international monetary policy at the zero bound

October 25th, 2014

The latest news from the International Monetary Fund (IMF) is further evidence that the world economy is not on a sustainable path of recovery from the 2008/2009 Great Recession.

Late last night (Friday the IMF) set a floor on the interest rate it uses to compensate member countries for use of its funds. The decision was made in reaction to falling interest rates around the world, threatened to turn its own rate negative. The floor – 0.05% – is just slightly above zero. With negative interest rates, no country would want to participate in IMF activities, as the Fund would be charging members for use of their money.

Something similar happens with interest rates turn negative in domestic economies: banks charge clients who deposit savings with them. Central Banks, and the IMF, dislike deflation (reflected in negative interest rates) for good reasons. Will setting an arbitrary floor on interest rates help, when underlying deflationary pressures are not addressed? My prediction is “No”, just as imposing ceilings on the prices of goods and services does not, in itself, prevent price inflation.

SDR, by the way, stands for “Special Drawing Right”, an international currency made up of a basket of national currencies. To my knowledge, SDRs are used only for transactions between the IMF and its members.

“In view of the prevailing interest rates today, the SDR interest rate for the next weekly period starting Monday October 27, will be established at the floor of 0.05 per cent,” the IMF executive board said.

The SDR rate is what the IMF pays to its lending nations for the use of their funds. …. The rate is calculated as a weighted average of the three-month risk-free rates in euros, yen, dollars and sterling.  ….

The most recent weekly calculation came in at 0.03 per cent. That reflected a euro rate of minus 0.02 per cent, a yen rate of minus 0.01 per cent, a dollar rate of plus 0.01 per cent and a sterling rate of 0.05 per cent. That rate will now be replaced by a 0.05 per cent floor from next week.

The possibility of negative rates caused several problems, according to a senior IMF official. There is no legal basis in its articles of association for paying a negative rate; it would have created a perverse situation where creditors were paying to lend money to the Fund; and it would have frozen up the SDR market as no country would have any reason to participate.

Robin Harding, “IMF introduces floor on interest rates“, Financial Times, 25 October 2014.

 

Reviewing Piketty’s Capital

October 23rd, 2014

[Thomas Piketty's] Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present – with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself. ….

As inequality rises and wealth becomes increasingly unearned, how can a democratic capitalist society respond? Regarding income inequality, Piketty advocates taxing incomes above $500,000 or $1 million at a rate of 80 per cent. Importantly, the point is not to bring in revenue, because it would probably bring in very little – remuneration at the top end would probably fall dramatically, given the small return to higher salaries. But given that taxes at this rate did not slow down growth in the past, and that countries that still have high top income tax rates have not fallen behind the US and the UK, the evidence indicates that their loss would be everyone else’s gain.

How does this work? The knock-on effect of top incomes on everyone else’s incomes, or what economists call general equilibrium effects, are rarely acknowledged, and indeed Piketty does not spell them out. But next time you hear someone suggest that a concern with top incomes can only be driven by envy, recall that, one way or another, the rest of us have to pay for those incomes: as workers, higher pay at the top means our salaries have to be lower; or as consumers, it raises the prices we face; or as pension-holders, it lowers share prices and profits that fund our retirement. Again, since the evidence shows that excessive pay at the top does not increase the size of the pie, their ever-growing slice comes at everyone else’s expense, and trimming it would leave more for the rest of us. ….

In 1913, just before the outbreak of the First World War, the historian and socialist theorist R. H. Tawney observed that ‘what thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches’. Let us hope that this time around we find a solution to the problem of riches that does not require global catastrophe.

Paul Segal, “Review Essay: The problem of riches“, Renewal 22: 3/4 (2014).

HT: Mark Thoma

Paul Segal is Senior Lecturer in Economics at King’s International Development Institute, King’s College London. For more reviews, see the current issue (no. 69) of Real-World Economics Review (ungated, free access). This special issue on Piketty’s Capital contains essays by Robert Wade, James K. Galbraith, David Colander, Dean Baker and others.

