Mideast Tragicomedy: Iraq's '$4B Bailout' of Egypt

It is no big secret that Egypt has been scrounging around the Middle East for emergency funding insofar as it has been unable to conclude an IMF deal. Famously, mercurial Qatar has stepped into the breach, but has been unwilling to extend more money as of late. More good money after bad and all that jazz. We can only presume it too would welcome (surprise!) an IMF deal that would indicate that Egypt is truly committed to shaping up even if there will be turmoil over conditionalities that involve, among other things, trimming healthy food and energy subsidies at a time of crisis.

Nevertheless, this one took me by surprise. So Iraq has energy revenues that Egypt practically has none of. Still, the near-civil war situation in Iraq among Shia, Sunni and Kurdish factions doesn't strike me as a particularly stable status quo: Apropos for the season, if Iraq can't save itself, how can it save others? Hard as it may be to fathom, though, talks are ongoing between Iraq and Egypt over some emergency funding. From al-Arabiya:

An Iraqi official says Baghdad has rejected a request from Egypt for a $4 billion bond to be deposited in Egypt’s central bank to bolster its faltering economy. The official said on Friday that it’s "too risky" to deposit such a large sum in Egypt but that talks are continuing for a smaller amount. The official didn’t elaborate. He spoke on condition of anonymity because he wasn’t authorized to talk to the media. In Egypt, the presidency’s media office confirmed in a statement to The Associated Press that discussions with Iraq are ongoing. Egypt’s planning minister, Ashraf el-Araby, visited Iraq this week...

Egypt has sought help from several oil-wealthy Arab countries after the central bank’s foreign currency reserves have tumbled to $13.5 billion as an aftermath of Hosni Mubarak’s 2011 ouster, covering little more than two months’ imports, as tourism and investment have diminished. So the central bank is rationing U.S. dollar supplies in auctions, making it hard for firms to get hold of dollars through the banking system.

It is not yet clear how much imports have been hit by the hard currency shortage, which has become more serious in the last three months. According to the most recent official data, imports rose to $16.4 billion in the final three months of 2012 from $14.6 billion a year earlier, but the increase was essentially due to higher costs for importing energy.

Given these factoids, I'd think that reduced-price guarantees for oil imports should be what Egypt seeks instead of stopgap funding to tide them over to whenever the IMF finally inks a deal with the Muslim Brotherhood. If it (sort of) works for Cuba with regard to Venezuela, what more Egypt and its near-neighbours?

The Long-run Budget Path

Click here to read my column in Sunday's NY Times.

Yale Journal of Economics

Students at Yale have started a new journal, called the Yale Journal of Economics, which aims to publish the best undergraduate papers, not just from Yale, but from any school. Click on the link to read the first issue or to find out how to submit.  The editors hope professors will encourage their students who write noteworthy papers to send them in.

Yesterday, I had the pleasure of being the featured speaker at the event where the inaugural issue was released.  Below is a picture of me with the new journal's editorial board after a dinner at Mory's, the classic Yale eating establishment.

Greening the tax system works

It has been some time that I have not mentioned the virtues of greening the tax system. By that I mean levying taxes on activities that exert negative externalities on others, such as pollution or congestion, while reducing standard taxes such as the income tax and even subsidizing activities that have a positive externality, such as getting educated. Yet, despite that great virtues of greening the tax system, it happens only moderately. Maybe it is because it bears some short-term costs before yielding longer term benefits.

Walid Oueslati confirms this using an endogenous growth model. In the long run, growth and welfare are indeed enhanced by environmental taxes if the proceeds are used to reduce wages taxes (but not capital taxes, a surprise given the optimal capital tax literature). In the short run, however, the impact on both can be negative due to the reallocation of factors during the transition to the new steady state. These disruption are similar to the sort-term costs of freeing up international trade. If you add it some temporary transfers to those who suffer in the transition, all is good and current opponents trying to protect some rents should be willing to go along. So, what are we waiting for?

PS: This must be the worst-looking working paper cover I have seen so far. The abstract is unreadable. Why this choice of colors?

Is money a factor of production?

An easy trick question to ask students about factors of production is whether money is one. Of course it is not, unless you consider burning it to fuel an oven. A factor of production is an input to the production process, such as capital, labor, raw materials, energy, etc. Money is only a facilitator in the acquisition of those goods. And if money or credit are constraining production, this belongs in a separate constraint, not in the production function.

Why do I mention this? Because money is occasionally put in a production function, and Jonathan Benchimol makes it even the focus and title of his paper. Why does he do that? He wants to estimate a New-Keynesian model and see whether money would matter in such a way. It does not. But who could really blame him for trying, as these models either have money in the utility function (few people enjoy money per se, most people enjoy what you can do with it, and that is already in the utility function) or no money at all (at still manage to draw lessons for monetary policy). In the kingdom of the blind men, those who are blessed with one eye are kings.

What is the purpose of insurance?

A friend points me to this passage:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."

I have the same problem with my other insurance policies.  My homeowner insurance doesn't cover the cost when my gutters need cleaning, and my car insurance doesn't cover the cost when I need to fill the tank with gas. Instead, the policies cover only catastrophic events, like my house burning down or a major accident. Now that the Obama administration has fixed the health insurance system, I trust they will soon move on to solve these other problems.

Reduce inequality by increasing the number of school days

Some children have the bad luck to be born in a poor environment or a dysfunctional family. For them, school is the great equalizer that gives them a chance to still make in reasonably well in life. That works only if they can be in school and out of bad influence long enough (the "incarceration" hypothesis). Unfortunately, in areas where there are few school days and where especially the Summer break is long, all the good work is easily undone. In particular where there is inequality, we see the richer kids go to Summer camps to reinforce what they learned or learn some more, while the poor ones linger at home and forget a year's worth of school.

It is thus not surprising to see that Daiji Kawaguchi finds that fewer school days leads to more inequality. He looks at the 2002 school reform in Japan that abolished school on Saturdays. Comparing time diaries and test scores of students before and after the reform, he finds a dramatic change in the distribution. Students after the reform studied one third less at home, and the decline was even steeper in poor households. The impact on test scores is that the slope against socio-economic factors becomes 20-30% steeper. This is just from removing two half days of school a month. I wonder how this would translate in an international comparison where the school year ranges from 180 days in the US and France to 220 days in South Korea.

Finger length and altruism

Social scientists interested in the biological origins of human behavior have a strange obsession with finger length, and specifically with the ratio of second to fourth digit. Indeed, this ratio is an indicator to exposure to some hormones as an embryo, and any relation between this ratio and behavioral traits is a good hint that one is born with some behavioral variation. I have reported previously about entrepreneurship and risk taking in this regard, now it the turn of altruism.

Pablo Brañas-Garza, Jaromír Kovarík and Levent Neyse find that people with particularly high or low ratios are less altruistic than the norm. So, it seems that maximizing altruism is a delicate biological process, and that altruism is at least in part determined before birth. I am not sure where this paper leads us to next.

Natural disasters and economic growth

Recently, I discussed how being in a disaster-prone area may have consequences for economic growth and the ensuing costs from calamities. This discussion was largely theoretical, but there are some empirical papers out there that can provide some good insights.

Pelle Ahlerup is the author of the latest one, and he finds that natural disasters have a positive impact on growth, and this result is largely driven by humanitarian aid. Does this mean we should wish for more disasters? Of course not, because just looking at economic growth is the wrong welfare measure. After all, a disaster leads to the destruction of life or goods, and the ensuing economic effort is replacing this loss. That effort could have been used for better purposes without the disaster. What is more interesting in the paper is that the impact on growth lasts well into the long run, beyond repairing the damage. This is where humanitarian aid comes in, as it may have helped give the economy the spark it needed to get back on rails. One can imagine that this could be associated with some foreign direct investment, or positive experience for foreign investors, or some long-term development project to prevent the consequences of such disasters in the future. Haiti comes to mind here. The fact that disaster have no impact on growth in developed economies reinforces my hpothesis.

