Latvia and Sweden

The situation in once fast-growing Baltic tigers is dire. As the Economist writes, the third quarter of 2008 was marked by a 4.2% contraction in economic activity and unemployment reached the level of 7.2%. The country had to face problems in its banking sector - Parex Bank, the second largest financial institution in Latvia, had to be nationalised after clients escaped to secure subsidiaries of Scandinavian banks. Latvia's plans of accession to the Eurozone complicate the situation even more, as the local currency, lat, is pegged to euro and the central bank has had to defend the fixed exchange rate recently.

Next year the economic slowdown will most likely deepen. The positive point is the IMF help package, which is nevertheless linked to austerity measures.

Going further, the situation in Latvia is bad, but also interesting from an economic point of view - it even led to the creation of a specialised blog: http://latviaeconomy.blogspot.com/.

Nevertheless, probably the most bizarre phenomenon is the initiative of young Latvian students. As Gazeta.pl (a major Polish web portal) wrote, a group of them decided to mock government actions and formulated a petition in which they request Sweden to take over Latvia (!).

The petition can be found here.

Although the petition is a clear joke with political undertones, it is true that Sweden experienced a financial crisis at the turn of the 1990s. And yes: some compare today's global crisis to the Swedish experience.

Is there, nonetheless, any lesson from the Swedish crisis for Latvia?

Econ grades

George Bush got a B grade for Econ 101. But do school grades really matter when national economy stumbles?

One more thing on Cox and Alm

I always keep international economics in mind, so while reading for my earlier post, I took this interesting excerpt Cox and Alm's article. Their view for why consumption went up in past years is that prices have been falling. And why is that?

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

By the way, if the theme interests you, I really recommend reading the whole thing.

Long live inequalities: The several gaps between rich and poor

Last week, Greg Mankiw quoted an article in The New York Times, by Cox and Alm, who report:

[I]f we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. [...]

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with [...] 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

The article touches on a very important issue, which is the way we measure inequality. This theme got special attention with Krugman's Conscience of a Liberal[1], where he "explains what can be done to narrow the wealth and income gap"[2]. The debate involves several aspects, such as its statistical measurement (see Mark Thoma’s “Increasing Inequality is Not a Statistical Illusion”) or, as the quoted NYT op-ed puts it, whether we should substitute consumption for income calculations.

The thing that troubles me, however, in all this wealth/income/consumption inequality debate, is very few people actually question its central assumption that inequality is bad! In that case, there’s another type of inequality we should really look into, because it could help explain some more of the above 2:1 proportion. Steven Landsburg provides an insight it for us:

In 1965, leisure was pretty much equally distributed across classes. People of the same age, sex, and family size tended to have about the same amount of leisure, regardless of their socioeconomic status. But since then, two things have happened. First, leisure (like income) has increased dramatically across the board. Second, though everyone's a winner, the biggest winners are at the bottom of the socioeconomic ladder. […]

[W]hen you compare modern Americans to their 1965 counterparts—people with the same family size, age, and education—the gains are still on the order of 4 to 8 hours a week, or something like seven extra weeks of leisure per year.

But not for everyone. About 10 percent of us are stuck in 1965, leisurewise. At the opposite extreme, 10 percent of us have gained a staggering 14 hours a week or more. (Once again, your gains are measured in comparison to a person who, in 1965, had the same characteristics that you have today.) By and large, the biggest leisure gains have gone precisely to those with the most stagnant incomes—that is, the least skilled and the least educated. And conversely, the smallest leisure gains have been concentrated among the most educated, the same group that's had the biggest gains in income.

Aguiar and Hurst can't explain fully that rising inequality, just as nobody can explain fully the rising inequality in income. But there are, I think, two important morals here.

First, man does not live by bread alone. Our happiness depends partly on our incomes, but also on the time we spend with our friends, our hobbies, and our favorite TV shows. So, it's a good exercise in perspective to remember that by and large, the big winners in the income derby have been the small winners in the leisure derby, and vice versa.

