VothSpeak

Remembering Berthold Guthmann

2012-02-02T23:28:00.003+01:00

I am sometimes asked if my research on anti-Semitism (with Nico Voigtländer) 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 airman in World War I, that I found on Leo Finegold's site. He survived, and won an Iron Cross. His brother (pictured, together with their sister) died in Verdun. Berthold had a successful career as a lawyer in Wiesbaden. 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 29th of September, 1944, where he died, aged 51.

Portugal

2012-01-25T17:09:00.000+01:00

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

2012-01-14T16:36:00.001+01:00

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

2012-01-11T17:44:00.001+01:00

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

2012-01-11T17:24:00.000+01:00

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...

2012-01-11T15:21:00.003+01:00

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

2012-01-04T16:11:00.001+01:00

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

2011-12-11T15:30:00.000+01:00

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

2011-12-11T13:09:00.001+01:00

... 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.

my Spanish elections review...

2011-11-28T21:35:00.003+01:00

on Bavarian radio [in German].

optimism out of nowhere

2011-11-28T21:14:00.003+01:00

Markets today were "upbeat" about the prospects of an eventual Eurozone rescue... the basis? Some vague reports that the Germans are pushing for....? You guessed it, tougher fiscal rules. Exactly what Europe needs. Sigh. Just like Germany definitely needed another wage-and-price-cutting package in 1931. How is that going to help? Let's see... more austerity will be a tit-for-tat. In exchange, the ECB will buy everyone's bonds in a bid to make that nasty PSI aftertaste go away (that grand idea of scr**ing Greek bondholders so as to reassure the others). That is what some people think. It's part of that true-and-tested model that says - if things are really bad, they will get better, because now people need to do something. Except that they haven't. For about 18 months. My take? Never underestimate human stupidity. I will believe it when I see it. The German government has decided that, after pretending that Greece had a liquidity problem (when it actually had a solvency one), everyone now has a solvency problem (even if the issue is liquidity and self-fulfilling prophecy scambles for the exit). I am waiting for the market counterreaction when people realize that there is only tit, and no tat...

more war, better states...

2011-11-28T20:39:00.000+01:00

Good things come to those who wait... and Nicola's and my paper on state capacity and war has certainly taken a bit of time. The idea? In many historical accounts of the rise of states in Europe, war does the heavy lifting: You fight more, hence you invest more in centralization, bureaucratization, tax raising, etc. There are two problems with this: First, warfare is not exactly an early modern European exclusive. Hunter-gatherer societies have lots of violent death; there are no strong hunter-gatherer states. Second, war means that you can disappear as an independent power, as did Poland, Burgundy, and a long string of independent states and statelets in early modern Europe.

Nicola and I decided to put things together in a single model that can explain 1. divergence between powers 2. a rise in state capacity as the cost of warfare escalates. The abstract is:

In 1500, Europe was composed of hundreds of statelets and principalities, with weak central authority, no monopoly over the legitimate use of violence, and multiple, overlapping levels of jurisdiction. By 1800, Europe had consolidated into a handful of powerful, centralized nation states. We build a model that simultaneously explains both the emergence of capable states and growing divergence between European powers. In our model, the impact of war on the European state system depends on: i) the importance of money for determining the war outcome (which stands for the cost of war), and ii) a country's initial level of domestic political fragmentation. We emphasize the role of the "Military Revolution", which raised the cost of war. Initially, this caused more internally cohesive states to invest more in state capacity, while other (more divided) states rationally dropped out of the competition. This mechanism leads to both increasing divergence between European states, and greater average investments in state building on the continent overall.

The arithmetic gets better and better

2011-11-18T20:48:00.000+01:00

Over at WSJ marketbeat, they report on Goldman Sachs' latest thinking re the Greek restructuring. They seem to have concluded that the proposed 50% haircut is not enough to return Greece to debt sustainability:

In our view the key problem lies with the structure of the PSI itself, namely the insistence on a 50% reduction in face value for bond holders. From an investor’s perspective, a 50% haircut reduces both the final payment but also the coupon payment. Thus the impact on the NPV of the bond is much larger than 50%. The voluntary nature of the deal assumes some incentive for investors. Thus, the IIF have suggested an increase in coupons for the new bonds in order for investors to be compensated in terms of cash flows at least.

The problem, of course, would be that this by itself undermines sustainability -- higher coupon payments mean bigger deficits. As GS points out, what Greece needs is the exact opposite: lower coupon payments right now, so that the worst of austerity can be undone. Once growth resumes, and interest rates fall a bit, sustainability will look a lot better quite quickly. I guess there is something not altogether great about thinking up restructuring rules as a fly-by-night operation between a handful of overwrought, half-numerate politicos...

Productivity in Process - this week in the Economist - Economics Focus

2011-11-18T08:52:00.001+01:00

The Economist this week discusses research by my old college friend Tim Leunig (LSE) and myself on process innovations - that's two Econ Focus highlights in three weeks... Here is the abstract of the paper (available on SSRN):

Fifty years ago economic historians found surprisingly small gains from 19th century US railroads, while more recently economists have found relatively large gains from electricity, computers and cell phones. In each case the implicit or explicit assumption is that researchers were measuring the value of a new good to society. In this paper we use the same techniques to find the value to society of making existing goods cheaper. Henry Ford did not invent the car, and the inventors of mechanised cotton spinning in the industrial revolution invented no new product. But both made existing products dramatically cheaper, bringing them into the reach of many more consumers. That in turn has potentially large welfare effects. We find that the consumer surplus of Henry Ford’s production line was around 2% by 1923, 15 years after Ford began to implement the moving assembly line, while the mechanisation of cotton spinning was worth around 6% by 1820, 34 years after its initial invention. Both are large: of the same order of magnitude as consumer expenditure on these items, and as large or larger than the value of the internet to consumers. On the social savings measure traditionally used by economic historians, these process innovations were worth 15% and 18% respectively, making them more important than railroads. Our results remind us that process innovations can be at least as important for welfare and productivity as the invention of new products.

decision time

2011-11-17T13:50:00.000+01:00

In August, I gave an interview to Der Spiegel, saying that the Euro can't last another 5 years in its current form. At the time, many people thought I was nuts. Now, some 3 months later, it looks as if the beginning of the end is near. Yields on AAA-countries like Austria are moving up. Bloomberg reports that Spanish 10-year yields are now above 7%. That's not a catastrophe just yet - Spain can pay a bit more interest, and the debt profile isn't that short-term. But if it lasts any length of time, this is going to be very painful: Higher interest rates mean that the country will need more austerity measures to keep the future debt path under control; output will fall yet further; yields may increase even more. It's now abundantly clear that the last rescue package was a disaster on a monumental scale - forcing a 50% haircut on the private creditors felt good, but now everyone is asking who will be next. If all the promises over Greece were worthless, is the same true for Spain and Italy? Of course; they are too big to rescue outright. The only solution is to convince the markets to keep buying. It's a confidence trick that makes the markets work; once confidence goes, the spreads explode. The more people worry, the higher the yields, the higher the collateral requirements, the weaker the banks.

As the ECB tried to tell politicians for the last year - sovereign bonds are too important as a risk-free asset in the financial system to mess with them. The only solution now, to avoid defaults of Spain and Italy in the near future, is to offer a blanket guarantee of all existing EU debt, incl. Greece; undo the haircut on Greek bondholders; and introduce unlimited bond-buying by the ECB. I won't like it any more than the average German, but there is really no alternative short of a wholesale implosion of the weaker Eurozone economies.

at last...

2011-11-16T14:28:00.000+01:00

someone is thinking about the mountain of unrecognized losses in Spanish banks due to bad real estate deals, and the need to recapitalize. Bloomberg runs a story that the PP - poised to take power in Sunday's election - is preparing either a bad bank solution or will force capital injections. The latter (especially if done right - break up some of the bigger banks) would be a sensible step in the right direction... but my money is that there will be a half-botched bad bank instead, with taxpayer money dropped on the banks in exchange for some vague hope of starting lending again.

A new paper

2011-11-04T22:11:00.002+01:00

from CEPR predicts fame and fortune for economics bloggers...

Europe's spectacular own-goal

2011-11-04T10:43:00.003+01:00

The latest Euro summit was meant to build a firewall around Greece, and to isolate it from the other weaker members of the Eurozone. One week later, it is clear that this has failed spectacularly. Yields on Italian bonds are rising; the IMF has now been called in to monitor the budget. What is going on? Why does even the extended bailout fund not do more to stabilize investor confidence? The truth is actually very simple. The 50% "haircut" imposed on the private sector lenders to Greece is a gross violation of everything that European politicians promised until a few months ago. That's a bad way of reassuring investors.

Remember all the claims that no member of the Euro zone would ever default? That speculators betting on this would go bankrupt? That there would be no touching the creditors before 2013? All of this has gone out of the window, as a result of an ugly display of political strong-arming. Just as Germany's first post-war Chancellor Adenauer once said - "what do I care about the rubbish I talked yesterday". True, the politicians had the banks over a barrel; Ackermann could not say no to Mrs Merkel when she insisted on this voluntary write-down. But the obvious implication is that all other promises and declarations are equally empty - that bondholders of Spain and Italy might find themselves in exactly the same spot as the ones who hold Greek paper. Guess what? If you know you can lose up to 50% (up from 21% just 3 months ago -- latest update in November - Greece would now like to default/"voluntarily restructure" 75% of its debt in NPV terms), you don't feel that confident. About anything. How this was meant to solve the deeper crisis is anyone's guess.

With the benefit of hindsight, it's pretty clear that Europe should have just written an XXL-sized cheque for Greece a year ago. The Financial Times Germany is citing a few economists - Aghion, Alesina, me - saying precisely that. Austerity isn't working, and won't work. A single bad day on the exchanges destroys more value than all of Greece's external debt. Yes, Greece don't "deserve" another penny, but that's not the point. Europe has to do what is right for itself, without worrying about moral hazard (let's be honest - how many countries would want to follow the Greek route even if they get a big cheque?) It's time to switch from moralizing and punishing to actual crisis prevention.

CNN reflections

2011-11-03T18:02:00.002+01:00

CNN has an op-ed by yours sincerely on the Greek crisis, and analogies with the case of Argentina in 2001. As they say - history doesn't repeat itself, but it certainly rhymes.

The Economist

2011-10-20T21:37:00.001+02:00

The Economist in its "Economics Focus" column this week features Jacopo Ponticelli's and my work on unrest and austerity... as well as my earlier paper on Latin America, making a related point -- the more you cut, the higher the level of unrest will be.

What's Greek for "Erfüllungspolitik"?

2011-10-12T13:06:00.001+02:00

Today came the news that Greece (again) missed its deficit targets, with the red ink growing in September. Slow growth is typically blamed, and surely austerity doesn't help much in stabilizing growth. How do we make sense of the grim determination paraded around by the Greek government, and round after round of austerity? One interpretation says - it just can't be done, the cuts are too much for growth and tax collection plummets with GDP. The other interpretation thinks of the current posturing by the Greeks as theatre: Look, it really cannot be done, so please spare a few billion euros (insert transfer from the EU/debt forgiveness here).

My money is on the latter interpretation. It's pretty clear that only a small part of the overall fiscal mess can be attributed to slow growth. An inability/unwillingness to go after tax dodgers, throw them in jail, and make them pay (to encourage the others) is more than half the story. I think the Greeks are taking a leaf from the book of another country with monumentally high debts, and then failed to repay them: Germany.

After World War I, Germany was saddled with reparations payments of unspecified magnitude. The politicians charged with running the country's first full democracy didn't like it any better than the right-wing nuts who would have liked to say no, with a good chance to start the war. Their solution? Trying to convince the Allies that it really cannot be done. Taxes went up, inflation was soaring, and still, the Germans didn't manage to generate surpluses, and transfer them successfully to the victors of 1918. The attempt was better than half-hearted, but a good deal less than whole-hearted. It had a name -- "Erfüllungspolitik", the politics of fulfillment. For a country that had just been forced to reduce its army to 100,000 men, it's hard to think of an alternative (which didn't stop right-wing extremists from murdering politicians in charge, such as Walter Rathenau, the then foreign secretary). The cost, for sure, was terrible. By 1923, inflation had destroyed middle class wealth on an unimaginable scale, and output was still below 1914 levels.

And yet, in terms of its primary aim Erfüllungspolitik "worked". By 1924, everyone realized that Germany needed help and a respite. The solution - a big loan from the US - ushered in Weimar's only halcyon years. The Greeks seem hell-bent to demonstrate to the world that they cannot pay, as did the Germans; and they are equally good at destroying their economy along the way.