Island Lovin': Chasing Revenue in Cyprus, Falklands

No pina coladas for you I'm afraid. On today's blogging menu are--can you believe it--tax cheats and squid. In the past I've enumerated the generic ways island nations or protectorates generate revenues:

1. tourism
2. tax havens (paradis fiscaux)
3. offshore gambling sites
4. flags of convenience
5. nationality for sale

How it managed to get into the EU despite unresolved conflicts between its Greek and Turkish parts aside, there is not much of a mystery about what is happening in Cyprus. Like that of Greece which it highly resembles, Cyprus has few competitive advantages. What's more, after the global financial crisis, it has not been able to take much advantage of traditional revenue-generating measures listed above. End result? Ho-hum, another Eurozone banking crisis.

What is notable here however is the EU's apparent willingness to destroy a pillar of the Cypriot, erm, "economy": its status as a tax haven for wealthy Russians. Alike Iceland, the creation of an outsized financial industry relative to the "real" economy did not bode well when global economic conditions turned sour. Sure it does the touristy and shipping stuff as well, but its bread and butter has really been (dodgy?) finance. With the EU-IMF bailout in place, things will change drastically in this respect:

The overall impact will be a dramatic change for Cyprus’s economy. Over the past 30 years, since the fall of the Berlin Wall, the island has banked on its ability to attract money from Russia and elsewhere as an offshore center. Oversight has been tightened up since Cyprus joined the E.U. in 2004, but it remains relatively lax by international standards, and foreign companies pay a flat tax rate of just 10%. For a while the strategy seemed to work well; Cyprus built up a gargantuan banking industry, which is currently about five times the size of its total economy, according to Standard & Poor’s.

About one-third of the $88 billion in deposits in those banks are from Russians, who have increasingly used the island’s banking system as a tax-sheltered conduit for their financial transactions worldwide. Indeed, Cyprus shows up in international statistics as a huge investor in Russia itself, as a result of “round-tripping” by Russians who didn’t entrust their money to their own national banking system. According to European Central Bank statistics, more than 40% of the deposits in Cyprus banks are in excess of $650,000

Estimates vary as to the Russian portion of deposits in Cyprus; another source says it's more like 40% for a total of $32 billion. Whatever the source, the EU-IMF brokered deal is going to inflict a massive haircut on deposits over EUR 100,000 not covered by insurance since (a) the losers are not EU citizens anyway and (b) the European Union has been cracking down hard on tax havens anyway after the global financial crisis to shore up member states' revenue losses. There was some loose talk about how Russia might offer an alternative (read: more attractive) bailout package to the Cypriots, but it has not materialized.

So, to pile on more woes, Cyprus needs to find another way to make ends meet now that the EU has effectively scuttled its status as a tax haven.

---------------------------

Another island economy which is having some challenges making ends meet are the Falklands. Obviously, it does not have many natural trade partners in South America since it's not only the Argentines who regard its British rule as an imperial-era throwback but nearly everyone else in the Southern hemisphere. Apparently, the list I prepared above was incomplete since the Falklands have been relying on fishing licenses for squid for revenues:

Squid licenses have provided about half the Falklands government's revenues over the years, ever since it showed it meant business by chasing an unlicensed Vietnamese shrimper all the way to South African waters, and firing into its hull along the way.  

That said, the Falkands conflict has created difficulties for this potentially lucrative activity insofar as both the British and the Argentines are suffering from the presence of a huge flotilla of illegal fishing vessels in search of squid that is said to be of largely Chinese origin. And speaking of their conflict, Argentina's navy hasn't fully recovered from the Falklands War, making it even more difficult to deter poachers:

Argentina pulled out of a fisheries management organization it had shared with Falklands in 2005. The lack of cooperation has left both sides ill-equipped to deal with the fleet scooping up squid just beyond their maritime boundaries, and sometimes within. "It's like the Wild West out there," said Milko Schvartzman, who campaigns against overfishing for Greenpeace International. "There are more than 200 boats out there all the time," and many routinely follow squid into Argentina's economic exclusion zone, he added. "Unfortunately the Argentine government doesn't have the naval capacity to continually control this area."

The Falklands are defended by British warships, planes and submarines, giving the fisheries agency considerable muscle to enforce licenses in its waters. But Argentina's navy has never recovered from its 1982 war against Britain for the islands, and its coast guard has just eight ships to cover more than 1 million square miles (2,800,000 square kilometers) of ocean, said its chief of maritime traffic, Mario Farinon.

Farinon says the lack of seizures doesn't mean Argentina isn't trying. The coast guard always has at least one enforcement boat monitoring the squid fleet," he said, and "the important thing is not capturing them, but preventing them from coming in." Still, the problem is so big that it can be seen from space: Images of the Earth at night, taken by a NASA satellite last year, show darkness at sea the world over, except for this spot in the South Atlantic. There, 200 miles from the nearest coasts, the lights of this renegade fleet shine as brilliantly as a city.

As literally a common pool resource, both the Falklands and Argentina are harmed by the latter's inability to prevent overfishing as squid stocks diminish. After all, why pay for a fishing license what you can get for free in Argentina's supposed area of jurisdiction? It's interesting how formal Argentina-China economic cooperation in currencies is set against the backdrop of the latter being unwilling to discourage this kind of rampant poaching.

Make no mistake: island life ain't one of permanent vacation. Go ask the Cypriots or the Falklanders.

No Steenkin' Tourists Please, We're Saudi Arabia

 To be sure, Saudi Arabia has a unique tourist monopoly insofar as all Muslim men and women who can do so are obliged to visit Mecca during their lifetimes. Pilgrims aside, though, there is not really a Saudi "tourist" industry as we understand the term--especially for leisure travellers. The problem is especially acute for would-be Western tourists interested in the rich cultural heritage of Saudi Arabia. To be sure, Saudi Arabia is a hard sell for your typical freedom-loving Western traveller: No alcohol. Women of all religions are required to be covered nearly from head to toe despite the extreme heat. They cannot drive, either.

Even now, tourist visas to Saudi Arabia are next to non-existent for leisure travellers. Of course, with billions and billions of forex reserves, the kingdom is hardly lacking in cash that the likes of Egypt and Morocco desperately need to make their balance of payments, well, balance. So, it is no real surprise that reform of Saudi Arabian tourism is moving at a glacial pace given its political economy. That is, why upset the ultra-conservative Wahhabists or even tempt societal change by encouraging liberalization of social norms that are assumed to be necessary in attracting more (Western) tourists?

Things move slowly in Saudi Arabia. Prince Sultan launched the tourism commission in 2000. Nine years later he announced that Saudi Arabia would be issuing tourist visas in “the near future.” But, with $288 billion in oil revenues last year, it’s not like Saudi Arabia is desperate for foreign currency. There is much to take into consideration before the country opens its doors: What would the kingdom’s reactive religious conservatives say about an influx of infidels? Would Western women consent to wearing the floor-length black abaya and headscarf that is required of Saudi women? Would those women demand to drive their own rented cars — something Saudi women are not allowed to do? And how could the authorities protect tourists in a country still threatened by domestic terrorism? After all, a militant suspected of having ties to al-Qaeda assassinated four French visitors not far from Mada’in Saleh in 2007. Fears of cultural and political contagion, too, are rife: Western notions of individual freedoms could be intensely destabilizing for a country that has so far weathered the storms of the Arab Spring. While change is happening at an unprecedented rate inside the kingdom — just last month, women started serving on the closest thing the country has to a parliament — a flood of insensitive outsiders could force too much too quickly, provoking a vehement backlash from the country’s conservative core. It’s easier, and less risky, not to let anyone in at all. 