Second, a certain class of pundits and politicians are quick to see any increase in income inequality as a problem that needs fixing—usually through some form of redistributive taxation. Applying the same philosophy to leisure, you could conclude that something must be done to reverse the trends of the past 40 years—say, by rounding up all those folks with extra time on their hands and putting them to (unpaid) work in the kitchens of their "less fortunate" neighbors. If you think it's OK to redistribute income but repellent to redistribute leisure, you might want to ask yourself what—if anything—is the fundamental difference.

My moral here is: if we really want to end inequality, why not go all the way and adopt a totalitarian communist system? This reductio ad absurdum may seem odd, but it’s not the case that people are equal. Nor can we say for sure how they are different, but our ignorance should make us turn to a more merit-based system.

Such system would allow agents to make their own choices regarding the income they wish to work for, the wealth they aim at accumulating and how much leisure they are willing to give up for those. It’s not an easy choice: we all would like to consume more, accumulate money – be it for increasing consumption, leaving it for your kids or anything else – while having more free time.

This reminds me of a story about a very successful Brazilian investor. He and some friends were at a bar going through the financial reports of a firm, trying to find something to give an edge over the market. After hours of scrutinizing the books, they finally found what they were looking for and decided to celebrate. As they looked around looking for the waiter, they noticed the bar was empty. They had been working for hours, it was already evening (around 9pm to my recollection) and the place should be filled with people. This puzzled them until someone solved the mystery: it was New Year’s eve!

Of course the reporter interviewing him asked if he wasn’t upset about working so late during New Year’s eve, but no, he wasn’t. Now, how many people would be willing to work late on December 31st? Is it fair to infringe this person’s liberty by taxing him more than his co-worker who was enjoying his vacations instead of studying accounting books? I believe this answer involves not a subjective judgement, but can be answered by verifying which would yield more wealth to society.

The reality is we are constrained by time and some people are more productive, others are willing to work harder, while others would just like to earn their living and enjoy life. Why should we be opposed to a genius work-a-holic making millions of dollars, if he produces much more than that to society and few of us have that characteristic?

Let each person pick his own bundle of ability-effort-output and there shall be no (legitimate) envy. And inequality will undoubtedly be a good thing, for it will motivate harder work, simultaneously allowing more leisure.


Notes:

[1] For his summary of the theme and the book, you can check Krugman’s first blog post. There is also a highly controversial NYT review. You can also go straight for Mark Thoma’s comment on this, which gathers different sources.
[2] Quote from the book's back flap.

In Response to CITIZEN OF EUROPE: Do Central - Eastern European countries need their own Gordon Browns?

Jan Jablonski clashes with Citizen of Europe. The first blog debate starts!

The text makes two major points. Firstly, the fact that the UK stays outside the Eurozone allows it to make a necessary economic adjustment through currency depreciation rather than through “painful disinflation”. Secondly, as an opposite case, Spain didn’t have a freedom in altering the exchange rate, therefore the adjustment had to be done through prices and consequently affect employment. It actually all boils down to the question about whether it pays to join the Eurozone, as giving up the currency and monetary policy is the essence of a monetary union.

The discussion on this topic is already humongous starting from “the optimum currency area theory”. For the case of the UK the famous Five Economic Tests for assessing the UK's readiness to join the Eurozone can be mentioned. On the course of the discussion however, it does not become clear whether floating exchange rate regime helps dealing with shocks and adjustments or is in fact an another source of a shock. Additionally, Spain did not enjoy the benefits of having semi-world currency as the UK does (which brings substantial income), so giving up peseta was easier in that sense. Here:

“In Spain, the booming economy led to rising wages and, as a result, to a surging inflation. That in turn contributed to the loss of exports competitiveness and economic slowdown.”