Kafka

2011-10-01T03:47:00.004+02:00

... is alive and well, and writing the script for Russian news anchors. I was in New York yesterday, to give a talk about anti-Semitism at NYU. To make the most of my time there, I gave an interview to Russian TV about the European bailout package, release 2.0. Or so I thought. All was well for the first minute or so... until someone must have handed the wrong sheet to the girl, who promptly proceeded to quizz me about oil prices, Obama, and the Arab spring. There is always a risk of something going wrong on live television, but this was a curved ball I didn't see coming at all. You can see my flabbergasted expression about 1.10 into the clip over at youtube. It's funnier after the fact than when it happens... It gets slightly better after that: http://www.youtube.com/watch?v=krKvZfePUq8

EFSF leveraging - a miserable accounting trick

2011-09-25T16:41:00.003+02:00

The Euro rescue fund, known as EFSF, could be made bigger at no extra cost to the tax payer - or so leading Eurocrats seem to suggest. To me, this looks like a bad accounting trick. Currently scheduled to top out at a lowly €440 bn, the fund could be allowed to leverage itself by borrowing from the ECB. In that way, it could, say, get 5€ for each € of capital, and really get going on ... buying Italian, Spanish, and Greek sovereign bonds. Overall, the EFSF's firepower could amount to a cool 1.5-2 trillion €. Surely, that would be enough to banish the default genie back into its bottle?

I have no view on whether 2 trillion would do the trick. Eventually, once almost all public debt of Southern Euro member states is owned by either the EFSF or the ECB, politicians can safely ignore what the markets say. A couple of trillion help, but they won't last for more than a year or two. Leveraging the EFSF reminds me of one of Private Baldrick's cunning plans (link here), of Captain Blackadder fame. The reason is simple -- the leveraging is simply a silly accounting stunt. If the EFSF buys a euro of government debt, and it goes bad, who pays? The EU taxpayer. If it leverages that investment, by borrowing from the ECB 5 euros, and the investment goes bad, who pays? Exactly. Either the Euro taxpayer (by underwriting the leveraged loss of the EFSF) or the Euro taxpayer (by having to recapitalize the ECB after it loses a ton of money). If politicians feel they cannot, in good conscience, explain more than €440 bn in rescue funds to their voters, then they cannot justify the idea of leveraging.

Of course, the idea of going for broke shows just how fundamentally flawed and unworkable the system of ever-greater rescue packages really is. The alternative? Let the Greeks default. Nationalize and recapitalize the banks that lose their shirts - and use this as a golden opportunity to cut the banks down to size, by selling the nationalized banks in sizes that are 1/10 of their size today. That way, we also reduce the risk of a major financial meltdown every time a bank gets into trouble.

RAC1 interview

2011-09-25T15:59:00.001+02:00

You can listen to my words of wisdom about the future of the Euro (and about who is more useful - astrologers or economists) over at RAC1 [in Spanish - program intro is in Catalan].

As part of the media reaction to my Spiegel interview, there is also a bit more over at CNN's excellent background piece on the origins of the Euro crisis, and interviews with European news service EURACTIV with Austrian newspapers Kleine Zeitung and Salzburger Nachrichten.

My CNN soapbox

2011-09-16T17:32:00.000+02:00

A small op-ed piece of mine over at CNN, on whether true Finns, Dutch, or Austrians will break the Euro...

Facebook revolutions

2011-09-13T21:06:00.001+02:00

The Arab spring and London riots created a lot of media hype about how the internet and cellphones can create mass movements. I was a bit sceptical, not least because Jacopo Ponticelli and I (in our paper on Austerity and Anarchy) didn't find much when we looked at media penetration and the likelihood of demonstrations, riots, etc. Now, Navid Hassanpour has a new paper on "Media Disruption and Revolutionary Unrest". He looks at what the effect is of cutting off cell phone service. Here is the abstract:

Conventional wisdom suggests that lapses in media connectivity - for example, disruption of Internet and cell phone access - have a negative effect on political mobilization. I argue that on the contrary, sudden interruption of mass communication accelerates revolutionary mobilization and proliferates decentralized contention. Using a dynamic threshold model for participation in network collective action I demonstrate that full connectivity in a social network can hinder revolutionary action. I exploit a decision by Mubarak's regime to disrupt the Internet and mobile communication during the 2011 Egyptian uprising to provide an empirical proof for the hypothesis. A difference-in difference inference strategy reveals the impact of media disruption on the dispersion of the protests. The evidence is corroborated using historical, anecdotal, and statistical accounts.

It's a really nice study - cleanly identified, detailed, and timely. Let's see what the media make of it.

talk about the euro

2011-09-10T17:02:00.002+02:00

It was my first time on a TV talkshow - last week, German ARD had an hour-long program "Menschen bei Maischberger" on "The Euro Crisis - Never-ending horror?". The other guests included the parliamentary secretary at the German Economics Ministry, Peter Hintze, the SPD elder statesman Klaus von Donanyi, Tissy Bruns, Chief Political Correspondent of the Berlin daily Tagesspiegel, Anja Kohl, ARD stock market expert, and Heinz Kammerer, representative of the German banking association. It was certainly educational for me. About half the time, Hinze highjacked the occasion with long sermons about the importance of Euro rescue packages for the political future of the EU. He is an ex-pastor, after all, and uplifting rhetoric that is long smooth phrases and short on analysis comes easily to him; how theology qualifies him to be a major player in German economic policy-making I will never know (compare that to the qualifications of Alan Krueger, serving in a similar position at the US Treasury). Von Donanyi impressed me the most; sharper than many people half his age, at age 83, he had read everything and thought about everything, down to the latest Reinhardt-Rogoff book. I still differed with his conclusions, but he was in a different league from from Hintze... having served in the same capacity under Helmut Schmidt, in the 1970s. Someone should write a bit about the decline and fall of the German political class.

Europe after the End of the Euro

2011-09-09T13:14:00.002+02:00

[this is the English original of my article published in Le Monde]:

Europe after the Death of the Euro

For years, countries struggled to defend the rigid link between their currencies. Speculators attacked; country after country implemented austerity programs to make debts sustainable, to win the trust of international investors. At the same time, the economic downturn deepened. Unrest became more common; political systems buckled under the strain of more cut-backs, surging unemployment, and unsustainable debts. And still, the common currency was widely regarded as the best way to assure stability. Without it, no trust in governments, in economic management, no end to economic turmoil, or so the refrain went. And then it all disappeared, almost overnight. Countries abandoned the common currency. And the earlier they did so, the faster their recovery. None of the terrible predictions about the end of the world as we know it actually turned out to be true.

The time? The early 1930s. The common currency? The gold standard. What sounds like a description of modern-day Europe is actually very similar to the drama played out some 80 years earlier. Cutting the link with gold turned out to be the single best policy measure politicians could take. Britain left early – in 1931 – and only suffered a mild downturn, compared to the US which stuck with gold at the old parity until 1933, or France, which hung on even longer. Where the link with gold was severed, deflation and austerity measures came to an end, debts became more sustainable, growth recovered, unemployment fell. And when people looked back at the interwar gold standard, they soon asked – how could we be so wrong? Sacrifice so much for such a misguided policy?

Europeans after the end of the Euro will ask the same questions. Why did they waste more than a decade with interest rate policies that were too high for some, too low for others, creating boom and bust as well as unsustainable debt burdens and banks that eventually implode? How did they stomach all these austerity programs and bailout packages, for so little gain? Presented to electorates as a policy without alternative, the Euro is actually a poorly designed currency arrangement that was always more about political symbolism than about sound economics. Today, member countries of the EU have eleven currencies – the euro and ten national ones of members states that have not joined EMU. The European Union will not fall apart if eleven currencies become twelve or fifteen. The Euro can only survive if the German, Austrian, Dutch and Finnish taxpayers are willing to sign a blank cheque; or if economic reforms and austerity packages on a truly frightening scale are implemented. Neither option is politically feasible. It may take a few more rescue packages and a few more years for politicians to finally realize this, but electorates in Europe are already growing restless. Once the true economic and political costs of “rescuing the Euro”, again and again, are fully understood, it will need to be abandoned.

With the Euro gone, we will see a return to the currency world before 1999. Some countries will follow German monetary policy, either by sharing a currency or by copying everything that Frankfurt does. This is the future for Holland, Finnland, Austria, perhaps the Scandinavian countries. The southern European countries will probably stick with a rest-Euro. Interest rates will be set appropriately; growth recovers; unemployment falls; asset price bubbles become less likely. Some countries may default, and banks in several countries may need to be nationalized, as they were in Scandinavia in the early 1990s. The euro will devalue against the new Deutschmark; exports from Italy, France, and Spain will be more competitive, and German export surpluses will shrink, reducing economic imbalances in the European Union. At the same time, vacations by the Mediterranean, French wine and Italian cars become cheaper for the Dutch, the Danes, and the Germans. This is not a vision of economic apocalypse – it is the way rebalancing should work.

What does this mean for Europe’s political future? Surprisingly little. To be sure, many prominent European politicians will have a lot of egg on their faces. Megalomaniac fantasies about the “United States of Europe” will be laid to rest. The so-called bicycle theory – that Europe has to move ahead or crash – will be forgotten. We will have more pragmatic policy-making, with Brussels starting to look out for the things that actually matter, and trying much harder to make them work. What matters are the single market – free trade, freedom of movement, intellectual exchange, fair play for European companies trying to compete for government contracts elsewhere, or trying to buy another firm.

Instead of the grand visions and grand pronouncements, Brussels will have to focus on the hard, boring, beneficial nitty-gritty. Implementation of existing rules and schemes is important, and Europe currently leaves much to be desired. The single market works only in part; mutual recognition of degrees, for example, is often only a legal fiction. My dubious Oxford PhD cannot be validated in Spain, for “technical reasons”. Don’t ask why it needs to be “validated” at all. Germans are not allowed to buy holiday homes in Denmark; European governments often stop the sales of companies to foreign buyers for no good economic reason; and so on. European integration should be guided by what is good for its citizens and companies.

Sharing the same pieces of paper in the wallets of Europeans turned out to be a bad idea. It has failed at its only conceivable purpose, making the lives of Europeans better than they otherwise would be. Giving up the Euro now will do less damage to the European project than several “lost decades” of unemployment, stagnation, austerity, and riots. The European Union is much more than monetary union, and Europe is so much more than the EU. European citizens know this, but politicians need reminding that this prestige pet project is not the same as Europe’s future.

talkshow entertainment

2011-09-05T22:57:00.000+02:00

Tomorrow night, you'll have a chance to see yours sincerely on German TV -- over at ARD-1st German Television, in a talk show called "Menschen bei Maischberger".

The sharp end of history

2011-08-15T21:41:00.001+02:00

It's been a pretty exciting week on the beach... my paper with Jacopo Ponticelli about austerity and anarchy in Europe, 1919-20009, got a ton of press, including interviews with the BBC, France24, and Die Welt. The fact that London burned a mere week after we posted the working paper surely helped. Typically, with economic history papers, something that seems topical now, when you start working on it, will barely elicit a yawn when you are done. This time, we got lucky... we started working a year ago on the topic, inspired by the Greek protests and an invitation to do a paper on fiscal policy in historical context, for the Central Bank of Chile (a far-sighted lot, it turns out). I first finished a similar paper on Latin America, and then we got this one out.

I hope the paper doesn't become any more topical...via Haaretz, I found the photo above, of what Israeli protesters installed on Rothschild Boulevard in Tel Aviv.

Another big problem with cross-country growth regressions...

2011-08-11T12:29:00.002+02:00

as explained by Tim Harford.

Germans and the bailouts... Michael Lewis/Antonin Scalia edition

2011-08-11T11:01:00.005+02:00

In his How to Write A Sentence, Stanley Fish rightly spends a few pages lauding and analyzing Antonin Scalia's beautiful sentence:

Interior decorating is a rock-hard science compared to psychology practiced by amateurs.

I was reminded of it because a friend sent me the link to Michael Lewis's "It's the Economy, Dummkopf", published by Vanity Fair. The abstract reads:

With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street’s con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country’s Nazi past, all of which help explain its peculiar new status.

I normally like Michael Lewis's writings, from Liar's Poker to The Big Short. This one, however, is a very long amalgamation of stereotypes, with almost no insight mixed in -- starting with the entirely non-novel idea that German potty-training (too early) is somehow related to the countries sinister ways (always lurking behind the corner) to the allegedly ordered and disciplined approach to anything. It's basically pop psychology (Germans are hung up about shit, and hence do the most awful things, from the Holocaust to buying subprime debt) combined with what every newpaper-reading halfwit already knows about the European debt crisis (only the Germans thought EMU was serious, and that rules meant something; the Greeks and everyone else who borrowed more than they now want to pay only did what was natural). Page after page, from the description of German finance ministry officials to the Autobahn, Goering's Air Ministry, and the Reeperbahn, Germans are portrayed as goosestepping automatons animated by the busy executive's version of From Dr Caligari to Hitler.