Oddly enough, the thrust of Saudi Arabia's tourist promotion is mainly domestic in keeping Saudi holidaymakers from going abroad as usual but to have a greater number do so at home:

Saudi Arabia may be shutting the door to foreign tourists, but it is still spending hundreds of millions of dollars to burnish the country’s cultural gems, in preparation for a different kind of visitor: Saudis themselves. Just outside of Riyadh, an army of workmen are putting the finishing touches on an ambitious restoration of Saudi Arabia’s first capital, the vast mud-brick city of Addiriyah, founded in 1740 by the first King Saud and the religious reformer Imam Mohammad Abdulwahab, father of the strictly back-to-basics Wahhabi Islam that dominates Saudi theology. Once completed, the site will house five museums, a heritage hotel, a handicraft market and a sound-and-light show. Elsewhere in the country, 25 archaeological teams are unearthing clues to Saudi Arabia’s pre-Islamic past, an undertaking once frowned upon by clerics who saw no need to study the dark days before the arrival of Islam. Prince Sultan has launched a heritage-hotel company in a joint venture with a local hospitality consortium, as well as a loan program for farmers to convert their holdings into rural inns. “Saudi Arabia is literally at the crossroads of the world’s great civilizations,” says Sultan. But it is the country’s vast wealth and oil wells, not its cultural heritage, that dominate the popular imagination. Sultan wants to change that. “Saudis are just starting to realize that with these heritage buildings and traditional villages they are sitting on a different kind of oil well.” 

Things are rather different there, as you would expect.

UPDATE: See the State Department's long list of none-too-subtle no-nos for travellers to Saudi Arabia. Leisure travel? Forget it.

Swagel on Scheiber

Phill Swagel reviews Escape Artists by Noam Scheiber on President Obama's first term. 

How life events shape risk aversion

After an accident or near-accident, we all tend to become more careful. One can attribute this to the realization that the odds of an accident are higher than we thought. But there may be more that just Bayesian updating, we may also become more risk averse with each such event in ways that also affect our tolerance for other risks. From an economic point of view, it is not well known how the aversion to financial risk is formed, and experience with adverse shocks of some sort may play here.

Alessandro Bucciol and Luca Zarri look at the US Health and Retirement Study, where risk aversion can be inferred from portfolio choices. They find that two life events matters significantly for the increase of risk aversion: the loss of a child and being in a natural disaster. Yet, I cannot help thinking that the result is not about risk aversion, but Bayesian updating for probabilities of rare events. While I have not suffered from such events, I have heard others say how they realized the value of life as they recovered from them. Are these statements of risk aversion or statements of how lucky they have been to survive and that they should revise the probabilities? When looking at portfolio choices, can these two be distinguished?

How much money laundering is there in Italy?

It is well known that the underground economy in Italy is substantial, and that an important share of this is due to illegal activity. Hence, there should be an important amount of money laundering going on, an amount that seems to be impossible to measure given that these activities precisely try not to get detected. But economists can be resourceful and try to pull it off, for example à la Steve Levitt.

Guerino Ardizzi, Carmelo Petraglia, Massimilano Piacenza, Friedrich Schneider and Gilberto Turati try to pull that off, reasoning that money laundering is performed by depositing cash, and that if there are more cash deposits in financial institutions of an Italian province where there is more activity from illegal syndicates, one should be able to back out how much of these deposits are due to money laundering. Concretely, they regress across provinces over four years cash deposits on a few controls, the number of detected extortion crimes and the number of drug dealing, prostitution and possession of stolen goods. One may have some qualms in using detected crimes, which may be a very poor proxy for actual crime, especially for a country that is so corrupt, but I suppose this is all we have. However, this regression assumes that those illegal syndicates stay within the confines of their province when they deposit their proceeds. Given the size of an Italian province (median inhabitants: 375,000), that seems like a real stretch. I guess we still do not know how much money laundering is going on in Italy.

Much of observed income mobility is measurement error

Much of the discussion about income inequality and poverty is vacuous if it does not take into account some form of dynamics. Are the poor of today also the poor of tomorrow? If yes, we have a problem, if not, we have much less of a problem. It thus become quite important to measure properly income mobility, how people move from one part of the income distribution to an other. That is easier said than done. One can take two snapshot of the the income distribution, and then calculate some correlations. But there could be measurement error, always a problem, and income changes may be temporary, artificially biasing upwards mobility indicators.

Tom Krebs, Pravin Krishna and William Maloney make significant progress in this measurement by putting some structure to it. For example, a permanent change in income should be reflected in a change in consumption, while a temporary income change does not. Thus, building a consumption-saving model with an income process that has permanent and temporary components, tying this with income data from households in Mexico to calculate income mobility with the new methods and old ones. It turns out that most of the usually measured income mobility comes from measurement error or temporary income. In other words, there is at least in Mexico much less income mobility than we think there is. This is bad news for economies where we know income shocks have a tendency to be temporary, such as the US. The American Dream is farther that you think (previous exhibits I and II).

Have the Youth Ever Had It So Bad? (UK Edition)

In 1957, then-British Prime Minister made the statement that his compatriots "never had it so good" amid the prosperity and plenty of the postwar years. A half century later, everything seems to have come undone that a recent BBC feature asks of the young people if they ever had it so bad in the future looking utterly bleak. It is no new to today's youth in rich countries that they are screwed. Dismal job prospects, the skyrocketing cost of higher education, falling wages and bearing the burden of maintaining welfare systems that previous generations will surely exhaust before current generations can benefit all add to the general gloominess. No sane persons aside from self-serving politicians will admit it, but today's generation of young adults are likely to have a lower standard living than their parents. Sorry, but that's the way it is.

I needn't expound on the elaborate and quite frankly laughable hoax called the "American dream" which only the most delusional cling to. Note, however, that a similar situation can be observed in any number of other of Anglo-Saxon nations. A young adult in the United Kingdom, for instance, is about as screwed as his or her American counterpart:

A student who started university in 2011 will graduate with average debts of £26,000 and bleak career prospects. And even the lucky ones who get good jobs face a lifetime of renting, unless the "Bank of Mum and Dad" is willing and liquid enough to help out.

Baby boomers born in the 1940s to mid 60s bought their first home when prices were low and watched property prices shoot up as house-building slowed while the population rose. There was relatively low unemployment up to the 1980s and again in the 1990s and 2000s. Wages rose. Low inflation and globalisation kept prices down. They got generous pensions.

There was poverty too, but those middle and top earners flourished. They are the lucky generation. So goes the theory. It's not just young agitators saying this. In 2010, Conservative frontbencher David Willetts, born in the late 1950s, tackled the subject in his book The Pinch. It is subtitled "How the baby boomers took their children's future - and why they should give it back."

The only question for me is why the youth in these countries do not express more discontent about being screwed over so badly by greedy seniors. Contrary to what some say, those greedy seniors are giving succeeding generations a massive handicap which they will probably never surmount in attempting to fashion a standard of living similar to that of previous generations. Sorry, but that's just the way it is.

The Economist as Advice Columnist

Ask Emily is slated to be the economist's version of Dear Abby.

Could obesity rates be even worse than expected?

The rise of obesity rates is now being called an epidemic, in particular in Anglo-Saxon countries. The fact that such a large portion of the population is now considered obese is quite alarming, considering that this was minimal a generation ago, and that the proportion of obese children is even in the double digits in some countries is mind boggling. Could it be even worse?

Yes, according to David Madden who claims that most obesity statistics are based on self-reports for weight and height, from which the BMI (body-mass index) is calculated. Under current standards, a BMI of 30 is considered obese. He suggests that a threshold of as low as 26 should be used to account for the reporting bias in weight. As this bias seems to increase over time (at least in Ireland), the threshold could move down even further. Obviously, this bias will depend on the environment (local culture, context of survey, for example) and could make correct measurement very uncertain. I guess the best way is to actually measure people. One should look into that.

