Sunday, April 26, 2015

Good News for Students!

I had to go up to Orem on short notice late Friday afternoon.

I promised that anything I posted on this blog by midnight Friday would be tested on the exam, and it will be.

But, nothing I post after this will be on the last exam for the Spring 2015 class.

This actually is a rather large pile of stuff, going back to the start of the grading overload I entered the week of March 30 — perhaps about a dozen new posts.

I will be writing those up over the next couple of days. Read them if you like: they’re all amazing bits of macro insight Winking smile, expressed clearly Confused smileand conciselyCrying face, and sprinkled with scintillating wit and charm.Sarcastic smile

Friday, April 24, 2015

The Social Progress Index (Not Required)

Trying to measure well-being with something other than real GDP per capita is a good thing.

Doing it well though? I’m not sure how well we do at that.

One of the most famous alternative measures is the Social Progress Index created by Social Progress Imperative. Go play with it: they have fun, interactive tools, for slicing and dicing their data. This was started out by Michael Porter (yes, that Michael Porter from your management classes).

But these things bug me. I am sure some of this is some natural American Chauvinism.

But I also wonder about why they choose the data series they do, and why they weight them the way they do.

For example, the U.S. ranks 35th in freedom of the press, a step lower than Romania. Who are they kidding with this nonsense?

As an economist, my biases are towards accepting what people do (rather than what they say or believe) as indicative of how they’re doing. And I really frown upon it when experts assert that individuals decisions are somehow incorrect because they’ve voluntarily chosen something that the experts might not.

So, for me, something like immigration is a good sign, and emigration is a bad sign. On this count, America’s doing pretty well.

And, of course, in the news this week has been the sinking of a ship overloaded with migrants, heading to Italy. Italy ranks even further down the Social Progress Index than the U.S. does.

At a minimum, I’d be happier if this sort of thing was also included in the Social Progress Index. Oh … and how about including the money expended by rich countries to rescue these migrants: Italy actually scaled back a huge rescue program and still spends more money than other countries on this. Shouldn’t that get credit somewhere?

What’s the Job and Pay Outlook?

Here’s a complex, but really interesting view of the changing U.S. labor market:

There’s a ton of information here.

Bluer is more jobs, while redder is fewer jobs. The 6 recessions of the last 40 years really stand out (although it’s still tough to separate 1980 from 1981-2 recessions). This chart also emphasizes that in terms of job losses, the Great Recession was pretty bad (red). You can also see the pervasively weak job growth of this expansion by the whiteness on the right hand side.

The “wedges” going left to right show the relative size of different industries: professional and business services, and healthcare and education are now the largest. Most of that is from strong growth through the 80’s and 90’s — although relatively speaking, growth is currently strong in professional and business services. Manufacturing has, of course, declined.

Going top to bottom shows industries by the average wage. Manufacturing (two categories actually) and construction are not on the top; but they are the ones closest to the top that have seen the biggest declines. And food service has definitely grown, but it’s pretty clear that the story that our economy is dominated by lowly paid burger flippers is an urban myth.

This was drawn from “Slowing Job Growth Tests Economy” in the April 3 issue of The Wall Street Journal.

If you like this sort of thing, you should definitely click through the linked image in the article entitled “Job Sectors: Winners and Losers”, which takes you to a page with several more interactive charts. Very cool.

The Real Minimum Wage

Just a quick chart showing the dates and levels of the nominal wage, and how that was affected by inflation:

I think this chart partially supports a claim I’ve made in class: that if you like the idea of raising the minimum wage occasionally, this might not be a bad time because it isn’t that high in real terms (and because if the country swings conservative in 2016, inflation will slide the real minimum wage much further downhill to the right).

Drawn from "McDonald’s Joins Trend in Raising Pay" in the April 1 issue of The Wall Street Journal (the full article is not required).

Don’t Believe the Myth

Most people believe that that America has less social programs than other developed countries.

This is a myth. We are about average.

But the myth can be, and is, supported with hard data. This is one of those cases where you can be mislead into believing something that’s false with selective use of the data.

The reason this comes about is that other countries support their social programs more with spending, while the U.S. supports them relatively more with tax breaks.

In order to get the full picture you have to look at both. But many people just focus on the spending part, which makes the U.S. look … cheap.

This is covered in Eduardo Porter’s March 31 column in The New York Times entitled “The False Hope of a Limited Government, Based On Tax Breaks”. The article looks at what are called “tax expenditures”. These are basically tax deductions, often given to promote desirable private behavior. But they are also a substitute for actual public expenditures: give people a break if they pay for something themselves, rather than having the government spend the money to provide it for them.