You can debate if you want to devote 17 pages to predictable nonsene, writing or reading. I don't think Lewis is wrong about the notion that there is something like national character. He just gets it wrong, or at least 90% of it, after his multi-day fact-finding mission to Germany. What gets me the most is how smoothly Lewis skips over the disorderly, get-it-done, anarchic side of my countrymen - with all its good and bad sides. Try to have your flight cancelled in Frankfurt, and make it to the counter... in the UK, they would queue. In Germany, you will have one big melee, people getting their elbows out, fighting to get onto the next plane. It's a kind of can-do-anarchy, disorderly, results-oriented, each man for himself, and not very rule-bound. It isn't always pretty, but it's ... very different from Michael Lewis's image, which seems to come straight out of a 1950s Hollywood war movie. Tax officials in local offices (whose name and a number appears on your tax notification) can make decisions on fining you, or taking that fine off. Every year in my classes, when I ask questions that require people to think outside the box, the German students do much better than many other nationalities -- the school system emphasizes the exact opposite of rote learning, from an early age. In days of old, the German army, despite being an instrument of a deeply anti-democratic state, used "empowerment" before the term was invented, pushing independent, important decision-making down to the level of sergeants and privates (which made for very high efficiency, as analysed in Martin van Creveld's wonderful Fighting Power). And several German classmates of mine are I-bankers... and doing pretty well as far as I can tell.

What does all of this mean for the EU debt crisis? To be honest, I think national character has very little to do with it. Germans behaved much like the Greeks in the interwar period, borrowing right, left, and center, building public swimming pools with the proceeds of bond issues, and then defaulted on ... those (stupid) Americans. Much of this is eloquently described in what is still the best book about the Weimar economy -- Harold James's The German Slump: Politics and Economics 1924-1936. No need for potty-training fairy tales here. Back then, in the late 20s, American financier J.P. Morgan Jnr. lost faith in German borrowers, in the way that Germans are now updating their beliefs about Greeks. His comment? "...Germans are a second-rate people".

Austerity and Unrest Over the Long Run

2011-08-07T22:38:00.005+02:00

With riots in London last night and the heavy smell of tear gas still lingering over the Acropolis, Jacopo Ponticelli and I thought we'd look at the connection between budget cuts and unrest more systematically. The working paper is now out. We look at the extent to which riots, demonstrations, political assassinations and general strikes increase as governments cut expenditure in Europe, 1919-2009. Here is the abstract:

Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a stronger effect of cut-backs on the level of unrest.

And here is our answer, in one slide:

The bars show the number of incidents - CHAOS aggregates them all, and then you have the components -- demonstrations, riots, assassinations, and general strikes. As the bars get darker, cuts get deeper. Once you cut expenditure by more than 2% of GDP, instability increases rapidly in all dimensions, and especially in terms of riots and demonstrations.

Sure, there are many incidents that can lead to an eruption of violence– from the killing of Mark Duggan in London last Saturday to a high-speed pursuit gone wrong (in the case of the Rodney King riots in LA in 1992). The more interesting question is -- why are cities at some points in time more akin to a tinderbox? Why does it only take one incident for massive violence, riots, or anti-government demonstrations to erupt? Even if there is something else that provides the spark, you want to know why there is so much dry wood around that you get a conflagration. Here, our results suggest that the role of budget measures is important.

We also use some additional, more detailed data on the causes of each demonstration to confirm our hypothesis that the link is causal. Incidentally, the same pattern is apparent in Latin America since 1937.

So, if you ever found yourself reading papers by Alesina and co-authors arguing that i. budget cuts can be good for growth ii. there is no punishment at the polls for governments cutting expenditure, and wondering why governments don't engage in more austerity - maybe here is your answer. Even if (and it's a big if, given the IMF's latest research) Alesina et al. are right, and growth can follow cuts, the pain may be concentrated amongst some groups. If these become massively unhappy... it can start to look pretty ugly out there in the streets, and I doubt that that'll be good for growth. As a matter of fact, Nick Bloom of Stanford has a bunch of fantastic papers showing just how painful uncertainty shocks are in terms of subsequent economic performance.

My next (academic) book

2011-07-29T09:08:00.003+02:00

... is one step closer to completion. Peter Temin and I have been working away in the archives of Hoare's Bank for a some years now, producing a couple of articles along the way [for a "best off", click here or here]. We now have a book manuscript, entitled "Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1800", which we are circulating prior to a book conference at Yale in early October.

The argument? Over the last 30 years, economic historians have learned that growth was "slow" in Britain after 1750 (Crafts, Harley, Antras and Voth). At the same time, there is plenty of evidence that the "mechanical arts" progressed quickly (Mokyr, Temin) - a wave of useful gadgets found its way into the British workplace. How do we explain the disconnect? Our answer is - finance. Or, more precisely, the absence of it, as well as the wrong kind. Scholars have long talked about a "financial revolution" after 1700 in Britain (Dickson). This revolution was about public finance, not credit intermediation. Using detailed micro-evidence, we examine why, in Postan's words:

“the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of her wealth found its way into the new industrial enterprises …”

Our answer is that government regulations in the form of the usury laws and the Bubble Act stifled the development of private finance; government borrowing shocks - crowding out - in addition made financial intermediation much more difficult. In combination, this slowed things down a lot. Britain's industrial transformation after 1750 could have been a lot faster if private finance had played a bigger role. The fact that private capital did not find its way into enterprise readily, and that most financing took the form of retained profits, is a cause for the big rise in the capital share of output, as recently documented by Bob Allen (amongst others).

We document all these challenges through the lens of five goldsmith banks, whose records have survived to the present. The banking in industry in 1700 looked more like Silicon Valley today - lots of entry, lots of exit, little permanence. By 1750 or so, stability had become the norm -- this is what Peter and I call the "Triumph of Boring Banking". We show how these firms survived and eventually learned to prosper, despite stifling government regulations. We like to think it's an interesting exercise in "business history meets macro and financial history", but now it's time for advice from some of our readers.

You can have a peek here:

Temin-Voth book manuscript

The reigns of power...

2011-07-27T10:30:00.000+02:00

pass to Fernando Broner at the end of the month - I am stepping down as the director of the ITFD Master. Fernando has been the deputy director for most of the last 3.5 years. Time whizzed by rather quickly -- it seems like yesterday that we planned the program in 2007, and started in 2008-09 with 18 students. In September, we will probably have 40 or so, from all over the globe. Less apparent from the outside, perhaps, is that we have a bit of a special governance structure, with a steering committee of four academics (Fernando, Jaume Ventura, Antonio Ciccone, me) setting the broad academic path, and the director being in charge of implementation and day-to-day running of the program. From my perspective, the structure has worked well, and fine-tuning over the years has made the master a lot stronger.

One of the pleasures of the job is keeping in touch with alumni, and following their trajectories. Just recently, I heard from Antonella Liberatore (who now has a permanent position at the Economic Research and Statistics Division of WTO in Geneva) and Jasper Hamerlynck (VP at the Institutional Equity Division of Morgan Stanley). If any ITFD students are reading this - do drop us a line, or even better, drop in when you are in town!

if this is private sector pain...

2011-07-22T17:42:00.003+02:00

I want some. The EU finally got its act together: There will be a selective default to make the private sector pay... but the banks and insurance companies that agreed to the bond swap are not the only private investors out there. There was news that vulture funds were buying Greek bonds for 50 Eurocents on the € in early July, and now, the EU deal is making some people out there a lot better off. Some of the price action today:

Greek Eurobonds, inflation-indexed, 2003 (25) + 28.9%
EO-notes 2009 (19) + 21.1%
EO-notes 2009 (14) + 14.4%

...and so on, across the entire maturity spectrum. The rally started at a very low level, as we all know, and the 2009(14) for example is still trading at 63% of face value, for a yield to maturity of 24.9% p.a. That's down from over 35% a few days ago. Over the last year or so, every additional aid measure has been greeted with a relief rally, only to be followed by an ever-deeper slump. Will this one come to stay? I think it just might. Once markets factor in the lower bond yields, debt sustainability will look a lot better. That justifies lower yields, and so on. The mountain of debt hasn't gone away, but paying for it will have become just that much easier so that, together with the EU generously sprinkling aid on Greece, an outright default might not be on the cards after all...

The "transfer problem"

2011-07-18T23:39:00.006+02:00

Larry Summers today wrote an interesting piece for Reuters. His first point - worth considering - is that the German obsession with wrapping the private sector's knuckles and enforcing discipline is overblown + dangerous. It is, indeed, what many thought before Lehman, and that one didn't end well. The second point he makes is about the chances of Greece actually paying up. Summers says "...no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors." Of course, if true, it also means that countries cannot credibly run up sizeable foreign debt positions. Pointing to Keynes' famous point in the Economic Consequences of the Peace, he argues that transferring so much money abroad is simply politically infeasible.

If I get my numbers right, Greece would have to produce primary surpluses of 5-10%, to be transferred to the rest of the EU (in the main) for the next 20 years or so. Of course, many regions in Europe transfer this much to other regions -- but not in exchange for past goods + services received, contrary to the Greek case. One example, close to home? Catalunya. One of the most productive regions in Spain, it is currently sending approximately 9% of its GDP to the rest of the country. Of course, Catalunya is not a separate country, but part of Spain, and all the taxes for which its citizens get precious little payback were not exactly embraced enthusiastically. But pay they do, regardless. This simply shows that open revolt need not follow on the heels of high transfers of a region's riches elsewhere; it depends on the way this is sold to the population. Catalans, while grumbling, are on the whole remarkably placid on the issue. What surprises me is that, in contrast to the rest of the Europe, where regions with their own culture + language are normally "bribed" to stay, Catalans end up paying for being part of a larger entity they do not much care about. Perhaps they should take some lessons from Southern Sudan, and sign up George Clooney to push their case internationally...

Debt trouble

2011-07-13T09:50:00.005+02:00

I was teaching "Financial Crises" in the CREI Macro Summer School last week (link here). As I was brushing up the syllabus, I realized just how much great work Mian and Sufi have done on the recent crisis. I already knew their paper in the QJE on the subprime crisis, where they show that areas with high latent demand for mortgages in 1997 (i.e. high denial rates) saw a big increase in lending, lower denial rates, higher LTVs, without any improvement in economic conditions.

Now, they also have a paper (with Francesco Trebbi, in the AER) on the voting of Republicans and Democrats on the bailout packages for homeowners, and for the financial industry. Guess what? Your ideology matters.... but only up to a point. What also matters a lot are the economic interests of your constituents. So if you are a god-fearing Republican who believes in small government, Ronald Reagan, the right to bear arms, and not helping anyone in need... you may rethink the last bit if your constituents are looking at a lot of foreclosures. As Groucho Marx said - these are my principles, and if you don't like them, I have others.

Mian and Sufi also have a small new paper, published in the SF-Fed's Economic Letters, on which areas of the US are suffering the most from the current recession... and it's all about debt levels. The first thing that is stunning is the size of the debt binge in the last 10 years (figure above). The second killer chart in the paper looks at the differential performance in auto sales:

Counties with a lot of household debt saw a big decline in sales in the run-up to 2008 already, and have stayed depressed. The low-debt counties have roared back, as everyone should have done in a normal recovery. Slow recovery? Maybe there is something more to it than a bit of pump-priming via the government deficit, and QE1-3. Without inflation, it's hard to see what will help those suffering counties reduce their debt burdens.

All of this goes to show that the analogy of debt binges and alcohol-infused parties is quite apt - fun while the punch is on tab, less so the next morning. That was also the argument about the Great Depression, made by Barry Eichengreen and Kris Mitchener almost a decade ago (in a much underappreciated paper). The title? The Great Depression as a credit boom gone wrong.

Surprise of the day... another bad idea

2011-07-13T09:30:00.000+02:00

from the EU. This time, the collected EU finance ministers seem to think that by buying back Greek debt at depressed prices, they can really make those irritating, overpaid bankers pay. There may be clever ways of engineering such an outcome, but the basic idea doesn't work. In one of their classic papers, Bulow and Rogoff (QJE 91) show that buying back debt is no way to reduce the burden of too much debt. Open market buybacks, at least, "allow creditors to reap more than 100 percent of any efficiency gains". Why? A country's repayment capacity is its repayment capacity. As you buy back debt, you effectively spread that capacity over ever fewer bonds - there is more blood, sweat, and tears squeezed from the Greek taxpayer for each bondholder remaining. The secondary market price of debt rises as repurchases proceed. Most likely, the market value of all bonds outstanding stays roughly constant as the face value declines. So, what to do? Maybe buy-backs are the answer, but to get it right, get a good advisor to design the process - like Paul Klemperer of Nuffield, Oxford, who advised the UK government on G3-spectrum auctions.

hack attack!

2011-07-10T22:44:00.002+02:00

The Barcelona GSE website was hacked last week, and remained down for much of it. I hope prospective students didn't get worried -- this kind of thing happens all the time, and the elves downstairs assure me nothing has been lost. As of Sunday, 11-7, we are back in business!

Happy memories... or not?

2011-07-06T20:32:00.001+02:00

I have just come back from the BGSE graduation ceremony, at the AXA forum at the other end of town. It was the normal mixture of fun and speeches, saying good-bye to students that I had come to get to know and greeting the parents that produced the interesting, alert, curious boys and girls that we taught. I feel a bit nostalgic about everyone leaving - didn't I just get to know you a few months ago?