Parental involvement laws have no influence on teen sex behavior

Many jurisdictions have implemented parental involvement laws that require from physicians to discuss with or at least alert parents about a possible abortion with their minor daughter. The idea is to raise the stakes of unsafe teen sex in that parents get involved. The literature seems to point to the success of such laws in that regions that implement them have, other things being equal, lower rates of sexually transmitted diseases (specifically gonorrhea), which is a clear marker for unsafe sex.

Silvie Colman, Thomas Dee and Theodore Joyce claim we should be rethinking this statement. Indeed, they find no association between parental involvement laws and teen sex using better data than what was used in previous studies. In particular, they have data that includes finer age groups for the patients, something that seems essential for this type of claim as sexually transmitted diseases are much more caught by 18-19 years olds (who are not minors) than 15-17 years olds, who are subject to such laws. They also take into account race and ethnicity, as the reporting rate for gonorrhea vary considerably among them, and they add reports for chlamydia. The fact that the laws have no impact on teen sexual activity shows that they do not know about them or do not care. And a law that has no impact is a useless law.

Enter Big Government, S Korean Welfare State?

One of the unspoken things many Asians feel has contributed to Western malaise is the ubiquity of extensive welfare states. With the so-called baby boom of those born in the immediate post-WWII era reaching retirement age, these countries are beginning to feel the massive fiscal pressure of providing for pensions and health care for those no longer working. Think of those hapless uber-bankrupts in the United States who cannot roll back promises made long ago that they cannot possibly meet--more so now given America's utterly pathetic growth rate.

Why, then, would leading Asian countries flirt with consigning themselves to a similar fate? Apparently, this is the very question facing South Korea--your archetypal success story. Needless to say, this success has not benefited everyone equally, hence calls to reform the Korean system away from massive industries (chaebol) and provide more opportunities for others not fortunate enough to be so favoured:

From childcare to old-age pensions, Park [Geun-Hye] wants to ramp up social spending by $125bn over the next five years as she responds to growing complaints that the proceeds of growth have been skewed towards the rich and the chaebol conglomerates that dominate the economy.

Ms Park is presenting this as a turning point after decades of small government. While the country is, by some measures, as prosperous as Italy or New Zealand, its spending on public services remains far lower than in most developed countries. Ms Park believes that this must change as the nation enters the next stage of its development. But do her sums add up?

It all sounds great on paper, but the question must be asked: Who's going to pay for it? I'm afraid Park is not so clear on this point (yet):

Instead, 60 per cent of the $25bn annual funding cost - which amounts to about 2 per cent of GDP – will come from eliminating wasteful government expenditure, although Ms Park has given no details of where these savings can be made. The remaining 40 per cent, she says, will come from regularising and taxing South Korea’s informal economy, which she believes to account for a quarter of GDP.

In short, Ms Park will fund her programme through measures that sound attractive to everyone. But until she gives more detailed proposals, there will be plenty of scepticism over whether this can really yield the sums required. And the latter could be bigger than Ms Park admits.

I am generally sceptical about claims that budgetary gaps can be closed by efficiencies in tax collection and stricter expenditure, and I don't see why I shouldn't be just because it's South Korea we're talking about here. Sure it's a country that works unlike any number of dysfunctional Western ones, but despite the popular acclaim there for a welfare state, did they ever consider that the problems the West faces stem in large part from it?

The matter is something to ponder even if the implications would be politically incorrect.

The Economist as Civil Libertarian

Tyler Cowen's new column in the NY Times reminds us that the worldview of economists often extends beyond economic issues.

Baseball's Team USA: Symbol of American Decline

Puerto Rico celebrates annihilating the US in the US

You kind of expected this result but it's worth mentioning anyway as a fine metaphor for American decline: For the third straight World Baseball Classic (WBC)--held in the United States for the third consecutive time, no less--Team USA has been thoroughly spanked at what America claims is its "national pastime." They came, they saw, they got their behinds whupped by teams displaying superior unity. How unlamented is this situation? Even the pop culture commentator of note for uncritical USA#1-style boosterism is oddly silent. At any rate, what we have here is sporting mediocrity that reflects wider American decline. That the whitebread commentariat doesn't even mind just adds to the deafening silence of this Symphonie Pathetique [sic].

Indeed, I will argue that the poor play of baseball's Team USA reflects deep-seated pathologies in that downwardly mobile nation. Let us count the ways:

(1) The United States has weak fundamentals - Modern American-style baseball lacks many of the qualities that make the game attractive to a knowledgeable international audience. In every WBC, you have seen American players swinging for the fences in hopes of turning the game around with a towering home run (that almost never came). For many years, the Stateside game has been heavily reliant on muscle-bound, frequently steroidal freaks like Barry Bonds, Jose Canseco, Jason Giambi Mark McGwire--MVPs all of them--to generate runs.

In contrast, Americans usually deride as "small ball" the things true baseball fans like to watch--especially timely hitting, smart base-running, and so forth exemplified by the Japanese who are into the final round for a third consecutive time gunning for the same number of outright victories. Watching Japanese baseball games at a local Japanese eatery, I can also assure you that the Japanese are indeed exceedingly sound at that other fundamental--defence--as well. You don't get the Little League errors frequently seen in MLB since Japanese players practice a lot at fielding instead of bulking up (steroids optional) and relying on the long ball to carry the day.

I needn't add that the US economy is in the same (sinking) boat with its equally dodgy fundamentals. It has far too much government and household debt. It is structurally biased towards consumption despite its households having both low savings and declining income. In other words, like Team USA, the American economy relies on all the wrong things.

(2) Americans are fond of excuses - Let's face it: Americans are whingers of the highest order. The latest sorry excuse for this pathetic display is that Team USA did not have a top-quality pitching staff. The underling assumption, however, is dubious: why should we assume that playing in MLB would guarantee sterling performance in the WBC? The way Americans think, they believe that more international players implies that MLB is the choice destination and offers the most intense competition in baseball.

Well, think again. Here's a question for the USA#1 cheerleaders: How many MLB players does mighty Team Japan feature? None. Nada. Zip. Zilch. Likely, it's not as though Big Name Pitchers would automatically solve American baseball mediocrity. Its inability to compete for medal places once again illustrates that there may be deeper lying symptoms of ingrained structural decline.

Economically speaking, Americans are fond of passing off similar excuses: Europe's slowdown is hitting the US, China's slowdown is hitting the US, other countries don't play fair, etc. It's the same old story again and again in the absence of a collective willingness to admit failure and try to make things better that's led the country down its path to mediocrity.

(3) Americans don't particularly care that they suck - The point is well-taken that WBC is not watched by all that many Americans. An insightful piece of commentary thus asks whether the country even cares that America sucks so badly. A telltale sign of decline is when you are constantly mediocre yet are too indifferent to take notice. Does it not hurt when others cheer for the other team much more loudly on your home ground?

All of which brings us to the bottom line...

(4) Americans are not world-class in a sport they invented - The heart of the matter is that this is the third time others have outdone Americans at their "national pastime" at home for a third consecutive event with nary a medal to show for their (pathetic) efforts.

Industries where America used to lead but have become a joke at are plentiful--think of its car manufacturers, airlines, and so forth. The world has moved on, and the US is simply uncompetitive in areas it blithely assumes it still leads in. Overall, think of "capitalism" as the economic game which the US has long dominated but is now rather poor at and you wouldn't be much off the mark.

Alike in most other things nowadays, only a moron would put good money on Team USA.

UPDATE: It's all over folks, and the Dominican Republic has won in a spectacular unbeaten run. Lest you think the baseball-bored Americans are typical fans, the reception of the WBC was quite massive elsewhere. Which again begs the question of why the US continues to host this event when home crowds are unenthusiastic and the home team obviously sucks:

Japan's loss to Puerto Rico on Sunday was watched by 51 percent of potential viewers in Japan, MLB said. It was the largest share for any of Japan's WBC games this year. The game also was the most-watched sporting event in the past year in Puerto Rico, with the final moments getting a 74 share. ... MLB executive Tim Brosnan called the WBC an ''unqualified, over-the-top success.''

