Eurozone Leaders: get your frickin' act together

The normal response to the question "do Eurozone leaders finally get it?" is "of course not.. are you serious ? What the hell is wrong with you?!"

Luckily for us Professor Charles Wyplosz has a more eloquent and thought-out answer at the lovely www.voxeu.org website.Although the conclusion is in the main title: not yet.

Link available here.

Nobel Prize for Economics : Sargent and Sims

This is the real start of the awards season people with Thomas Sargent and Christopher Sims winning the prize this year.


The Marginal Revolution blog has a very easy to follow of explanation of what it is these chaps have done to win a prize that so pisses off physicists, chemists and other "real" scientists the world over. Check it out here.

And for all you "real" scientists out there, please enjoy Dilbert cartoon

Oh right, the blog...Sorry about that.

Having taken a career break from the blog (i.e. I got a career) I thought I would try and get things moving back here before you go off and hang out with those no-goodniks over at the Irish Economy blog.

So here are a few things I came across recently that may be of interest:

The first is taken from Paul Krugman's blog in which he cites a paper by Muller, Mendelsohn, and Nordhaus who use the example of air pollution* and how this side-effect of production affects society and how this does (or doesn't) impact on policy makers and potential contradictions in their ideology.

They find that in a purely monetary sense the cost to society is huge with a number of industries inflicting more damage in the form of air pollution than the value-added by these industries at market prices. The argument, Krugman explains, is as follows "consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives."

Ah. So we tax them then to make up for this disparity and offset the detrimental impact of air pollution. A response to such a market failure is required but this will be shot down by those who think Adam Smith was a leftie-pinko interventionist. 

An interesting examination of how one's ideology and need to be right can hinder them from doing what is most efficient. Not necessarily a trait only found in conservatives though...

Secondly Yoram Bauman, PhD., is the (sigh) Stand Up Economist. Moreover, he is not dreadful, in fact he's actually pretty good. Unlike that bloke at Guy's Econometrics blog who changes the lyrics of popular songs to econometrics terms...Bleugh.

Check out the Bauman's explanation of the Greg Mankiw's 10 Principles of Economics here. I especially like his footnote joke. I mean, seriously some of the footnotes in my old macro book were straight out of the Third Policeman.


* = always the staple for discussing external costs to society, just like cakes are always the example used when discussing diminishing marginal utility.

Millionaires Demand to Pay More

Check out this video.

The 200-strong Patriotic Millionaires for Fiscal Strength group (catchy name) is demanding that President Obama raise their taxes.

This will surely take off across the world, right ?... Right ?!

David Cottle asks "Are These Havens Really the Safest Places to Go"?

David Cottle in the Wall Street Journal looks at the so-called safe havens of the bond markets (i.e.US, Swiss, Japanese and German bonds) and wonders why in times of downturn these bonds are perceived as being less risky despite their connection to the global downturn (Germany's funding of it's Eurozone partners bailouts) or their own endogenous problems ( US debt, Japan's stagnant economy).

Cottle highlights a report by UBS which concludes that, to some extent at least, this may be investors from these safe havens coming home to roost by investing back in domestic bonds after having invested abroad during times of global growth.

Article here.

Brady Bonds to the rescue ?

Alright, everybody come back out from behind their couches. Morgan Kelly's buggered off for another four months so we can all get back to reading less scary and more constructive  opinion pieces. Like this one by Barry Eichengreen.

The Berkley professor discusses using a system of financial instruments and regulations similar to the Brady Bonds of the 1980s to deal with Greece and the increasing likelihood that it is facing default. Eichengreen cites a plan devised by two veterans of the Brady Bonds: Gary Evans and  Peter Allen. He also points out that another veteran of the Brady Bonds was a certain Mr. Trichet...

Mohamed A. El-Erian: How Risky is the Global Economy?

Rather than just stretching his arms as wide as possible and saying "about this much" Mohamed A. El-Erian discusses four potential risks that the weakened global economy still faces. These are:

• The world as a whole has yet to deal fully with the economic consequences of unrest in the Middle East and the tragedies in Japan.
• The debt crisis in the EU's periphery.
• Housing in the US is weakening again.
• The increasingly visible fiscal predicament in the US: having used fiscal spending aggressively to avoid a depression, the US must now commit to a credible medium-term path of fiscal consolidation

It is not a pessimistic or alarmist view and makes for interesting reading. It would however have been helpful for El-Erian to include his opinions on what could be done to counter these risks.

