A defense of Hungarian economic policies and prospects
It seems that Hungary has climbed out of its slump and it is now growing at 2.5 percent a year, at least during the last quarter. This interesting but self-serving editorial serves up a few reasons why:
We are increasing small- and medium-size businesses’ access to capital through grants and loan programs for product development, and reducing corporate-income taxes for these firms to 10% from 19%—among the lowest in Europe. These businesses are vital to Hungary’s export-driven recovery. As they continue to grow, so will private-sector employment, which in turn will reduce the heavy burden on our welfare system.
We would rather receive the same total tax revenues from a larger number of employers—each paying less tax—and have more employed Hungarians spending their wages and driving consumption. We’ve significantly lifted the tax burden off consumers by slashing the personal income-tax levy to a flat rate of 16%, from a tiered system where the highest rate was 32%.
We are also tackling welfare reform. Our government-run system has been plagued by spiralling costs, systemic abuse and inefficiencies that were exposed by the deteriorating economic conditions after the financial crisis. We believe that any welfare cuts should aim to boost employment and embed a work ethic among Hungarians. So we have reduced unemployment and disability benefits and pharmaceutical subsidies, and are in the process of reducing back the red tape that makes employing workers complicated and expensive.
I would stress caution is interpreting these arguments and note they are from a member of the current government. Luck, positive real shocks (agriculture), and mean reversion are also at work. Still, it is interesting to see that the Hungarian recovery is far outpacing that of the PIIGS countries; Hungary of course is not on the euro and it has avoided wrenching deflation, instead experiencing mild inflation. Furthermore the Hungarians seem to be putting a spending freeze into operation and they are addressing pension liability problems. It is unlikely that is the cause of their recent turnaround, but it hasn’t hindered it either.
All this is true:
Our economy has grown for six consecutive quarters, unemployment levels are falling and the Hungarian forint is one of the world’s strongest-performing currencies this year.
Budapest is now an expensive city, and it no longer makes for a good cheap vacation.
Favorite Hungarian composers
1. Franz Liszt: The “late, serious” pieces are important but I don’t think they are much fun to listen to. I recommend the Transcendental Etudes, performance preferences here. “Funerailles,” played by the young Lazar Berman. “Years of Pilgrimage, the Swiss years,” by Aldo Ciccolini. The Hungarian Rhapsodies, played by Cziffa or Robert Szidon. Many of the opera transcriptions are subtler than they are made out to be, as creative examples of early mash-ups. The B Minor Sonata is a bit too long but Clifford Curzon has a lovely version. The organ music remains undervalued and the instrument well suited the composer’s chromatic tendencies.
2. Bela Bartok: The orchestral music is easier to enjoy live, when the different colors and melodic strands stand out more. Concerto for Orchestra is a good place to start (for a Hungarian conductor try Fritz Reiner) and also Piano Concerto #1, get both Pollini/Abbado and Barenboim/Boulez for contrasting interpretations, both brilliant. The six string quartets, by the Emerson Quartet. The piano sonata by Youri Egorov and “Out of Doors” and “Allegro Barbaro.” The Sonata for Two Pianos and Percussion, by Bartok himself if you wish.
3. Gyorgy Ligeti. My favorite piece is Lux Aeterna but that is best heard in concert, like a lot of choral music. On disc the horn trio works best. The Sony collection volumes are uniformly excellent and perhaps the piano music is the easiest place to start.
Other notable Hungarian composers are Kodaly and Péter Eötvös, sorry that I have not in every case mastered the diacritical marks. Most Kurtag leaves me cold but the Kafka Fragments are one place to start. There are many fine Hungarian film music composers.
The silent ongoing run on Greek banks
The Greek banking system has a relatively low loan-to-deposit ratio of about 120%, well below Irish and Portuguese levels. But over the last year, deposits have fallen by €44 billion, and Greek banks have been shut out of the repo market, the interbank market and bond markets. That has left a €135 billion funding gap, mostly filled by the European Central Bank.
Here is more. Here is a good Irish analysis. And this:
Greece is now the lowest-rated sovereign in the world, having fallen below Ecuador, Jamaica, Pakistan and Grenada.
An ideal partner for a currency union with the Germans, no?
Uh-oh
According to a recent report by Fitch, as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks.
There is more detail here; fortunately, not all of them have heavy exposure to Greece. You will recall also that “runs on money market funds” were one problem which regulators have yet to address in a satisfactory manner. Here is another claim, with an uncertain degree of verification:
It will be American banks and insurance companies that will have to make the lion’s share of default insurance payments to European institutions if Greece fails…if one includes credit default exposure, American exposure to Greece increases from $7.3 billion to $41.4 billion.
It still remains the case that without contagion effects these losses can be handled.
