First Thoughts on Piketty

I have been reading Thomas Piketty's "Capital in the 21st Century." It is truly an impressive work, and I am much enjoying it. I have recently organized a session at the upcoming AEA meeting (January in Boston), where David Weil, Alan Auerbach, and I will be discussing the book, followed by a response from Professor Piketty.

Let me offer a few immediate reactions.

The book has three main elements:

1. A history of inequality and wealth.
2. A forecast of how things will evolve over the next century
3. Policy recommendations, such as a global tax on wealth.

Point 1 is a significant contribution. I like this part of the book a lot.

Point 2 is highly conjectural. Economists are really bad at such things. In particular, the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children.  So, from my perspective, Piketty tries to draw way too much from r>g. (Quick Quiz for econonerds: (a) What does r>g tell you in a standard overlapping generations model?  (b) And what is the magnitude of bequests in that model?  Answers below.*)

Point 3 is as much about Piketty’s personal political philosophy as it is about his economics. As we all know, you can’t get “ought” from “is.” Like President Obama and others on the left, Piketty wants to spread the wealth around. Another philosophical viewpoint is that it is the government’s job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes. No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).

The bottom line: You can appreciate his economic history without buying into his forecast.  And even if you are convinced by his forecast, you don't have to buy into his normative conclusions.
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* Answers to quiz: (a) That the economy is dynamically efficient (that is, it has not over-accumulated capital).  (b) Zero.

Report from the Chair

Readers of this blog may have noticed that I have not been as active here over the past two years as I was previously. One of the reasons is that, about two years ago, I was appointed chairman of the Harvard economics department. That has been keeping me busy. But I am happy to report that the job is going well. One of the responsibilities of the chair is to oversee faculty hiring, and we have had some great results. Our new faculty hires include the following (in alphabetical order):

1. Gabriel Chodorow-Reich
2. Ben Golub
3. Robin Lee
4. Matteo Maggiori
5. Matthew Rabin
6. Gautam Rao
7. Neil Shephard
8. Stefanie Stantcheva
9. Elie Tamer

A pretty good list, if I say so myself!

The Many Determinants of Demand

Allen Sanderson sees them multiplying.

Quantifying Effects of Sanctions on Iran's Economy

Rouhani at WEF: not exactly the Taliban at TEDx (now that'd be something, wouldn't it?)

Political risk analysis is an interesting IPE-related field which gauges how political factors can disrupt foreign investment. For obvious reasons, Iran has been the modern exemplar of a high risk, high return destination. That is, if you can invest in the country in the first place. Obviously the United States has long prohibited all trade and investment with Iran, so the more interesting thing has always been how other countries react to pressure from the US to do the same. For instance, it was only in 2010-2012 that the EU imposed an embargo on Iranian oil and gas exports, stopped commercial money transfers with Iranian financial institutions, and prohibited investment in Iran's energy sector.

With the more moderate President Hassan Rouhani now in charge--he Tweets and attends the World Economic Forum to drum up foreign investment--Western countries have lifted some sanctions in an act of goodwill. Just when you thought Iran was rather different, here's its leader trying to drum up FDI like everyone else. To provide context, a few months prior to his WEF talk, the US and EU eased sanctions on Iran. In exchange for more scrutiny of its nuclear program, Iran gained a six-month partial reprieve on sanctions:

In November [2013], Iran's government agreed to give Western powers more scrutiny of the country's nuclear program for six months. In exchange, Western capitals eased some sanctions. The relief is limited to just a handful of industries—aircraft, car parts and petrochemicals, for example. And Western authorities are scrutinizing deals closely. Businesses exploring the Iranian market "do so at their own peril right now," U.S. President Barack Obama said last month, "because we will come down on them like a ton of bricks."

But that hasn't stopped companies from boosting their presence or sending in advance teams—essentially making exploratory visits in the hopes that sanctions may be lifted further and permanently.