The biggest tax expenditure for households is the mortgage interest deduction, which encourages private home ownership. The biggest tax expenditure for firms is that ability to write off employee healthcare expenses as a cost.

My opinion is that the author is solidly progressive. So it’s a big deal for him to say that while political constraints limit the size of the U.S. government more or less explicitly, we’ve got this system of stealth government through tax expenditures that implicitly broadens our government:

Such spending through the tax code not only offered the false promise of smaller government. Its most insidious effect was to hide what the government does and, notably, to shield from political debate which people it benefits most. That is clearly not those of middle and low income, who don’t earn enough to qualify for many tax deductions and often don’t even claim them.

You can see his progressiveness in the (correct) position that most of the benefits of tax expenditures go to the rich.

Check out the chart (sorry, I had to do a screen capture of a small image, and then scale it up to fit):

15-04-01, NYT, Spending and Tax Expenditures

The large gray bar is what people see when they focus on spending only. The darker bar is what is spent after accounting for some tax expenditures.* When using the dark bar, America is actually just above the OECD average.

* The excluded tax expenditures — the mortgage interest deduction, and public spending in education — are pretty big too, and would tend to make the U.S. government look relatively larger.

Don't Blame Germany (Not Required)

(This is not required because I think you've heard enough about Greece this semester).

Two huge names in academic international finance, Jeremy Bulow and Kenneth Rogoff, chimed in on Greece with an op-ed in the April 17 issue The Wall Street Journal entitled "Don't Blame Germany for Greece's Profligacy".
In the court of world opinion, a large majority seems to believe that even if the Greeks may have been a tad fiscally irresponsible, it is the Germans who have driven Greece into depression through cruel insistence on austerity and debt repayments.
This populist narrative misses the essence of the problem ...
I would not describe either one of the authors as conservatives. These are firm liberal/progressives saying we shouldn't be sympathetic to the underdog in this case.
Let’s first dispense with the “it’s all German-led austerity” nonsense. ... In 2009, fueled by a three-year jump in government spending to 54% of gross domestic product from 45%, the Greek government was running a primary deficit equal to 10% of its GDP, according to IMF estimates. In other words, new borrowing equaled all principal and interest due, plus an extra 10% of GDP. When major accounting fraud was reported, private lending to the Greek government stopped ...
But Greece has already taken advantage of others:
Sober observers realize that further debt write-downs are both desirable and inevitable. But don’t blame today’s austerity on tough repayment terms that have never been, and probably never will be, implemented. Already the EU’s current bailout terms include no principal or net interest until 2020. Greece has enjoyed a much smoother cushion than say, the Asian financial crisis countries in the late 1990s. [emphasis added]
And, I think I've gotten across many points this semester whose tone is echoed in the article:
Eurozone leaders would like to portray the Greek crisis as unique, but in many respects it is merely extreme.
In a lot of case, what we need to do is redefine normal to include more unusual behavior than we'd care to.

Thursday, April 23, 2015

What Do Economists Do at Google?

This in on Quora. Follow this link, but only the response from Hal Varian is required.

Varian wrote the text that I used for Micro I and II in my Ph.D. program. I still refer to it, and have used it to supplement what I’m doing in that ECON 4900 class that meets in the computer lab before Price’s Stata class.

Wednesday, April 15, 2015

Helping Greece by Helping Germans

One dimension of Greece's problems is their trade deficit. Buying more stuff from foreigners than they buy from you isn't always a problem.

  • If you buy more from foreigners because they're offering you a great deal to get hold of your currency, then the trade deficit may be a good thing. This is the U.S. of the last 2 generations.
  • If you buy more from foreigners because you've already gotten rid of your own currency and have theirs and need to spend it, then the trade deficit may be a bad thing. This is contemporary Greece.

And one country's deficit is someone else's surplus. For simplicity, that could be Germany (which has the biggest trade surpluses in the world as a portion of their economy).

So Greece has the bad kind of deficit, and Germany has the surplus. Is Germany's surplus good?

Again, there are two sides.

