Applicants from 26 countries already...

It's that time of the year, when applications are rolling in and we are allocating slots for the ITFD class of 2012-13. So far, we have applicants from 26 countries (by February), and slots are going fast. Here is a fun little map that shows where they all come from:

ITFD applicants map

One Monster Slain

“Writing a book is an adventure. To begin with, it is a toy and an amusement; then it becomes a mistress, and then it becomes a master, and then a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster, and fling him out to the public.”
- Winston Churchill

Peter Temin and I have just flung our monster into the waiting arms of Oxford University Press -- the manuscript of our book Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700. We even made it by the contractual deadline, which cannot be that common for an academic book. After a great book conference in Yale in October last year (generously funded by an anonymous donor, approached through the good offices of Will Goetzmann at the IFC at Yale School of Management), we revised things thoroughly. As they say, your friends stab you in the front... 

What's the argument? That growth in England during the Industrial Revolution was "slow" (as established by a generation's worth of research) in part because private financial intermediation didn't work very well. We look at data from goldsmith banks to show how dysfunctional bank lending was in channeling money towards productive uses. Why was it thus? Why did the "financial revolution" after 1688 lead to cheaper public credit, but less private intermediation? Because of financial repression, is our argument - the government stepped in and made it hard for banks to do their job. Usury laws limited interest rates and skewed lending decisions towards established borrowers; the Bubble Act made incorporation impossible so that no new companies could be founded; and the six-partner rule kept English banks too small to be of much use. On top of that, there was massive "crowding out" as a result of many wars after 1700. A look at the American mirror - where all these restrictions quickly disappeared after independence - shows how stifling English financial regulation was. You can read an earlier draft here scribd) and here (pageflip view).

Wisdom Central

CREI is holding another summer school in Barcelona. CREI's best and brightest are offering classes; I am going to talk about Sovereign Debt Crises, combining theory and empirics (both historical and recent). What's on the menu? Here is the summary:

Sovereign Debt Crises: Past, Present and Future

Instructor: Hans Joachim Voth

Selected Topics:

• Is this time different? Sovereign debt crises over the long run
• Illiquidity and insolvency: Measurement and conceptual issues
• Punishment vs reputation in theory and practice
• The price of default: Investor returns from sovereign debt, 1850-2010
• Stability at what price? Solvency, austerity, and social instability
• Regulating stability: Plans for a “New Financial Architecture”

Dates: July 2 – 6

Time: 13:30 – 15:30 h

Price: 600 Euros (Students: 400 Euros)

As you can see, I will cover a bunch of things, from a conceptual framework for sovereign debt crises, the risk of self-fulfilling "debt runs" and the absence of state-contingent debt to important empirical regularities over the last 200 years (with a detailed discussion of Reinhart and Rogoff's classic This Time Is Different). I will also talk about some of my recent research on the link between political and social instability and austerity (short summary over at VOX here).

You can sign up here. 

An incredibly good deal...

courtesy of Forbes.com

A friend recently sent me, for entertainment, the latest update on Forbes' "Cost of Living Extremely Well" (CLEWI). If you were thinking about having a spa treatment, or buying that Learjet, Steinway, or Beluga, better hurry; nothing that is really nice is getting any cheaper. As a matter of fact, the Cost of Living Extremely Well has risen much more than the cost of living index in general. Of course, that is partly because statistical offices seem to see it as their job to define ordinary living cost so that almost everything that goes up in price is not counted or explained away by "quality improvements". It's not as bad as in Argentina, but the way that indices have gone in the last 20 years makes them increasingly remote from people's experience (with the biggest howler the Eurostat decision not to include owner-occupied housing in the harmonized price index - they claim it is too difficult. I am not making that up - but they are working on it).

One thing that goes into the CLEWI is the cost of Harvard tuition, room, and board, which is up another 4%, to $52,652 - just like every year, a rise ahead of headline US inflation. Actually, there are very good reasons why we SHOULD expect the cost of education to rise faster than the CPI.