This Project Syndicate article is taken from a lecture Mr. El-Erian gave at Princeton.

Wall Street Journal's Top 25 Economics Blogs

Hi apologies on my absence from the blogosphere.

As I'm sure you were all freaking out over my disappearance, I vow to make sure that you guys won't ever be left staring blankly at The False Economist homepage, refreshing it every fifteen seconds for days on end again.

So please enjoy a veritable cornucopia of other economics blogs as rated by Wall Street Journal.

List available here.

World Bank Report : Conflict, Security and Development

A report out today by the World Bank has urged a rethink on what aid spending should target. According to the report, there should be more focus on the justice system, policing and ensuring political stability, rather than on  health and education.

Is this a new take on "trickle-down" economics ? Or is it reasonable to suggest that money spent on developing health and education systems in failed or failing states is a waste of money ?

Report is available here.

BBC background article available here.

Patrick Honohan Suggests GNP-Linked Bonds

Governor of the Central Bank, Patrick Honohan, has proposed a new risk-sharing idea to deal with Ireland's seemingly unsustainable debt repayments. To put it very simply: when Ireland's GNP increases it should pay more and when the country's growth falls it should pay less back.

Apart from being a good idea, although one that will require many conditions and qualifiers to have a chance of being even reviewed by Ireland's partners, it also highlights Ireland's need to find a way to manage its huge debts.

FT article by Honohan here.

Wall Street Journal  article disccuses it here.

Wayne Rooney curses at cameras AND explains the Ricardian/Malthusian theory of rent economic rents

In the Financial Times, British economist John Kay dicusses that age-old question asked by people who don't "get" sport: Why do modern footballers get paid so much compared to their predecessors ?

In answering he applies the concept of economic rent* to the problem. This issue was  first discussed 250 years ago by James Anderson, a Scottish farmer and economist who put forward his ideas about economic rent in An Enquiry into the Nature of the Corn Laws in 1777. He stated that "it is not the rent of the land that determines the price of its produce, but it is the price of that produce which determines the rent of the land". Seemingly a paradox exists, but, Kay explains, Anderson found that:

"The demand for corn determined how much land had to be cultivated: the worst land that needed to be brought into production to satisfy that demand would earn only the cost of production, and better land would earn rents that measured the value of their superiority. Who benefited from these earnings was a political issue" 

These ideas would go on to form the Malthusian/Ricardian theory of rent although it is believed that Ricardo and others were not aware of Anderson's theories.

So why does Rooney earn relatively more than the great Stan Matthews ? Basically as demand for footballers increase, lower quality footballers are brought in, squads expanded, youth players paid more etc., to meet the demands of the public. The superior footballers (Rooney and to a lesser extent, Titus Bramble) will be able to dictate higher relative wages, although the extent of these is down to the negotiating skills of their agents.

At least, that's my understanding of it....

The other major reason is of course the huge increases in profits generated by clubs compared to the 1950s and the obvious impact this will have on the players.

Kay's article is available here.
Background to the Ricardian/ Malthusian theory of rent available here.
 

* = The excess payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply.

Top 20 Articles in the American Economic Review

To celebrate the 100th anniversary of its first publication, The American Economic Review has released its "Top 20" articles, as selected by a committee consisting of Kenneth Arrow, B. Douglas Bernheim, Martin Feldstein, Daniel McFadden, James Poterba and Robert M. Solow.

Background article by the Economist available here.

Document with links to the articles available here.

So get reading on some of these monumental economic texts and wow your friends in the pub with your knowledge of  the Kuznets Curve and the Cobb-Douglas theory of production.

Irish Times: The Psychology of Selling

The brilliant Mr. Patrick Freyne (ex-TV reviewer for the Sunday Tribune) has an article in the Irish Times on behavioural economics and the logical fallacies we, as consumers, fall for again and again. Read it here.

Daniel Gros: Flawed Economics of the Competitiveness Pact

The Director of the Centre for European Policy (CEPS), Daniel Gros, has written a short article examining the logic behind the so-called Competitiveness Pact, a joint proposal from France and Germany to improve the Euro Area's competitiveness. The Pact led to a number of alternative proposals being offered, most notably one by the Presidents of the Commission and European Council.