But before I get all bleary-eyed, perhaps I should heed a bit of advice that comes out of really interesting research. Ever found yourself moaning silently when some postmodernist quack cr***ed on about how reality is socially constructed? Well, it turns out that there is some truth to that. In Science, there is an incredible bit of research showing that people who can perfectly well remember events change their view if you surround them by people who say something else. The scientists in question used MRI scanners to find out how this happens. Turns out that two parts of the brain, linked to fear and emotion, are involved in us changing our memories -- the hippocampus and the amygdala. Get a computer to tell people they remember wrong, and these parts of the brain do nothing. With people, it's the opposite. So maybe that's the point of ceremonies -- to create salient events that help us recall all that was great about a really great class!

The Spanish Crisis

2011-07-04T12:03:00.002+02:00

as a comic strip, in 6 minutes (with English subtitles). Not a bad summary overall.

If you really want to know

2011-06-29T09:25:00.002+02:00

what is going on in the Spanish economy, read Edward Hugh [long post].

tear gas and "chicken"

2011-06-15T18:58:00.000+02:00

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...

I have been called many things...

2011-06-14T19:28:00.005+02:00

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.

tea leaves reading hour

2011-06-14T19:07:00.000+02:00

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.

I am a sucker...

2011-06-07T21:07:00.003+02:00

for a good title, and this one is just great:

http://psycnet.apa.org/psycinfo/2011-10561-001/

[hat tip to Tyler Cowen]

White elephants, up close... real close

2011-06-07T21:01:00.001+02:00

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.

mozal

some basic arithmetic for gauging austerity's impact...

2011-06-01T16:42:00.000+02:00

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!

Slate covers "Persecution Perpetuated"

2011-06-01T16:20:00.006+02:00

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).

How not to combat terrorism

2011-05-29T08:31:00.001+02:00

Terrorism is driven by poverty and deprivation in the Third World, right? Surely, a great way to combat it is to give development aid, and make the lives of the poor, downtrodden masses better... or maybe not. ITFD students Cristina Yoong, Rachel Lund, Joonas Uotinen, and Sonja Settele look at the issue in their policy topics presentation. They offer some powerful arguments that question how much, in particular, the US should invest in the largely lawless FATA region in Northwestern Pakistan. They show that most leading terrorists come from more educated, well-off households, and that a proclivity towards terrorism is not significantly correlated across countries with poverty. Even the most optimistic studies suggest that aid would have to be in the hundreds of billions to reduce the recruitment of low-level terrorists by a significant number. Equally importantly, they show that much of the aid actually helps the Taliban directly, through protection money and the like. Their presentation is here:
Terrorism and Aid

Fabio Sola joins the World Bank in Brasilia

2011-05-27T14:52:00.003+02:00

Congratulations to Fabio Sola (ITFD 2011) who will be joining the World Bank's country office in Brasilia this fall. He we work in the Lead Economist's office, and will have a chance to apply his econometric skills and understanding of macrofinancial issues.

Attack of the one-armed economists

2011-05-27T14:49:00.000+02:00

Harry Truman allegedly said that he wanted to meet a one-armed economist, so as to spare himself the endless "on the one hand... on the other hand" that our profession can produce. Well, one of our aims here at ITFD is to breed Truman's favourite type of economists. Teams of 3-4 students practice being "one-armed" at the end of their time here, by writing and presenting a policy topics memo. The idea is to reverse the normal, analytical process where you start with a lit survey and then add gradually some nuggets of knowledge before hedging your conclusions in the summary at the end. Here, we want students to answer a policy questions. Working in teams, we had a bunch of presentations on interesting and creative topics:

Should development aid be used to combat terrorism?
One-to-one computing for Chile – is it worth it?
Should Indonesia impose more stringent capital controls?
The Costs and Benefits of a US$3 Billion Factory: Should Development Aid be used to expand the Mozal Mega-Project?
Is stock market development a feasible and desirable channel for the sustainability of Botswana's growth?
Charter City in Honduras - alternative for classical development aid?
Should Mexico issue Diaspora Bonds?
Microfinance in India: should the recently proposed regulation be introduced?
Management of oil revenues: Should Angola create a Sovereign Wealth fund?

It takes a bit of a "gestalt switch" to do what is required here - start with the recommendation, say clearly why you favor it, think about counter-arguments, sum up. How did it work? For my part, I would say it was a pretty impressive show (pics here)

What's really going on with Greek debt?

2011-05-22T20:28:00.002+02:00

I have been thinking a lot about the Greek debt problem. About a year ago, I looked at the numbers and decided that on economic logic alone, this one will end in a restructuring -- the primary deficit was just too big, and the debt too high. Now that the markets and politicians are debating with ever greater intensity if "reprofiling" or a "soft restructuring" will take place, I am beginning to think that we might actually see this one settled without a default. What's changed? Apart from my contrarian instincts, I think it's important to remember that there are many moving parts here -- the European governments, financial markets, the Greek government, the ECB, and the electorates of Greece and the EU member states stomping up the cash. It's all a bit like a Ruby Goldberg machine, really. The spread on Greek debt has been soaring of late, and the EU needs to decide on some course of action now that the IMF and EU missions are checking that Athens is doing its share. I get the sense that some operators in financial markets are, in a way, lobbying for a default event - anything that allows people to cash in on their CDS.

I think they may be disappointed. I may be wrong, but the rhetoric coming out of Berlin (and recently, Paris) about reprofiling seems more designed to put pressure on Athens than a good predictor of events to come. I am not saying that a restructuring couldn't happen, but given that the ECB is vociferously opposed, and that no EU politician wants to be responsible for the next Lehman disaster (as predicted by the ECB if Greece defaults), I think the current discussion is more designed to get the Greek government going - or, more precisely, to give the Greek government an excuse to tell its electorate that there is nothing that can be done to avoid lots more austerity.

My money is on the following: 1. Tough budget cuts and markedly tougher privatization requirements for Athens, maybe in the form of a semi-autonomous agency a la the German Treuhand that handled sales of the East German assets 2. Fresh loans by the Europeans 3. A "voluntary" roll-over agreement with the banks so that they agree to take fresh Greek bonds as the old ones expire. Some of this will be painful in the short term for Greece and for the banks, but it will save the Greek financial system and keep access to outside funding open. As I have said before, making the tax system less distortionary is good for growth. Also, if the confidence trick works, Greek savers may start putting some money back in their own banks, which will help with recovery... and once hedge funds and private individuals in the markets see that Greek bonds offer 25% and are effectively guaranteed by the EU, yields will come down. That was the hope a year ago, and it didn't work. But that doesn't mean it cannot pan out this time...

Screw up now, enjoy later

2011-05-20T17:03:00.004+02:00

Today, there are demonstrations in Barcelona and across Spain against "the political class, the crisis, and the fact that people who lose their house because they can't pay the mortgage still owe something to the banks..." or so my cabby explained. The last bit is interesting. Dación en pago, the idea that someone who borrows on mortgage can just hand back the keys, has become the fantasy of many Spanish house buyers who are faced with negative equity. In the US, this happens a lot; many states allow the practice. In almost all European countries, including Spain, it's a no-no.

So who is right? It's actually not very hard to think through the consequences. Allen and Gale have a beautiful paper that looks at exactly this kind of thing. It's called "Bubbles and Crises". The idea? If you have a "stupid" bank that, on average, loses money, its lending is likely to create bubbles galore. The reasons is risk-shifting. If you borrow to buy an asset, and it goes up in value - bingo, you are rich. If it goes down, you just hand it back to the bank. Since none of your money is at risk, you can't lose. How much of that asset do you want to buy? Me personally, a lot. Sign me up. Actually, double that. And so on. Of course, this creates price pressure upwards... The downside of the model was that it required a stupid bank that lost money on average. But if there is one thing we have learned in the last 10 years, it's that there is no shortage of stupid banks. So, while handing the keys back to the bank and cancelling all debts sounds nice ex post for those who got themselves mortgages that were too big relative to their incomes, it is really, really bad policy. The depressing thing, of course, is that given how loud vox populi is, it is not impossible that someone somewhere will want to garner some votes by changing the rules.

J-PAL Placement - Congratulations to Max Bode

2011-05-08T01:44:00.003+02:00

The first ITFD graduate to join the Jamal Poverty Action Lab (J-PAL) is Max Bode, who is graduating this summer. He will be heading to India for a month of data work with Erica Field and Rohini Pande, before working at the Harvard location of J-PAL for the next two years.

The first time I enjoyed a rap song...

2011-05-04T07:02:00.000+02:00

Keynes vs. Hayek [thanks to Greg Mankiw for the link]

http://gregmankiw.blogspot.com/2011/04/keynes-vs-hayek-round-two.html

When the facts change, I change my mind

2011-04-06T17:30:00.003+02:00

About a year ago, I illustrated the standard debt-sustainability calculations with the case of Greece. If you plug in plausible numbers for growth, for interest rates, and for the debt stock, you get to a need for fiscal adjustment that is frightening. Indeed, it is so large – compared to, say, the fiscal tightening that undid the Weimar Republic – that one had to say “no way”. The necessary swing in the fiscal balance – from primary deficit to surplus – was around 10% of GDP.

Now, I am starting to think that this may not be mission impossible after all. The reason? It’s not what you think. For a while, much of the profession and, to a surprising degree, policy-makers seemed to have decided that the Alesina et al. view of fiscal adjustment was right – that you can cut yourself back to growth. The IMF has done some painstaking work last year, and this argument now looks pretty doubtful.

However, there is another story that can create a bit more hope. There is no question that countries that tax more are richer. Any scatterplot shows correlation is strong. Is it causal? Recent work by Besley and Persson says so. They look at the part of variation in tax capacity that can be explained by the history of military conflict after 1816. States with a history of lots of (expensive) wars still tax more; and that part of the variation is also strongly associated with being richer. Now, Dincecco and Prado (2010) have a new working paper in which they show that the number of battle deaths in the early modern period is also a good predictor of the taxman’s take today – and that this also explains how rich a country is. This strongly suggests that the link is causal – taxation is good for you.

Why? A lot of economics implies that high taxes should be bad. Disincentives for work and entrepreneurial activity are large; a bloated state is as likely as not to waste precious tax dollars. And yet, taxes also generate benefits. Besley and Persson show that capital markets work much better in countries where the government is more capable overall – enforcing laws, investing in education, building infrastructure, protecting property rights, ensuring that debts are collected. All of this costs money. Also, high tax revenue mostly means that everyone pays. The more uneven the tax burden, the lower the overall yield is likely to be. That would also imply that a high tax take is often associated with FEWER distortions.

It’s these kind of distortions in the PIIGS experiencing problems today that seem to suggest that maybe, there is a silver lining to the issue of excessive debts. In countries like Greece, Spain, and Portugal, the self-employed effectively escape taxation on a staggering scale. Many transactions take place with black money. Buying a house is often akin to a scene from a Hollywood gangster film – the buyer first goes to his or her bank, and exits with a suitcase full of cash. The cash is then exchanged at the notary’s office, before being paid in again by the seller. None of it is declared to the authorities. This is not some occasional, half-criminal type of transaction – this is the norm for house buyers today, in a Southern European EU country I know well. Taxation is hence not just too low relative to debt; it is also highly uneven, and hence, distortionary. For example, you end up with an awful lot of people working in property who should be working elsewhere.

As Spain, Greece, and Portugal, desperate to plug their fiscal holes, are scrambling to find fresh funds, they will have to go after the areas of the economy they have largely far left alone – such as construction, property transactions, and the self-employed. Many of the citizens that should, by rights, have been working in large companies in the taxed part of the economy are today working in the self-employed sector; only tax fraud makes this worthwhile, since it compensates for the low productivity of their labor. As that gap narrows, overall output will increase, and the tax take will rise. In the short term, austerity may spell hard times for the Club Med and Ireland. And yet, tax reform done right may very well pay rich rewards, not just in terms of revenue, but also in terms of economic efficiency. Maybe,

Greece

can pull it off after all.

finally... a radio program I have been waiting for for over a decade

2011-03-17T19:26:00.002+01:00

If you visit a British bookstore, you can find the European history corner by looking for a monumental collection of swastikas on the shelves... It used to amuse me as a student in Oxford, and then became a curiosity. A normal weekend in the UK will include some re-run of a World War II movie, a documentary about the last Spitfire pilot alive, and a few book reviews in the Sunday papers. Apparently, 850 books on the Third Reich were published in the UK in 2010 alone, including one on Collectible Spoons of the Third Reich. Now, the BBC actually has a clever radio documentary about why this is - over here. It's pretty good, but I would say that - my own working hypothesis (Britain can't get enough of being reminded of the last time it was actually Great) gets a pretty strong endorsement. The journalist even gets close to spoofing my all-time I-hope-this-is-never-actually-written-title Hitler's Willing Gardeners.

First UPF doctoral candidate to go on the RES tour

2011-03-10T17:58:00.000+01:00

The Economist recently profiled some interesting research showing that European output of scholarly articles was growing faster than that of US departments. Maybe Europe is also catching up in terms of producing PhDs? One swallow does not make a summer, but here is a nice leading indicator... even abstracting for the parental pride factor.