I see, then, but what is the economic worth of sanctions applied against Iran? More importantly going forward, how will the detente with Western powers affect Iran's economic fortunes? One of the the world's largest political risk consultancies, IHS, puts dollar signs on these important figures:

1.5 percent growth forecast, $270 billion lost due to sanctions. Rapprochement with the West will help to stabilize Iran's economy. IHS forecasts Iran’s real GDP will rise by 1.5 percent in FY 2014/15, after two years of contraction. Signs of improved relations along with temporary and conditional sanctions relief have breathed life into the Iranian economy. The EU has suspended its ban on insurance coverage for Iranian oil shipments, $4.2 billion in oil revenues has been unblocked, and current restrictions on imports of crude will be held steady for the six countries still purchasing oil from Iran.”

 However, Iran is not out of the woods yet. External and fiscal balances will remain under pressure, inflation will continue to run at high double-digit rates and trade and current account balances have been cut sharply due to sanctions. IHS estimates that since 2011, Iran’s economy has shrunk by more than $270 billion due to sanctions. 

The IHS release also details optimistic, downside, and status quo scenarios that contextualize Iran's economic performance going forward mostly on the application of Western sanctions. Especially striking is the prediction that a total lifting of sanctions on Iran may result in 6-8% growth under the optimistic scenario. Whether you approve of them or not, there is little doubt that they have a significant bearing on Iran's economy.

After OLPC: Ten Commandments of ICT for Education

Is tech the global education solution? I have an continuing interest in the information and communication technologies for education (ICT4E) field having worked on education reform and written an article on the ill-fated One Laptop per Child (OLPC) project for UC Berkeley's California Management Review. For the record, it was not an article I found pleasant to write about--these folks were well-intentioned, after all--but we need to explore why they failed. Isn't the appeal of the Internet obvious to all? Doesn't the Internet automatically promote development? Especially with OLPC, failure to read the political-economic environment of education procurement meant that its reception has been muted as the article explains.

There has been much research done in this field ever since not only by international organizations like the World Bank, regional development banks, UN agencies such as UNESCO, etc. Fortunately for us, ICT4E stalwart Tim Unwin (his fine blog comes highly recommended) lists the ten commandments of ICT4E in a new article for the Commonwealth publication Global: The International Briefing commemorating the Internet's 25th anniversary (WWW inventor Tim Berners-Lee is a Brit, right?) With the benefit of hindsight, you kind of wish the OLPC folks considered these earlier on:

1.  It is the learning that matters and not the technology: Many e-learning and m-learning initiatives place the emphasis on the technology – be it laptops or mobile phones. Effective initiatives begin with identifying the learning objectives and then pinpointing the technologies that are best suited to delivering them.
2. Teachers must be closely involved in the implementation of ICT for education initiatives: Teachers need to be given effective pre- and in-service training in advance of the introduction of ICT in schools. This is absolutely crucial and goes far beyond the mere learning of Office packages of software.
3. Sustainability issues must be considered at the very beginning: Computers, laptops, tablets and mobile phones are expensive. While it can be affordable to purchase these as a one-off investment, careful thought must be given to the budget costs of maintaining this equipment and of how to provide it for the next generation of pupils. Computers do not last forever and a substantial budget stream must constantly be made available.
4. The supporting infrastructure must be in place: All too often, insufficient attention is paid to ensuring that there is sufficient reliable electricity and internet connectivity to enable the equipment to be used, and for teachers and students to gain access to the internet.
5. Appropriate content must be available to help deliver the curriculum and learning needs: Far too often, ICT initiatives merely provide access to internationally available content delivered in foreign languages. It is important that local content developers are involved in shaping learning content and that as much attention is focused on using ICT to provide new ways of communicating, and not just delivering information.
6. Ensure equality of access to all learners: ICT devices enhance inequality between those who have access to them and those who do not. It is essential, therefore, that attention is paid to ensuring that all learners are indeed able to access the benefits. Usually, ICT for education initiatives starts with those who are already privileged through their wealth or by living in urban environments with the necessary infrastructure. Enlightened initiatives actually begin with delivering learning solutions to the most marginalised people and those living in rural areas. It is also salient to remember that people with greater disabilities have far more to gain from learning ICT skills than do those with fewer disabilities.
7. Monitoring and evaluation must be undertaken from the very beginning: Evaluation ensures that learning objectives are indeed being achieved and that any initiative can be tweaked accordingly to improve its efficacy.
8. Appropriate maintenance contracts for equipment and networks need to be established: Training local people in the maintenance of learning technologies is essential to ensure that the equipment is used effectively. This can also provide a real boost to local economies.
9. Use equipment and networks in schools for as long as possible each day: ICT equipment and networks in schools should be used by local communities in out-of-school hours. This maximises the use of expensive equipment and can also provide a valuable source of income generation that can help defray the costs of its usage.
10. Think creatively in your own context: There are no best practices, only a range of good practices from which to choose. Learners and teachers should develop solutions that best fit their learning needs and then get on with implementing them!

