Game theory and cross-border deposit guarantees
What was it that Jeff said? Nonetheless this issue has been bothering me, especially after reading EconomistMeg. Let’s say that “Germany” guarantees bank deposits in Spain. But the guarantee cannot be unconditional. That is, if Spain leaves the euro anyway and redenominates its bank deposits into lower-valued pesetas, Germany will not make the Spanish bank depositors whole. For one thing the implicit liability is too large, for another Germany would be offering Spain a huge free lunch and relying too much on political pressure to stop subsidized exit from happening. For yet another thing you cannot reward those countries which totally break the basic rules.
So the guarantee is actually “we cover your bank deposits against many contingencies, except the one we all fear the most.”
Could that work anyway?
Perhaps it depends on the motives for deposit flight. If the motive is “I’m afraid that my bank in particular will fail, and I’ll be left in the cold before the whole system goes down,” the German guarantee may be worth something. Such depositors, with such fears, will be reassured.
If the motive is “I see the whole domestic system going down, leading to peseta redenomination,” the guarantee won’t stop the bank run. Or should I say “the non-guarantee will not stop the bank run”?
Thinking about this problem makes one less optimistic about the prospects for a cross-border deposit guarantee.
Another issue is that the Netherlands, Slovakia, Finland and others may not feel the same “responsibility rights” as Germany when it comes to “saving the eurozone.”
Thoughts on how to avoid another Great Depression
This is another excellent Martin Wolf column, read the whole thing. Here is one excerpt:
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.
I believe people should take more seriously the notion that the ECB will remain hopeless, and that the crisis can only be addressed by some kind of joint US-German-UK-toss-in-the-other-sound-countries radical multilateral move. Which is not to say I am predicting that. But at least in principle, those three countries can get something done and they also have stronger common interests than those across the eurozone, sorry to say.
Just to make the comparison biting, what if we postponed the costly benefits part of ACA for a year (it may be struck down anyway) and send $200 billion directly to Spain and its banks? Is more money needed? Use this as an excuse to get rid of farm subsidies and cut defense spending. Surely the Germans would then chip in too, and perhaps even the Chinese, if we made the donors club sound exclusive and toney enough. Drop hints about various silly islands (not Taiwan).
Have the new QEwhatever driven by purchases of Spanish mortgages. If they keep the money abroad, we lose only the cost of the paper or the electronic bookkeeping entries. If they buy American goods and services with it, consider it QEwhatever as applied to American exports rather than mortgage paper. No liquidity trap there, and the Fed doesn’t itself have to choose which exports to buy. Combine with the Fed’s FX swap facility in some kind of nefarious way, and we can invent four or five new acronyms. And so on. We would still have a long, grinding worldwide recession but perhaps much less of an AD collapse with it.
I understand that Obama may not be the binding constraint here, but is he even thinking about pulling this off? Is he sitting around wishing for it? Is anyone talking to him about these options?
Norwegian markets in everything
How close is the UK to potential output?
Paul Krugman draws our attention to this very interesting 98-pp. paper by Bill Martin and Robert Rowthorn (pdf here, also see this Martin Wolf column). They argue that the current problems of the UK are almost solely demand-based, that the UK’s supposed productivity problem is much overstated and shows up in measurement largely due to labor hoarding, and that observed inflation is due mostly to import price shocks. There is more, so dare I suggest you read the whole thing?
I have a few points, which I will put under the fold…
1. The authors write: “There is an effective demand failure, high unemployment and, within companies, under‐utilisation of the employed workforce – a form of “labour hoarding”.” This implies radical deflation for competitive industries (MC = 0), which does not seem to be the case. Alternatively, it could imply no productivity decline for the more competitive industries, which also does not seem to be the case.
2. Real wages in the UK have been falling, post-recession. In the pure Keynesian view, how much further must they fall through monetary stimulus to restore full employment ? Isn’t this ultimately also a pessimistic view about UK productivity?
3. The authors acknowledge that worker productivity has fallen, but they blame this on cheaper labor, and view it as a symptom rather than as a cause. I doubt if you can fill most of the box that way, as efficiency wage effects are unlikely to be so large. In any case their mechanisms here are not very clear. Furthermore wouldn’t the story imply that further stimulus, by lowering real wages, would lower productivity even more?