The discussion is actually about business cycle. The supposition is that a proper monetary policy response would be the appropriate action. However, was a monetary policy in Spain an efficient tool in smoothing business cycle before joining the Eurozone? Maybe it was not? Maybe fiscal policy is actually a more efficient tool? Of course it is efficient only in case of a proper budget discipline, giving space for the automatic stabilizers to work.

Even if adopting euro was not really helpful to deal with the situation in Spain, is it also the case for EEC? The article is not really clear about how to relate the UK and Spanish example to the EEC, but certainly the first question to ask would be about business cycle synchronization. How much are the cycles of EEC synchronized with their biggest EU trading partners. Is it to the similar extent as in Spain? In case it is more synchronized, giving up monetary policy for European Central Bank would be less painful for the EEC than it was for Spain.

Author: Jan Jablonski, MSc, Economics International moderator

CITIZEN OF EUROPE: Do Central - Eastern European countries need their own Gordon Browns?

I have recently come accross an interesting piece in Financial Times. As Martin Wolf writes in his column, the sterling is about to follow the dollar in going abruptly down:

Like the US, the UK has had buoyant credit growth, huge rises in house prices, low private and national savings and a sizeable current account deficit. Like the US, it also absorbed the surplus savings of much of the rest of the world in the 2000s. It is, in short, one of the canonical “Anglo-Saxon” economies.

And furthermore:

Yet, until recently, sterling was a very strong currency. (...) Such high valuations were unlikely to last and have not done so. The strength was driven by the country’s stable economy, open capital markets and the highest nominal interest rates in the Group of Seven leading high-income countries. But now growth seems likely to slow sharply, short-term interest rates are set to fall and capital markets are suffering credit-crunch blues

So it seems that a potentially falling sterling will be the sign of a necessary economic adjustment. Surely, high current account deficit, rising housing prices and low levels of saving cannot last too long.

And what's even more important, Wolf makes a comparison to Spain, member of the Euroarea. In Spain, the booming economy led to rising wages and, as a result, to a surging inflation. That in turn contributed to the loss of exports competiveness and economic slowdown.

But in Spain, the adjustment cannot be made through exchange rate devaluation - no, Spain's monetary policy decisions are made in Brussels and the ECB will not devalue Euro, thus risking higher inflation!

So the only way for Spain, as Olivier Blanchard from MIT argues, is to go through a painful disinflation period and high unemployment (higher unemployment means lower pressure on wages and, thus, lower inflation).

I personally investigated the issue during my stay at Berkeley (together with my friend Ethan Lutske and under the guidance of Prof. Barry Eichengreen) and our solution to the problem was labour flexibility. Moreover, one of my friends (a student from Amherst College, name withheld) suggested in a private conversation that Spain should have foreseen the problems and done something to cool down the economy (e.g. curtail budget deficit drastically).

The question is why these solutions are or were not used? Can Europe afford to have flexible labour markets? And more importantly: should it?

More importantly: is Martin Wolf right in praising Gordon Brown for "saving the UK from Euro"? And do Central - Eastern European countries need their own Gordon Browns?

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With this post, we start the first DEBATE on Econ Int'l - it is a completely new feature (and not the only one to come!). Soon other posts on the topic will be published and you will be able to track the debate with the use of a special tab on the right!

Paying Taxes

PricewaterhouseCoopers and World Bank have just published a new report on corporate taxation, "Paying Taxes 2008":

"Paying Taxes 2008" offers data on total tax rates, payment frequency, and the time needed to comply with tax regulations in 178 economies. This year's report finds that business taxation goes well beyond corporate income taxes. It identifies five types of taxes that firms pay: profit, social, property, turnover, and other taxes, such as municipal fees and fuel taxes. The number of steps, time requirements, and various cost indicators are used to determine the overall burden of paying taxes.

You are probably wondering who is No. 1? Ireland? Honkkong? Or
maybe some Central - Eastern European country, e.g. Estonia? No.

One more surprise: it is Maldives.

RIO'S VOICE: Growth and development styles?