  • If you sell more to foreigners because you like to work hard without consuming a lot, then the trade surplus may be a bad thing. This is contemporary Germany (China too).
  • If you sell more to foreigners because there's high demand for what you do and you can't say no, then that's a good thing, but you should learn to say no. This is Dr. Tufte teaching extra classes this semester and not being able to keep up on the grading.
Do note that most people make snap moral judgments about deficits and surpluses (Greece = Bad, Germany = Good) that don't fit into those bullet points. So, who do you think is right: a professor who's trying to help you out, or the armchair moralists? (Don't tell me ... maybe I really don't want to know your answer ;-)

DIGRESSION: Ben Bernanke has a brand new blog called ... wait for it ... Ben Bernanke's Blog. Why should you try reading it? Well, he's a really famous macroeconomist (I used his text in ECON 3020 a long time ago), a former chair of the economics department at Princeton, the foremost expert on the financial crises of the Great Depression, former chair of Board of Governor's of the Federal Reserve System during the Great Recession, got his Ph.D. from MIT which produces top flight macroeconomists year after year ... and he got 800's on both the math and verbal parts of his SAT's way back when.

Anyway, one of Bernanke's first posts made a point that I wish I'd thought of.

We tend to beat up Greece for being in trouble. That's the armchair moralist in us (and I'm as guilty of anyone at this). This inclines us to say that Greece has to solve its own problems.

But recall, Greece is paired with Germany: the Germans are working too hard to make things for the Greeks. So our inclination is to say the Greeks ought to work harder, but we could just as easily say the Germans should work less hard.

Now, one of the little bits of institutional culture that makes Germany what it is is that they still negotiate large scale wage contracts, tied across industries and regions. This is kind of like the U.S. of 50 years ago where the negotiations between GM and UAW had wide repercussions for contract negotiations in other industries and regions.

Bernanke points out that The Wall Street Journal reports that the Germans are negotiating big pay increases because they are near full employment. This is great for German workers, but it's also good for Greek producers because it helps them compete for Greek spending. Plus, in the 21st century, it gives Germans extra money to spend in Greece as tourists.

P.S. There's like a Mobius blogging loop here. Bernanke links to The Wall Street Journal (click the first link in this article), who link ... back to Bernanke's new blog (click the last link in this article) which he only started 2 weeks ago. Sheesh.

Who Needs Larping? (Not Required)

I learned a new word (from SF, DJ, and AF) in class the other day, and now I’ve used larping in a sentence! At SUU, learning lives forever!

Monday, April 13, 2015

Countries Ranked by GDP Forecasted for 2030

AF sent a link to an article that shows countries ranked by projected size of their economy in 2030.

World's 20 largest economies in 2030
These look just about right to me. Given the source, I'm not surprised: the Department of Agriculture hires actual macroeconomists with Ph.D.'s, instead of hacks.

Thursday, April 9, 2015

Shadow Banking

KH sent a link to an article he read about shadow banking. Blame him for this big thing you’ve got to read ;-)>

I wouldn’t generally cover this topic in ECON 3020. In principles, I go broad and shallow, and I do touch on shadow banking for about 10 minutes. In ECON 3020, I go into much more in depth about the really big ideas: how individual well-being relates to measured aggregate performance, what the time series tells us about what’s knowable about aggregate performance, and how growth theory can explain that.

But … shadow banking is a buzz phrase that’s in the news. As a macroeconomist I’m not sure that makes me happy: why don’t people get the message that it’s all about growth, you know?

Anyway, politicians feel that they are masters of the universe, and the legacy media are sycophants who confirm this. And shadow banking is something they’re concerned about, so I should at least give you a primer.

The parallel you need to draw is between banking and shadow banking. A shadow bank is like a bank, but it isn’t one. So what is it?

First, think about what it means to be a bank. Your liabilities are primarily your depositors deposits. Your assets are primarily (loans that are) invested in less liquid assets. You act as an intermediary between lenders and borrowers (or equivalently between more liquidity and less liquidity), and take a cut for your services. You generally have more depositors than borrowers, and the depositors are smaller. Your liabilities are more liquid than your assets, so you always run the risk that the depositors will want their money back on short notice.

Compare this to other institutions: if they have many liquid investors and many illiquid investments, they’re going to behave a lot like a bank. In particular, they might have runs like banks do.

The [shadow banking] sector, which includes mutual funds, exchange-traded funds, hedge funds and other institutional investors, has ballooned …

A lot of people (again, this is often politicians, bureaucrats, and the media) blame the financial sector, including the banking and shadow banking sectors, for the global financial crisis of 2007-9.

In any financial crisis, it’s hard to differentiate between liquidity and solvency problems. Liquidity problems go away if treated. Solvency problems usually can’t be treated effectively. The message of the last 10 years should be that the financial system had liquidity problems (because it’s more or less recovered and paid off its infusions of liquidity), while other sectors like construction, real estate, and the public sector had solvency crises (which are mostly still unresolved).

