Sovereign Risk Chart

The Globe and Mail¹ offers a heat chart of sovereign risk² across six categories, and ranked across their average (scroll down to find it). It is sourced to the Royal Bank of Canada.

The U.S. ranks well on government spending – which isn’t something you’ll hear pundits say. Not surprisingly, we rank poorly on fiscal and structural balance.

1 This is a nationally available newspaper published in Toronto: Canada’s equivalent to The New York Times.

2 Sovereign risk refers to default by a country. In the old days, the sovereign was the individual member of the royalty in charge, and at that time bankruptcy on their part was equivalent to bankruptcy of the entire government.

WTF

Here’s a new government policy!

Instead of helping new businesses start, why don’t we just create facades for imaginary businesses?

It’s hard to believe, but this is actually a municipal policy in North Tyneside – an urban area in northeastern England.

Healthcare

David Cutler – the Democratically-oriented expert on the healthcare bill lists the 10 ways that it can save money:

Over the past year of debate, 10 broad ideas have been offered for bending the health-care cost curve. The Democrats' proposed legislation incorporates virtually every one of them.

Why is reform viewed so negatively? In part, it may reflect the perfect being the enemy of the good. …

Reform is also viewed negatively because official scorekeepers do not believe anything on this …

Of course, no one knows precisely how much medical spending increases will moderate. But one cannot doubt the commitment to try. What is on the table is the most significant action on medical spending ever proposed in the United States. Should we really walk away from that?

David Brooks – a political columnist at The New York Times, and a conservative one at that, on all the (7 !!!)fudges that went into it.

The Democrats have not been completely irresponsible. It’s just that as the health fight has gone on, their passion for coverage has swamped their less visceral commitment to reducing debt. The result is a bill that is fundamentally imbalanced.

David Leonhardt, an economic columnist at The New York Times, and of a liberal disposition, opines that we may as well run with this because the alternative is worse.

I see only two good options for anyone who wants to be fiscally conservative.

The first is to say we cannot afford to cover the uninsured. …

The second option is to say that expanding insurance would bring enormous benefits.

Megan McArdle, a sometimes progressive, always libertarian columnist at The Atlantic thinks the whole issue has too much levity:

… Why can't fiscal conservatives say that if we want to have the entitlement, we should first make sure the cuts we're proposing work?  Why can't they say that we can't afford this particular expansion, and that it's time to go back to the drawing board?  "The fierce urgency of now" is obviously totally compelling to those who think nothing can go wrong, but for the rest of us, it's not a good reason to commit ourselves to a very risky course of action.

The Production Function for Ideas

After class last week, Ammon and a few others were talking about whether idea creation – which we haven’t included in our growth models yet – might have increasing returns to scale.

Think for a little bit now about how quickly ideas evolve once we figure out an algorithm to digitize them …

What was the latest thing to completely blow your mind? For me, it was getting lost in a small city in Iowa this past summer, and not being able to get directions from my cellphone without having an accident. So, I tossed the phone on the floor to concentrate on the street signs, and a few seconds later my phone told me to turn left in 3 blocks. It wasn’t so much that it could give me directions that surprised me, it was this it troubleshot its user.

So consider this from Kottke:

One afternoon … Cope clicked a button and went out for a sandwich, and [his program] spit out 5,000 beautiful, artificial Bach chorales, work that would've taken him several lifetimes to produce by hand.

What will happen to growth rates if the creation of ideas does in fact have increasing-returns-to-scale?

Matched Pairs, Financial Crises, Housing Bubbles, and the Great Recession

Dean Baker* points out that Spain did not have a financial crisis, but it had a housing crisis and a recession arguably worse than most developed countries.

Food for thought: from this he concludes that housing, not finance, is the source of the trouble.

This is consistent with the post by Krugman from a month or so ago – he asserted that Canada got off mildly because it did not have a financial crisis, but interestingly, it didn’t have much of a housing boom either.

But, this is inconsistent with what I pointed out in class that there are lots of states that have floated through this recession, most of which did not have a housing crisis.

*Newspapers in Europe are far more politically biased than those in the U.S. The Guardian is known as a left-center newspaper.

Measuring the Effects of the Stimulus Package

I fall on the Econobrowser side of this debate, but as I’ve said in class, I’ve been moving towards the Cafe Hayek view for about 20 years.

Anyway, Menzie Chinn (a big name macroeconometrician) of Econobrowser says that the CBO estimates of the effects of the stimulus package are believable.

Russ Roberts, a non-macroeconomist and non-econometrician of Cafe Hayek fires back:

I’m skeptical on logical grounds but I confess that I do not have strong empirical evidence on my side.

… The CBO “estimates” are not an analysis of what the stimulus actually did but rather what some predicted it would do. [emphasis added]

Chinn responds:

Yesterday, I had a headache. I took a couple tablets of aspirin. (Actually, it was ibuprofen, but the point remains.) My headache subsequently disappeared. I have no direct empirical evidence that the headache disappeared as a consequence of the aspirin, but I have a plethora of studies that suggest that aspirin (or ibuprofen in this case) can relieve headaches.

As the foregoing example suggests, it does seem to me there is empirical evidence. It's just not the direct sort Professor Roberts desires.

Roberts comes back with another analogy:

That brings me to my second point that seems to be difficult to make clear. The CBO estimates are not estimates. They are forecasts based on previous estimates. They are akin to a golfer who is 150 yards from the flag and asks his caddy for advice on what club to use. The caddy knows that in the past, the golfer has averaged about 150 yards with a 7-iron, so he takes one out of the bag and hands it to the golfer. The golfer swings. He can’t see the green—it’s obscured by trees. The golfer asks the caddy to estimate how far his shot landed from the hole. If the caddy replies that he estimates without looking that the ball is surely within a few feet of the hole because the average 7 iron goes 150 yards when this golfer uses a 7-iron, you don’t call that an estimate. It’s a hope. An expectation. And it might be true. But it’s not an estimate. No caddy would say such a thing. He would wait till he could see where the ball actually ended up.

Surely where the ball goes depends on the execution of this particular swing. The wind. The humidity. How much sleep the golfer got the night before. And so on. Doesn’t the impact of ARRA depend on how it’s structured, who gets the money, the mood of the country, the expectations of increases in future taxes and so on? Yes, these things are hard to measure. So is the mood of the golfer and the angle of club as it strikes the ball. But that’s why the caddy looks and sees where the ball is. Even if the stroke appears to  be well-executed, his ex ante prediction of 150 yards can be way off. That’s why he looks.

In economics, we can’t look. We can’t say that because unemployment remains high the stimulus failed. We can’t say that because GDP grew a lot, the stimulus was a success. We understand there is other stuff going on. But if we can’t control for that stuff, then how can we know (or even estimate reliably) the effect of the stimulus?

What’s the takeaway from all this supposed to be? Reasonable economists disagree over whether the numbers produced are meaningful. You never hear this coming out of Washington – the politicians and bureaucrats use these numbers as facts, and then can’t figure out why their policies don’t do what they expect them to.

More On African Growth

Alwyn Young, another big name in the growth literature, has new estimates of economic growth for sub-Saharan Africa, and also reports that per capita real growth has been strong – 3.3% on average – since 1990. Using the Rule of 72, that implies a doubling of living standards in those 20 years.