From the WSJ "Brazil Says ‘Não Obrigado’ to China-Style Growth Rates":

At the International Monetary Fund meetings, most ministers points to the 10% growth rate of China with a mixture of envy and awe. But Brazil’s finance minister Guido Mantega says 5% will do just fine. “I don’t know if it’s desirable to grow more than 5%,” he said in an interview. “We prefer to grow at a medium rate.”

My first reaction was to wonder who could possibly believe that. I couldn't, and I'm Brazilian! If Mr. Mantega's claim were true, we would be willing to forego half of the income per period we could have if growth rates were equivalent to Chinese ones. Keeping the pace, Chinese will double their GDP in 7 to 8 years, while it will take us around 15 years to double ours. Everything else equal, that roughly translates into twice as much time to double our standards of living, and why would anyone go for that?

According to the WSJ article, it seems as if Mr. Mantega is concerned about inflation, which is easier to keep under control when growing moderately because of lower demand pressures, and about being able to lower interest rates:

At mid-level growth rates, he said, it was easier to keep inflation under control – and provide additional incentive for Brazil’s central bank to lower the country’s sky high interest rates. The Brazilian benchmark Selic is now 11.25%, down from 19.75% in Sept. 2005.

“The conditions are there so that interest rates can head toward levels in civilized nations,” said Mr. Guido, by which he said he meant a nominal rate of 7% to 8%

But wouldn’t that ignite inflation?

I'll ignore the contradiction this time. Important to note now, however, is that China's 10-year high inflation is well within Brazil's target of 4.5% ± 2 p.p. It is possible to grow fast while maintaining prices under control, as long as the economy is not growing beyond it's potential rate. [For those thinking of accelerating inflation in China, remember growth was also accelerating past 10% a year.]

Funny enough, the other day I ran into China Daily's op-ed "China is on the right path to development". From what I wrote above, one could think I would agree with it, and that was my impression at first too, however the title of the article is rather misleading. Instead of focusing on the policies and institutions allowing for Chinese growth, the author in fact discusses the responsibilities that come along with the country's rise.

He declares that "the current international economic order and rules, which were mostly formulated by Western powers to reflect their interests, do not work well for the realization of China's long-term and strategic interests", and goes on to essentially state that China ought to abide by its own commitments, but shouldn't give in to "ceaseless demands from Western powers for further opening and reform".

Unfortunately reality is not so easy to deal with. Policies that benefit a country at the expense of its trading partners will certainly lead to retaliation, as history has shown over and over. The US Congress has already indicated it will pass a bill raising tariffs if the Chinese don't revalue the Yuan, recent events also indicate China's beggar-thy-neighbor policies are irritating the Europeans. Soon, Brazil and other nations will follow. The China Daily's article seems to ignore how others interested parties react to China, and it would be wise to remember these words from the World Economic Outlook of April 2006:

Even as linkages between economies grow, far too many governments are putting the slightest domestic constraint above any international interest. Others are reviving beggar-thy-neighbor policies, except they are now on the capital account—shielding large swathes of their own economy from corporate takeovers while encouraging their own companies to take advantage of the continued openness of others.

This is dangerous, short-sighted and sub-optimal. As Raghuram Rajan (Economic Counsellor and Director, Research Department, IMF), "I hope good sense will prevail".

And what about Brazil? Well, one can debate all day which development style to use. The most serious problem with our minister's statement is that we cannot talk about a style of growth when there is no growth to begin with! I have a feeling we will come back to this some time soon...

CITIZEN OF EUROPE: F-16 Planes, the Euroarea and Falling Dollar

What do F-16 fighter planes, joining the Euroarea and the falling dollar have in common?

It seems that they do have a lot.

As Gazeta Wyborcza (a large Polish centre-of-the-left newspaper, with very good econ articles) wrote, the Polish government decided to increase the number of F-16s Fighting received this year from 4 to 6 (Poland bought 48 planes to be received in the coming years and is thinking of joining the JSF programme)

There are two connections between this purchase, joining the Euroarea and the falling dollar..