The distinctions of the last two paragraphs are important. It’s not clear if politicians and bureaucrats are going after the financial sector as a diversion, or because they need to show they can do something and haven’t figured out how to effectively address the more serious problems in the insolvent sectors.

The particular article forwarded by KH, entitled “IMF Warns (Again) of Growing Shadow-Banking Risks” from the April 8 issue of The Wall Street Journal discusses how the IMF wants to get involved in regulating shadow banking.

This should frighten you. On the other hand, keep in mind that the IMF has got its own set of primary problems, and if they feel that shadow banking is a secondary problem that makes their primary problem worse, then their position is somewhat reasonable. It’s a matter of degree though.

The IMF is a little bit scary, as far as bureaucracies go. It was created (as part of the Bretton Woods system) as an independent international organization to help countries maintain fixed exchange rates with each other by offering financial aid when some countries got into short term exchange rate trouble. It was sort of like a credit union for countries: everyone contributed money all the time, and out of those pooled funds big loans were made occasionally to those countries that were in need.

And when the Bretton Woods system started to break down in the 1970’s, the IMF lost its reason for existence, and withered away. NOT!

So the IMF is definitely a bureaucracy that has evolved to find new roles for itself. That’s just great: bureaucrats who don’t really report to anyone, in search of problems to address. Having said that, the IMF is staffed by bright people, tends to be a fairly low corruption organization, and has tried to be helpful. This is why they’re involved with the Greek financial crisis: they have expertise, some money of their own, and they aren’t seen as a bigger country bullying a smaller one.

But now they’re worried about shadow banking. Why is that so?

Well, why is anyone interested in putting their money into a shadow bank in the first place? Probably because they offer a better risk for return tradeoff, or a risk for return tradeoff that they can’t get from banks.

Gee … d’ya think that’s because they aren’t regulated like banks? Or maybe that bank customers are the “dumb” money, and shadow bank customers are the “smart” money?

Now I start to get worried a little bit. I worry because the regulators regulate banks, and if they call something that isn’t a bank a bank, it’s because they want to regulate it too. And then they put the modifier “shadow” on the front of it. That’s not exactly a positive adjective in most cases. If they called them super-terrific-happy-banks, and then wanted to regulate them, I wouldn’t be so suspicious.

I also wonder if this is productive in the long-run. If my supposition is correct — that people are doing shadow banking instead of banking because their investments do better — then regulation that pushes shadow banks to behave more like banks will just lead to the creation of a shadow-shadow banking system that perpetuates the problem. This is what I’ve referred to elsewhere in this blog (and in class) as the water balloon problem: you squeeze one end and it bulges at the other.


OK. But maybe the IMF has other problems. In particular, the mobility of capital is creating problems for the maintenance of exchange rates at reasonable levels. This is a problem both for depreciating currencies, like the Euro, and for appreciating currencies — like the (American) dollar, and the Swiss Franc. The reason for this instability is primarily the inability of some countries to practice reasonable fiscal policy, but secondary to that is the ease with which smart money can move out of the bad places and towards the better places. To play the devil’s advocate, the IMF has to make a cost-benefit analysis of dealing with future financial crises vs. discouraging shadow banking, and reasonable people may view the latter as the better option.

Greece Gets the Message

(Just about) every country pays back the IMF. This morning, Greece made a full payment, on time, to the IMF.

Here’s a screen capture of the interactive chart from the article:

15-04-09, WSJ, Greece's Debt Due Dates

This chart is a bit odd: the month is actually to the left of its label. So, April starts with the tick mark above March and goes to the tick mark above April. So, today’s payment on April 9 has already been completed and removed from the chart.

The next two payments are to the holders of Greece’s treasury bills. This is mostly Greek banks, and can probably be paid by rolling them over with new treasury bills.

The next serious deadline is the orange bar on May 11. This is also to the IMF, and is about 70% larger than the payment made today. The four payments due a month after that, are collectively, about twice the size of that payment due in May.

Sunday, April 5, 2015

That Pesky Minimum Wage Increase Issue

Progressives are convinced that raising the minimum wage is a net benefit to society. Conservatives are sure that it is not.

Conservatives need to get a clue, tone down the rhetoric a bit, and at least be more open-minded. Yes, the theory is on your side. But the data … well … not so much.

This is really a question about the elasticity of employment with respect to minimum wage changes. That’s a measurable thing.

And it’s been measured a lot.

So much so that anyone can pick and choose the value of that estimate that they prefer: if you want a certain number … it’s out there.

Now, there’s this statistical technique called meta-analysis. In short, it means that you put together everyone else’s results, and then treat those as a new data set … so that you can talk about the distribution and accuracy of the results.