Assorted links
1. Ganz, of Budapest, should be a household word. Here is an image from the impressive Hungarian Museum of Elektrotechnics, which by the way doesn’t seem to have a working website.
2. Felix Salmon on Stanley Fischer.
3. Salman Rushdie to write science fiction drama for television.
4. Ferris Bueller critique makes the movie sound better than it is.
How to cut government spending
Paul Krugman, among many others, raises the Keynesian argument against cutting government spending in a downturn. Yet cutting spending is easier to do than these accounts make it seem. Cut the rate of growth of government spending on health care:
1. It is one sector where supply constraints often bind. Releasing some of those resources from pursuing government subsidies will lead to their relatively rapid redeployment elsewhere. For instance if you cut the rate of growth of Medicare spending, some more doctors are likely to start accepting Medicaid patients. And job growth in the sector is robust, even these days.
2. The policy is cutting a rate of growth, rather than cutting current spending in absolute terms. This may lead to sectoral readjustment problems for some people who are planning careers in health care, but it leaves current revenue streams intact and indeed it is still likely to grow them by some amount. Fairly often I see Keynesian opponents of “spending cuts” confuse absolute cuts with cuts in the rate of spending growth; the latter involve much smaller Keynesian problems.
3. There is a nice cushion of rents in the medical sector, and that makes it easier to cut spending there too.
4. Spending too much time with aggregate AD and AS curves causes one to overlook some of these cross-sectoral distinctions.
5. We also could and should cut farm subsidies, which go largely to agribusiness. It’s part of the Keynesian argument today that wealthy corporations are just sitting on their cash. I don’t buy that as stated, but if it will convince Keynesians to call for an immediate end to farm subsidies, so much the better. We now can cut farm subsidies altogether and the rate of growth of government spending on health care; that’s two areas right there.
6. Let’s not forget defense spending. Not all of those cuts need be a Keynesian disaster.
7. It is the so-called “discretionary spending” where Keynesian arguments are most likely to hold. Not surprisingly, that seems to be the area where we are most determined to cut spending. Silly Americans! Given that, is our government an institution you should trust to enact good Keynesian policy more generally?
Not all government spending is created equal, for Keynesian purposes or otherwise. There is plenty of spending we could cut without creating a Keynesian disaster, even if you accept the Keynesian framework straight up.
Jeff Madrick’s *Age of Greed*
Here is my review, along with Diane Coyle’s review of Tim Harford, and here is an excerpt (from the most negative part of my review):
…I found numerous points to object to. The chapter is titled “Milton Friedman, Proselytizer,” and there is a good deal of (fascinating) information about Friedman’s early years as a “fanatically religious” Jew. One is left with a picture of Friedman as a rather clever but irresponsible simplifier and dogmatist. There is not a comparable discussion of Friedman’s role in insisting on good empirical work and the testing and falsifiability of economics propositions, his building of the University of Chicago department with first-rate scholars and future Nobel laureates, and the numerous times he changed his mind on economic issues, including on monetary theory and policy. Friedman was much more a scientist and a skeptic than this essay lets on.
There are also particular errors and omissions. The discussion of Friedman’s desire to eliminate social programs does not mention that he wanted to replace them with a guaranteed annual income. It is wrong to claim that “the instability of velocity is what finally undid monetarism in the 1980s” when volatile interest rates were a much bigger problem, and in open economies such as Switzerland the exchange rate became the issue (monetary velocity moves in strange ways but it does so slowly). Few economists would agree with Madrick’s claim that “Friedman and Schwartz . . . made little advance over what was already known” or that their Monetary History had little empirical basis. Contrary to Madrick’s view, it is now widely accepted that inflation—or at least ongoing inflation, as Friedman made clear—is always a monetary phenomenon. These aren’t mere accidental oversights; they contribute to a systematic downgrading of Friedman’s legacy of scholarly depth and impact.
Assorted links
2. Health care in twenty years’ time? Forty?
3. Useful history of the debt ceiling (pdf); it started during WWI.
4. Paul Romer’s charter city TEDtalk.
5. New Larry Summers column at the FT, seems it will be regular.
Loyalty filters
“When you compare the costs of a full-time bodyguard versus a dog, the dog makes a lot of sense,” Mr. Curry said. “And the dog, unlike the bodyguard, can’t be bought off.”
Here is more, the article is interesting throughout.
Surprising Beach Reading
When I ask who she reads on the subject, she responds that she admires the late Milton Friedman as well as Thomas Sowell and Walter Williams. “I’m also an Art Laffer fiend—we’re very close,” she adds. “And [Ludwig] von Mises. I love von Mises,” getting excited and rattling off some of his classics like “Human Action” and “Bureaucracy.” “When I go on vacation and I lay on the beach, I bring von Mises.”
So who said it? I was surprised.
Why is recorded, non-live sports so boring to watch?