So is there one thing that ISN'T up? That offers the same or better value than, say, six years ago - and doesn't cost a penny extra? That's right - attending the Master's programs at Barcelona GSE. They were €12,000 in 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, and in 2012-13, they will still exactly and precisely cost €12,000. Everything else costs more - coffee, electricity, subway tickets, restaurant meals. But you can get a sterling education in Europe's most glorious city by the Med for what must be one of the best prices in the world of higher education... Of course, tuition revenues don't cover all the costs of running world-class econ departments; there is a large subsidy here somewhere from the hard-pressed taxpayers in Catalunya. Buy while it lasts, I say.

Greece burning

I was on German radio yesterday morning, commenting on unrest in Greece. You can read (if your German is up to it) most of what I had to say in an interview with Der Standard from Austria. The punchline? We need to do what Wolfgang Schäuble already hinted at last week - reduce the extreme level of austerity in the policy mix, quickly, before most of Europe starts to look like Greece. 

When you don't want to be this right...

(image via libcom.org)

Last year, Jacopo Ponticelli and I wrote a paper looking at the link between austerity measures and unrest. We found a close one. The dramatic images from yesterday - with wide-spread rioting in Athens, building burning, etc. could not bear out our thesis with more force. And there is no question that this was about austerity, either ... normally a tough nut to crack in this context is the question if the link is really causal. Of course, academics always enjoy being able to say "I told you so", but this time, I would have preferred it if the Greeks had proven us wrong.

While there is a lot of understandable frustration with Greece's unwillingness or inability to implement reforms, the riots illustrate that austerity is reaching its limit. How many more budget bills can the government and the troika push through parliament? And what is the implication for the rest of Europe? For the moment, bond markets are a bit calmer, and equity markets are in party mood. The pictures from Greece tell us that the cheer of markets thanks to more austerity is bought in an unsustainable fashion. It's not the most likely scenario, but we may very well see a rapid deterioration in the growth outlook in Spain and Portugal, thanks to all the cuts and tax hikes being implemented now. If this produces yet more deficits and another round of austerity, the Greek scenario is beginning to look much more likely; somewhere along the way, the bond market will panic, and the mother of all bailouts could be on the agenda by mid-summer. Let's hope I am wrong. Even Wolfgang Schaeuble, whose pleasure in forcing austerity on deadbeat ClubMed countries has a been a constant at EU summits, seemed to hint last week that he is starting to change his mind. 

Remembering Berthold Guthmann

I am sometimes asked if my research on anti-Semitism (with Nico Voigtländer, now forthcoming in the Quarterly Journal of Economics) isn't hugely depressing - spending so many hours on a topic that is so harrowing. It is true that I don't always find it easy to deal with the emotional impact. Statistical analysis showing that things don't change a great deal in the average location doesn't exactly leave one optimistic about the future of mankind; at the same time, Nico and I find some small rays of hope -- like an identifiable subset of cities in which persistence was much lower than elsewhere (essentially open, outward-looking trading cities and places with a lot of migration.)

One of the false claims that was used to create ill-will against Jews during and after World War I was that they didn't serve at the front. The German Army High Command actually ordered a count of all Jews in uniform, allegedly to counter such rumors - only to keep the results secret. We do have detailed information on casualties, now beautifully compiled for the web by Leo Finegold. Jews died, if anything, at a higher rate than non-Jewish Germans in uniform.

I was browsing around, gathering some background information, when I stumbled across a small snippet of information. As so often, it's the little details that get you. Here is one that I found particularly moving: It's that little picture of Berthold Gutmann in this post, a German-Jewish aviator during World War I, that I found on Leo Finegold's site. He won an Iron Cross and survived the war. His brother (pictured, together with their sister) died in Verdun. Berthold had a successful career as a lawyer in Wiesbaden after the war. The remembrance book compiled by the German archival service actually has an entry for him:

Deported from Frankfurt to Theresienstadt on June 16, 1943, he was sent to Auschwitz on the 29th of September, 1944, where he was murdered, aged 51.

