Archive for June, 2010

« Older Entries

fiscal austerity

Tuesday, June 29th, 2010

As the G20 leaders focus on austerity, they are following the path of Ireland, which slashed spending and raised taxes nearly two years ago.

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent. ….

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

Liz Alderman, “In Ireland, a Picture of the High Cost of Austerity”, New York Times, 29 June 2010.

One reason austerity has not helped is that Ireland is locked into a super-fixed exchange rate system known as the euro. It is not possible for Ireland to devalue its currency, which would promote exports and discourage purchase of imported goods.

Tags: ,
Posted in Finance | Comments Off

Herbert Stein on economics and economists

Monday, June 28th, 2010

In the preface to a book of mine called Washington Bedtime Stories [Free Press, 1986], I summed up two main lessons of fifty years as a Washington economist:

  • Economists do not know very much.
  • Other people, including the politicians who make economic policy, know even less about economics than economists do.

Herbert Stein, On the other hand – essays on economics, economists, and politics (American Enterprise Institute, 1995), p. 78.

Herbert Stein (1916-1999) was chairman of the Council of Economic Advisers under Presidents Nixon and Ford. He is best known as the formulator of “Stein’s Law”, which he expressed as “If something cannot go on forever, it will stop”.

HT to Arnold Kling.

Posted in Political Economy | Comments Off

government spending and Hayek’s “Road to Serfdom”

Sunday, June 27th, 2010

George Mason University economist Tyler Cowen comments approvingly on the swing to fiscal austerity in the wake of financial bailouts and stimulus packages in the United States and other countries. He doesn’t mention the huge budget deficits of GW Bush, nor the fiscal conservatism of Bill Clinton.

“The Road to Serfdom,” the critique of socialism written 65 years ago by the Nobel laureate economist Friedrich von Hayek, was recently No. 1 in nonfiction sales at Amazon.com.

Many people, including the Fox News commentator Glenn Beck, have contended that growth of government power has, indeed, set us on such a road today. But the reality looks different. ….

While we can expect a larger public sector in America, the cause is mainly the aging of the population, and it will play itself out over the next 30 years with an increase in government transfer payments, mostly through Medicare. Furthermore, even Professor Hayek favored welfare spending and social insurance, so those programs will not alone bring us to serfdom.

Tyler Cowen, “Economic View: A Pendulum Swing Toward Austerity”, New York Times, 27 June 2010.

What if the US government were to make Medicare a universal entitlement, extending coverage to residents younger than the age of 65. Would that move the country toward Hayek’s serfdom? Tyler Cowen, by the logic of today’s column, would answer “No”. I agree. Government transfer payments – even transfers in kind, such as schooling and health care – are not the same as government ownership of the means of production.

Posted in Finance, Health Economics | 2 Comments »

Ed Leamer and the Journal of Economic Perspectives

Saturday, June 26th, 2010

The Journal of Economic Perspectives, published quarterly by the American Economic Association (AEA) is a very useful publication, one that I always look forward to receiving. The articles are clearly written, and are intended for use by non-economists. I was thus pleased to learn that the AEA has decided to make all online issues published since 1999 available to everyone without charge.

Do take this opportunity to browse the publication. You are sure to find something of interest. The latest issue (Vol. 24, No. 2, Spring 2010) contains two symposia. The first revisits UCLA economist Ed Leamer’s famous 1983 article, in which he reflected on the state of empirical work in economics and urged colleagues to “take the con out of econometrics”. The second looks at gender gaps in test scores. There is also a stand-alone article by NYU economist Lawrence J. White on “Markets: The Credit Rating Agencies”.

To give you some indication of the flavour of the Journal of Economic Perspectives, here is a paragraph from Professor Leamer’s contribution to the first symposium:

Ignorance is a formidable foe, and to have hope of even modest victories, we economists need to use every resource and every weapon we can muster, including thought experiments (theory), and the analysis of data from nonexperiments, accidental experiments, and designed experiments. We should be celebrating the small genuine victories of the economists who use their tools most effectively, and we should dial back our adoration of those who can carry the biggest and brightest and least-understood weapons. We would benefit from some serious humility, and from burning our “Mission Accomplished” banners. It’s never gonna happen.