There is a new essay by Chuck Klosterman. He lists several reasons why watching recorded sports events is such a downer, but he lays heaviest stress on a Bayesian argument:
2. “If this game has already ended and I don’t know anything about what happened, it was probably just a game”: This sentence is so obvious that it’s almost nonsensical, but I suspect it’s the one point that matters most. It’s the central premise behind the entire concept of “liveness,” which is what this whole problem comes down to.
…When you watch an event in real time, anything is possible. Someone could die. Something that has never before happened could spontaneously happen twice. When there are three seconds on the clock, not one person in the world can precisely predict how those seconds will unspool. But if something happens within those three seconds that is authentically astonishing and truly transcendent — well, I’m sure I’ll find out about three minutes after it happens. I’m sure someone will tell me, possibly by accident. You can avoid the news, but you can’t avoid The News. Living in a cave isn’t enough. We’ve beaten the caves. The caves have Wi-Fi.
Do you watch the live, non-recorded performance and enjoy the hope of a Black Swan? The essay is interesting throughout. I thank a loyal MR reader for the pointer.
My favorite things Hungary
The Austro-Hungarian empire does not count per se, so I will use the Hungarian language for demarcation. As you might expect, there is lots:
1. Author: Peter Nadas, A Book of Memories, is a classic novel of ideas which is under-read in the United States. Nadas has a new book coming out this fall. Imre Kertesz doesn’t do much for me.
2. Movies: Bela Tarr, Satantango. It’s over seven hours long, but don’t be put off. It has some of the best shots of grazing cows and angry peasants committed to reel, and I wanted it to be longer. It’s mesmerizing in a way that makes it one of the film classics of the new century. I find Werckmeister Harmonies too corny but it has some fine scenes. Less traditionally thought of as Hungarian is the great Emeric Pressburger, who collaborated with Michael Powell on numerous fine films. Alexander Korda did The Thief of Baghdad.
3. Actor, Peter Lorre is the obvious choice, plus Bela Lugosi made the best Frankenstein ever, forget about Dracula.
4. Conductor: You have George Szell, Antal Dorati, Georg Solti, and Eugene Ormandy. Szell was so often perfect, Dorati cut some of the best sounding records of all time, Solti’s whiplash style was either offputting or splendid, and Ormandy was deeper than he was given credit for. Ivan Fischer is a more recent contender, for instance his Mahler’s 4th reflects a scrupulous concern with rehearsals. Péter Eötvös is an excellent conductor of contemporary music.
5. Pianist: Gyorgy Cziffra and Ervin Nyiregyhazi are two memorable eccentrics. Solti and Szell were underrated as pianists and Zoltan Kocsis is very good. Don’t forget Franz Liszt, even though no recording has survived.
6. Scientist: There is Szilard, Teller, and von Neumann and many many others but can they come close to this top tier? The options for Hungarian mathematicians defy belief. Hungarian inventors were critical to the “great non-stagnation” of 1870-1940, including for the all-important electrical transformer; few if any of those names have survived much into general Western history which I suppose says something.
7. Artist: Victor Vasarely is the obvious choice, but I don’t like him so much. This area seems oddly weak. Am I forgetting something? Mihaly Munkacsy anyone?
8. Economist: Janos Kornai comes to mind, and Melchior Palyi remains underrated. I believe Milton Friedman’s parents were from Hungary.
The bottom line: You can’t gush enough about music and math and physics and science and invention. The achievements from a small country are staggering and unprecedented. Yet literature and painting are relatively weak. Hungarian composers will get a post of their own, but there is a strong line-up of Liszt, Bartok, and Ligeti. What else am I forgetting? I can’t think of major films set in Hungary and I don’t count the Hollywoodesque The Shop Around the Corner even though nominally it is Budapest.
Assorted links
2. Interview with Ricardo Caballero.
3. There is no great stagnation. Here is even more, and better, proof.
4. Are children an inferior good? And Caplan’s response. Is it possible that education is a form of real income, and so using education and real income variables — unadjusted — picks up real income better than stand-alone “real income” does?
Markets in everything
So some else posts in MR under the name of “Andrew”. @tylercowen I will offer cash for the rights to use the name “Andrew” on MR.
Other Andrew, please submit your sealed bid…
Bryan Caplan vs. Amy Chua debate
Here I am, sitting on a bench in downtown Budapest, reading the Guardian, when on p.20 I see a published debate between Bryan Caplan and Amy Chua. If I have one wish, it is that Chua would put her anecdotal points in the form of a statistical argument. Which assumption behind the twin adoption studies is she rejecting? Or where are those studies engaged in too much aggregation? I suspect she will never tell us. Coming back to the hotel room, I now find Bryan’s commentary on the debate. The two have very different senses of humor, and I bet she wouldn’t think that Bryan’s jokes are funny either.