The Best Job Opportunity Ever

The Harvard economics department is now recruiting teaching fellows for its popular undergraduate principles course, Ec 10, for the next academic year.  If you are a Boston-area graduate student with a solid background in economics, please consider interviewing for the chance to introduce the next Andrei Shleifer, Ben Bernanke, or Marty Feldstein (all former Ec 10 students) to the power of economic thinking. 

If interested, email ec10@fas.harvard.edu for more information and to request application materials.

A hesitant government may have good aspects

If you look at economic and especially fiscal policy in the US and in Europe these days, it can be characterized as hesitant. And this despite large challenges, or maybe because of these challenges as more is at stake and political forces dig in. It is widely regarded that a hesitant government is welfare worsening, but a case could be made for it to be welfare improving in situations where a the government lacks a necessary commitment device.

Jaromir Nosal and Guillermo Ordoñez discuss such a situation, namely bank bailouts. Quite obviously, the first best policy is to never allow bailouts, but once an opportunity arises, the government is much tempted to still use a bailout. This time-inconsistent policy translates into more risk-taking by banks, and more bailouts opportunities ensue. But if the government is hesitant, either because the information is not clear or because of internal or political constraints, then it does not authorize bailouts as easily, and banks behave better. Hesitating (or filibustering) acts like a commitment device. And this is good, in some situations.

ERP

The Economic Report of the President was released today.

Caplan on Card

In a blog post about the minimum wage, Bryan Caplan makes note of a tension in some of David Card's research.  For those who don't know him, Card is one of the great empirical labor economists of his generation.  In some of his research, joint with Alan Krueger, Card finds that increases in the minimum wage have negligible effects on employment.  In other research, on the Mariel boatlift, Card finds that increases in the supply of unskilled workers have negligible effects on wages and employment of existing workers.

Caplan notes that these results are hard to reconcile: The former suggests that labor demand is highly inelastic, whereas the latter suggests it is highly elastic.  That is a very good point.  While I was well aware of Card's famous research on these topics, I had not put them together and recognized the tension between them.

To me, this brought to mind an econometrics class I took from Frank Fisher many years ago.  Frank used to say that the "iron law of econometrics" is that coefficients are biased toward zero.  He meant that various problems, such as measurement error and misspecification, tend to make it hard for researchers to find an effect even when one really exists.  Fisher's "law" overstates things, which was Frank's style, but his basic point is often right.

Should managers be liable in court?

It is fair to say people are quite upset that managers are not criminally prosecuted for crimes their businesses do. As the latest case with HSBC shows, where the bank laundered massively money related to circumventing political embargoes and drugs trafficking, was convicted several times and faced only fines that were lower than the profit gained, it seems impossible to adequately punish corporate crime. While lawyers may have some justification for this, let us look at the economics of it.

Andreas Engert and Susanne Goldlücke claims it is difficult to find a case for managers being liable for their mistakes. This comes from the nature of their compensation contract and the reliability of court decisions. When managers take poor decisions, their compensation suffers from it. Thus, one has to be careful not to add too much risk for the manager when the courts add to the ill effects of poor decisions, especially as courts are not perfect either. Part of the argument has to do with the classical principal-agent problem: the performance signal is imperfect, and even if the manager was very careful, luck may be against him, his compensation already suffers, and courts should not pile it on. The nature of the compensation contracts thus matters a lot. With a linear contract, it is never good for the courts to punish the manager. If it non-linear (convex), then it depends on how precisely the courts can work.

Now this all applies to poor decisions, there is not necessarily a crime involved. But as a business is fined for a crime, the compensation of the manager is typically impacted. Is this then sufficient? I am not sure this paper helps completely in this regard. Indeed, crimes are punished with incarceration. The loss of freedom adds another dimension to the punishment which is difficult to reflect in a fine to a business and how this translates in loss of compensation. Someone should look into that.

Pope Francis & Liberation Theology's Latin Shadow

Well, well, I suppose this is a halfway decent result: Cardinal Jorge Bergoglio, now Pope Francis, is someone from the third world even if he is a child of (white) Italian immigrants. As I suggested, it's partly a concession to the still-strong Italian contingent. Supposedly the runner-up from last time around before being bested by Benedict XVI, this time around he has the task of running the world's largest single denomination.

The choice of a Latin American pope, despite not hailing from the fastest-growing regions of Africa and Asia, is also an exercise in shoring up the faith in countries that are becoming increasingly secular or susceptible to charismatic / Protestant movements that offer more surface entertainment value. (They keep repeating the statistic that over 40% of Catholics are in Latin America. Among the more outlandish claims, Venezeuelan "leader" Nicolas Maduro suggests this result is down to Hugo Chavez lobbying Jesus upon his recent demise.) Still, I suppose that it's the politically astute choice for these reasons. Notably, while Francis has been an outspoken opponent of unfettered capitalism and the International Monetary Fund after the high neoliberal era of Argentina's crisis at the turn of the millennium, he is not fond of liberation theology either.

I have written about the emergence of liberation theology in Latin America and its application of Marxist ideology to questions of poverty and inequality--both of which remain unfortunately common in the region. From the site of Leonardo Boff, the former priest repeatedly censured by then-Cardinal Ratzinger and future Pope Benedict XVI:

Among the many functions of theology today two are most urgent: how theology collaborates in the liberation of the oppressed, who are today’s “crucified Christs,” and how theology helps to preserve the memory of God so that we do not lose the sentiment and sacredness of human life which is threatened by a culture of superficiality, consumption and entertainment. We should always unite faith with justice, where a perspective of liberation is born, keeping the flame of our sacred lamp burning so that it can feed the hope for a better future for the Earth and all humanity.

Well into his tenure as pope, Ratzinger continuously hammered liberation theology's doctrinal unsoundness. While Pope Francis is very much focused on social justice and is famous for interacting with the marginalized and oppressed, he is nevertheless opposed to mixing the inherent godlessness of Marxism with Church teaching:

Though he is averse to liberation theology, which he views as hopelessly tainted with Marxist ideology, Cardinal Bergoglio has emphasized outreach to the impoverished, and as cardinal of Buenos Aires he has overseen increased social services and evangelization in the slums. “I am encouraged by this choice, viewing it as a pledge for a church of simplicity and of ecological ideals,” said Leonardo Boff, a founder of liberation theology. What is more, Mr. Boff said, Cardinal Bergoglio comes from the developing world, “outside the walls of Rome.”

Jesuits--of which Francis is one--have at different times been sympathetic to liberation theology. I distinctly recall having to take a required course entitled "Liberation Theology" when I attended college at a Jesuit university. Being younger, I didn't fully understand that it was in bad odour with the leaders of the faith even then. However, the election of a Jesuit who disavows the whole gimmick probably will further marginalize its ideology.

Overall, though, I am satisfied with this result and wish the new pope the best. Contrary to media reports that portray the Catholic Church as being in a state of constant crisis, it remains a growing one in other parts of the world that haven't adopted European-style apathy. It's been there for two decades, and who's to say that its days are numbered or even that its best days are behind it?

And, unsurprisingly, he is no fan of the IMF-style structural adjustment imposed on Argentina and countless other countries which have caused any number of hardships for folks of lesser means:

He became archbishop of Buenos Aires in 1998 and Pope John Paul II proclaimed him cardinal in 2001. It was reported that he declined to live in the archbishop’s palace, favouring a more frugal lifestyle. As economic problems buffeted Argentina at the turn of the century, Cardinal Bergoglio spoke forcefully for the poor and against neo-Liberalism and the International Monetary Fund. “We cannot permit ourselves to be overcome by inertia, to act as if we were impotent or to be frightened by threats,” he said in a sermon.