The Review of Economic Studies does a nice thing - every year, it brings seven of the most promising young PhD students who did well on the US academic market over to Europe, where they give seminars at a number of universities. This year, my doctoral student Peter Koudijs will join the RES tour. If I am not mistaken, he is the first UPF doctoral candidate to do so. This is not a small thing - it's equivalent to semi-official confirmation that you were a star of the market in a particular year. What makes this particularly nice is that, until now, there were only a handful of Europeans (meaning, economists with doctorates from European schools) who were on the RES tour until now (Dave Donaldson, now at MIT, and Markus Brunnermeier, now at Princeton, come to mind). Before he goes, he will have to make a decision on where to start his career as an assistant professor, having received a string of top offers, from NWU-Econ and Chicago-Booth to Stanford GSB, LSE-EcHist, and Columbia GSB.

Persistence over the very long run.

2011-03-10T17:16:00.005+01:00

I am over at Harvard for a few days, giving a talk tomorrow. Nico Voigtländer and I have a bunch of papers on the long-run consequences of the Black Death. Since I have done some other work on Nazi Germany, one day, we wondered if there wasn't a parallel between the two periods worth exploring. As the plague sweeps through Europe, causing unprecedented mortality, people look for causes - and many blame the Jews for poisoning the wells. In many - but not all - towns and cities in Europe, the Jewish population is brutally murdered in 1348-50. We were wondering if there is some logic to the geographical pattern of violence - and in particular, if we can find the same pattern in the 20th century. It turns out that there seems to be a huge degree of persistence - areas where Jews were burned in the 14th century were much more antisemitic in the 20th. Here is the abstract of our paper [download HERE]:

Persecution Perpetuated: The Medieval Origins of Anti-Semitic Violence in Nazi Germany
How persistent are cultural traits? This paper uses data on anti-Semitism in Germany and finds continuity at the local level over more than half a millennium. When the Black Death hit Europe in 1348-50, killing between one third and one half of the population, its cause was unknown. Many contemporaries blamed the Jews. Cities all over Germany witnessed mass killings of their Jewish population. At the same time, numerous Jewish communities were spared these horrors. We use plague pogroms as an indicator for medieval anti-Semitism. Pogroms during the Black Death are a strong and robust predictor of violence against Jews in the 1920s, and of votes for the Nazi Party. In addition, cities that saw medieval anti-Semitic violence also had higher deportation rates for Jews after 1933, were more likely to see synagogues damaged or destroyed in the Night of Broken Glass in 1938, and their inhabitants wrote more anti-Jewish letters to the editor of the Nazi newspaper Der Stürmer.

With this, we are trying to contribute to the burgeoning literature on the long-run persistence of culture. Guiso, Sapienza and Zingales found that Italian cities with a history of independence had higher rates of trust and income even today; Jha shows that Indian cities with a mercantile past show less violence between Hindus and Muslims over a horizon of 300 years. Relative to these papers, we show a) persistence over a much longer horizon b) the survival of a pure cultural trait without obvious economic benefit, especially since Jews largely vanished from Germany after 1500.

*** Jonathan Haskel, whose intellectual judgement I hold in high esteem, actually called our results "the most amazing correlation he has ever seen". The title of his post? "Are the experts wrong?" ;-)

I should be more careful what I work on...

2011-02-23T09:43:00.001+01:00

you see, first I worked on (historical) bubbles, and then NASDAQ blew up... then I did research on the sovereign debt defaults, and Greece imploded. In the fall, for a conference at the Bank of Chile, I did a paper on social and political unrest - assassinations, riots, anti-government demonstrations, violent overthrows of the government... and look what we get in the Middle East. The pejorative term for scholars changing research focus as events unfold is "intellectual ambulance chasers"... but what is this? A reverse Midas touch? At any rate, for a sample of South American countries, I looked at what drove levels of unrest. In particular, I show that budget cuts have a strong effect on the likelihood of instability - over and above the effects of an economic downturn. Here is a link and the abstract:

Efforts at fiscal consolidation are often limited because of concerns over potential social unrest. From German austerity measures during the 1930s to the violent demonstrations in Greece in 2010, hard times have tended to go hand in hand with antigovernment violence. In this paper, I assemble cross-country evidence from eleven South American countries for the period 1937 to 1995 about the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between austerity and instability. I examine the extent to which this relationship simply captures the fact that fiscal retrenchment and economic slumps are correlated, and conclude that this is not what is driving the effect. Finally, I test for interactions with various economic and political variables. While autocracies and democracies show a broadly similar response to budget cuts, countries with a history of stable institutions are less likely to see unrest as a result of austerity measures.

The paper will be out later in the year in a volume edited by Jordi Gali and Luis Felipe Céspedes. Right now, with a doctoral student from UPF, Jacopo Ponticelli, I am working on a related paper to see how much of this holds over the long run in a wider set of countries.

ITFD => Yale PhD program

2011-02-22T11:43:00.003+01:00

One of our graduates, Moritz Lenel (ITFD 2010) just got admitted to the Ph.D. program at the Yale Economics Department. All the faculty in our program thought very highly of him, and he really hit some impressive home runs when a student here. Remarkably, in addition to being an academic star, he is also a genuinely nice guy, and I think our letters reflected that! Of course, we are enormously pleased that the admissions committee at Yale did the right thing, and I would bet real money that some other top schools will follow suit. This is also great news for the program, since it shows that the training here is actually pretty decent preparation for entry into highly competitive doctoral programs in economics...

*** March 10 update **** Moritz also got into Stanford, and is waitlisted at Harvard and MIT. Congratulations again, and fingers crossed...

After you, please (it's only a matter of life and death)

2011-02-14T19:34:00.000+01:00

Bruno Frey and friends have written a wonderful piece in the Journal of Economic Perspectives on who survived on the Titanic. They argue that social norms (women and children first) and class explain survival well. Being British, on the other hand, was bad for your chances to make it -- the downside of too much civilized queuing up...

Inflation and diplomacy - Axel Weber edition

2011-02-13T10:07:00.003+01:00

Axel Weber, the current President of the Bundesbank, is resigning in May of this year. He also won't seek office as head of the ECB. There is a good deal of gloating in the press about him going. A well-known inflation 'hawk' and an opponent of the ECB's bond-buying extravaganza to keep Greece & Co. afloat, he is widely considered not diplomatic enough for leading the ECB. For example, his open dissent about the bond purchases last year is seen as an unacceptable lack of esprit de corps.

To be honest, the whole logic of this line of reasoning is passing me by. Central bankers are not diplomats. At some point, Western countries decided that independent, technocratic institutions are better at making monetary policy than politicians. The Fed under Volcker, and the Bundesbank under Hans-Otto Pöhl, are excellent examples of how to do this right. Was there anything diplomatic about raising interest rates in the middle of a recession, as both of them did in the early 1980s? For sure not. They courted controversy, told smooth-talking politicians begging for some easy money to take a hike, and helped to bring inflation (and inflationary expectations) under control. In the long-run, there is no tradeoff between inflation and unemployment; only dead inflation is good inflation.

When the ECB was set up, it was meant to inherit the inflation-fighting prowess of the Bundesbank. One shouldn't exaggerate the implications of a single personnel decision, but I see a broader pattern that is turning the ECB into more of a mixture between the Bundesbank of old and, say, the bad old Bank of Italy or Banco de Espana, which presided over double-digit inflation for decades. Where Pöhl and friends would hike interest rates overnight by a few hundred basis points, with no warning, cold-turkey style (even the early Greenspan pulled one of these off), the new regime hopes to guide expectations through the most esoteric of shifts in bureaucratese, thinking that if they say "strong vigilance" against inflation instead of "vigilance", bond markets and the economy at large will get it. Interest rates? Almost never shall they be touched, and if so, by 25 basis points every 6 months, maybe.

So far, the inheritance of strong inflation-fighting credentials from the past, plus a benign macro environment, have ensured that this sort of magic worked surprisingly well. But at some point, I fear that stronger medicine will be needed - someone, at some point, will have to do the ugly thing of raising interest rates, big-time, perhaps even if growth is not looking pretty, because inflation is too high. Who are you going to call? Suave, smiling diplomats, who got their jobs by being nice to their home country politicians, or by working for Goldman Sachs? Or blunt, robust characters with solid academic qualifications, like Axel Weber? For my money, the fact that he was a bit rough around the edges, said what he thought, didn't take his views from the editorial pages of the FT, and wasn't afraid to p*** off some politicos, was the strongest set of recommendations anyone could have for the top job. Shame that it's not the kind of person who will lead the ECB.

Ryanair, Max Weber, and the social basis of capitalism

2011-02-07T11:11:00.002+01:00

BBC news brings us a story of a Ryanair flight from the Canary Islands which saw a "student rebellion". Apparently, some students from Belgium became unruly and decided to stop following crew instructions after one of them was charged a gate fee for "oversized luggage". So what? This happens all the time, budget airlines are known to make life miserable for passengers to squeeze a few extra euros out of them, and students misbehaving is not really surprising.

The reason why I am interested in this is that it highlights, in a nutshell, what makes modern economies tick - and how companies partly undermine the social compact underlying their profitable operation. The legal situation is probably quite clear - the company wrote something in the small print of the contract you agree to when you click 'ok' (yes, we all read that, no?). This gave them the right to charge extra for all luggage larger than 1x2x3 cm, or all bags that are red, or square. You should know, and shut up. The problem is that in modern societies, strangers get on largely by agreeing to be "reasonable". The taxi driver you just paid doesn't scream bloody murder to get paid again; you don't refuse to pay after you reach your destination, even if the cabbie can't do anything to make you. In either case, there is probably no witness, no enforcement. You just do it because it is the right thing to do.

If we were left to only follow immediate incentives, with no restraint on our actions, most transactions would become impossible, and we would need lawyers on standby 24/7 to get the shopping done. So what's my point? There are companies - and Ryanair is a chief culprit - that go way outside what is reasonable. Indeed, their business model is partly founded on pushing the limits of reason, decency, and the law. In Barcelona, a judge recently ruled that Ryanair cannot charge you €€€ extra for not turning up with a printed boarding pass. I assume that half of their fine print is equally open to legal challenges. And yet they try, and they get away with it.... because we are all collectively too lazy to do what the one heroic Spaniard did who took them to court. The result is that companies like Ryanair gradually undermine the very fabric of reason and trust that govern and allow most commercial transactions. The US in no small measure is less pleasant as a place to live because companies have gone down this route to a greater extent. Interestingly, Max Weber also thought that modern capitalism destroyed the moral basis from which it sprung. If he had suffered a single flight on Ryanair, blaring trumpets on landing included ("another Ryanair flight on time"), I am sure he would have felt vindicated.

What's the solution? We have "sin taxes" (on alcohol, tobacco, gambling). Let's have a tax on rip-off companies, too. Let's put together some general-purpose small-print that is reasonable, involving consumer associations. Companies aren't bound to use it, but if they don't, they get taxed (a lot) extra. That would protect the "commons" of trust and decency which allows modern-day capitalism to flourish...

what's in a slide?

2011-02-03T19:22:00.005+01:00

Jeff Ely, from the econ department at Northwestern, uses a slide from UPF doctoral candidate Peter Koudijs' job market talk to show how you should always have one chart that encapsulates everything you are trying to say in an academic presentation ...(over at cheeptalk)

The chart shows what happened to the stock price of the East India Company after Prime Minister Fox warned that the company would not be bailed out by the government (yes, they did that in those days). You can see the reaction in London on Nov. 19th and the following days. But you don't see it in Amsterdam, where the same share is traded. Why? Because the boats bringing the information didn't sail when the weather was really bad. In this chart, every vertical line shows when a boat sailed (upper panel), and when it arrived (lower panel). You can see that it took until Nov. 29 for the news to reach Amsterdam. Then, the reaction was instant. Peter weaves this into an interesting story about informational efficiency, and what we can learn about the importance of news in generating volatility (it turns out that about half of the price changes can be explained by news in this uniquely clean setup - but that leaves the other half unexplained, which Peter tackles in a nice, home-made model emphasizing asymmetric information). Now, we have to wait for those job offers to come in...

Inflation watch...

2011-02-03T18:20:00.002+01:00

Who issues currency? Well, of course, governments and central banks do. But if you think about it, up to a point, airlines do, too. The miles you accumulate, what are they worth? You can redeem them for a plethora of goods, from flights and upgrades to hotel stays and donations to charity. You can even pay your (flight) taxes with them. Given that more and more economists are starting to think that perhaps, with inflation above the ECB target, we should worry about price pressure, it is interesting to see that Lufthansa has just (effective January 2011) decided to devalue its own currency. While some award requirements stay the same, others are going up by a whopping 17%. I am sure they will say that they haven't adjusted them for years. Well, since the price of their flights changes in terms of "real" money, it is not clear to me that this is much of an argument -- the value of the miles fluctuates with the value of the normal tickets, so there is no reason why they should change at all.