4. The whole argument rests upon worker willingness to accept lower real wages (and lower nominal wage acceleration) in response to external shocks (see pp.32-33 on how nominal fits into the story and how the authors clearly assume considerable wage flexibility). Keynesians are otherwise suspicious of this kind of premise, and the real wage decline doesn’t seem to have just come from unseen price inflation. So why suddenly accept a wage flexibility assumption from these guys? And if that premise is accepted, why believe in such a big role for demand shocks? The basic story doesn’t fit together, and it doesn’t fit with Krugman’s own views.
5. Citing “import price shocks” as an explanation for recent UK inflation isn’t actually different from citing “supply side bottlenecks.”
6. This is more speculative: the UK boom of the oughties possibly can be understood as a joint boom of supply and demand, rooted in multiple equilibria. Investors have since reevaluated which equilibrium the UK “belongs” to. The “British story” just doesn’t seem so exciting any more, Jubilee or no Jubilee, and the credit rationing from the banks reflects this. A response to a very large shock can in fact reveal lots of information about future prospects. The authors don’t give much shrift to forward-looking theories and mechanisms. (By the way, maybe you don’t like multiple equilibria stories, but as I read the paper the authors also seem to be relying on one for the labor market wage-productivity link, though again I wish they would spell out their story more formally.)
7. Labor hoarding in the U.S. seems to have gone down a great deal, so it is odd to invoke it as the decisive factor to explain the UK data. It’s declining in popularity as an explanation more generally, and I don’t see what the authors do to resurrect it.
8. There were plenty of new hires after the recession ended; why didn’t firms just reallocate their surplus “overhead” labor that was being hoarded? The discussion circa p.37 doesn’t convince me, as it doesn’t face this question head on.
9. The effects of the credit bust are both demand-side and supply-side, and also suggest maybe that isn’t the key distinction here for the UK.
Let’s try a few general points:
10. There are admittedly some puzzling features of the recent UK economy, most of all how much real wages have fallen. But they are puzzles for all major theories, not just the supply side theories. Since this is a real wage decline, I tend to think supply side stories are going to have a big role here.
11. It is very likely that AD is a problem, but we just don’t know how large the UK output gap is. Given that, it is fine to call for credible nominal reflation, just don’t get your hopes up too much or oversell it.
12. This paper makes one more agnostic by stressing the unreliability of the data (such as business capacity surveys, which don’t suggest a lot of excess capacity). It doesn’t have a coherent demand-side story which fits the cited data, much less a demand-side story consistent with Krugman’s arguments and models.
Assorted links
Cheating and Signaling
The Chronicle of Higher Education has an article on cheating in online courses and some of the high-tech measures being used to detect such cheating:
As the students proceeded, they were told whether each answer was right or wrong.
Mr. Smith figured out that the actual number of possible questions in the test bank was pretty small. If he and his friends got together to take the test jointly, they could paste the questions they saw into the shared Google Doc, along with the right or wrong answers. The schemers would go through the test quickly, one at a time, logging their work as they went. The first student often did poorly, since he had never seen the material before…The next student did significantly better, thanks to the cheat sheet, and subsequent test-takers upped their scores even further. They took turns going first.
…”So the grades are bouncing back and forth, but we’re all guaranteed an A in the end,” Mr. Smith told me. “We’re playing the system, and we’re playing the system pretty well.”
…A method under consideration at MIT would analyze each user’s typing style to help verify identity, Mr. Agarwal told me in a recent interview. Such electronic fingerprinting could be combined with face-recognition software to ensure accuracy, he says. Since most laptops now have Webcams built in, future online students might have to smile for the camera to sign on.
Some colleges already require identity-verification techniques that seem out of a movie. They’re using products such as the Securexam Remote Proctor, which scans fingerprints and captures a 360-degree view around students, and Kryterion’s Webassessor, which lets human proctors watch students remotely on Web cameras and listen to their keystrokes.
The cheater-detector arms-race is interesting but also makes me think about the signaling theory of education. Cheating works best if the signaling model is true. If education were all about increasing productivity and if employers could measure productivity then cheating would be a waste of time. As illustrated by Mr. Smith, however, at least some students care about the A that cheating produces more than the knowledge that learning produces. Mr. Smith must believe either that education (in at least this class) doesn’t increase productivity or that employers don’t learn about productivity. Employers have big incentives to learn about productivity so my bet is on the former.
If students perceive the situation correctly we also have an interesting hypothesis: students should cheat more in those courses that offer the least productivity gains. Studies on cheating find mixed results across major, with some finding that business majors cheat more and others not, but these studies are cross sectional, i.e. across individuals. A better test of the theory that I propose would look at cheating by the same individuals across courses. Absences should also be higher in courses with lower productivity gains.