One way to look at the is with something called a funnel graph. This shows the point estimate of the effect on the horizontal axis, and the accuracy of the effect on the vertical axis (higher is sharper). Here’s it is for over a thousand minimum wage studies:


(If you really need to know what the red line means, you can go read this post from Menzie Chen at Econbrowser, but I’m not worried about it if you’re not).

This does show a predominantly negative effect: the peak of the distribution is just left of zero. So the conservatives are right. The thing is, the progressives are right too: the effect is in the “so what, who cares” range.

Let’s assume that the elasticity is –0.1 for the sake of an example. This means that a 30% increase in the minimum wage (which is about what’s on the table nationally) will lead to a 3% reduction in minimum wage hours. That’s not much.

To put that in perspective, consider a place with 20 minimum wage workers. Doubling their wage would lead to a 10% drop in employment, so 2 of those workers would get fired. That’s a tragedy for those individuals, no doubt. But think about it: what would minimum wage workers say to a lottery in which they had a 90% chance of doubling their income, versus a 10% chance of losing their job. I think they’d take that gamble.

Thinking About Being a Professor? (Not Required)

Some students are interested in becoming professors. Here’s a little video about what you should be thinking about while you’re still an undergraduate.

BTW: I think this is especially useful for students thinking about going into fields other than economics or business.

FWIW: This video really doesn’t apply to the MBA and MAcc (which are the graduate programs we have in SUU’s School of Business). But there is one salient point in the video for SUU students considering those programs: don’t go to graduate school to avoid getting on with your life.

FYI: If you’re interested in perhaps getting a Ph.D. in economics or finance, feel free to come talk to me. Before coming to SUU I taught for 8 years in a program that granted Ph.D.’s, taught about 25 Ph.D. classes, sat on about a dozen dissertation committees (including being the primary advisor on two of them), and eventually ended up directing the whole program. I’m not tooting my own horn here (who needs the extra work, right): if you need info there are zero people with more experience about this at SUU. Zero.

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Friday, April 3, 2015

What Does Bank Nationalization Mean?

Greece is threatening to nationalize its banks. What does that mean?

Nationalization isn't a common word any more. It started to fade out in the 80's when it became clear that capitalist countries were finally pulling away from more left-wing economies.

Nationalization goes back to the whole communist "the workers will control the means of production" thingie. Of course, in practice this meant the government ran the "firms".

This was a fairly common form of communism-lite as practiced by socialists and social democrats around the world. The U.S. even got into the act a few times: Amtrak is our nationalized passenger rail service (don't knock it: it loses money just like the private railways did until they couldn't afford to lose more money on that product).

But Greece doesn't want to nationalize the trains, they want to nationalize banks this time ... and in response to a financial crisis. What's up with that?

First off, Greece is still part of the Eurozone, so the (still) private banks are all working with Euros that can be spent anywhere in the Eurozone.

Secondly, banks are a little different from other firms. Think about the balance sheet of a firm: assets = liabilities + net worth. For most productive firms, the liabilities are paper financial contracts (debt) and the assets are physical stuff. You''d think it was pretty weird if the debt of a productive firm looked like its assets: imagine opening your own pizzeria and going out and borrowing the actual ovens, tables, and a building (and having to make interest payments in the same stuff) ... that would be weird. But that's kind of what banks are like: their liabilities are the deposits of their depositors (basically loans to the bank), and their assets are loans.

So a bank is more like a consignment store (you know, the places that sell your used clothes on your behalf, in exchange for a cut of the proceeds). Except that they're a consignment store for your cash. The big difference is that your used cash is a lot more liquid than your used clothes; in the sense that liquidity is about your ability to rapidly convert your wealth into purchases ... cash is more liquid than just about anything else.

The other detail that's important about Greek banks is that a large and growing part of their assets is those short-term treasury bills that they've been buying to be supportive of the Greek government.

Given all this, here's what the Greek nationalization strategy would look like:

  • Introduce a new currency (journalists currently label this "the drachma" because that's the name of the currency Greece had before it joined the Eurozone)
  • Nationalize the banks
  • Steal all the equity (there may not actually be much equity in the Greek banks to take, so "steal" is a bit harsh)
  • Refuse to do any transactions in which money exits the bank (like new loans) in Euros. Instead, require that borrowers accept the new drachmas. 
  • Accept any transactions in which money enter the bank (like loan payments and deposits) to be in either drachmas or Euros.
  • Smile nicely when someone comes in to exchange their Euros for drachmas (while away from the bank you are leaning on every business in the private sector to stop taking Euros). 
  • Keep all the Euros that the new-ish banks accumulate and use them to pay the interest on the treasury bills, so the Euros end up in the hands of the government.
  • Use those Euros to pay off the IMF and other creditors.
Obviously, this is a scheme that will work. Of course, it's pretty clearly unethical too.

