Nathaniel Rothschild allegedly said that one should "buy to the thunder of cannons and sell to the sound of trumpets". I guess, the modern-day version would be to trade to the smell of tear gas, which has been wafting across Athens recently. Closer to home, in the beautiful park next to the university that houses the Catalan parliament, ministers and MPs were surrounded by Spain's own indignados movement... which made it just that touch harder to be in the office on time this morning, with riot police blocking many of the streets leading to the campus. It was pretty calm as things go, with no violent clashes, but the image of ministers being ferried in by helicopter reminded me a bit of President De La Rua's last day in office.
Back to the issue of trading: Even popular financial advice sites like marketwatch are now offering suggestions on how to make $$$ from a coming Greek default. I would say, not so fast... we are mainly witnessing a public game of "chicken" between the German finance ministry and the ECB. Some of this is squarely aimed at the wider public -- "look, we are trying to get tough with private creditors". While the EU has an amazing talent to screw up things, I would say -- uncharacteristically, as those who know my pessimistic side might think -- that this one is too important to go wrong, and that a deal will eventually get done, with no more than a bit of a Vienna-style initiative imposed on the creditors. Now, if only the Greek government will actually stay in office for long enough to see through the implementation of the next round of austerity...
but not a Jew. Nico Voigtländer and I wrote a paper on the persistence of anti-Semitism which is getting a bit of press. Now a pro-Palestinian website has decided that writing about pogroms is a sure sign of us being both Zionists and Jews. Needless to say, I am rather flattered that someone should think me a member of a tribe that has consistently produced more outstanding intellectuals and artists than any other group I can think of. And equally needless to say... neither Nico nor I are in fact Jewish. We just think that extreme hatred and an inclination to group violence are really interesting issues and deserve to be studied seriously, in a historical context, and that anti-Semitism is a particularly important example in this regard.
How much economics can you get out of a single graph? Here's is my entry: The Economist has a chart for salary expectations of graduates. Not many surprises there - Swiss grads expect more than those in Poland. More surprising - women expect less than men, but hey, they do earn less. They are just realistic. Then my eye wandered to the entries for two countries close to my heart - Germany and Spain. First of all, the Spanish graduates all expected starting salaries LOWER than the national average salary. Pretty much everywhere else, that's not the case. Note that educational attainment has risen quite quickly in Spain in recent decades, from a low base. That means that the average university graduate is comparing himself with a salary paid to people whose educational attainment is really quite low -- and they still think (and probably will) earn much less. The college premium? None in Spain. Truth be told, much of the university education here has consisted in handing out pieces of paper to people who sat in overcrowded lecture theatres long enough to lower the reported unemployment rate. There they were often taught by people with a degree from the university where they are now teaching [no, that's not UPF economics - we never hire our own doctoral students, and class sizes here are small]. So education mostly doesn't pay. That mainly because it's lousy on average, and the selectivity of higher education is so low that there is no premium in Spain.
Then I looked at the national wage rates for Germany and Spain -- the difference is factor 2! Now, Germans are more productive per head (and much more productive per hour - working hours in Spain are pretty long). But the ratio is off. A quick check confirms what I remembered: Spain is about 3/4 as productive per head as Germany, and not 1/2. That's another way of saying that, per unit of output, Spaniards earn less. How come? Normally, you would think that having low wages relative to output would be great for growth - profits should be high, and growth should take off. But not so fast.
The reason why the pay difference is large probably reflects two things: First of all, there are lots of side payments in small-and-medium firms that are not reported ("the envelope" with black money). This is a major source of inefficiency. The big firms can't and won't engage in this practice, which means that their wage costs are higher -- to get workers, they have to fork out more. The uneven tax cheating is driving employment into the inefficient small firms. Second, if the ratio of wages to output is lower than in, say, Germany, then someone must be getting the rest. Normally, that would be profits. Part of it is, I am sure, just payments to fixed factors of production, like rent... those silly prices for land, again. Finally, returns to entrepreneurs and the self-employed may be higher, but possibly not for the reasons we might like. Entry regulation etc has something to do with it. Spain is not exactly home to a large number of small + medium, world-beating companies. Most produce for the home or regional market. The reason why they are in business at all is that they know how to navigate the local forest of regulation and connections - and not higher efficiency. The political cast conspires to keep competition out, from the national level down. The country has one of Europe's most uncompetitive phone- and internet-markets (all those well-connected board members at Telefonica); there is a blatant breaking of EU competition rules when it comes to takeovers (remember EON's attempt to buy a utility in Spain?), etc. All of this shows up as profits somewhere, but it isn't exactly good for the economic performance of the country. This also suggests that "pay restraint" isn't the first thing to think about when it comes to restoring the country's economic vigor.