Capital in the Twenty-First Century was translated from the French by Arthur Goldhammer and published by Belknap Press in 2014.

happiness, satisfaction, and GDP

October 22nd, 2014

I would like to call everyone’s attention to a superb article written by University of Southern California economist Richard Easterlin, a scholar who, years ago, touched off the booming field of “happiness studies”. I, for one, am not convinced that happiness – even life satisfaction or subjective well being – is something we can usefully measure, aggregate and use for policy purposes. Nonetheless, Easterlin makes a spirited, impassioned case for replacing GDP (Gross Domestic Product) with SWB (Subjective Well Being). He has succeeded in convincing me that SWB, with all its faults, is at least preferable to HDI (the UNDP’s Human Development Index) as a measure of welfare.

Here are two paragraphs from the introduction, and two from the conclusion of the essay. The entire essay (4 pages) can be downloaded, copied and printed without charge, so click on the link below. You will not be disappointed.

Since 1990, GDP per person in China has doubled and then redoubled. With average incomes multiplying fourfold in little more than two decades, one might expect many of the Chinese people to be dancing in the streets. Yet, when asked about their satisfaction with life, they are, if anything, less satisfied than in 1990.

The disparity indicated by these two measures of human progress, Gross Domestic Product and Subjective Well Being (SWB), makes pretty plain the issue at hand. GDP, the well-being indicator commonly used in policy circles, signals an outstanding advance in China. SWB, as indicated by self-reports of overall satisfaction with life, suggests, if anything, a worsening of people’s lives. Which measure is a more meaningful index of well-being? Which is a better guide for public policy? ….

Examples of the disparity between SWB and GDP as measures of well-being could easily be multiplied. Since the early 1970s real GDP per capita in the US has doubled, but SWB has, if anything, declined. In international comparisons, Costa Rica’s per capita GDP is a quarter of that in the US, but Costa Ricans are as happy or happier than Americans when we look at SWB data. Clearly there is more to people’s well-being that the output of goods. ….

[W]ith SWB, the judgement of well-being is made by the individuals affected. GDP’s reliance on outside statistical “experts” to make inferences based on a measure they themselves construct looks deeply flawed when viewed in comparison. These judgements by outsiders also lie behind the growing number of multiple-item measures being put forth these days. An example is the United Nations’ Human Development Index (HDI) which attempts to combine data on GDP with indexes of education and life expectancy.

Richard A. Easterlin, “Why our happiness and satisfaction should replace GDP in policy making“, The Conversation, 21 October 2014.

Professor Easterlin, to his credit, ends the essay with these words: “[A]s as measures of well-being go, SWB is [not] the last word, but clearly it comes closer to capturing what is actually happening to people’s lives than GDP ever will. The question is whether policy makers actually want to know.”

HT: Mark Thoma

economic inequality and Hong Kong protests

October 21st, 2014

Hong Kong’s protest movement – now more than three weeks old – has largely focused on definitions of universal suffrage and various methods for electing political leaders. However, many of those taking part also feel economically disenfranchised ….

The territory’s per capita GDP has soared from below $7,000 two decades ago to about $38,000 now. ….

However, that economic dynamism has come at a price. A fifth of Hong Kong’s 7m people live in poverty, according to the charity Feeding Hong Kong, while the income gap is the widest in the developed world. ….

“The Hong Kong economy has been flying since 1997. It has skyrocketed. But a lot of people don’t enjoy the success,” says Eric Yeung, a 26-year old protester, who works in a hospital. “We are earning our money to feed this small group of people. They get richer, while we get more underprivileged. Our burden has become heavier.”

Josh Noble, “Economic inequality underpins Hong Kong’s great political divide“, Financial Times, 21 October 2014.

coping with dementia

October 19th, 2014

English journalist Fiona Phillips reflects on how she reacted when each of her parents were diagnosed with dementia, an incurable disease that many of us will suffer from before we die.

A couple of weeks ago, Pope Francis said something that brought all the guilt of putting my mother in a care home flooding back. At a special mass to honour grandparents, he said a society that does not care for its elders “has no future”. He warned of a “poisonous” culture in which they are abandoned in care homes, where, he said, “they often suffer neglect, fear and loneliness”.