Why would the Greek government do this? I think that's easy: 1) because they can, and 2) because they need to.

We could debate a lot about why Greece would "need to" do this thing that other governments don't, but let's just leave it at face value: we already know Greece is in a situation that other countries are not.

Why would the public put up with this? I think that's a good question. First off ... the public almost always puts up with nonsense like this. Everyone wants to believe that the government is doing its best for them. Secondly, I think too few people actually understand how business and finance work. If the axioms that guide your life include 1) rich people exploit poor people, 2) it's always someone else's fault, and 3) you don't readily distinguish revenue and profit ... then concluding that you're not responsible when you take the big pile of cash because it belongs to some faceless rich guy makes a lot of sense.

Greece: A Six Week Checkup

It’s been nice not to have to think about Greece for a while. Time’s up!

Remember when they signed that deal back in February that there were other deadlines to worry about?

Greece no longer has enough money to pay the IMF €458m on April 9 and also to cover payments for salaries and social security on April 14, unless the eurozone agrees to disburse the next tranche of its interim bail-out deal in time.

To the Greek government, it’s still all about … themselves:

The view in Athens is that the EU creditor powers have yet to grasp that the political landscape has changed dramatically since the election of Syriza in January and that they will have to make real concessions if they wish to prevent a disastrous rupture of monetary union, an outcome they have ruled out repeatedly as unthinkable. [emphasis is original]

“They want to put us through the ritual of humiliation and force us into sequestration. They are trying to put us in a position where we either have to default to our own people or sign up to a deal that is politically toxic for us. If that is their objective, they will have to do it without us,” the source said.

You gotta’ wonder when they use a word like sequestration. Just about no one knows what that means who speaks English. But they’re using it here like it’s a swear word.

Oh, and remember that no one defaults on IMF loans:

Going into arrears at the IMF – even for a few days – is an extremely risky strategy.No developed country has ever defaulted to the Bretton Woods institutions. While there would be a grace period of six weeks before the IMF board declared Greece to be in technical default … [emphasis is original]

Perhaps the problem is the people around the world who choose to label Greece as a developed country. It isn’t. Instead, it is a less-developed country that belongs to a club with other developed countries. I don’t want to offend anyone, but perhaps when the rich kids ask a token poor kid to party with them they shouldn’t expect them to be able to make it work financially.

Here’s the rumor:

“We will shut down the banks and nationalise them, and then issue IOUs if we have to, and we all know what this means. What we will not do is become a protectorate of the EU,” said one source.

As usual, there are enablers:

Eurozone creditors may be willing to release enough funds to cover Greece’s government costs on April 14, but only if Syriza pays the IMF first.

We’re back to listening to the client warnings coming out of financial institutions that have to handle international transactions:

Bank of America warned that a “critical sequence of events could unfold” once Greece misses a payment to the IMF. It would trigger a parallel default to the eurozone bail-out fund (EFSF) under the legal master agreement, and might force the EFSF to cancel its loan packages and demand immediate repayment. This in turn would trigger a default on Greek government bonds issued under the bail-out accord.

The situation is now critical. Even if Greece manages to cobble together enough money to cover the April deadline, it owes the IMF a further €200m on May 1 and €763m on May 12. A Greek official told EMU counterparts at a teleconference on Wednesday that the country has run out of money. "There is no way we can go beyond April 9," the official reportedly said.

The drama comes after the creditors refused to rubber stamp Athens' latest bid to unlock funds, raising objections over Syriza plans to boost union powers in collective bargaining and boost pensions for lower income groups.

Brussels continues to insist on more concrete pledges, despite receiving a 26-page list of reforms on Wednesday.

Former European Commission head Jose Manuel Barroso warned Greece that they have a moral obligation to other states, describing the demands for more time and money as "completely unacceptable".

“We should remember that there are poorer countries that are lending money to Greece, so to propose a cut to their debt would be certain to receive a no from their partners," he said.

You can read the whole thing, entitled “Greece draws up drachma plans, prepares to miss IMF payment” in The Telegraph. There’s a useful timeline at the bottom of the article (although, gee whiz, you’d thikn they’d include the other 2 IMF deadlines from a few paragraphs up).