Gallego travel notes
The ATM gives you a choice of eight languages, including Catalan, Gallego, Valencia, and Euskara. At first the street signs appear to be in Portuguese, but that is a trick. Other times the dual Spanish and Gallego phrases on the signs are exactly the same.
Gallego as a province [Galicia] reminds some of Nantes, France, and the surrounding area, or of parts of southern Chile.
If you put together Keynesian economics and public choice theory, you get a very nice and indeed downright spacious airport in Santiago de Compostela. More infrastructure here will not jump start growth.
Counterintuitively, Santiago avoids the destruction of its authenticity by relying on tourism. The city has been a major tourist destination since at least the 9th century A.D., so the arrival of tourists — many of them have religious motives — is how the city’s past is preserved. It is the people who stay at home who are ruining the place.
Vigo, the largest city in Gallego, has lovely sea views, lots of refrigeration facilities in its port, and superb seafood. It is slow on a Sunday, especially for its size. Percebes looks like this, and it is a must-try.
“A Coruña is one of only eight pairs of cities in the world that has a near-exact antipodal city.” That would be Christchurch, New Zealand. A Coruña is supposed to be the most prosperous city in Gallego, yet it is scary how many abandoned or boarded up buildings are in the heart of downtown.
The city’s Roman lighthouse is still in use, and it is the world’s oldest active lighthouse.
It is very green in Gallego and it rains a lot, though not as much as in Bergen, Norway.
I strongly recommend a trip to Gallego. There are numerous reasons to go, and few reasons not to go, the only really good one being that you may wish to go somewhere else.
Steven Pearlstein on the United Kingdom
Indeed, there is a suspicion that at least some of the downturn here is a statistical mirage caused by the necessary adjustment to wages and prices following the bursting of that financial bubble. If the financial sector never really added as much genuine value to the economy as was indicated from all those inflated salaries and bonuses, then at least some of the decline in GDP since then may merely reflect a healthy repricing of labor, financial assets and goods across the economy rather than a worrisome loss of output. Low inflation, slowly rising employment, little or no growth in measured productivity, household incomes and GDP — these are all consistent with that story of statistical mirage.
Here is much more. And there is this:
Other than Labor Party politicians, nobody seriously doubts the wisdom of cutting back on the number of public employees or the size of their pensions, or capping welfare payments to any household at the median income, or bringing more efficiency to public education or the public health service through greater competition. The idea that these will be done once the economy returns to normal growth is a political fantasy.
From JohnLeemk
It’s incredibly frustrating. The political and policy world falls into two camps:
Those who believe no stimulus is necessary, everything is supply-side.
Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.It’s like people completely forgot the existence of Milton Friedman, and decided to revert to the stupidest possible version of New Keynesianism, where interest rates are the only lever of monetary policy and the printing press is something that only functions when rates are above zero.
I feel like to both the centre left and the right, Milton Friedman is too heretical now — too right-wing for the left obviously and too left-wing for the right. Consequently, everything about monetarism has been stripped out of the public consciousness and we are left with vulgar Keynesianism and vulgar Austrianism.
We truly live in a Dark Age of economics.
That was a comment from Scott Sumner’s blog, passed along to me by David Levey.
Why has Foreign Aid Been Untied?
The more cynical among us have sometimes thought that rather than recipient welfare the purpose of “foreign” aid is to provide a cover for domestic aid. Foreign aid pork, i.e. using foreign aid to subsidize special interests in the donor country has certainly been common. Historically, most foreign aid has been tied; that is, the recipient was required to spend the money on the donor country’s exports. Relative to cash, tying raises prices and reduces choice and recipient welfare–the deadweight loss of Christmas problem.
US food aid is a classic example. US food aid tends to peak after a glut. It’s cheaper for us to give food away when we have lots and not coincidentally giving food away after a glut helps to keep prices higher, benefiting US farmers. It’s precisely when food is plenty, however, that prices are low and aid is less needed. When food is scarce, prices are high and aid is more needed but then we would rather sell our food than give it away. In addition, we typically require food aid to be transported on US ships which raises costs. Finally, the food we give away is not always best suited to the recipient’s preferences or needs.
For a public choice theorist the fact that foreign aid benefits domestic special interests is not at all surprising. What is surprising is that tied aid is way down. Great Britain banned most tied aid in 2002 and indeed tied aid is down across all of the major OECD donor countries. Food aid and technical assistance are still tied but these aid categories are down and untied grants and loans are up. In 1984-1986, for example, about 60% of aid was tied and today only 10-25% of aid is tied (depending on source).