Up to 80% of people living in care homes have Alzheimer’s Disease or some other form of dementia. It is a wretched, cruel, misunderstood condition that I’ve seen both parents through.

I’ll never forget the day I had to leave my mum in a care home – in her late 60s, the youngest resident there – with her early-onset Alzheimer’s. I still wake up at night with the guilt of leaving her and her imploring “But I’m your mum…” …. The four hours I spent in my car, my face flooded with tears, was a journey I still carry around with me. My dad had said he couldn’t look after her. I hated him for it. What we didn’t know then was that he was already in the early stages of Alzheimer’s himself, and didn’t know what the hell was happening to him. ….

Mum was admitted to hospital with dehydration on several occasions during her time there. My guilt and heartbreak drove me down nearly every weekend to Wales to see my once always-so-glamorous mum sitting in a chair, head bowed, smile gone, with somebody else’s clothes on, dirty nails, and her hair savaged into a care-home crop. The look of an institution. Not a home. That look will always haunt me. ….

Mum had already died when it became clear that my dad could no longer live independently. I found this out when I arrived on his doorstep unexpectedly and found that he’d been living like a tramp for months. It was the only occasion he’d opened the door to me in all the months I’d been making futile visits to the house, after driving hundreds of miles.

This time he cried when he saw me, as though he was relieved that his predicament had been unmasked. He was living on a dirty mattress on the floor, surrounded by clutter, piles of mouldy dishes in the sink and bundles of notes to himself as a prompt to his disappearing memory. I decided there and then that I had to move him nearer to me.

Fiona Phillips, “Dementia: Why putting my parents in a home will haunt me forever“, BBC News Magazine, 17 October 2014.

Fiona Phillips (born 1961) is now an Alzheimer’s Society ambassador.

improving public healthcare in Pakistan

October 19th, 2014

BBC News brings us the heartwarming story of one man’s struggle to provide free, world-class care to millions of Pakistan’s kidney patients.

Pakistan’s shambolic public health system suffers from corruption, mismanagement and lack of resources. But one public sector hospital in Karachi provides free specialised healthcare to millions, led by a man whose dream was inspired by the UK’s National Health Service. ….

Adib Rizvi was barely 17 when Hindu-Muslim communal riots forced him to migrate from India to the newly created country of Pakistan.

Without a family, he spent much of his time as a medical student in Karachi in the 1950s living in boarding hostels.

“In those days, I had plenty of time to roam about and observe what goes in our hospitals,” he remembers. …. “I saw people being abused for not being able to pay for treatment. I saw elderly women taking off their earrings and pawning them to pay for medicine.

“People would beg for healthcare, but they would be demeaned. It was like people were required to pawn off their self-respect to get a service which I felt should have been their right as citizens in the first place.”

After completing his medical degree in Karachi, Dr Rizvi went to Britain for a fellowship in surgery. There, he spent a decade working in hospitals.

“I was inspired by the National Health Service (NHS). It showed me that providing free healthcare was doable,” he says.

But when he returned to Pakistan in 1971 and joined Civil Hospital Karachi as assistant professor of urology, most people around him told him he was talking utopia. “They said it can’t be done here.”

At the time, he had a choice.

He could have opted to set up his own private hospital. He could have built up his own lucrative empire while keeping his day job at the poorly run government hospital – a path taken by many highly qualified physicians in Pakistan.

“But the option never really appealed me,” he says. “I always felt that in order to really make a difference, I had to be committed to this public sector hospital. Because when you contribute to public sector institutions, you help the common man. That’s what I wanted to do.”

Shahzeb Jillani, “Pakistan’s ‘miracle’ doctor inspired by NHS“, BBC News, 19 October 2014.

The Sindh Institute of Urology and Transplant (SIUT) is part of Civil Hospital Karachi (a large teaching hospital). It began in 1971 with a shabby eight-bed ward. SIUT hospital today is  a world-class kidney disease centre, with 800 beds in two multi-storey buildings.

workers’ rights

October 18th, 2014

FT columnist Simon Kuper complains that politicians routinely ignore the rights of workers, even as they focus on “‘Rights’ – for gay people, women and other suppressed groups”.