So here is your lesson - miles are really just like fiat money. If Lufthansa (or any other airline) decides that tomorrow, your miles are worth 90% less, there is nothing you can do about it. And if you look at the charts in Reinhart and Rogoff's book on average inflation since 1500, you see very clearly that the overall pace of inflation has accelerated hugely since the introduction of pure fiat money in the 1970s... So if miles are a bit like fiat money, what is the limit of the analogy? Getting and spending are oddly tied up with airmiles, in a way that is not the case with normal money. The only way you can accumulate enough miles for a nice award is to fly so much that you don't want to see another plane for a very long time [yes, I just came back from the Boston area, where, inter alia, I gave a couple of talks about the M.Sc. programs at Barcelona GSE /UPF].

Indian Reservations

2011-02-03T13:38:00.005+01:00

I never thought I would be able to mix boyhood entertainment with serious scholarship... cowboys and Indians AND serious economics? Get lost. But no, one of the job market candidates coming through CREI/UPF, Christian Dippel from U Toronto, has a very clean and cool paper on the incomes of native American-Indians. First, he shows that income differences between different reservations are HUGE -- much bigger than across US states. Most of these probably opened up in the last 20 years, or so he argues. This matters, because until ~1980, the reservations were largely run by the federal government. Under Reagan's "New Federalism", they got a degree of autonomy. Christian shows that reservations where previously politically independent groups were forced together do much worse than the rest -- the effect is around -20 to -30%. He uses a clever identification strategy that uses the effect of mining on reservation formation in the 19th century, which is reasonably plausible. This allows him to claim the effect is causal. Overall, I thought this was very nice work - clear, clean, important.

The only thing that remained a bit muddy is the mechanism. What political economy model would rationalize this gigantic effects? If you force previously independent clans together, why is that necessarily bad? It could be that there is more competition for leading the local council, instead of having deep political factions that lead to stalemate or power-grabbing. Ex ante, I wouldn't be sure what to expect, so the actual, big differences leave me a bit puzzled. But Christian has some plans to get census data to tell us more about exactly which type of activity suffers on the 'bad' reservations. With that in hand, my guess is that the paper could go far. Actually, in some ways, Christian reminds me a lot of another Toronto product, Nathan Nunn, who first got a job as an assistant professor at UBC-Vancouver before going here.

parental pride

2011-01-26T08:36:00.005+01:00

As a general rule, if your PhD student does well, it's his/her accomplishment; when they screw up, it's the advisors fault. And yet, I sometimes can't help mild pangs of fatherly pride... for example, have a look at the fly-out list for UCLA-Economics over at the Econ Jobs Wiki:

Maximilian Kasy (UC Berkeley), Christian Dippel (University of Toronto), Rafael Dix-Carneiro (Princeton), Zhipeng Liao (Yale), Kei Kawai (Northwestern), Myrto Kalouptsidi (Yale), Keith Ericson (Harvard), Alexander Torgovitsky (Yale), Dan Lu (University of Chicago), Peter Koudijs (Pompeau Fabra)

Yup, they are still struggling with the spelling of UPF a bit, but my doctoral student Peter Koudijs is the only European on that list. Fly-outs are not offers (yet), of course. But the change in visibility of our doctoral candidates in recent years has been very gratifying. No doubt, having had some great students and placements in recent years (for example, Nico Voigtländer and Davide Debortoli) has helped. Fingers crossed for the final leg of the jobmarket for all UPF doctoral candidates!

Love letters from the tax authority can work wonders

2011-01-21T08:50:00.004+01:00

Dina Pomeranz (Harvard/MIT) gave a jobtalk yesterday. She conducted a clever experiment with the help of the Chilean tax authorities. Sending vaguely threatening letters to firms that are suspected of VAT evasion, they look at what happens to the amounts declared not just by the firm itself, but by suppliers and clients. Interestingly, she can show how collection goes up along the value added chain. In particular, there is a big effect for final sales reporting, where the self-reinforcing nature of VAT does not apply -- which in turn suggests that it is working pretty well at other stages of the value added chain.

Funnily enough, the New York Times published an article on the same day that Dina was here, on the unexpectedly large tax haul for the Spanish authorities in 2010 -- up by a quarter, equivalent to some €10 bn. Perhaps the autorities here should try and send a few, vaguely menacing letters? As it happens, I had the new Catalan Director General for Economics and Finance, Albert Carreras, in my office this week. Albert is a colleague at UPF, and the outgoing dean there - and many moons ago advised me when I studied at EUI. We talked about budget woes and possible taxes. I might drop him a line with Dina's paper...

You read it here first...

2011-01-14T15:17:00.007+01:00

The Economist has come round to my conclusion of last spring, namely that the Greek sovereign debt case is a no-hoper... I hate to say "I told you so", but the simple debt dynamics of Greece are just too grim [see "Greece and 1+1 of debt dynamics"].

Meanwhile, the forex market is celebrating the "success" of the Portuguese and Spanish debt auctions. The Euro shot up against the dollar since Tuesday. It is true - the auctions didn't go as bad as feared. Yields still up by a 100 bp, and close to 7% for Portugal's 10 year bond. You can apply the same logic that I used for Portugal. Current debt stock is not as bad as Greece's, at 85% of GDP, but the Economist calculates that they need a swing in the primary balance of 8%. That's a very big number. Foreign bondholders will get scared long before any Portuguese politician can deliver on this. With fully 2/3 or debt held abroad, I agree with Paul Krugman, who observed in the NYTimes that with a few more successes like the last one, Portugal will be bust for sure.

Now I know it isn't just me...

2011-01-12T09:14:00.007+01:00

For years, I used to joke with my co-author Mauricio Drelichman that the best way to make progress on our papers would be to sit in the office, take another office chair, push it hard against one's kneecaps, and then force oneself to be immobile for the next 4-10 hours. That's what being on an airplane is like, and these days I get a phenomenal amount of work done in flight. Give me a good run to Vancouver, where Mauricio works and lives, and we can put a major revision of one of our papers to bed. What exactly is it? I think it's partly the absence of disruptions - no phone calls, emails, nobody "just dropping by", no regular seminar or lunch appointment. Three times 1.5 h is much less productive than 4.5 h uninterrupted. I think it's also the sheer discomfort. The only way to mentally disconnect from one's miserable surroundings (let's be honest, where is the delight suggested by glamorous airline ads in being stuck in metal tube re-breathing the same air?) is to focus on something else - in this case, work.

Fresh from the New York Times comes the news that there may be another reason why this works, for some - the feeling that one is about to run out of battery power focuses the mind on "just get it done". Sir Raymond Carr, the master of my old college in Oxford, always gave the same advice to incoming Ph.D. students - just write. And doing that seems much easier for Simon Sinek when the battery indicator is slowly crawling towards zero -- see "Fly Me Anywhere, I Just Need To Work". Maybe, enterprises and academic departments should contain "productivity rooms" where we deliberately replicate the misery of airline travel, at what would surely be a low cost. In case of a sudden loss of concentration, masks will automatically... no, let's not take it that far.

Incidentally, Sinek is working on a book that emphasizes the importance of explaining intent to providers, employees, etc. I haven't seen the manuscript, but I hope he points out the analogy with what the German army called Auftragstaktik -- which involved explaining the point of a mission to humble sergeants and privates, so that they could make decisions on the fly about how to best adapt the means to the purpose of the whole exercise. It made for great combat efficiency, and I always thought it odd that an undemocratic country with a pretty authoritarian culture should evolve such a tactic, while the armies of Western democracies in WWI and II mostly believed in often bizarre micro-management, mostly with disastrous effect. The best book on this and other aspects of military HR I have ever read is Martin van Creveld's Fighting Power (a comparison of the US and German armies in WW II).

Application season...

2010-12-23T09:20:00.003+01:00

Every year, we see a similar pattern - applications to the ITFD program start slow in November, and then pick up from December onwards. Compared to this time last year, application numbers are up 37%, which is encouraging. What is most striking is that the quality seems to vary a lot by date of application, with really good students often applying early. We process applications until the programme is full, and urge everyone to apply as early as they can - and before the end of March if possible. Scholarships are filled periodically until they are gone, so for our applicants who need some funding, applying early is a good idea, too. So if you are thinking of ITFD, maybe the right thing to do is to sit down with a good cup of tea over the holidays, fill in the forms and write the statement of purpose (yes, we do read them, and they do matter!), and give it a shot.

Just how great is the euro for Germany?

2010-12-18T18:21:00.006+01:00

I am at a conference in Berlin on sovereign debt. Last night, at one of the many pleasant restaurants serving remarkably good food at reasonable prices, one of our German colleagues held forth with a view I read a lot in the newspapers - that Germany should just bear the cost of endless bailouts since its industry was "benefitting so much" from the euro. Wage and price inflation elsewhere in the Eurozone made countries uncompetitive; Germany's wage restraint paid off, at the expense of the free-spending peripheral countries. The NYT has a story on changes in export shares of European countries in the last 10 years. The allegedly unfair advantage of the euro for German exporters should matter much less with the ROW -- the exchange rate versus the dollar, the pound, the yen can still adjust. What does the chart show? Germany's export share (relative to the rest of the continent) is up -- but it grew no faster within the Eurozone than for exports to the rest of the world. This doesn't prove that exports to the Eurozone wouldn't be lower if we had the DM, and it had appreciated a lot; but it takes the wind out of the sail of those commentators who argue that swapping shiny cars for junk bonds is such a great deal for the Germans that they should happily carry on doing it forever...

world heritage

2010-12-18T13:37:00.003+01:00

The best buildings by Lluís Domènech i Montaner in Barcelona have just been designated a World Heritage Site. I always had a weak spot for his architecture (much more than that of the ever-fashionable Gaudí). Story in the New York Times, including some awsome slides.

'tis the season ... for peddling PhDs

2010-12-10T14:02:00.008+01:00

What does faculty do all day? I know it's a question many students wonder about. In addition to running ITFD, the department made me placement officer for the graduating PhD students. This means three things - organizing trial job talks and mock interviews, answering emails of the kind "who are you top candidates in IO and micro? which Canadians from your department (...) should we hire independent of field?", as well as sending unsolicited emails to all and sundry telling them how great our graduates are. This, plus a few dozen small administrative things, like making sure that the website for the jobmarket candidates looks ok.

After all this activity, we are now anxiously waiting for the results... this is how parents must feel when the report card arrives. We have 8 PhD candidates on the market. Combined, they have 43 interviews at this stage, or more than 5 each. Quite a few places still have to decide, others will have a second round of decisions, so I am hopeful that this will be a pretty good year. As always, the response is uneven. [update - the final number in late December was 101 interviews for 8, or more than 12 per head] Finance candidates are doing particularly well, with 15 and 10 interviews for two candidates, plus one early flyout. I am reasonably pleased with the quality of places calling, too -- the top always matters more than the average in this game - and this year our candidates already got calls from Berkeley, Northwestern, Harvard Business, Stanford GSB, UCSD, Bocconi, Warwick, Carlos III, CEMFI plus assorted central banks. Fingers crossed for this year's PhDs!

Spain believes in education...

2010-12-04T13:58:00.003+01:00

it pays its professors in a year what it pays its air traffic controllers in two weeks. And boy do they deliver service.

Investment bankers discover solution to the Euro debt problems

2010-12-01T10:41:00.006+01:00

The solutions spells M-O-N-E-Y. German money. Lots of it.

The American journalist H.L. Mencken once joked that for every difficult problem, there was a solution that was simple, elegant, and wrong. That is what I was reminded of reading the increasingly hysterical comments being issued by various people in the I-banking community. Euro area debt problems? The end is nigh? Let's get a bailout. We have had three years of effective "blackmail" by the markets, where governments have caved in every single time, making bondholders whole at the expense of the public. The German government some weeks ago felt that enough was enough. Now the rise in bond yields is creating a crescendo of voices arguing that a "fiscal union" in the EU will solve this problem. Bloomberg ran a full story composed of nothing but London-based investment bankers sagely advising that this was the only solution. Among the more bizarre suggestions, the idea that some 350 billion of Greek, Portuguese and Irish debt gets transferred to the core countries to bring debt burdens down... I think these people are based in the wrong place.

Anyone with any knowledge of German politics will tell you that a gigantic bailout - much as our underpaid friends in the City would love it - will not happen. The whole Euro experiment was sold to the German public via a million holy oaths that this could not happen; the already weak consensus behind the euro will crumble before we see a fiscal transfer union or massive debt shifts. Some commentators are always advising that the Germans and French are just bailing out their own banks. True, in part. But that used to favor bailouts in the past; it is now becoming much harder as a political sell. Yet more money for bankers? Not the message you want to send as a politician. And don't forget -- Germany's export performance is largely built on selling to the rest of the world. While most of the EU mostly trades with the rest of the EU, Germany does sell in significant amounts to the US, Brazil, China, and the rest of Asia. Compared to that, exports to Portugal, Ireland, and Greece are miniscule. Germany needs Europe much less today than it did 20 years ago. The second mistake that people make when thinking about incentives for a bailout is to say that Germany is benefiting hugely from other EU countries not being able to devalue against a Deutschmark. True, but the point of Germany's export surpluses is to accumulate foreign assets for the day when the population is dominated by pensioners. A stronger Mark will facilitate buying up assets elsewhere, from factories and stocks to holiday homes in the sun. Bottom line - much of the current chatter about Germany having to step up to the plate for sure is, in my view, a bunch of I-bankers whistling in the dark, hoping that their trades will finally turn around...