The connection No. 1 is simple: the cheaper dollar is, the less you have to pay for the planes.

But there is something more to it that meets the eye.

Poland wants to join the Euroarea around 2011-2012. So far it has met all monetary requirements (inflation, interest rates etc). Nevertheless, the situation with fiscal requirements is not that good: budget deficit is still more than 3% (the Euroarea reguirements are here).

At the moment, the economy is booming - the growth is around 6%. Nevertheless, economists predict a mild slowdown next year. That means budget revenues will be smaller and budget deficit may increase.

By paying for two additional F-16s now, the government decreased expenses scheduled for the next year of about 90M USD. The predictions are that, thanks to this, the budget deficit will drop below 3% next year.

As a result, Poland will be able to start negotiations on accession to the Eurozone.

Shrewd, isn't it?

CITIZEN OF EUROPE: Is EU really so socialist?

A couple of weeks ago, we wrote that the EU is going to regulate financial markets more tightly and make them more transparent...

Nothing new on that topic, but something definitely interesting is happening in EU international financial markets...

The new EU legal act MiFID (the Markets in Financial Instruments Directive) is due to be introduced soon.

For people not knowing the EU law: a directive is not a set of directions - it is a fully binding legal act that needs to be, nevertheless, transposed into national legal systems by member states parliaments before a set deadline.

I am now doing my homework on the EU institutional law and what's more the MiFID is not new to me: while working in corporate banking this summer, I heard many discussions on MiFID... And I must admit that he EU directive is surely a very interesting piece of legislation. As the Economist writes:

"Big Bang” or not, expect dramatic changes. The new rules end the monopoly (albeit a waning one) of national stock exchanges over share trading and throw open the field to newer electronic exchanges and even the big investment banks. Until now, some countries (such as Poland, the Czech Republic and Hungary) still required trading to take place over the national exchange. Others, such as Britain, have long been more liberal.

Handed an effective monopoly like the utility companies of yore, the protected exchanges took full advantage, charging everything from fat fees on membership to hefty tariffs on each trade. Even in more liberal regimes, over-the-counter trades have had to be reported to the exchanges. The exchanges charge members for the privilege of doing so and then, to add insult to injury, levy members again for access to those data in “real time”.

The new law dismantles each one of those monopolies at a stroke. "'

What is even more important:

"Under MiFID, these off-exchange markets will in effect become more regulated, because they will have to disclose more pricing information. They will also be freer to tempt business away from the traditional exchanges. This should encourage the traditional marketplaces to lower fees and increase the speed of transactions to become more attractive, which could make for leaner markets and larger trading volumes. On the other hand, it could “balkanise” trading; one of the tests of the new law's effectiveness will be whether it adds to overall liquidity or channels it in so many directions that it evaporates."

So as we can see: a new EU legislation piece means more markets and more transparency.

This is largely in contrast to what many of my Polish libertarian friends think of the EU. It's strange, but for some guys in my country, the EU is first and foremost a 'socialist federation', stiffling markets and spreading statism... Just look at the picture (scroll down, to the very bottom)

Bizarre... At least to some extent.

Not that I am a lover of Brussels, but still: a partially pro-market character of the EU cannot be denied...

Investment high-flyers...

Imagine that you are a CEO of huge multinational and you are looking for a suitable location of a foreign direct investment (e.g. opening a factory, a chain of shops or aquiring such entities abroad). Where would you go?

China? Slovakia? Estonia? Chile? Brazil?

None of these countries...

According to Investment Performance Index for prepared by the Irish National Bank, the top three FDI high flyers are:

1. India
2. Poland
3. Thailand.

(for an article on the index click here)

Nobel Prize in Economics goes to...

Speculations of who will get this year's Prize were pretty intense, but finally the verdict is there:

Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson.