Edward E. Leamer, “Tantalus on the Road to Asymptopia”, Journal of Economic Perspectives, Spring 2010, p. 44.

Edward Leamer is one of my favourite economists. His 1983 article “Let’s Take the Con Out of Econometrics” appeared in the American Economic Review. It can be downloaded freely here or here.

Last month Leamer spoke with EconTalk host Russ Roberts about the current state of econometrics. The hour-long podcast can be downloaded here.

Thanks to Arnold Kling for the pointer to an ungated JEP.

Posted in Uncategorized | 1 Comment »

George Soros on fiscal tightening

Friday, June 25th, 2010

[I]nvestors correctly recognise that cutting deficits at a time of high unemployment will merely increase unemployment, making fiscal consolidation that much harder. ….

The policies currently being imposed on the eurozone directly contradict the lessons learnt from the Great Depression of the 1930s, and risk pushing Europe into a period of prolonged stagnation or worse.

George Soros, “Germany must reflect on the unthinkable”, Financial Times, 24 June 2010.

George Soros (1930-) is a Hungarian-American businessman who made a fortune shorting the pound during the 1992 Black Wednesday UK currency crisis. He and I have one thing in common: We were both influenced by the Austrian-British philosopher Karl Popper (1902-1994). But Soros actually studied under Popper; I only know him through his writings.

Posted in Finance | Comments Off

systems analysis of health care

Saturday, June 19th, 2010

Medical journalist Atul Gawande has posted his commencement address to graduates at Stanford’s School of Medicine. His message? The system of care – how components fit together – is a major determinant of the cost and effectiveness of medicine, irrespective of the excellence of individual drugs, devices and specialists.

Half a century ago, medicine was neither costly nor effective. Since then, however, science has combatted our ignorance. It has enumerated and identified, according to the international disease-classification system, more than 13,600 diagnoses—13,600 different ways our bodies can fail. And for each one we’ve discovered beneficial remedies—remedies that can reduce suffering, extend lives, and sometimes stop a disease altogether. But those remedies now include more than six thousand drugs and four thousand medical and surgical procedures. ….

It should be no wonder that you have not mastered the understanding of them all. No one ever will. That’s why we as doctors and scientists have become ever more finely specialized. If I can’t handle 13,600 diagnoses, well, maybe there are fifty that I can handle—or just one that I might focus on in my research. The result, however, is that we find ourselves to be specialists, worried almost exclusively about our particular niche, and not the larger question of whether we as a group are making the whole system of care better for people. ….

Having great components is not enough. We’ve been obsessed in medicine with having the best drugs, the best devices, the best specialists—but we’ve paid little attention to how to make them fit together well. Don Berwick, of the Institute for Healthcare Improvement, has noted how wrongheaded this is. “Anyone who understands systems will know immediately that optimizing parts is not a good route to system excellence,” he says.

Atul Gawande, “The Velluvial Matrix”, The New Yorker News Desk, 16 June 2010.

HT to The Browser.

Posted in Health Economics | Comments Off

Martin Wolf on the dangers of early fiscal tightening

Friday, June 18th, 2010

In his recent FT column, Jeffrey Sachs of Columbia University argued that fiscal stimulus was unnecessary: monetary policy would have been enough. I disagree. Despite the most aggressive monetary policy ever, private sectors moved into huge surpluses. Monetary policy was “pushing on a string”. The fiscal offsets – overwhelmingly due to built-in fiscal stabilisers, not the discretionary stimulus – helped sustain demand in the crisis. But they were insufficient, even with monetary support, to prevent deep recessions. The argument that stimulus was unnecessary is hard to accept. It is easier to believe it was too small, albeit also ill-targeted. ….

As long as output remains depressed, the fiscal support is most unlikely to be inflationary. Nor will it crowd out the private sector: it is more likely to crowd it in. The big question, then, is whether deficits can be financed. My answer is: yes. Remember that so long as the private sector runs financial surpluses it must buy claims on the public sector, unless the developed world as a whole is about to move into huge external surpluses.

Martin Wolf, “Why plans for early fiscal tightening carry global risks”, Financial Times, 16 June 2010.

The message is repetitive, but bears repeating since so few world leaders are listening.