The bright side of the Irish crisis

2010-11-28T10:22:00.005+01:00

These days, it is easy to remember why economics used to be known as the "dismal science". The EU finance ministers are meeting today, to put the fine print for the Irish rescue package together. One European bailout is following another; growth is mostly poor, and even where it isn't, output is not returning back to trend; and unemployment is stubbornly high. News that the last big private Irish bank was being nationalized last week seems like a small wrinkle. And yet, one can think of this detail as possibly a first ray of sunlight.

Whenever the future of the Euro is discussed, the practical difficulties of leaving are pointed out. In particular, as soon as there is a good chance that a country might leave, its banks will face a massive run on deposits; converting assets and liabilities into the new national currency will be tricky, as any mismatch will zap bank capital. But how do these problems look in a country whose banks have blown up already? Where the capital injections for the banks are so gigantic that they more or less double the national debt? And where banks mostly live on liquidity support from the rest of Europe? That place is Ireland, and somewhere, someone is hopefully thinking what I am thinking -- this is the time to get out.

The euro was a gigantic mistake in the first place, a vainglorious triumph of politics over sound economics. When the financial crisis broke out, the Queen famously asked during a visit to the LSE - why didn't anybody notice in advance? On this one, for once, many economists were actually acutely aware just how bad an idea the euro was. Barry Eichengreen wrote many articles and a book warning about foisting a new gold standard on advanced economies with massive nominal rigidities. Nobody listened.

Ireland will have to suffer massively in years to come as it is for the folly of its bankers and the stupidity of its housing bubble. It will have to live with IMF-EU imposed austerity. Why not try to get something in exchange for all that pain? A new Irish pound, introduced overnight, would quickly devalue and restore Irish competitiveness. An independent central bank could set appropriate interest rates while anchoring inflationary expectations. The banks would still have to struggle with potential asset-liability mismatches, but the problem cannot be large compared with the capital injections necessary already. And depositors have been taking their money out already. Once the new currency is in circulation, they can put it back in, as there is no uncertainty about the Irish future of the euro left.

What would this do to the rest of Europe? An Irish exit from the nightmare that the euro has become would surely see Greece, Spain, and Portugal leave, too. Depositors there would run on their banks to get euros out while they still can. Banks in some of these countries are healthier than in Ireland; an Irish exit would impose some real costs on the Club Med. And yet, much of the "health" of Spanish banks is illusory anyway, as it depends on fantasy valuations of all the brick and mortar on their balance sheets (something that the Bank of Spain is increasingly concerned and unforgiving about). A quick exit may still be better than a decade of slow, grinding deflation combined with Zombie banks and Zombie household balance sheets being kept on artificial life support before the inevitable rise in interest rates at some point pulls the plug.

When Britain left the gold standard in 1931, the governor of the Bank of England famously declared (having been aboard a ship and out of contact when the decision was made): "I didn't know we could do that." Leaving the euro may seem similarly unimaginable to many, but it may be just as feasible. In the 1930s, cutting the link quickly led to a recovery of demand, by reducing deflationary pressures. Far from the shattering blow to confidence feared by many, exiting the gold standard was actually great for business. Leaving the euro may be every bit as good.

phew...

2010-11-23T20:27:00.004+01:00

too much of everything! First we had Alan Krueger yesterday, who just stepped down Assistant Secretary of the US Treasury for Economic Policy, giving the Inaugural Lecture that officially "opens" our academic year... He spoke on economic policy making - lessons from the US experience... and a good show it was!

Today we had Robin Burgess from the LSE speaking on "Weather and Death in India". Together with his coauthors, he finds that a single day of more than 36 degrees in India raises the annual death rate by about 1%, which is a huge effect... and may bode ill if all the predictions about rising global temperature are right.

A very accurate real estate idiot ranking...

2010-11-23T19:59:00.007+01:00

goes live over at IDEALISTA. What is a flat or house worth? Whatever the value of having a roof over your head is... discounted to the present. Economists look at variables like the average rent to average house prices, and if the ratio is very low, you can normally be sure that the adjustment (back to its long-term average) comes through lower prices, not higher rents. The reason is that rents get paid out of current income, and house prices can be sustained by someone selling his house and buying a bit of extra house elsewhere... without ever being able to afford the price of the new one if he had to finance it all. In Spain, rental ratios were laughably low for some time, around the 2% mark. In the US, we are getting back to numbers around 3.5-4.5%, which seems about right; in Germany, the current ratio is 5-7.5%, meaning that rents are high relative to prices (mainly because prices are low).

All these comparisons are normally a bit doubtful because you have to believe that the average house for sale is like the average house for rent. That may or may not be true, and depends on rental law, etc. But sometimes, you can get it 100% right -- if the same house is available for renting or buying. That is what the good folks at Idealista have used to compile their list. Most of the owners listing their properties at these prices are clearly smoking something interesting -- a house in Asturias (listed without pictures) is for sale for 2.5 million €, or 2,500 p.m. Wow, that's a rental yield of 1.2%! Even the house ranked 80th (from low to high) only produces 2.66%. I would say two things. First of all, Robert Shiller must be right -- you have to believe in behavioral explanations to understand these owners. Second, the extra-slow-motion-deflation of Spain's housing bubble has a long way to go...

Solving the US federal deficit problem

2010-11-20T19:14:00.002+01:00

is easy and fun... at least over at the interactive NY Times website:

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?hp

There, you will encounter a wide range of spending cuts and tax increases. Mix and match to solve the problem. I guess I am a mild fiscal conservative, ending up with a share of 56% spending cuts to 44% tax increases in my preferred plan. Give it a try!

It's a dirty job

2010-11-16T21:38:00.007+01:00

but someone has to do it... Which student hasn't dreamed of it? One of your professor lying in the dirt before you? That's what our ITFD students got today at lunchtime, when we played a few rounds of beach volleyball. In the first pic, you can see your sincerely after getting up again, admiring the energy and hand-eye coordination of our students. In the second one, Joonas Uotinen gets ready to slam the ball hard as Rachel Lund passes it back. As days in November go, there are worse things to do at midday!
Thanks to ITFD '11 student Kart Siilart for the picture, who, in addition to having a psychology degree from Harvard and an MBA from Insead, also turns out to be a pretty decent photographer...

Good news from the bureaucratic front - we're official!

2010-11-12T18:22:00.006+01:00

Why oh why does the EU turn every good idea into a bureaucratic nightmare? When I first heard about the Bologna ideas, I was really excited. Three-year BAs, compatible degrees across Europe, new syllabi - I could already see good education of the snappy, focused, useful variety coming to all of Europe (and not just the UK). Some years later, it's clear that the teaching Taliban have highjacked the undergraduate teaching structure; many ideas entirely unrelated to the basic idea of having compatible ideas across Europe have been tagged on. One of the really idiotic things that the Bologna process gave us is that Master's degrees now need to be certified by the national authorities -- you can get an "official" and "unofficial" master, effectively. In the US, there are universities that are accredited, and those that are not - fine. MIT is accredited, and Abraham Lincoln College in Podunk, Nebraska, is not. But the idea of perfectly well-established universities having to submit each and every course syllabus, etc., for a master to be officially approved (including those that have been taught for decades) is straight out of Kafka.

To cut a long story short, we got there -- the good fairies in the Barcelona GSE office guided us through the whole process, and starting with the class of 2011, our (and all other Barcelona GSE) masters are official - hooray!

The gold bug bites hard...

2010-11-08T19:24:00.003+01:00

There I was, innocently trying to explain why my students should learn about the gold standard... and trotted out the "usual suspects" in terms of explanations. It's a bit like EMU, folks! It tells us about what social and political factors matter for running a monetary system! etc. And only two weeks after that problem set on the gold standard, out comes Bob Zoellick, head of the World Bank, arguing for a new gold standard. I have to say, I almost swallowed my gum when I read the headline. It's not Ron Paul, but Zoellick, who made a pretty decent trade negotiator under George W. Bush. We know that a) gold is very good if you want to kill inflationary expectations b) works disastrously if your problem is deflation c) is the worst thing you can do if your labor markets are rigid. Now, let's see what we know about the current crisis. Inflation is NOT the problem -- if anything, Bernanke and friends worry themselves sick over the fact that inflation is too low, and monetary policy doesn't have enough oooomph as a result. Labor markets are pretty rigid everywhere in the developed world. Even after a few decades of "structural reforms", we still have long-term labor contracts, unemployment insurance, etc. (and a good thing, too). The 19C labor market where workers traded their time for cash the way we trade tomatoes is long gone, and nobody except some freaks on the luny fringes of economics wants them back. So why would anyone want a new gold standard? Apparently, Zoellick feels that it would anchor inflationary expectations, etc., but he doesn't have much to say about why this should be a problem when financial markets predict less than 2% on average over the next 10 years. For my money, Keynes' verdict on gold stands - it's a "barbarous relic".

Who is afraid of currency wars?

2010-11-08T11:21:00.003+01:00

At the Central Bank of Chile conference the other day, talk naturally turned to the threat of what the Brazilian finance minister Guide Mantega called "currency wars" -- the danger that the world is headed for major conflict over currency movements. All of this is coming from a) unease about the exchange rate of the Chinese currency, which many American politicians feel is too low b) fear in the rest of the world that American pump-priming in the form of quantitative easing will put undue upward pressure on their currencies. On the bus over to the conference restaurant, I had the good fortune of chatting with Olivier Blanchard, currently chief economist of the IMF, and as we talked (without attributing anything specific to him or the IMF) it occurred to me that the current discussion is quite similar to what we used to think about the end of the gold standard during the Great Depression. The standard story used to say - everyone devalued against gold, i.e. against each other, in a bid to improve the competitiveness of their economies. By the end, relative rates were not much changed -- but you had tremendous turmoil in between, and world trade collapsed. That's saying currency wars in the 1930s were really bad, and the implication is gloomy -- we are at it again.

The new view, pioneered by Barry Eichengreen and others, holds that devaluing against gold was good because it broke the grip of deflation. Relative exchange rates may not have moved much, but that wasn't the point -- reflating by getting the money supply up was. In that sense, if we all did a bit of quantitative easing, a bit of "currency war" might be a good thing. It's also an interesting way of aligning incentives. The standard problem in an open economy is that we want our neighbor to stimulate his economy (especially if there is a risk of inflation) - much better than to do it at home. Because QE likely has an impact on exchange rates, this "free rider" problem is mitigated - you may still benefit from your neighbor's QE, but you will pay a price through a higher exchange rate if you don't move as well. In that sense, the non-cooperative policy setting that Mantega described may be a good "second best", provided you believe that Europe is being a bit conservative in terms of monetary policy... The part of the world that really does have a problem is epitomized by Mantega's Brazil, which as been booming and certainly doesn't need more stimulus. But then, perhaps it can live with a higher exchange rate as a price for equilibrating growth around the world.

Congratulations to Fernando Broner, who wins an ERC grant

2010-11-08T11:09:00.008+01:00

Fernando Broner, a specialist on international finance and sovereign debt, was deputy director of ITFD for its first two years and is now on the steering committee as well as teaching 2 courses (and co-directing independent study projects). He has just won an ERC starting grant award. I want to congratulate him on this important distinction -- the ERC has been at the forefront of modernizing science funding in Europe, by making it more open, competitive, and all-round sensible (i.e. more like the NSF in the US). But then, I would say that -- I got one, too, in the first round of the advanced grant scheme a few years back. Jaume Ventura, who is in charge of student affairs at ITFD and teaching courses on "contemporary problems in macro" as well as "international finance", got one last year, and so did Nicola Gennaioli, who is teaching for us in the third term... which means that 4 professors involved in running our program got a love letter from Brussels. At least as a percentage, I think this must be higher than in any other masters program in Europe... and UPF economics must have one of the highest concentrations of ERC awards, given that Fernando is bringing our total to 8:

Jordi Gali
Jaume Ventura
Jan Eekhout
Gino Gancia
Nicola Gennaioli
Joachim Voth
Marta Reynal
Fernando Broner

Antipodean Reflections

2010-10-22T22:31:00.004+02:00

I am in Santiago de Chile for a few days, attending the 14th Annual Conference of the Central Bank of Chile. There were plenty of papers that gave food for thought (perhaps even one by yours sincerely on fiscal adjustments and unrest). The one that particularly caught my eye was by Jeff Frankel of the Kennedy School at Harvard, who looked at the work of the Chilean commission that helps to decide which share of revenue the government should save (some related musings by Jeff are here). To put things in perspective, we know that a) output volatility in the developing world is much higher than in richer countries b) that fiscal policy in LDCs is typically procyclical. If tax revenues depend a lot on resource extraction (copper in the case of Chile), there is a big temptation to just go out and spend when the big times roll. Jeff argues that Chile has much to teach to the rest to the world. As part of a commitment to running a structural surplus over the cycle, it delegated forecasts of copper prices and tax revenue to an independent commission. This might be a good idea not just in countries suffering the wild swings of the resource cycle. He neatly shows that budget forecasts are almost always too optimistic, especially in the European Union. This is largely driven by people overestimating GDP growth. I like the idea of putting more of fiscal policy into the hands of non-politicians (part of "post democratic politics", I guess). The thing I am not so sure about is if the biases Jeff documents (in a place like Ireland, say) aren't partly to do with a general tendency to overestimate improvements in good times... which might affect technical experts too. It's one thing to be in a country with commodity booms, and to realize that these tend to last only so long; it's quite another to look at Ireland in 2006 (or Singapore in 1995, or the US in 2000) and to say - this can't last.