Both IMF economic fundamentalism and liberation theology's brand of warmed-over Marxism are undesirable; who am I to disagree as we search for a more acceptable middle ground?

UPDATE: Slate has a brief backgrounder on the Jesuits and liberation theology. 

UPDATE 4/28: AP has more on how leftist priests are pinning their hopes on Pope Francis

Optimal deviations from inflation targeting

When a central bank adopts a monetary policy target, such as a targeted inflation rate, should it absolutely adhere to this goal, or are deviations from the goal tolerated? This is not necessarily a rehash of the "rules versus discretion" question, as it is a question about the formulation of the policy rule. In other words, is it OK for a central bank that has a specific inflation target to use a rule that deviates from the target under specific circumstances?

Barbara Annicchiarico and Lorenza Rossi say this is OK, and these circumstances do not need to be extraordinary. The reason here is the often neglected impact of economic shocks, in particular technology shocks, on the growth potential of economy. Without the endogenous growth mechanism, the optimal policy of the central bank is to stick to the target. With it, it can deviate because the dynamics of the economy and the intertemporal trade-offs make it optimal to give a little bit of slack now to be in better shape in the future.

This reminds me about the silly debate about the ineffectiveness of central banks when inflation is below target when unemployment is still high. It is all about the dynamics of adjustment of the economy after a shock. Economic variable do not go back to long-run equilibrium in one shot, it takes time and they can be off long-run values even in equilibrium and under optimal policy.

Should we see more university mergers?

When should universities merge? The recent examples I have witnessed were due to economic hardship, where one college could simply not meet ends and was taken over by another one. There is also a new trend in France to merge universities that had previously been split apart, as part of the eternal higher education reform in this country. Many universities grew so large that they were split along sciences lines (natural, engineering, social sciences, humanities), only to realize that French universities were then really hurting in international rankings. But none of this follows any reasoning about what is best from a social point of view.

Marisa Hidalgo-Hidalgo and Guadalupe Valera try to get to this by using a bit of theory, comparing a university monopoly to a duopoly. A monopoly can bargain better for lower wages and better faculty, and it can create synergies. But a duopoly encourages better competition for excellence. The overall results is that the more heterogeneous universities are, the easier a merger will turn a societal benefit. The current merger craze in France is thus appropriate, but for a different reason.

Yet the model does not allow to take into account some very important aspects of education. Think for example about the diversity of classes than can be offered in a larger institution. And that includes the French mergers, as now there is a potential for students to take classes outside of their field and thus emulate something like a liberal arts education. After all a big drawback of European and especially French education is the excessively specialized education, leading to a workforce lacking flexibility.

American colleges could also benefit from mergers. Think about all these tiny colleges that can barely offer a halfway complete curriculum for the most popular majors. These micro-colleges are expensive for students and pay actually very little to faculty who have to teach extremely varied classes and struggle to do tat well. There is definitely scope for taking advantage of some economies of scale here. But merging large, complete universities, like what the authors have in mind, is definitely less advantageous. Imagine if Columbia University and New York University were to merge. There would be little to gain in a programmatic sense, and I do not think there would much pressure on faculty wages. After all, the market for good faculty is national, if not international.

New Rankings

US News and World Report has released its updated rankings of graduate programs in economics.  Click here to see them.  The top programs are:

#1 Harvard
#1 MIT
#1 Princeton
#1 Chicago
#5 Stanford
#5 UC-Berkeley
#7 Northwestern
#7 Yale
#9 Penn
#10 Columbia
#11 NYU
#11 Minnesota
#13 Michigan
#13 Wisconsin
#15 Caltech
#15 UCLA
#15 UC-San Diego
#18 Cornell
#19 Brown
#19 Carnegie Mellon
#19 Duke

USA v the World: Political Economy of Accounting

One of the more arcane debates in international political economy I am aware of from taking lots of accounting courses over the years is that which concerns adoption of accounting standards. Basel III capital adequacy standards notwithstanding, this subject matter is admittedly dull but quite important in the sense that it matters which standard is followed for corporate financial reporting to make these comparable worldwide.

For the longest time, the United States has followed its own standard known as the Generally Accepted Accounting Principles (GAAP). The GAAP was perfectly alright in the past insofar as much economic activity worldwide was conducted by American MNCs. With the rise of the rest, however--especially the equally standards-happy European Union--there has been the emergence of a rival global standard known as the (surprise!) International Financial Reporting Standards (IFRS).

The logic of harmonizing accounting standards is similar in that the goal is to reduce transaction costs for various stakeholders. Those reading financial statements do not need to adjust their interpretation depending on whether it's GAAP or IFRS. Companies--even American ones--only need report in a single standard instead of multiple ones even if it's not necessarily the US one and so on and so forth:

Financial reporting standards and requirements vary by country, which creates inconsistencies in financial reporting. This problem becomes more prevalent for investors trying to identify accounting reporting differences when they are considering providing funding to capital-seeking companies that follow the accounting standards and financial reporting of the country in which they are doing business. The International Accounting Standards Board (IASB) seeks a workable solution to alleviate the existing complexity, conflict and confusion created by inconsistency and the lack of streamlined accounting standards in financial reporting.

The main difference between the GAAP and the IFRS is the approach each takes to the standards. The GAAP is rules-based while the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines attempting to establish rules and criteria for any contingency, while the IFRS begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation.

As you would expect, the portrayal of the benefits is in a similar line of argument:

The Consequences of Initiatives on Worldwide Accounting Diversity
The convergence and subsequent change of accounting and reporting standards at the international level impact a number of constituents, including corporate management, investors, stock markets, accounting professionals and accounting standards setters and agencies.

Impact on Corporate Management
Corporate management will benefit from simpler, streamlined standards, rules and practices that apply to all countries and are followed worldwide. The change will afford corporate management the opportunity to raise capital via lower interest rates while lowering risk and the cost of doing business.

Impact on Investors
Investors will have to re-educate themselves in reading and understanding accounting reports and financial statements following the new internationally accepted standards. At the same time, the process will provide for more credible information and will be simplified without the need for conversion to the standards of the country. Further, the new standards will increase the international flow of capital.

Impact on Stock Markets
Stock markets will see a reduction in the costs that accompany entering foreign exchanges, and all markets adhering to the same rules and standards will further allow markets to compete internationally for global investment opportunities.

Impact on Accounting Professionals
The shift and convergence of the current standards to internationally accepted ones will force accounting professionals to learn the new standard, and will lead to consistency in accounting practices.

Impact on Accounting Standards Setters 

The development of standards involves a number of boards and entities that make the process longer, more time consuming and frustrating for all parties involved. Once standards have converged, the actual process of developing and implementing new international standards will be simpler and will eliminate the reliance on agencies to develop and ratify a decision on any specific standards.

In my mind, there is no real reason why the US should retain separate standards for accounting.

Commentary

1. Jeff Sachs on Paul Krugman
2. Bill Gates on Acemoglu and Robinson

Thanks to our friends over at Marginal Revolution for both pointers.

Imagine Chinese growth rates without misallocations

China has been growing at a very rapid pace, and many have studied how this has happened and why. Yet, when you look at the economy now, it is still remarkably inefficient, especially with a financial sector that is very far from potential. In particular, the state-controlled banks do not provide loans for the best investment opportunities, but rather disproportionately to state-owned enterprises, which obviously are not as productive as the private sector.

Robert Cull, Wei Li, Bo Sun and Lixin Colin Xu use a survey of manufacturing firms that the World Bank conducted in China in 2005 to document what determines the firm;s financial constraints. To no one's surprise, state-owned enterprises have a big advantage. But among them, those who have CEOs that are well connected with the government or the Party have is even markedly easier. This points of course to the massive misallocations within China that people are still complaining about. Imagine how much richer China could be with a better allocation of its financial resources.