Posted in Finance | Comments Off

Costa Rica’s new president and violent crime

Tuesday, June 15th, 2010

Costa Rica has a new president – Laura Chinchilla, who took office on May 8th 2010 – so I am recycling a TdJ that reveals her thoughts when she was Justice Minister in the government of President Oscar Arias.

In recent years we have witnessed an alarming increase in levels of criminal violence. ….

[D]uring the period 1990-2006 total crimes per 100,000 inhabitants increased from 135 to 295 and increases in some components are especially troubling. Robbery, for example, increased 700%, and use of illegal drugs increased 280%. Violent crimes also experienced a sharp growth of more than 100%. The murder rate, indicator par excellence of the level of violence in a country, increased 50% in that same period. As a complement for these indicators, we looked the percentage of households in which at least one family member has been victim of a crime and found that this number increased from 20% in 1986 to 27% in 1999 and 40% in 2004. ….

Increasing violence and fear has caused us to draft over the last fifteen years abundant laws regarding law enforcement and punishment. ….

As a result of all this legislation, … in the last ten years we have doubled the rate at which we jail our citizens, which places us at the head of countries with the highest rates of incarceration on this continent. Paradoxically, after adopting all these measures, violence and criminality continue to grow and the prevalence of fear is stronger today than ever. ….

For this reason the Government of the Republic… has proposed implementation of a National Plan for Prevention of Violence and Promotion of Social Peace.

19 August 2007: It is about time action was taken, given the rapidly deteriorating public security in Costa Rica. The author of this column, Laura Chinchilla, is Minister of Justice in the current government of President Oscar Arias. Thought du jour will be monitoring developments. Translated somewhat freely by L. Willmore. The original Spanish follows.

15 June 2010: I haven’t seen the statistics, but violent crime seems to continue rising in Costa Rica. We shall see whether Laura Chinchilla is more successful as President than she was as Justice Minister. We wish her well.

En los últimos años somos testigos de una preocupante tendencia hacia el incremento de los niveles de violencia criminal. ….

Por ejemplo, durante el período 1990-2006 la tasa del total de delitos por 100.000 habitantes pasó de 135 a 295 y algunos de ellos crecieron de manera especialmente preocupante; tal es el caso del robo, cuya tasa se incrementó en un 700% y las infracciones a la ley de psicotrópicos, que crecieron en un 280%. Los delitos violentos experimentaron también un importante crecimiento; así ha ocurrido con las agresiones físicas, que crecieron en más de un 100%. La mismas tasas de homicidio doloso, indicador por excelencia del nivel de violencia en un país, se incrementaron en un 50% en ese mismo período. Como complemento a estos indicadores, al analizar el porcentaje de hogares en los que algún miembro ha sido víctima de un delito, observamos cómo dicha cifra pasó de un 20% en 1986, a un 27% en 1999, y a un 40% en el 2004. ….

La violencia y el miedo nos ha llevado ha promover en los últimos quince años una abundante legislación en materia policial y penal. ….

Como consecuencia de toda esta legislación, … en los últimos diez años se ha duplicado la tasa de prisionalización, lo que nos coloca a la cabeza de los países que más encarcelan en el continente. Paradójicamente, al tiempo que hemos adoptado todas estas medidas, la violencia y la criminalidad, lejos de reducirse o contenerse, han seguido creciendo y la sensación de temor es más fuerte hoy que antes. ….

De ahí que el Gobierno de la República … se haya propuesto impulsar un Plan Nacional para la Prevención de la Violencia y la Promoción de la Paz Social.

Laura Chinchilla Miranda (Ministra de Justicia), “Un país sin miedo” ["A Country without Fear"], La Nación, San José, Costa Rica, 19 agosto de 2007.

Tags:
Posted in Political Economy | 1 Comment »

libertarians and oil spills

Tuesday, June 15th, 2010

Harvard economist Edward Glaeser reviews Libertarianism, from A to Z (Basic Books, 2010), a collection of essays written by his colleague, Jeffrey Miron. Here is an excerpt, but do read the entire post.

Libertarians are rarely anarchists. Almost all of them believe in some form of state power, at the very least the protection of private property and the enforcement of contracts. Many of them, including Milton Friedman, are quite comfortable with larger exercises of state power, including the redistribution of resources to those who have less. ….