Thursday, April 2, 2015

Strategies Regarding Greece (Not Required)

I know I made you read a lot about Greece. And I know it’s pretty boring a lot of the time (it bores me too). But … like spoiled teenagers … Greeks were the ones that decided that other people need to pay more attention to them.

Anyway, I read a piece about this year’s Greek crisis that interested me more than others. It appeared in the March 30 issue of The Wall Street Journal and was entitled “Greece’s Fate Lies in Athens’ Hands, Not Berlin’s”.

What I liked about this was the non-judgmental way it discussed the strategies and realities of all sides. Here are some excerpts:

One of the Greek government’s biggest mistakes …has been to assume that its fate lay in German hands. …

… Prime Minister Alexis Tsipras believed that Greece’s fortunes hinged on a “political deal” that pitched Athens against Berlin. … German Chancellor Angela Merkel tried to convince Mr. Tsipras that he was wrong: he had overestimated Germany’s power and underestimated the importance of respecting eurozone rules and processes. …

But Berlin is adamant that it cannot deliver what Athens has been effectively demanding: unconditional loans. For Germany, it is a vital legal principle that the deal struck by the previous Greek government … remains a continuing obligation of the Greek state. …

Of course, Athens is entitled to seek changes to its bailout program, but it needs the agreement of all the other 18 members of the Eurogroup, not just Germany. …

Besides, finance ministers have delegated the task of designing and evaluating bailouts to the institutions formerly known as the troika … it avoids the politically toxic situation where one government sits in judgment on the policies of another …

In Berlin—and across the eurozone—there is frustration that Athens spent two months challenging the process, rather than working on the substance …

… What remains nonnegotiable is that Athens’s proposals must be fully evaluated by the institutions, a program agreed and some reforms implemented before any cash can be disbursed.

… Athens has received little sympathy from Berlin over its warnings that it is running out of cash … officials note that the date on which Athens says it will run out of money keeps changing. …

… There are some signs this pressure is working. Eurozone officials say … there has been constructive engagement between Athens and the institutions. … Though details remain … technical teams are still hampered by the refusal of Athens to allow them to talk directly to ministers …

What is clear is that the decisive moves in this saga will be made in Athens, not Berlin. Mr. Tsipras campaigned on a promise to keep Greece in the euro but also to change the eurozone. Now it is clear he cannot do both …

BTW: the author also notes that we’re not supposed to call it The Troika any more:

[Greece] refused to deal with the “troika” … — comprising the European Commission, the European Central Bank and the International Monetary Fund — since renamed “the institutions,” now known as “the Brussels Group.” It was reluctant even to negotiate with the Eurogroup of European finance ministers …

Taxing Consumption Instead of Income

The political winds in the U.S. may favor a shift towards taxing consumption more and income less. We are out of step with the OECD on this:

15-03-30, WSJ, Tax Patterns of the US and the OECD

Taxing consumption is generally preferred to taxing income by most economists. The reason is that income is spent on either consumption or income. So in some sense we are already taxing consumption at the same rate that we tax income. The difference is that when we tax income we tax savings too.

Taxing saving is probably not the best idea if you’re interested in improving well-being. Improved well-being comes from utilizing more capital, and saving is how we pay for that. Further, technological improvements allow us to control more pieces of capital, so that technological growth means we need more capital, not less.*

Skim the whole thing, entitled “Tax Proposals Would Move U.S. Closer to Global Norm” from the March 30 issue of The Wall Street Journal. (Do note that I said “skim” rather than “read”, indicating that I think this topic is a bit less important than others).

* This is part of the reason that, say, repairing cars is more expensive than it used to be. Technology has allowed cars to contain more pieces of capital that are controlled by the driver (and sometimes by passengers). More capital in your car makes spending time in the car less boring … but it also means more things that can go wrong.

Addendum to the Quodlibet (Not Required)

We already covered DH's question in this class's quodlibet (normally I keep them separate, but in this case I've pasted the question and my response to it from the G drive into the bottom of this post). Since that question was already tested on Exam 2, this post won't be required for other tests.

Anyway, I saw an interesting follow-up about this today on Quora. In particular, I like the answer from Alex Tabarrok, which is currently the top vote-getter.

The question was about whether they taught neo-classical economics in the Soviet Union. Tabarrok's answer points out that the Soviets assigned a mathematician to work out production planning for a plywood factory. That mathematician was Leonid Kantorovich, and in that work he (independently of others) developed parts of what we now call linear programming (which Kim Craft does in Decision Modeling, ECON 3170, and which I do for MBA's in Spreadsheet Engineering Craft, ECON 6100).

