”?
Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits.
An FT summary is here. Here is WSJ coverage. Here is NYT coverage. Here is the relevant Monty Python skit. And there is more, all from the annals of time inconsistency:
The changes will include more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be overturned if a qualified majority of eurozone countries agrees to overturn it.
Merkel says the bondholders of the troubled nations won’t bear losses, although there is no German or other guarantee of the debt. It is hinting at the prospect of a guarantee without actually making one. The NYT summarizes the whole thing:
The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.
Only the last one on that list means anything. They might as well try to fool the markets this way. The positive scenario is: 1) fool the markets, 2) give Italy breathing room, 3) Monti restores growth and sound finances in Italy, and 4) things aren’t so bad anymore.
There aren’t really any better (and feasible) ideas on the table.
Assorted links
1. Good background on Sargent and Sims.
2. Lost puffin found in sex clinic, and David Warsh baits Greg Ransom.
3. How doctors die.
5. Will Japan and Russia clone a woolly mammoth?
6. A total coincidence, but here is a list of the most corrupt eurozone countries. And I am still skeptical, but it seems markets really like the new Italian austerity plan.
My eurozone podcast with Russ Roberts
You will find it here, I was happy with how it turned out.
Wolfgang Münchau has a nice update:
Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.
That is another absurd “solution” that has no chance of working, unless of course the critical countries simply recover on their own. (Why does it remind me of “Don’t mistreat the Abos! (if anybody’s watching)”? Don’t forget this:
Andrew Duff, a member of the European Parliament, last week provided a very useful guide to the distance the eurozone is from where it would have to be if it were a proper fiscal union. He drew up a list of all the changes in the European Treaties that would need to be amended to achieve that. It includes changes to 23 articles and five protocols.
And this is from MR comments, Ryan Cooper:
Thinking in the short term, obviously the solution involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent’s debt in one way or another. But just past the immediate crisis I don’t see any reason for optimism. If recession really does hit, how are the SPIIG crowd going to get out of the “debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity” cycle? It seems like a 1918-style suicide pact.
The SPIIG governments have to be weighing the costs of cutting their losses and getting out. (Right?) People seem to agree that would be another devastating financial crisis, and thinking selfishly that would be bad, but if I were Spain and it’s a choice between 2-3 years of total chaos and 20-30 years of grinding hopeless misery, I think I’d go with the first option.
Solve for the equilibrium…
Addendum: Ezra Klein offers observations from Germany; they focus on the real side of the economies!
Does going public affect innovation?
From Shai Bernstein, on the job market from Harvard:
Abstract: This paper investigates the effects of going public on innovation. Using a novel data set consisting of innovative firms that filed for an initial public offering (IPO), I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables strategy, I find that going public leads to a 50 percent decline in innovation novelty relative to firms that remained private, measured by standard patent-based metrics. The decline in innovation is driven by both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions. I find suggestive evidence that changes in firm governance and managerial incentives play an important role in explaining the results.
Assorted links
Will the new eurodeal work?
Sarkozy and Merkel are already prepping their electorates for a pending deal, the usual media sources give some varying summaries of what is up, plus it will evolve anyway. A few of you have written in and asked me if it will work.
I have a simple formula for assessing euro-deals, and it goes as follows:
1. Can Italy grow at two percent a year, more or less sustainably?
2. Will/can the market regard the actions of the seventeen eurozone nations as more or less unified?
If you can add up those two questions to about 1.7 worth of “yes,” then the deal can work. Otherwise not.
You might also wonder, if the answers to those two questions come in at 1.8, is the deal needed in the first place? Probably, to get #2 up to a quasi-yes. (By the way, the Irish seem to think a treaty change and thus a referendum is on the way.)
It is my best judgment — and I stress that word — that the sum answer to those two questions, even with an announced deal by Dec.9, and looser monetary policy, comes in at about 1.16. Which isn’t enough.
Asking for 1.7 worth of yes seems quite modest, doesn’t it?
Addendum: Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone. Any “set things right” action on Germany’s part is, one way or another, a form of doubling down. If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany. The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.” That’s a tough call. The Germans understand that one better than do most of the bloggers I’ve been reading on the topic.
By the way, here is an interesting article on German geopolitics, though I don’t agree with much of it I recommend giving it a read.