Portugal

In all the bruhaha about Greece's approaching credit event, people have taken their eyes of Portugal. The country is going down the Greek path with high speed - austerity, a shrinking economy, more austerity, and political and social instability around the corner. Matt Lynn over at WSJ Marketplace has a lot of clever things to say why Portugal actually has LESS of a chance to pull out of the death spiral than Greece... higher private debts, for example. The one difference I see is that Portugal is not a complete banana republic -- the government actually tries to implement reforms, and get some things done. Meanwhile, the Greek clown show continues; yesterday, the Greek parliament even failed to liberalize the opening hours of pharmacies... 

what students really think

Bryan Caplan over at the Library of Economics and Liberty has some clever applications of Kahnemann's ideas to economic matters, as illustrated by the way non-economists and first-year undergrads (might) approach tricky economic questions (using a simple rule-of-thumb translation):

Target Question	Heuristic Question
Does the minimum wage help low-skill workers?	Would I be happy if employers gave low-skilled workers a raise?
What policies will make Americans richer?	What policies try to hurt people I don't like?
Do anti-firing laws help workers in the long-run?	Is it bad to be fired?
How much will Obamacare improve Americans' health per dollar spent?	How bad do I feel when I think about sick people without insurance?
What is the most efficient level of tax progressivity?	How much do I admire/envy the rich?

Needless to say, economists could argue at length about which substitutions students make when we confront them with challenging questions.  Better yet, we could try to empirically - even experimentally - triangulate their substitutions.  Whatever the specifics, though, substitution is a plausible explanation of not only the absurdity of many popular views about how the economy works, but people's certainty about these absurdities.  

more pay

equals lower quality. There is a lesson for how to balance the budgets of European countries in this interesting paper by Raymond Fisman, Nikolaj A. Harmon, Emir Kamenica, and Inger Munk (via NBER - gated):

We examine the labor supply of politicians using data on Members of the European Parliament (MEPs). We exploit the introduction of a law that equalized MEPs' salaries, which had previously differed by as much as a factor of ten. Doubling an MEP's salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.

Vatican appoints Catholics as cardinals

Apparently, the Vatican cribbed the cv's of the 22 new cardinals from their wikipedia entries.... Via BBC:

One clue was that many new cardinals were described as being "Catholic".
The Vatican says it was trying to help journalists and warned them the biographies were "unofficial".
The names of the 22 new cardinals from around the world were announced by Pope Benedict on 6 January.
The similarity between the profiles of them handed out by the Vatican and their Wikipedia entries was spotted by the Italian journalist and blogger Sandro Magister.
In the kind of language not normally used by the Vatican, a Dutch archbishop, William Jacobus Eijk was described as being "one of the most talked about religious men in the country".

Now, this couldn't come at a worse time... I have just been correcting exams, and like everywhere else, we are constantly having to remind students that plagiarism is no joke, that copying things from the net is not ok, and that a sequence of more than a few words from another source needs quotation marks and a source. This takes infallibility to a whole new level!

another year...

another job market, and I am in charge of placement. So far, our 7 candidates had 129 interviews; two  three  five days after the Chicago ASSA meetings, they already have one offer and 14  16 18   29 flyouts - fingers crossed it's just the start of a big wave of campus interviews and eventually, offers.