But once the need for public action is accepted, things start getting very muddy and we can’t rely on either a love of liberty or fear of the state for guidance. Consider the purely hypothetical case of a massive oil spill in the Gulf of Mexico. The traditional libertarian would argue that regulation is unnecessary because the tort system will hold the driller liable for any damage. But what if the leak is so vast that the driller doesn’t have the resources to pay? The libertarian would respond that the driller should have been forced to post a bond or pay for sufficient insurance to cover any conceivable spill. Perhaps, but then the government needs to regulate the insurance contract and the resources of the insurer.

Even more problematically, the libertarian’s solution requires us to place great trust in part of the public sector: the court system. At times, judges have been bribed; any courtroom can be influenced by the best attorneys that money can buy.

Edward L. Glaeser, “The Economics of Libertarianism, Revealed”, Economix, 15 June 2010.

Posted in Environment, Political Economy | Comments Off

Nicaraguans in Costa Rica

Sunday, June 13th, 2010

Many Costa Ricans resent immigrants from neighbouring Nicaragua, much as some US residents resent immigrants from Mexico, often with little reason. It is thus worthy of note that La Nacion – the principle newspaper of Costa Rica – today praises the selfless act of a humble Nicaraguan immigrant, suggesting that he serve as an example for all Costa Ricans. For those who do not read Spanish, a rough English translation follows the Spanish text.

A sus 79 años, Francisco Prado ganó ¢70 millones [$133,257] en un sorteo de la Lotería Nacional. En adelante, vivirá de los intereses, porque renunció a su pensión del régimen no contributivo de la Caja Costarricense de Seguro Social “para que se la den a otro viejito, a alguien que esté muy necesitado”. El necesitado es el país, pero de recibir lecciones de generosidad como la dictada por este modesto agricultor nicaragüense radicado desde hace 50 años en Costa Rica.

Los ¢70.000 [$133 mensuales] de su pensión dejarán de llegar a … don Francisco, padre de ocho hijos ….

El régimen no contributivo tiene 86.936 beneficiarios de modestas pensiones que en la mayor parte de los casos recompensan años de esfuerzos desplegados al margen del sistema de seguridad social, ya sea por descuido de sus patronos o imposibilidad de incorporarse al sector formal de la economía. Un 58% de ellos son adultos mayores, muchos dedicados en su juventud a pesadas tareas, como las agrícolas, donde no tuvieron oportunidad de cotizar para la futura jubilación.

[....]

La virtud demostrada por el anciano nicaragüense … apunta a la necesidad de reconocer el aporte de los inmigrantes. Son recibidos con generosidad por Costa Rica, casi siempre saben agradecerlo y en su mayoría están dispuestos a pagar la hospitalidad con trabajo honrado y ejemplar.

“Virtud ejemplar”, Editorial, La Nación (San José, Costa Rica), 13 June 2010.

And now the English translation:

At the age of 79, Francisco Prado won a prize of ¢70 million [$133,257] in the National Lottery. From now on, he will live off interest on this money, because he gave up his non-contributory Social Security pension “to release it for another older person, someone who is very needy”. Needy is our country, but for lessons of generosity such as the one given us by this humble Nicaraguan farmer who has lived here for 50 years.

The ¢70,000 [$133] Social Security pension will no longer reach … Don Francisco, father of eight children ….

The non-contributory scheme has 86,936 beneficiaries of pensions that are typically modest, a reward for years of work outside the social security system, either because of carelessness of their employers or because of their inability to join the formal sector of the economy. 58% of these pensioners are elderly. Many of them worked very hard when young in areas such as farming, and had no opportunity to contribute to a fund for their own retirement.

[....]

The virtue displayed by this elderly Nicaraguan … illustrates the need to recognize the contributions of immigrants. Immigrants are generously received by Costa Rica, almost always return the favour, and most are willing to pay for this hospitality by providing honest and exemplary labour.

‘Quick and dirty’ translation by Larry Willmore of “Virtud ejemplar”, Editorial, La Nación (San José, Costa Rica), 13 June 2010.

What makes don Francisco’s act all the more noteworthy is the fact that numerous Costa Ricans with occupational pensions are defrauding the system by receiving a supposedly means-tested non-contributory pension.    Thanks to Ligia for the pointer.

Tags: , ,
Posted in Pensions | Comments Off

« Older Entries