Why has aid become untied? Could this be a case of improved public policy due to lobbying from the aid industry? It is interesting to note that although tied aid is down in the US, the US continues to tie a lot of aid, considerably more than the Europeans. One explanation may be that the decentralized US political system gives more weight to local domestic interests so tied aid continues to sell here despite opposition from most aid groups.
Special interests are also not the only explanation for tied aid. Tied aid can reduce corruption in the recipient country. If donors have become less worried about corruption, perhaps because governance has improved in the developing world, this could offer a public interest explain for an increase in untied aid.
Overall, I find it puzzling that foreign aid has become untied as the major beneficiaries appear to be poor foreigners with little political power.
*The Ocean of Life*
The author is Callum Roberts and the subtitle is The Fate of Man and the Sea. It is an excellent look at the environmental problems associated with oceans. Here is one bit:
European seas are far less productive than they once were. The fact that the UK bottom trawl fleet lands only half the fish today that it did when records began in 1889, despite a massive increase in fishing power, says all we need to know about how we have squandered natural capital.
…In 1889, there were ten to fifteen times as many large bottom-living fish like cod, haddock, and halibut in the seas around the UK as there are today.
The book is interesting throughout and very readable, without losing its fundamental seriousness.
The globalization of the food truck?
Among young Parisians, there is currently no greater praise for cuisine than “très Brooklyn,” a term that signifies a particularly cool combination of informality, creativity and quality.
And this:
An artisanal taco truck has come to Paris. The Cantine California started parking here in April, the latest in a recent American culinary invasion that includes chefs at top restaurants; trendy menu items like cheesecake, bagels and bloody Marys; and notions like chalking the names of farmers on the walls of restaurants.
The full story is here. And if you were wondering, and I hope you were:
Ms. Frederick waded through the thick red tape of four separate Paris bureaucracies: the business licensing commissariat; the mairie de Paris, or the local municipal office; the prefecture of police; and the authority that oversees the markets. Unlike some food trucks in the United States, the ones here are not allowed to troll for parking spots, or roam from neighborhood to neighborhood. They are assigned to certain markets and days.
Doller Otaku, or the culture that is you-know-where
It is hard to pull out just one paragraph from this gem of an article, but here goes:
I like to think myself as a kigurumist [from kigurumi, costume] because I don’t only dress up as two-dimensional beautiful girls. I also dress up as fairies, furry animals and monsters too. I think that dollers dress up as dolls as an extension of cosplay and I don’t want to be categorized as a doller or a cosplayer because I don’t put on an act. I don’t change my character or personality to match my kigurumi as others do.
And:
What’s important is I can become something on the borderline between human beings and dolls. I like the idea of existing somewhere between the 2-D and 3-D worlds.
Why wear a mask when you’re so pretty?
I must admit, I think I’m the cutest girl in the world. But I want to keep on pursuing beauty.
The article is here, with photos, via a loyal MR reader.
Spoons and the social discount rate
Its hard to imagine spoons will exist in their current form in 30 years. What does this tell us about the social discount rate?
That is from the ModeledBehavior hive mind.
Let’s assume an intertemporal equilibrium. The rate of return on buying consumer durables ought to equal (risk-adjusted) the rate of return on capital. Spoon improvement means a lower rate of return on holding spoons, which means a lower return on durables, which in turn means a lower rate of return on capital investment. For a given set of interest rates, that implies a higher rate of social discount.
That said, I find it easy to imagine spoons will exist in their current form in 30 years. What if I were wrong? I would be overestimating the MU of money in future periods and thus saving too much. I ought to buy more non-spoon items, renting my current spoons, knowing that spoon improvements will glide me into a cushy retirement.
Assorted links
1. Review of the new Chris Hayes book.
2. Garett Jones on speed bankruptcy (pdf).
3. The politics of Obama vs. Romney; politics isn’t about policy!
4. NYT presents 32 innovations that will change our world; are you impressed by their list? I like this one:
A team of Dutch and Italian researchers has found that the way you move your phone to your ear while answering a call is as distinct as a fingerprint. You take it up at a speed and angle that’s almost impossible for others to replicate. Which makes it a more reliable password than anything you’d come up with yourself. (The most common iPhone password is “1234.”) Down the line, simple movements, like the way you shift in your chair, might also replace passwords on your computer. It could also be the master key to the seven million passwords you set up all over the Internet but keep forgetting.
5. Are economics Ph.D programs teaching the right material?
6. More Paul Krugman on science fiction.