Thursday, January 21, 2010
The Myth of Ariba « The Baseline Scenario
The Myth of Ariba « The Baseline Scenario: "But the big difference, as many have noted, is that ours was an equity bubble, not (for the most part) a debt bubble. Technology startups were funded by venture capital firms, which generally have no debt, and by stock offerings; they generally don’t have the assets and steady cash flows to borrow money. (The telecom infrastructure companies were an exception.) There was little margin borrowing to buy stocks, as compared to the 1920s, so when the NASDAQ crashed, the damage did not spill over into other asset classes, and the financial system didn’t even wobble."
Saturday, January 16, 2010
Haiti and debt – Chris Blattman
Haiti and debt – Chris Blattman: "After a dramatic slave uprising that shook the western world, and 12 years of war, Haiti finally defeated Napoleon’s forces in 1804 and declared independence. But France demanded reparations: 150m francs, in gold.
For Haiti, this debt did not signify the beginning of freedom, but the end of hope. Even after it was reduced to 60m francs in the 1830s, it was still far more than the war-ravaged country could afford. Haiti was the only country in which the ex-slaves themselves were expected to pay a foreign government for their liberty. By 1900, it was spending 80% of its national budget on repayments.
In order to manage the original reparations, further loans were taken out — mostly from the United States, Germany and France. Instead of developing its potential, this deformed state produced a parade of nefarious leaders, most of whom gave up the insurmountable task of trying to fix the country and looted it instead.
In 1947, Haiti finally paid off the original reparations, plus interest. Doing so left it destitute, corrupt, disastrously lacking in investment and politically volatile. Haiti was trapped in a downward spiral, from which it is still impossible to escape. It remains hopelessly in debt to this day."
Emphasis mine. From the London Times.
For Haiti, this debt did not signify the beginning of freedom, but the end of hope. Even after it was reduced to 60m francs in the 1830s, it was still far more than the war-ravaged country could afford. Haiti was the only country in which the ex-slaves themselves were expected to pay a foreign government for their liberty. By 1900, it was spending 80% of its national budget on repayments.
In order to manage the original reparations, further loans were taken out — mostly from the United States, Germany and France. Instead of developing its potential, this deformed state produced a parade of nefarious leaders, most of whom gave up the insurmountable task of trying to fix the country and looted it instead.
In 1947, Haiti finally paid off the original reparations, plus interest. Doing so left it destitute, corrupt, disastrously lacking in investment and politically volatile. Haiti was trapped in a downward spiral, from which it is still impossible to escape. It remains hopelessly in debt to this day."
Emphasis mine. From the London Times.
That consumption binge? It’s mostly health care
That consumption binge? It’s mostly health care:
Everyone knows that American consumers have been on a binge for the last ten or twenty years. Data connoisseurs could even tell you that the consumption share of GDP rose from an average of 64% in the 1980s to 70% in 2007–8. But while the numbers are accurate, they’re not really telling the story of a binge. Much of the rise has come from spending on health care, not flat-screen TVs.
Sad to say, LBO was among the many who made the binge argument. We should have known better. Sorry.
The numbers
Graphed nearby is a history of the consumption share of GDP, with and without health care spending. (An Econ 101 refresher: GDP is the sum of consumption, investment, government spending, and exports less imports.) Note the relative flatness of the “ex-medical care” line—its recent level is actually below 1960’s—compared with the relentless ascent of the “total” line.
Some numbers to make these points: at the end of 1978, consumption was 61.5% of GDP; in the second quarter of 2008, it had risen to 70.3%, or 8.8 points. Well over half that increase, 5.0 points, came from spending on medical care. The share of GDP devoted to spending on goods actually fell by 4.7 points over that 30-year period.
The pattern is preserved if you start the clock in 1997, just as the stock and housing manias were taking off. Medical spending accounted for almost a third of that rise between 1997 and 2008. Energy accounted for another third. Spending on goods accounted for just 3% of the rise, or 0.1 point. In other words, the familiar story that Americans went hogwild buying all kinds of stuff is wrong.
Tuesday, January 12, 2010
Optimal Currency Area
Krugman wrote an excellent summary of optimal currency area theory. Read it all.
Economics and Politics - Paul Krugman Blog - NYTimes.com: "Suppose that some members of the euro zone are hit much harder by a downturn than others, so that they have much higher-than-average unemployment; how will they adjust?
In the United States, such shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better.
Europe lacks both the centralized fiscal system and the high labor mobility. (Yes, some workers move, but not nearly on the US scale).
To be sure, America has at least minor-league versions of the same problems: we are having fiscal crises in the states, and the housing slump has depressed mobility in the recession. But we’re still better able to cope with asymmetric shocks than the eurozone.
Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.
Economics and Politics - Paul Krugman Blog - NYTimes.com: "Suppose that some members of the euro zone are hit much harder by a downturn than others, so that they have much higher-than-average unemployment; how will they adjust?