As part of our series on ITFD student policy projects, here is the summary of another one I learned a lot from: Kristin Keohan, Kevin McEvilly, Kevin Timoney and Kristoff Potgieter (supervised by fellow ITFD steering committee member Antonio Ciccone) analyse expansion plans for the giant MOZAL aluminum smelter in Mozambique. The IFC, the lending arm of the World Bank, got them of the ground. MOZAL is already huge... accounting for 66% of Mozambique exports. Phase III would now build on the earlier success, and add a lot of capacity. To that end, there would need to be fresh investment in dams to generate hydroelectric power, etc. Is this a good idea? You would think so. Mozambique was a basket case before MOZAL came along; nobody from the rest of the world wanted to invest there. Once the aluminium plant was up and running, the perception of investors changed; FDI started to flow.
Despite all this, the 4 K's make a (to me) convincing case that this is a bad idea. First of all, there is no longer any need to subsidize expansion - the project risk is low, and giant firms like BHP which own the majority of MOZAL can shoulder the costs if they are economically viable. Their key argument why neither the IFC nor the Mozambique government should subsidize is that the externalities seem very small. There are few backward linkages: MOZAL is producing aluminum from bauxite mined in Australia, using cheap energy from South Africa. South Africa now increasingly needs its own electricity, and MOZAL III is largely an attempt to strong-arm the local government into providing subsidized energy. Crucially, the spilloves are tiny -- very few people are employed at MOZAL, and fewer are from Mozambique. In our urge to do "something" for development, it is tempting to bet on a project that seems like a winner... but it may be better to do so elsewhere.
Brad DeLong has a beautifully simple back-of-an-envelope calculation on what the deficit implications of austerity are. His figures are for the US, and they are ugly... austerity means higher deficits in the future. Exercise for today: plug a number (any number, really) for Greece, and put them through the same formula. You get the opposite result, big-time. I dare anyone to suggest a multiplier so high that you can undo the effect of interest rates in this case. So, do the German deficit-hawks have a point? Discuss, in no more than 1,500 words!
Ray Fisman, one of the most creative economists I know, writes in Slate about Nico Voigtländer's and my work on the medieval origins of anti-Semitism in the interwar period ("Persecution Perpetuated"). Grim subjects make for some interest, or so it seems...
On a small personal note, there is a silly little illustration how deeply ingrained mental habits become, which occurred to me looking at the picture that accompanies Ray's piece. If I am not mistaken, this is Adolf Hitler's personal bodyguard, the Leibstandarte, shaking hands with the Führer. The Leibstandarte had an exacting minimum height standard (5 foot 11). Back in the 1980s, I did national service looking after old people, cycling from house to house to help with household chores, shopping, cleaning, personal hygiene, you name it. And since I am a little taller than average (6 foot 4), many an elderly lady, in the sweetest of voices and with no ill intention, would pay me a compliment: "Wow, you are tall. You could be in the Leibstandarte!" It would always remind me how very lucky I am that I was born when I was, and that I could do national service as a conscientious objector, those 20 months of menial labor be damned (the only thing that would have been better would, of course, have been to skip it entirely; but it took Germany a long time to do the right thing and abolish the draft).
I am Joachim Voth, formerly the director of the M.Sc. in International Trade, Finance and Development (ITFD) at UPF-BGSE (and now a member of the steering committee). This blog will keep current and prospective students updated with news and reflections. I'll also try to give people a taste of what (intellectual) life is like down here by the Med.