Bad news is good news ... again

2010-10-18T17:36:00.005+02:00

Why do I have this sense of deja vu? No, it's not because I am heading to the airport tomorrow for another conference in far-flung lands (the Central Bank of Chile is having what promises to be a good one). It's that strange sensation I get from seeing stock markets rallying hard because Bernanke and friends are promising us more quantitative easing. So let's get this right. QE 2 is being discussed because a) output growth is slowing b) unemployment is high c) the US housing market is in the doldrums d) which means that the banks will have even more problems in the future e) which all sums up to a good chance of deflation. One can debate whether more money printing by the Fed is the right answer. As for the wisdom of bidding up stocks... either it works, which means that we will have anaemic growth plus rising prices, and then we have to worry about inflation (which has traditionally been bad for stocks). Or it doesn't, and we are getting something between the Great Depression and the Japanese lost decades. Neither prospect seems much of a cause for cheer. Now, when was it when I saw this last? That's right, in the fall of 2007, when increasingly bad news led markets to expect interest rate cuts from the Fed. For a few months, the bad news was accumulating, and the markets continued to move higher. Back then, people had complete confidence in the Fed's powers to make any recession disappear in... and when people realized it wasn't quite true, things really collapsed hard. It made for a good show back then. Given how untested QE is compared to good old interest rate tools, I wouldn't be surprised if we get a rerun in a stockmarket near you before long...

Stupid Germans and the surpluses

2010-09-30T15:10:00.005+02:00

Talk to any German these days about economic policy, and they will soon share with you a sense of outrage that the world is conspiring against their hyper-competitive exports. The German press never talks economics - it talks business. And what's good for business is good for a country as a whole, right? So if Germany has big surpluses, it reflects highly competitive firms. The other - like Mrs. Lagarde of France - are just envious. One COULD actually make some arguments that make sense of the German pleasure in trade surpluses. An ageing country should accumulate assets; some of these should be held abroad. The strongest argument AGAINST piling up trade surpluses is that all those shiny Audis and machine tools sold to the rest of the world buy very few things that will make Germans richer, either today or tomorrow. Michael Lewis has a brilliant book called "Short" about the financial crisis. One of the recurrent themes is how the bubble in subprime really got inflated because of the superabundance of stupid German money. His latest piece on Bloomberg gives you a flavor:

The proprietary trading business turns in part on one’s ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game.

If you export lots and import little, you have to export capital, by definition - you are lending to the rest of the world. For whatever reason, German banks - many of them state-owned - have a singular ability to populate financial markets with klutzes who cannot tell garbage from fine food. The trade surpluses which should translate into a huge foreign capital stock, ready to pay the pensions of ageing Germans, instead have a habit of going up in smoke every time a Nasdaq/subprime/bond bubble bursts. The welfare implications of that are not very hard to figure out... and you won't read in the German press about it. So either the country fixes its financial system (beloved 3 pillars and all), or it should use some of those shiny cars at home.

Is history "fate"? The strike in Barcelona

2010-09-29T19:49:00.005+02:00

Just this Tuesday, I was teaching the Comin, Easterly and Gong paper on whether today's riches were determined by technological development in the year 1,000 BC in the "Rise of the Global Economy" class in the ITFD. Today is the day of the general strike in Spain. By some strange accident, I was reading Orwell's "Homage to Catalonia" in the last few weeks, and - just as I was arguing in class - history really doesn't have to be spell "fate". Barcelona, the hothouse of Anarchist sentiment in the early days of the civil war, was remarkably genteel and tranquil today. Traffic flowed easily, taxis were available - with a bit of an effort - and a few posters apart, the university was quiet. Only a plume of dark smoke hanging over the Placa Universidad indicated some trouble (a police car had been torched, it turned out). In general, people seem to accept the changes to labor laws with a sense of frustrated resignation. Bizarrely, the people most likely to benefit - i.e. the young, university students, etc. - are more violently opposed than the rest. So the deeply ingrained instinct to start building barricades that Orwell describes somehow got mislaid... so big shocks - decades of Franco rule - really can change the cultural outlook and social fabric. Which reminds me of a paper I should have on the syllabus, one in the sequence of beautiful Acemoglu et al papers on institutions and economic growth. This one is on the impact of the French Revolution, and it's co-authored by our new UPF colleague Davide Cantoni...

congratulations

2010-08-12T11:01:00.003+02:00

It's a tough job market out there. That's why it is very nice to see that our students are doing well, despite the headwinds. Clara Sofía Gómez Botero (ITFD 09-10) just got appointed as advisor to the Colombian Deputy Minister for Housing. I am particularly pleased since Clara and her team showed a lot of feel for the policy process in developing countries like Colombia as part of their policy memorandum exercise (which focused on social insurance and indirect labor costs). Good luck to you!

Euro redivivus...

2010-07-23T09:22:00.003+02:00

or dead cat bounce? The Euro has surged since touching a recent low of below 1.20 to the dollar. After relentless news headlines hammering the common currency, and all the pundits claiming that parity was next, the market decided to turn a corner. Apparently, the upcoming double-dip in the US is even worse than all the "EU can't compete" sneers of our Anglo-Saxon friends. But make no mistake - purchasing power parity is still a long way off, and probably closer to 1.10 or so. That's true if you look at the Big Mac Index or more sophisticated measures, which the Economist just updated today. OANDA updates the Big Mac Index every day [and cites the exchange rate the other way around, i.e. you get 0.78€ per $]. Introduced by the Economist, it simply uses the ratio of Big Mac prices in different countries as an exchange rate forecast. It actually does pretty well, over relatively long time horizons. Elsewhere, Orley Ashenfelter and co-authors have used Big Mac prices to calculate ppp-adjusted wages. So, what does this mean for the exchange rate? In the short term, there is no way to tell. It's darn easy to tell really pessimistic stories about the US economic outlook (making monetary easing more likely than tightening), or do the same for Euro (another failed bond auction, anyone?). Over the medium term, I expect those Big Macs to do well at forecasting.

Damn good writing...

2010-07-23T09:10:00.001+02:00

for the five-minute-creative-reboot; but who will fix my umlauts?

http://www.newyorker.com/humor/2010/07/05/100705sh_shouts_ephron

One hell of a clever investor - Antonio Salazar

2010-07-22T15:00:00.005+02:00

Bloomberg has calculated that, relative to the size of the economy, Portugal has the largest quantity of gold of any country. Apparently, this is the fruit of dictator Antonio Salazar stockpiling the stuff, received in no small part in exchange for things like tungsten (very useful for making armor-piercing tank rounds - I wonder where they used those between 1939 and 1945?). How you go from that to a headline like "Gold Makes Dead Portuguese Dictator Top Investor - Bloomberg" I will never know. Well, it's summer, and I suppose it beats Nessie...

interest

2010-07-22T09:04:00.012+02:00

Well, it's always nice to be asked... especially if it's a sign that you are known for something. Well, almost always. Recently, I found this in my inbox:

from: NN

to: jvoth@crei.cat

date: Sat, Dec 5, 2009 at 18:13

subject: Bubble Help!

Dear Sir,

I am a member of an Irish University and my Economics thesis is on the link between irrationality and bubbles in the financial market, was wondering would you have any journal recommendations or articles which could help me within this topic.

Thank you
NN

Yes, absolutely. As a matter of fact, since I work in the area, it'll be more efficient if I write the thesis for you, and send you a draft next week.

I also enjoyed this one:

from: NN

to: jvoth@crei.cat

date: Tue, Apr 6, 2010 at 00:28

subject: about your paper "How the West Invented Fertility Restriction"

Dear Professor Voth,

I am UBC PhD and have some questions about your paper "How the West Invented Fertility Restriction". As i have not encountered this topic before, if you have some spare time, I would be thankful to have your ideas on these:

1) It seems that European Marriage Pattern is a puzzle that there has been many researches trying to solve the puzzle. Is there any surveys or texts you can introduce me that summrizes different ideas about this subject?

2) In your paper, you have brought some evidence that fertility restrictions through late marriage was voluntary in old days. Are there any counter arguments in the litrature? Does any other researcher interprets this fertility restrictions through late marriage, in another way?

3) And if there are any useful references for this subject.

Bests,
NN

This is after my co-author gave a presentation at UBC. The paper has 4.5 pages of references; we also spend a lot of time on possible counterarguments... Reading? A paper? You gotta be kidding. Let's write to the authors instead, and get some personalized feedback on unique questions.

Hmmm. Maybe I can magically transfor my career by trying this:

Dear Jean Tirole/Philip Aghion/Elhanan Helpman/Robert Barro,

I am a member of UPF's economics department. I would like to publish a brilliant paper. Please send me your most outstanding articles (unpublished), so that I can put my name on them and submit them to the AER.

best,
Joachim Voth

Don't get me wrong - I love to hear from students interested in my research. I just hope that the level of interest is a touch above "help me with my homework, pls"...

How BP should have handled the spill

2010-07-19T19:58:00.005+02:00

How to communicate in public is something I spend more time thinking about than is probably good for my sleep... I teach the research seminar at the UPF econ department, which is a second-year boot camp on research techniques for our doctoral students. A lot of emphasis is put on presenting and writing, and I actually show students Steve Jobs introducing the Ipod on youtube and then discuss with them what you can learn from Steve for our presentations.
Sometimes, one can learn a lot from bad examples, too. Little people, listen up - BP didn't quite get it right, to put it mildly (the chairman of the board, after meeting Obama, graciously spoke about the "little people" in the US affected by the spill). So, in a bid to be constructive, here is some brilliant advice from the good folks at Daily Goat on what BP should have done...

Youth unemployment

2010-07-16T11:42:00.002+02:00

Many of our graduates are actively hunting for work now. Some already found good jobs, others are interns at interesting places (congrats to Paulina Tourn, who is currently with the WTO). Now, Edoardo Campanella (ITFD 08-09) has written an article highlighting the problem of youth unemployment in Europe. It's for project syndicate, which feeds content to over 140 newspapers worldwide. Luckily, Edoardo isn't talking from personal experience. He is currently an economic advisor to the Italian Senate, and was formerly an economist at the World Trade Organization.

Soccer and Autonomy

2010-07-15T10:52:00.006+02:00

This week, I was getting quite a few emails from friends from all over the world, talking about soccer. The idea that a German in Barcelona isn't THAAAAT much into soccer takes some by surprise... Of course, not everyone in Catalunya identifies with the Spanish national soccer team, even when they are winning. Last time Germany played against Spain in the Eurocup finals, some of my Catalan colleagues said "We are counting on you guys tonight." This time, when asked if he was looking forward to the cup, one colleague born and bred in Barcelona said "My country is not competing." So I wonder who the press has been talking to that claims that issues of national identity and regional autonomy have been put on a back burner by the country winning the cup. As a matter of fact, and by strange coincidence, last Saturday saw a tremendously large demonstration in Barcelona. People were protesting against the Spanish supreme court decision that denies Catalunya many of the basic rights enshrined in its "Estatut", passed by referendum here and approved by the Spanish parliament. Gone is Catalan as the official language, a right to minimum expenditure of the Spanish state here, etc.

Oddly, the decision by the supreme court may actually be good news for those who favor Catalan independence. It is a miserly and narrow-minded decision, denying a people with a different language and culture even minimal symbolic recognition. This is the kind of ungenerous, stupid reaction to small requests for autonomy that has often led to independence in the long run. Britain's treatment of "Home Rule" in Ireland is a case in point. For many years before World War I, Parliament denied the most basic forms of autonomy to its conquered province. When it finally passed some minimal delegation of powers, implementation was delayed by World War I. When the British hugely overreacted to a minor armed rebellion (by shelling Dublin from warships, etc.), the political mood completely changed. Five years later, Britain ceded control over Southern Ireland. Now, the Supreme Court decision isn't quite the same as the bloody suppression of the Easter Rising in Dublin, but it has a similar, bloody-minded feel to it. What I don't get is why there isn't more of a systematic attempt to organize civil disobedience, withholding of taxes, etc.

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?