In the United States, such shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better.
Europe lacks both the centralized fiscal system and the high labor mobility. (Yes, some workers move, but not nearly on the US scale).
To be sure, America has at least minor-league versions of the same problems: we are having fiscal crises in the states, and the housing slump has depressed mobility in the recession. But we’re still better able to cope with asymmetric shocks than the eurozone.
Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.
How Many Currencies?
Some commenters on my Europe/euro post offer a reductio ad absurdum: if Spain should have its own currency, why not every state/town/family in America?
Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory. (Optimal? Optimum? Nobody seems to know — or care).
The basic idea is that there’s a tradeoff. Having your own currency makes it easier to make necessary adjustments in prices and wages, an argument that goes back to none other than Milton Friedman. As opposed to this, having multiple currencies raises the costs of doing business across national borders.
What determines which side of this tradeoff you should take? Clearly, countries that do a lot of trade with each other have more incentive to adopt a common currency: the euro makes more sense than a currency union between, say, Malaysia and Ecuador. Beyond that, the literature suggests several other things that might matter. High labor mobility makes it easier to adjust to asymmetric shocks; so does fiscal integration.
When EMU began as a project, there were a number of studies comparing the EU with the United States. What all of them suggested was that Europe was less suitable as a currency area, basically because of lower labor mobility and lack of fiscal union. That didn’t settle the question of whether the euro was a good idea, but it did suggest that appealing to the success of the United States with a single currency didn’t tell you much.
What I’ve always found interesting is the way many Europeans now insist that a single currency is absolutely essential, when the example of Canada — which is closer to the United States than it is to itself — provides an obvious counterexample. But people tend to forget that Canada exists …
Fiscal Transfers Across US States:
See the full data below:
Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory. (Optimal? Optimum? Nobody seems to know — or care).
The basic idea is that there’s a tradeoff. Having your own currency makes it easier to make necessary adjustments in prices and wages, an argument that goes back to none other than Milton Friedman. As opposed to this, having multiple currencies raises the costs of doing business across national borders.
What determines which side of this tradeoff you should take? Clearly, countries that do a lot of trade with each other have more incentive to adopt a common currency: the euro makes more sense than a currency union between, say, Malaysia and Ecuador. Beyond that, the literature suggests several other things that might matter. High labor mobility makes it easier to adjust to asymmetric shocks; so does fiscal integration.
When EMU began as a project, there were a number of studies comparing the EU with the United States. What all of them suggested was that Europe was less suitable as a currency area, basically because of lower labor mobility and lack of fiscal union. That didn’t settle the question of whether the euro was a good idea, but it did suggest that appealing to the success of the United States with a single currency didn’t tell you much.
What I’ve always found interesting is the way many Europeans now insist that a single currency is absolutely essential, when the example of Canada — which is closer to the United States than it is to itself — provides an obvious counterexample. But people tend to forget that Canada exists …
Fiscal Transfers Across US States:
See the full data below:
Thursday, January 7, 2010
CRE-ative destruction - Paul Krugman Blog - NYTimes.com
CRE-ative destruction - Paul Krugman Blog - NYTimes.com: "the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble."
Tuesday, January 5, 2010
Matthew Yglesias » The Bitter Fruits of a Finance-Oriented Economy
Matthew Yglesias » The Bitter Fruits of a Finance-Oriented Economy: "America’s self-image in the sixties was as the country where the General Motors and Boeing and General Electric are. By the past fifteen years, that had changed to a self-image as the country where Microsoft and Google and Apple are.
But to a large extent the real change is that we became the land of Citigroup and Bank of America and Wells Fargo. And this has had consequences:
But to a large extent the real change is that we became the land of Citigroup and Bank of America and Wells Fargo. And this has had consequences:
"However, Maxine suspects that the longest term and most severe damage from the finance casino will not be from government deficits required to shore up too-big-to-fail banks and insurers. It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it. The first distortion is the past diversion of some our best technical and mathematical minds away from physics, engineering, biology, chemistry, and, yes, even economics, to financial modeling, risk analysis, and all the other marvelous tools of speculation and gaming. Over the last 20 years or so, the financial sector has been diverting our future scientists and mathematicians into creating new derivatives aimed at managing risk (ha!) and into developing creative investment instruments aimed at obscuring risk.
The second long-term distortion is similar to the first. Maxine is thinking of all those bright, young, energetic people who came out of some of our best universities and opted to go to work for investment banks, not in technical jobs, but as traders, ratings specialists, analysts, again to support the conversion of trillions of dollars into chaff. Many of them might have gone on to graduate degrees in chemistry, biochemistry, physics, engineering, biology or medicine. Graduate work in psychology, sociology, English, history, political science, public health would have added more value than destroying wealth across the globe. Instead of a workforce that gained diverse skills that might one day transform the world in positive and substantive ways, we have a surfeit of MBAs with concentrations in finance and empty houses on overgrown lots.
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