Another day at the fiscal dentist... without anaesthesia

What's the effect of fiscal policy during a downturn? Somewhat to the embarrassment of the profession, economists only agree that multipliers are somewhere between zero and infinity. In a bid to make at least someone happy, the new Spanish government has decided to find out just how contractionary fiscal consolidation in the middle of a crisis can be -- tax just went up, from one day to the next, by as much as 7 percentage points at the top (and the tax rises kick in pretty quickly). Then there are more spending cuts, amounting to several billion in expenditure per year. What is the likely result going to be? Here is my guess -- Spain is going to repeat some of the Greek experience. Growth - already negative as of late 2011 - will slump. The huge tax hike will hardly produce any extra revenue (and forget about the idea this is just temporary, for two years. If you have to make a mistake, make it for a long time). As in Greece, the absolute deficit will hardly fall at all as economic activity collapses even more quickly than forecast. Remember that Greek ABSOLUTE deficits in euros hardly declined in recent years, despite very large rate hikes. There may be some good economic logic behind it, too. Gautti Eggertsson of the Fed in NY and co-authors have a new paper on public debt dynamics and tax and spending multipliers. They offer a strong argument for why - in the presence of a zero bound on interest rates - raising taxes in a slump may cause particularly large contractions. In their calibration exercise, multipliers are particularly big when tax hikes and expenditure cuts are not accompanied by interest rate reductions. This continues earlier work that Gautti has done with Paul Krugman on debt and deleveraging in a crisis... I wish I could say they were wrong, but I fear they may be spot-on.

of apes and men

Scientific American has an excellent article on group violence and socio-economic stress, by Eric Johnson:

The portrait of a powerful leader was pulled from the wall and sent dangling from a balcony as angry voices below cursed him and the other “fascists” believed responsible for their condition. One man, a lathe operator who had gone on strike, ran onto the balcony holding up two plates loaded with cheese and sausage. “Look and see what they eat,” he shouted to the crowd below, “yet we cannot get such food!”
The Novocherkassk riot on June 2, 1962, was Soviet Russia’s largest public uprising to date. More than two thousand took to the streets in response to the Communist Party’s decision to increase food prices by 30 percent at the same time that wages were being reduced. Workers walked out on the job, students left their classrooms, and men and women of all ages joined the chorus of protest. The crowd marched peacefully through lines of soldiers backed by armored vehicles that had been hastily assembled and went to voice their grievances directly with a communist government that claimed to be on the side of the worker.

There are clever observations from biology as well... a great read.

The Finally Final Deal

... to save the Euro. Yawn. I was on Monocle Radio and Berlin Inforadio during the recent Brussels summit, trying to explain how the latest package was going to help. It's not an easy question. While British isolation garnered a lot of headlines, the substance could hardly be more depressing. First of all, the much-touted "fiscal union" is no more than a growth-and-stability (for which, read, austerity-and-stagnation) pact writ large. Let's forget the problem that the old rules were never implemented, and skip over the question why these ones should be. Austerity is the answer, with debt-brake rules to be written into constitutions, etc. The idea that this will solve anything is more of a collective form of delusion (along the lines Benabou's brilliant paper) than economic policy proper. Sure, it would have been nice if Greece and Italy had saved a bit more during the noughties. But take Spain - it ran government surpluses for much of the post-Euro time. It had debt-to-GDP ratios way below Germany's for much of the time. Even if the current treaty had been in place (and implemented) have helped? Not at all. Spanish wages and prices won't fall by 20%, to make the country more competitive, any time soon. It'll take 10 or 20 years until German wages have risen enough so that Spain restores competitiveness and can seriously start to export. Of course, as house prices slide ever faster, it'll become easier to fill the export gap with asset sales. But effectively - a few niceties apart - the current setup condemns the Club Med to decades of stagnation and high unemployment.

The best thing that could happen? Another Black Wednesday. On Sept 16, 1992, Britain was ejected from ERM, due to a speculative attack by George Soros - an event much lamented in the press back then. It turned out to be a great blessing for Britain, which avoided the worst of the early-1990s recession and entry into the Euro as a result. The recent rout in bond markets, if it were to resume (and I see little reason why it shouldn't) could play a similar role, ejecting Spain and Italy from the Eurozone. In the short term, there would be real blood on the floor -- banks needing recapitalization, capital flight, etc. But in a few years time, people would recognize it for a heavily disguised blessing -- the only plausible way out of the current stagnation and austerity union.