Politicians rarely mention them any more except to mock them. Barack Obama spoke of “bitter” jobless small-town Midwestern voters who “cling to guns or religion, or antipathy toward people who aren’t like them”. David Cameron evokes a “broken Britain” of dysfunctional jobless slackers. Mitt Romney identified 47 per cent of Americans “who believe that they are victims?.?.?.?who believe that they are entitled to healthcare, to food, to housing, to you-name-it”. And French president François Hollande, at least according to his angry ex-girlfriend Valérie Trierweiler, calls poor people “the toothless ones”. ….

Many working-class people are now shifting to parties that still promise community – a national or ethnic community. France’s Front National and the Scottish, Catalan and Flemish nationalists have never done better. The US Republicans own most white working-class votes. The UK Independence Party just won its first parliamentary by-election, on the largest increase in voting share for any British party in any by-election ever. Nigel Farage, Ukip’s leader, says: “We are now tearing great holes in the old Labour vote in the north of England.”

The left discovered rights. Now it ought to rediscover community.

Simon Kuper, “The working classes deserve respect“, Financial Times, 18 October 2014.

the explosion of obesity in Mexico

October 18th, 2014

A quarter of a century ago, two-thirds of Mexicans were of normal weight, according to official statistics. Now, about a third of the population is clinically obese, and more still are overweight – adding up to a supersized segment of adults second only to the US.

The explosion coincided with Mexicans’ embrace of US fast food alongside their beans and tortillas, plus less exercise – almost a third of children spend four hours a day in front of computer screens, for example – compounding a genetic propensity to accumulate fat, the state health service, IMSS, says.

Jude Webber, “Education and taxation called to arms in Mexico’s obesity fight“, Financial Times, 17 October 2014.

the Holocaust in Italy

October 18th, 2014

FT columnist Gillian Tett reviews “My Italian Secret”, a new documentary produced by film-maker Oren Jacoby. The film shows how hundreds of ordinary Italians, and some not-so-ordinary, such as legendary cyclist Gino Bartali, worked together so that thousands of Jews could escape the Holocaust.

In recent years Joseph Perella, one of the giants of the American private equity world, has become obsessed with Italy’s history. The periods that normally attract attention, such as the Renaissance or the Roman empire, are not what interests Perella. Instead, what has sparked his passion is a saga that is relatively unknown in America today, namely how ordinary Italians treated their Jewish minority during the second world war. ….

[U]ntil I saw the Perella-financed film, I did not know that about 80 per cent of the Jewish population in Italy survived the war.

And while that high survival rate partly reflects the fact that the Nazis never completely controlled Italy, the attitude of the Italian population was also crucial. Although some Italians co-operated in shameful ways with the Nazis to send Jews to concentration camps – with tragic results – many others created networks to protect them, often at great personal risk. And despite the Vatican failing to speak out against the Holocaust, Catholic priests and nuns played a central role in these rescue missions, in sharp contrast to those in countries such as Poland.

Gillian Tett , “The quiet heroes of wartime Italy“, Financial Times, 18 October 2014.

 

a conversation with economist Jean Tirole

October 17th, 2014

In this special FT News podcast, Professor Jean Tirole, who won the Nobel economics prize this year for his insights into market dominance, talks to Ferdinando Giugliano about his views on the evolution of regulation and whether economics has become excessively mathematical.

Ferdinando Giugliano, “Interview with Nobel economics laureate Jean Tirole“, The World blog, Financial Times, 17 October 2014.

This 14-minute interview can be freely accessed. (Registration is required, without charge, and blogs do not count against your 8 free downloads per month.) Here is an interesting quote, from the end of the interview (at 13:24): “It [economics] is a science. It’s a social science, but it’s a science. And it is very important to use the right tools.” For Professor Tirole, these tools include mathematics and statistics.

 

FT Tirole podcast