But of course, one can argue that China is growing like crazy because it is transitioning from even worse misallocations, where there weren't even private savings to sustain a more productive manufacturing sector. This argument has been made, among others, by Zheng Song, Kjetil Storesletten and Fabrizio Zilibotti. Not only is China growing through rapid investment in more productive technologies, it is doing so while getting more efficient in distributing financing. And seeing how inefficient it is, there is a lot of potential growth for many more years.

A Bit Less Lame Than US-EU FTA: Japan in TPP

After the "who cares" of the US-EU FTA, here's something marginally more significant. There is no doubt that Japanese PM Shinzo Abe is seeking American favour in a very big way. The postwar US-Japan relationship has been characterized by lopsided deals to the former's advantage. Think of limiting Japanese exports to the US--consumer electronics, automobiles, you name it--when American producers could not compete. It was probably only a matter of time then that the LDP would lead Japan down this same road in US-led negotiations to enlarge the  Trans-Pacific Partnership (TPP).

We now receive word that PM Abe will make an announcement concerning Japan's TPP plans next week. It appears it's the same old, same old as far as the US goes in fearing Japanese auto exports in the event they are able to be exported tariff-free to the US. And just like then olden days when Japan was willing to strike unfair economic bargains since the US effectively left it with limited means of protecting itself militarily, the latest is that Japan will voluntarily accept the retention of tariffs on automobiles. It's the 80s all over again (I can hear Steve Perry over the radio right about now):

Japan will let the United States continue imposing tariffs on Japanese vehicles for now, a decision expected to help Prime Minister Shinzo Abe announce Japan's participation in talks for the Trans-Pacific Partnership free trade arrangement. The United States currently imposes a 2.5-percent tariff on imported passenger vehicles and a 25-percent tariff on trucks. Although a major premise of the TPP is to eliminate all tariffs in principle, Tokyo and Washington are maneuvering to allow exemptions of certain products that are politically sensitive at home.

Actually, there is a quid pro quo in play of Japan not lowering its towering agricultural supports--which begs the question of why you would even bother to join a free trade deal when it is riddled with escape clauses and opt-outs...

One reason Japan is compromising on the U.S. tariff is because Tokyo wants to maintain tariffs on various agricultural products. But if the U.S. tariffs are kept in place for very long, the merits to Japan of joining the TPP would weaken. For that reason, Japanese government officials want reassurances from Washington that the auto tariffs will eventually be eliminated.

Keep in mind that the economically moribund but politically influential US auto industry still fears Japan after all these years, while Japan's agricultural lobby remains fearsome and continues to be a key constituency for the LDP:

Yet amid the push from the top, resistance is expected from lobby groups in a potential stumbling block to a quick agreement. The “Big Three” U.S. carmakers of Chrysler, Ford and General Motors have reportedly opposed Japan’s entry into the TPP, arguing that the Japanese auto market continues to “lock out” U.S. vehicles.

Ahead of Japan’s summer upper house elections, Abe faces pressures from not only rice and other farmers, but also medical and consumer groups worried about the effects on the nation’s universal health care system as well as food safety. Defending the TPP, Abe told lawmakers on Wednesday that the universal insurance system was “a building block of Japan’s health care system and will never be shaken up....Relaxing individual food safety standards has not been negotiated either,” he added.

Consumer protection advocates have urged the Japanese government not to ease standards on food imports, including U.S. beef, labeling requirements on pesticides and genetically modified foods. Japanese farmers are also reportedly anxious to win exemptions from the TPP’s “zero-tariff” principle. According to agricultural cooperative JA Group, the elimination of tariffs would threaten Japan’s $48 billion in agricultural produce, making nearly all Japanese wheat, sugar and beef uncompetitive and wiping out a quarter of all rice production. The long-cherished national aim of “food security” would also be threatened, with the farm ministry estimating that reliance on imported food would increase to 90 percent from the current 60 percent.

Even if American and Japanese bigwigs do announce that Japan will now participate in TPP negotiations, I hardly think it's a done deal. Not only do they need to sort matters out bilaterally with contentious issues alike automobiles and agriculture, but the overall negotiations are also proceeding rather cautiously.

Ultimately, I think the official Chinese press reads things right: the main purpose as far as Japan is concerned is not trade creation but reinvigorating security ties with the US at a time of heightened security tensions with China over territorial disputes. Those North Koreans are looking pretty crazy too, so the perceived need by Japanese leaders to suck up to Uncle Sam via his pet project is understandable even if it has little to do with trade creation.

Americans Who Hate America: Latino Sports Fans

One of the more interesting aspects of the increasingly Hispanic population of the United States is their dislike of American national teams when they face those of Mexico. This phenomenon has been going on for years when football's (soccer's) Team USA faces--or, more accurately, get its butt whupped--by Mexico in Los Angeles. The scene is always the same: rabidly pro-Mexico crowds emanating mostly from the United States cheer on Mexico and boo America lustily. So we can identify a number of portents about the future: They will vote Democratic given the Republican dislike of amnesty for migrants. They will also root for the team of the country they likely left to be in America. In other words, they are not in America because they have any great love for the downwardly mobile place but because they found it more economically advantageous to be there--at least for now.

With the start of the 2013 World Baseball Classic, the Americans are once again hoping to place in the premier international event for the sport. Inauspiciously, however, the supposedly star-studded American team fell to ignominious defeat to Mexico in its first game. Ho hum, what else is new--just as in soccer, so it is now in baseball. Even more gallingly, the crowds at Chase Field (nee Bank One Ballpark for fellow erstwhile denizens of the Valley of the Sun) were solidly pro-Mexico, anti-America:

Team USA has a lineup full of MVPs and All-Stars, and sent out the reigning NL Cy Young winner for its opening game of the World Baseball Classic. All those hitters couldn't do much of anything against Mexico's string of pitchers and the Cy Young winner fell flat. Now the Americans have to win or they could be headed home after the opening round for the first time at the WBC. Adrian Gonzalaz hit a two-run homer off U.S. starter R.A. Dickey, seven pitchers kept the Americans' bats in check and Mexico rebounded from a disappointing opening loss with a 5-2 win over Team USA in Pool D on Friday night.

''They outplayed us in every area of the game and that is what you get,'' U.S. third baseman David Wright said. ''A pretty convincing win for them.'' Mexico had beaten the Americans before in the WBC, in 2006. But in that win, the Mexicans had already been eliminated and were able to play loose...The Mexicans pulled it off with a nearly flawless game, getting good pitching, solid defense and some timely hits in front of a boisterous, pro-Mexican crowd of 44,256 at Chase Field. 

Catch a glimpse of what Hispanicization means as these "Americans" are definitely in agreement that America stinks pretty badly. Not that Team USA has done much to change that impression in either soccer or even baseball.

For years people around the world have told nosy, meddling Americans "Yankee Go Home!" But nowadays they are finding out that people at home don't welcome them there, either. Such fun, eh, gringos?

Greg Ip's Little Book

A terrific, very quick, and nontechnical introduction in economics (more macro than micro) is Greg Ip's Little Book of Economics.  In case you don't know him, Greg writes for The Economist magazine and was previously at the Wall Street Journal.  He now has a new edition of his book, together with an online guide to suggested readings.

How much did the Gulf Oil Spill cost to shrimp consumers?

When the Deepwater Horizon oil platform exploded in 2010 and polluted much of the Gulf of Mexico Coast, some of the loudest complaints came for shrimpers fearing rightfully for their livelihood. The subsequent debate on how much the polluters should pay has been in part fueled by the question of how high the economic costs of the spill are, with a focus on repairing the pollution on the coast and in the water, as well as the economic costs to those living in the area. Ignored in all of this are damages to people outside of the region, for example shrimp consumers.