(click for bios; for the rationale of why the Prize went to these three American economist, go here)

Many of you may be probably wondering what the mechanism design theory is and, more importantly, since Noble Prize winners should make a contribution to humanity, what practical relevance it has for us. Well, it had an impact on the development of game theory, allowing economists to analyse the sources of market failure. It seems to me that Guardian is offering a pretty good explanation of what this economic animal is.

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Talking about the game theory, I have seen recently an interesting BBC three-part documentary: "The Trap. What Happened to Our Freedom".  

It touches upon game theory and modern economics, putting them in a wider social perspective.

Do I personally recommend watching it? Yes, if you like uncovering fallacies and sophistry (which is something economists are good at and do like...)

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Coming back to international economics, let me present you the article headlines for this week. On Wednesday, we should have a brilliant piece on carry trade by Kasia Burzynska of Gdansk University (Poland) and later (on Saturday) a research article on how Indonesia adapts to changing conditions in international economics by Barbara Kits of University College Utrecht (The Netherlands).

CITIZEN OF EUROPE: Between Scylla and Charybdis...

The first consequences of the financial crisis are clearly visible... The EU has plans of regulating financial markets more tightly, i.e. introducing more transparency, but also standardising and limiting the complexity of financial instruments...

Most of the readers would say that this is a definitely appropriate move... And I agree, but only to a certain extent.

As usually, there is something that some economic tiggers like the best...

I have no research on the topic at hand, but my intuition is that public choice theory may be relevant here - the number of lobbyists in Brussels is overwhelming and some of the new regulation may be detrimental to market players and the general population...

For me, public policy is always walking between Scylla and Charybdis. Scylla of market failure and Charybdis of government failure...

China, Japan and Baltic Tigers...

The Economist has a brilliant article on the China's economy. The article describes and analyses all possible threats to the Chinese economy at the moment, except one: a currency crisis.

As I wrote earlier (backed by research by more authoritative authors, e.g. Eichengreen or Allen), a currency or twin crisis is a viable threat in China and it is strange that the Economist does not take it into account. I bet that if hedge fund use all of their resources, the famous Chinese reserves may not be sufficient...

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My column collegue, André, is a big "fan" of inflation... In my favourite financial newspaper, I found a peculiarity that may be of interest to him.

Lowering inflation due to globalisation or other factors has usually been seen as a positive development, making the work of central bankers easier. Nevertheless, this is not the case in Japan:

A price war aimed at Japan’s 100m mobile phone users could have a significant impact on the core consumer price index, potentially prolonging the country’s brush with deflation, economists warned on Wednesday.'

This may not be a development stemming from international environment, but FT also writes that earlier there were fears that the Japanese fragile inflation may be lowered by a drastic plunge in prices of flat-screen TVs, which I do think may be due to China. I am just wondering whether Japanese alterglobalists will adopt it as an argument against globalisation... I am also wondering how alterglobalists, in general, respond to the argument that globalisation moderates inflation. Low inflation is, as we know from textbooks, less changeable, which means stability for employers and consumers and, thus, higher economic growth and lower unemployment. I guess that they could argue that low inflation is based on low wages in Third World countries. This is to some extent true, but you need to remember that costs of living in Third World countries are smaller than in the West, of which alterglobalists usually tend to forget...

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As a prelude to my article on the Baltic Tigers, please take a look at an interesting piece from FT. It seems that making appropriate (?) reforms is not always enough to create conditions for the long-term macroeconomic stability. In a week, we will delve more deeply into the topic and try to see whether the Baltic Tigers will be able to join the Euroarea soon...

Mishkin is pop, people are irrational and other news

I was going through our blog yesterday and a very interesting headline was showing up in our news section: "Fed's Mishkin downplays globalization as a factor in low inflation". In an earlier post on the theme, I defend that globalization can impact inflation through imports prices as well as through policy incentives and other mechanisms. Forbes reports:

Mishkin did say globalization may have helped in 'subtle' ways, such as by spreading a 'common culture that stresses the benefits of achieving price stability.'