The Pact will be debated at the European Council held on  24-25 March and we can expect sparks to fly over contentious issues such as the harmonisation of corporate tax rates and the retirement age. There are also calls for Wage Indexation to be abolished  (this is where social welfare and other payments are calculated based on the average wage as opposed to inflation or price levels)

In his piece, Gros states that there are two underlying hypotheses which provide the basis for the Competitiveness Pact:

1. If we fix (relative?) wages no external imbalances can arise since relative costs determine export performance.
2. Higher productivity always means more ‘competitiveness’, and is thus always useful to reduce divergences.

These are not necessarily true, argues Gros and so the logic behind the Pact is flawed.


Read it at the Eurointelligence website here.
The Franco-German Competitiveness Pact is available here.
And some background on the issue is available on the Euractiv news website here.

Happy Maths Day!

Such a shame it only comes once a year....

Here's a video by Professor Mark Thomas of the University of Oregon, who very kindly put up all his excellent introductory econometrics lectures on Youtube. Like every other econometrics lecturer in the world he has his own take on notation but the lectures are quite accessible and a great first step in learning more about what economics is based on.

NB. Lecture starts at the 12 minute mark.

Reading for the Weekend

There has been some really interesting articles this week (most from the FT but never mind):

•  Wolfgang Munchau thinks Merkel is living in a parallel universe.
• Colm McCarthy and Martin Wolf have both given great overviews on Ireland and what needs to be done with it's insurmountable debt.
• Crazy old  Axel Weber left the Bundesbank thus taking his hat out of the ECB ring and his name off the Merkels' Christmas card list. He then wrote an article opposing any plans to allow the European Stability Mechanism to purchase bonds and calling for the Stability and Growth Pact to be strengthened. Reinforcing the stereotype that most Germans think that all economic crises can be prevented by fiscal discipline alone.
• John Plender on the Credit Bubble's Comeback
• Roubini and Bremmer tell us that our G20 world has become G-Zero.

So, as you while away the hours this weekend, waiting to see who gets the position of being told what to do by the IMF and the Commission, and wondering which member of Vampire Weekend does Dylan Haskins look like, check out some of these articles, they give a flavour of the interesting times we live in.....
 

NOTE: For any of the FT articles, follow the link, you'll hit a paywall but the title of the article will appear above your address bar, just google the title of the article and click on the first link you come across and you'll be past the paywall.

Finance 101

Former UK Chancellor, Alistair Darling, has a short piece in Prospect Magazine (in addition to an interview with Prospect's editor) highlighting the lack of "financial literacy" in society. He calls for the basic concepts of finance to be taught at secondary level and for older people to have the opportunity to learn about the basic concepts of finance as well.

Furthermore, he notes that this is not just a problem for laypeople, senior board members of banks and other financial institutions appeared to be in the dark at times over the financial instruments they used and the strategies they followed. This is a defining feature in what caused the global financial crisis; the over-reliance on complex instruments and models by those who rarely, if ever, understood them.

Darling makes several good points, especially about the need for more clarity in the language used regarding finance. However, I would love to see him in the future expand on these issues. As a former Chancellor he would have a unique insight in to just how out of touch some of these people were and how relevant this was to the global financial crisis.

Article (including interview) available here

Dismal Scientists

The Economist asked some economists who they thought were the most important economists in the world today. Economist.

I'm ashamed to say I didn't know several of the names mentioned. I blame their PR guys rather than my academic skills...

Check it out here.

Tackling Future Food Crises in 8 Simple Steps

Olivier de Schutter, the UN Special Rapporteur on the right to food, wrote this great piece on steps G20 nations should take to break the cycle of shocks to the world-supply of food. Its a response to the measures suggested by the President of the World Bank, Robert Zoellick

Read it here at the brilliant Project Syndicate blog

Saving Microfinance from the wolves and vultures

There has been much criticism lately of microfinance and this has led to proposals for tougher regulation of microfinance institutions in India and other developing economies in which microfinance is operated.Some such lenders are acting increasingly more like loan sharks than community-based loan facilities for small, but significant, entrepreneurial activities.

A report by the BBC here shows that Indian officials are very concerned with these new microfinance groups  and their profit-driven agenda. These government officials have proposed setting a cap on the interest rates that microfinace groups can charge, a proposal which has been gaining support in recent months.

One particular reason for this is that "for profit" micro-finance institutions have been linked with with several cases of people who are unable to repay their loans committing suicide.Surely something needs to be changed so as to expunge organizations that act in such a bullying manner from operating under the banner of "micro-finance".