The thing is, he noticed that the answers he got from his new technique of linear programming ended up looking a lot like what the neo-classical economists were getting by coming at the problems from a completely different direction. It's not foolproof, but if you have two different fields converging on the same answers, it's a probable indicator that you're on the right track. Of course, it was a problem for the Marxists in the Soviet Union that Kantorovich's work didn't align with their theory. Kantorovich got a Nobel Prize in 1975.

P.S. During the exam I flashed that April Fool's joke on the screen. That post I was reading broadly relates to these topics. It had some interesting thoughts about the faults of Marx and Marxism from a non-economist.
If you admit that, [after the revolution envisioned by Marxists] capitalists having disappeared, there’s still going to be competition, positive and negative sum games, free rider problems, tragedies of the commons, and all the rest, then you’ve got to invent a system that solves all of those issues better than capitalism does. That seems to be the real challenge Marxist intellectuals should be setting themselves, and I hope to eventually discover some who have good answers to it. But at least from the little I learned from Singer, I see no reason to believe Marx had the clarity of thought to even understand the question.
FWIW, neo-classical economics gives pretty good answers to all of those, which supports my contention in the quodlibet pasted below.


In class the suggestion was made that macroeconomics has been shifting back slowly towards classical economics. What has led to this occurrence?

I give up: I can’t find the answer I wrote to this question. So here’s attempt # 2.

Yes, macroeconomics has shifted back towards the classical viewpoint over the last few decades. More generally, economics has as well.

Would it be fair to say that this is because that viewpoint has been ridiculously successful, or would that make me look biased?

One big overarching reason for this shift is that since from the mid 19th century, Marxism was “the wave of the future”. It’s really only the last 30 years or so that this wave has receded. And obviously it hasn’t done that yet in some fields. So any movement back towards the classical view is a movement away from that predominant tide. And don’t forget that many people consider the Keynesian macro we’ve moved away from a form of “Marxism Lite”.

What we now think of as economics was barely a field when Marx was writing. The outstanding problem then was understanding how values for items came to be. Marx’s idea was the labor theory of value. This has some superficial plausibility; and you need to remember that Marx was pushing the frontier with this. That theory had problems, and economists’ response to that was to back out of that branch of thinking and go in a new direction. Just about of all of what we think of as economics today follows that new branch (through the marginal revolution that solved the diamonds vs. water paradox). Non-economists latched on to the superficial appeal of Marx’s labor theory of value and are still holding on. We call that new branch the neoclassical paradigm: it’s all about optimal behavior, the importance of marginal thinking, and rationality.

The thing is, economics spent about a century trying to figure out how to test the implications of the neoclassical paradigm. Think about it: we didn’t have supply and demand in a formal textbook before Marshall in 1890, and we couldn’t even estimate supply and demand until the mid 1950’s. Keynes had split macro off from the rest of economics (now called micro) in 1935, so there were a lot of problems there that needed to thought through too: the Keynesian model is inconsistent with the neoclassical paradigm in a number of important ways (just that consumption depends on current income to begin with).

In the mid-1960’s, first Edmund Phelps (Nobel Prize in 2006) and then Milton Friedman (Nobel Prize in 1976) started pointing out that if we’re going to take the neoclassical paradigm seriously, then most of Keynesian macro had been just a wild goose chase.

What we’ve seen since then is a pretty much consistent string of intellectual victories of the neoclassical paradigm over both the Keynesian theory and Marxist positions. Most of those have confirmed the classical viewpoints, thus the sense that there’s been a return to those positions. But it’s also true that many politically progressive economists have used neoclassical techniques to address problems that the classical economists never conceived of (e.g., Akerlof’s 2001 Nobel Prize for his theory markets for lemons).

This has not generally made economists very popular in academia. Almost all of this shift back towards classical viewpoints (now call new classical as opposed to neoclassical) has either led to more politically conservative viewpoints (e.g., that policy should follow rules rather than discretion, first set forth by Kydland and Prescott who won their Nobel Prize in 2004), or has been interpreted as supporting politically conservative viewpoints (e.g., the idea that raising the minimum wage hurts more than it helps). Think about it: Larry Summers, an economist operating completely within the neoclassical paradigm, and solidly progressive enough to serve in Clinton’s cabinet, and Obama’s White House … was considered too conservative by the faculty of Harvard, and lost a no confidence vote as that university’s president. If you need a second example, Greg Mankiw, who essentially single-handedly founded the strain of literature called New Keynesian with a paper he wrote as an undergraduate (!!!) is regarded as so conservative by people outside economics that his class was boycotted as part of the Occupy Wall Street movement a few years back.