[H]e said that while it is 'plausible' to hold the theory that lower priced imports from China and other countries are lowering inflation, research suggests that the importance of this factor 'should not be exaggerated.'

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The Fed governor seems to be particularly under the spotlight ever since the media have called attention to his clues about the 50 basis points cut during last open market committee meeting. The Wall Street Journal blog had a very good piece about this. One passage above all others caught my attention:

There’s only one problem. Most of those four speeches came on nights or weekends. The March inflation speech was on a Friday night. The Jackson Hole paper was presented on a Saturday and last week’s “important”-downside-risks speech was given at 7:30 p.m. EDT, which might as well be midnight for Wall Street.

It is clear to me investors were not using all available information, which brings us to a question about the efficient market hypothesis and rational expectations theory, which claims "expectations will be identical to optimal forecasts [...] using all available information"[1]. It does not explain why the relevant and available information above would be ignored, perhaps because it doesn't address costs and benefits of gathering information.

But even if we account for that, wouldn't it be rational to assume that the expected benefits of gathering information about a Fed governor's public speeches outweigh costs?

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Back to international economics, Brian Caplan points out 4 other irrational beliefs people have in The 4 Boneheaded Biases of Stupid Voters. Check out the "Anti-Foreign Bias".

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Finally, Greg Mankiw points out The Rationality of Harry Markowitz and attends a seminar in Behavioral Macroeconomics.


Notes:
[1] MISHKIN, Frederic, "The Economics of Money, Banking, and Financial Markets", 8th edition, p. 157.

CITIZEN OF EUROPE: Is Sarkozy a disappointment?

I was pretty enthusiastic when I heard that Sarkozy won elections in France this year. Wow, I said, something is gonna change in this country. After six months of Sarkozy in power, I must admit that my enthusiasm has rather faded and certain skepticism has appeared.

Why am I disappointed by what Sarkozy is doing? Or, it’s better to say: why do I have doubts that he’s gonna make any valuable reforms?

Well, the reasons are multiple.

Firstly, Sarkozy did his very best to remove clauses on “unrestrained competition” from the new European treaty (a bad document in itself, but that’s a topic for a different post…). You could of course say that it’s nothing really important, as the EU Commission competition division is still (hopefully) in existence, but as many experts say the lack of the aforementioned clause make the foundations for antitrust rather fragile (just have a look at the article from FT

The other problem is whether the European Antitrust should be more like the American one, with greater emphasis on the dynamic effects. This is not a topic of this article, but undermining the very fundamentals of antitrust itself is a rather incorrect policy.

Secondly, Sarkozy seems to be in favour of creating national champions. As we can see, with Colbert it is like with Elvis: the guy is dead, but some still believe that he’s alive. And, as to the results of creating national champions, I am personally rather skeptical. Just have a look at the French computer science industry, which still needs protection, Korean chaebols, or obvious mistakes of the Japanese Ministry for Trade and Industry (described here). Going further, the US government didn’t create the Silicon Valley… Of course, car companies like Toyota or Honda are examples to the contrary. Nevertheless, the general picture of the effects of industrial policy is rather unclear.

Thirdly, it seems that Sarkozy still cannot understand what the monetary policy is for… The guy still thinks that you can boost the economy by lowering interest rates below the NAIRU level not harming the long-term sustained growth. Fortunately, we have Germans in Europe and their healthy conservative attitude…

Fourthly, he isn’t too fiscally conservative either. France will not meet its Euro-area budget criteria till 2012. I am afraid (though not absolutely sure – don’t have precise data) that the rest of Europe will have to pay with higher interest rates and less investment.

There is surely some talking about labour reform in France and deregulation too, but what Sarkozy has done so far doesn’t really make me believe that he will implement new policies… But you never know… Politik ist keine exackte Wissenschaft, as Prinz von Bismarck said…

Clearly, Sarkozy is kind of a disappointment, but it is not a time to give verdicts yet…

Remy Piwowarski