The Economist has a great article stating that better regulation and not a cap on interest rates may be the answer : Microfinance: Leave Well Alone.  

It's a very convincing argument and, for the most part, I agree. However, I think that any legislation should also re-emphasize the main aim of microfinance, which is to enable a person or a group to develop a business or project improving their standard of living and their community's well being.




NB. - Just noticed that, quite recently, one of the most criticized microfinance groups, SKS in India, had lowered its interest rates by a small amount following pressure from the Indian government and media.I wonder if several of these institutions will lower rates so as to allay any concerns about their practices and head off any new legislation.

National Recovery Plan 2011-2014

For anyone with a few days to spare here's how we're getting out of all that pesky debt we owe...apparently.

PDF file at : http://www.budget.gov.ie/The%20National%20Recovery%20Plan%202011-2014.pdf

Irish Lessons for China ?

Clifford Coonan wrote an article in the Irish Times last Saturday discussing how the small, but growing, middle-class in China have pushed up the demand for luxury goods and are starting to turn their attention to property. Sound familiar ? The ramifications of an overheated Chinese economy and an ensuing burst property bubble would be disastrous for a world economy coming out of recession, even with a restrictive environment for foreign investment and a more regulated banking sector than, say, Ireland

However there are many reasons not to panic just yet. China's potential for growth is immense, some analysts have their annual growth rate at between six and nine percent for the next decade. Furthermore it is taking unprecedented measures to allow its currency to rise even if they are still far from what is required to have the yuan trading at a realistic value.

It's a good article and the comparisons with Ireland are quite poignant, showing how people in countries flush with easy credit and a booming economy can behave in such a similar manner.

Article available here

Interesting Future for the EFSF

Here's two articles from the Finacial Times Alphaville blog discussing the recent rumours that the EFSF will be used by the EU to fund Greece buying back its own sovereign debt bonds on the secondary markets.

Note that RBS rates strategist, Harvinder Sian, is quoted as saying that this may only save the Greeks €12.5bn in debt costs, reducing it from 158% of GDP to 153%.

Interesting stuff considering Ireland may be moving in to this territory soon...

Weirdo Greek debt restructuring

Reflections

Who Owns US Debt ?

Here's a cool a graphic displaying the share of US Treasury bonds held by different nations with China holding the most US debt.



Although China is now seen to be diversifying its foreign exchange reserves with the recent purchases of European "periphery"  bonds (i.e. Portugal and Spain) the country remains heavily invested in US debt. Premier Wen Jiabao had previously called on the US to ensure the safety of its bonds as future increases in the US bond yields, caused by rising deficits which will require more funding, would devalue Chinese holdings*.

However, despite a small drop at the end of 2010,  it would not be in China's interests to abruptly and dramatically move away from US debt. This would lead to further deflation of the dollar and a fall in American consumers' demand for Chinese goods.

What is most likely to happen in the near future is that China will continue to slowly let the yuan apprecate in a controlled manner  while also diversifying its sovereign debt holdings.





*Explanation of this here

US States' GDP Equivalents

Found this cool chart on the Economist's website showing which countries are the GDP equivalents of which US states, i.e. Maine's GDP is $51.29bn and its equivalent country is Luxembourg.

Some interesting ones are Nevada, Illinois and Idaho. Remeber these are not per capita so Oregon having the same GDP as Pakistan is rather impressive when you consider the differences in population.

Its an interesting exercise, more in terms of highlighting the differences facing the nations and their US GDP equivalents rather than what they have in common. For example, a California default would be problematic but manageable for the US Fed, however a default by Italy (perhaps only slightly less likely!!!) would probably lead to a meltdown in the Eurozone and a huge crisis in the sovereign debt markets. 

Careful Now

Hi I'm Neil and welcome to my blog. Over the next few weeks I hope to have a few small articles and links up concerning:

• the Irish political situation, 
• the Eurozone debt crisis (particularly Portugal), 
• the World Economic Forum at Davos
• President Sarkozy's valiant efforts to create world peace, reduce global trade imbalances and revive disco music.

Eh maybe some of that last point requires more research.....

Until then please enjoy this New York Times article by Stephen J. Dubner and Steven D. Levitt (of Freakanomics fame) from 2007. Just what I need to think about after the gastro-excess of Christmas.