Addison Ellis, Jaclyn Kropp and Michael Norton identify for this case three sources of damages: higher prices, substitution to less liked goods, and added stigma from consuming Gulf shrimp (because it was perceived to be more risky). For the two first, they estimate the loss of consumer surplus to about US$100 million. For the third, they performed a series of experiments in 2010 to elicit from participants their willingness to pay for various types of shrimps. The stigma is reflected in a willingness to pay US$1.10 less per half-pound for Gulf shrimp. In terms of overall cost, my calculation indicates this would increased it by a little less than US$400 million, as 80,000 metric tons of shrimp were produced in the Gulf in 2010 (note the spill occurred on the 10th of April). Not small potatoes.

Neymar! Reducing Brazil's Football 'Trade Surplus'

It's time for another sporting feature since we haven't had one for quite some time now. Fortunately, there's interesting stuff courtesy of TIME Magazine about the changing complexion of "the beautiful game." Even if the Brazilian economy has cooled off markedly in recent times, it has had a strong run-up and most folks remain optimistic about its economy's future. Contrast its fate with that of the European football powerhouses that traditionally import South American players in droves--especially Portugal, Spain,and the United Kingdom--and you begin to understand the reduced "trade surplus" of Brazil sending away its best footballers time and again:

That progress is nowhere more evident than in Brazil's professional soccer league. It's no surprise that a country famously overabundant with superb players should export its surplus — some 1,500 a year leave for foreign leagues — but in recent years, there's been a spike in the number of returning players: more than 1,100 went home in 2012, up from 974 in 2008. Brazil's trade deficit in footballers narrowed to 315 last year from 556 in 2008. In large part, this is because the Brazilian league, just like its economy, has become more sophisticated and profitable. Not surprisingly, struggling Argentina, Brazil's great rival, is the world's leading exporter of soccer talent — its brightest star, four-time Ballon d'Or winner Lionel Messi, plays in Spain.

The latest Brazilian superstar is Neymar of the venerable Santos FC. He is the latest in a long line of players coming from that storied footballing country who can readily dribble the ball past myriad defenders with dazzling moves in the great tradition of Pele and his successors. Supposedly, the career trajectory of Brazilian stars went like this before:

Until the economic boom, the traditional arc of a Brazilian superstar's career ran thus: at 14, his talent was spotted by a local club; four years later, he was traded up to one of the smaller European leagues, like Portugal's, where his prodigious performances marked him as the Next Pelé; he had a couple of good seasons before a superclub like Real Madrid, AC Milan or Manchester United came calling. At Neymar's age, he was a full-blown global celebrity, with flashy cars, model girlfriends and big endorsement deals. If he had the right temperament — and durable knees — he could stay at the top of the European tree until his early 30s. Slowed by age, he then moved on to second-tier leagues, like Russia's or Turkey's, where he could still pull down a million-dollar salary; by 35, he was squeezing out the last few paydays playing in Qatar or Japan. 

That's Ronaldo, right? Nowadays, though, local clubs can afford to pay considerably higher wages with growth in the Brazilian economy in general and the league in particular. Management of these clubs is also becoming more professionalized, as are the medical and fitness regimen for the players. Couple those with global sponsorship opportunities--the likes of Adidas and Nike seek the best endorsers wherever they happen to be in the world instead of belonging to a particular (European) league--and the choice to stay at home makes more sense:

They are going home to a new kind of football organization. "The infrastructure is much better than it used to be, the training grounds, the medical staff, the support staff," says Deco, who left Brazil as a callow 19-year-old in 1997 to play first in Portugal (where he became a citizen, as have Brazilian players in other nations), then Spain and England before returning to lead Fluminense to the 2012 Brazilian Championship.

It helps that the clubs are now able to recruit professional administrators. Rio de Janeiro corporate lawyer Elena Landau, a former director of privatization at Brazil's national development bank, recalls the struggle to hire business managers at her favorite club, Botafogo, in 2003. "We were calling friends who had retired from corporate jobs and pleading with them to come and help run the club," she says. "Now, you can hire smart young people with sports-management degrees from university." 

However, the persistent question for players like Neymar is, are they truly world-class in being able to compete with the best talent European leagues have week in and week out? I guess Brazil expects that a home victory in the 2014 World Cup will be the best way to silence critics of players who decide to remain.

Monetary stimulus in high-inflation regimes

In countries where inflation is high and highly variable, you would not expect that monetary policy is optimal in a social-welfare sense. After all, such inflation is a sign of political influence, and from politicians that do not have the good of the people in mind: strongly expansionary monetary policy before elections, financing government expenses with a hidden inflation tax instead of other visible taxes, and even just pocketing monetary injections. Still suppose that for some exogenous reason inflation is high and highly variable, is their still scope for optimal monetary policy (beyond working toward a long-term goal of getting this under control)?

Wojciech Charemza, Svetlana Makarova and Imran Shah claim that yes, the central bank still can do good. They claim that output can be stimulated with a monetary stimulus when inflation expectations are much higher than output-neutral inflation. The latter is obtained with a two variable VAR, and then the sign of the residuals is used to interpret asymmetric impulse responses. Like many VAR analyses, this is a little bit voodoo science, especially when you look at countries whose data records are poor if not manipulated. Of course, following this policy will not help in solving the inflation problem of these economies (defined as at least 4.8% inflation at least 25% of the time). But if expectations are much lower, then one can tighten monetary policy without big consequences. Unfortunately, a VAR cannot tell us why all this would be happening, only that there is a statistical coincidence.

Comic of the Day (Not completely fair, but funny nonetheless)

Update: A reader suggests an edit of the above Bastiat-inspired comic.

The obscure economics of vampires

There is a certain appeal to study the economic aspects of something that on first glance has nothing economic. Following the motto of this blog, I have reported on quite a few of those, such as boobs, beer, toilet seats and the scruples of teens. It is almost always good to stretch the boundaries of what we can do with Economics, what I have called the imperialism of Economics. But in rare cases this is going too far.

Daniel Farhat presents us with such a case, wherein he studies the Economics of vampires. The paper uses an agent-based model to follow the interactions of humans and vampires and draws inferences about aggregate phenomena. I have had my issue in the past with agent-based models, in a large part because they are build on unjustified assumptions with no robustness tests, and this papers makes me most concerned about these issues. Indeed, the model is built in a complete empirical vacuum, and none of the modeling assumptions are tested for robustness. Furthermore, because vampires never existed, and with current medical knowledge never will, the paper is pointless.

Should firemen and police officers retire earlier?

Workers in some occupations get to retire with full benefits much earlier than others, for example firemen, police officers and jail guards. The justification is that they have dangerous or even life threatening occupations, and thus should be able to enjoy as much retirement as others. Does this argument really hold water?

Pierre Pestieau and Maria Racionero look at this question from the angle of optimal taxation and social security. Those with harsh occupations have shorter expected lifetimes (on average) and should be given early retirement by a utilitarian social planner so that they can consume more in early years. But the social planner needs to prevent the others from doing the same, and thus taxes heavily the savings of those in harsh occupations. Why would the social planner need to do this? It observes only the occupation, and thus has imperfect knowledge about expected lifetime. The worker knows better and can choose when to retire. Thus the issue the social planner faces is not that workers would choose the wrong occupation, it is rather that the workers who expect a longer lifetime would fake having a short one when they are in the harsh occupation.

Thus the paper is not at all about giving earlier retirement to people in harsh occupations. It is about giving that to people who expect to live a shorter life, using a signal from the occupation they are in, because it so happens that their is some correlation. It would be more interesting to see people sorting into those occupations once they learn what their expected lifetime is. To me this opens another question: if someone works in a dangerous occupation that has no long-lasting health effects expect sudden death (examples: police officer), conditional on having survived, should one still get early retirement? Probably not. But it matters when people decide what occupation to take.