Technological revolutionaries have by now been disabused of the idea that ICT is the magic bullet to promoting education in developing countries. Alas, things are never so simple: the form (electronics) is secondary to function (education). Remember that.

Indeed, I am becoming more "computer-agnostic" in thinking that the presence of computers is incidental and not instrumental to learning.

Solow on Piketty

A review in the New Republic.

Achtung Baby: Real Dangers of German Denuclearization

Chalk this one up as a victory of politics over common sense. Imagine adopting an energy policy that (1) leaves you vulnerable to the whims of vainglorious and unreliable energy suppliers, (2) raises the costs of energy provision, and (3) pollutes the environment more as you return to coal burning, and (4) opens you up to litigation for forsaking agreed-to contracts to maintain nuclear power plants. As it so happens, one of the most rational nations on Earth, Germany, is doing precisely that.

In the wake of the 2011 Tohoku earthquake in Japan, European countries have reassessed their use of nuclear power. The French who already rely on nukes for about three-quarters of their power sensibly shrugged off this concern, correctly reasoning that they were not in the earthquake-prone Pacific ring of fire and had more robust designs. They've even built more plants since. The Germans, however, took fright for reasons that are obscure to me. What, then, have been the negative implications of Germany's decision to phase out nukes by 2022? Let us count the ways...

1. Heightened reliance on energy from a dodgy chap with Cold War fantasies - so Vladimir Putin is a swell guy for frightening EU countries and boosting bond prices. However, he is hardly a reliable economic partner. As Germany mothballs more nuclear plants, its reliance on Russia will increase unless it significantly boosts production from alternative sources--fracking, renewable energy, etc:

Germany, faced with the possibility that restricted energy supply from Russia could undermine its efforts to end nuclear power, needs to reduce its reliance on Russian energy and compensate the loss with renewable energy, Steinmeier said. Germany, which imports one-third of its natural gas from Russia, has decided to phase out all of the country's nuclear reactors by the end of 2022 in the wake of the nuclear accident at the Fukushima Daiichi power plant that broke out in Japan in 2011.

2. Increased costs of energy provision will hit German industry squarely in the gut - as one of the world's genuine manufacturing powerhouses, Germany is set to endure a largely self-inflicted setback. German researchers have modeled the impacts of denuclearization and state:

The model analysis with the electricity market model MICOES shows that the nuclear phase-out has a visible effect on the wholesale electricity prices that will increase compared to the situation with a lifetime extension of nuclear power by 11% in 2015 and 23% in 2020.

3. The quite frankly idiotic German phase-out not only increases environmentally unfriendly coal burning in Germany but also coal and nuclear production in neighboring countries that are ramping up to fill German energy demand. Net result? Zero improvement in cleaning up the air in Europe or making nuclear power "safe" as production is shifted to neighboring countries whose technologies are generally less advanced than Germany's (with the exception of the French):

Previously a net exporter of electricity, Germany now imports as much electricity as it sells abroad. Removing so much German electricity from the market has benefited power companies in neighboring countries that rely heavily on coal and nuclear power, thereby undermining Germany's environmental goals and its nuclear safety concerns.

Although abandoning nuclear power is expected to eventually clear the way for the development of renewable energy, in which Germany is already a world leader, the environmental effect so far has been problematic. Last year's shuttering of eight of the country's 17 reactors has led to an increase in carbon dioxide emissions of 25 million tons annually in Europe, said Laszlo Varro of the International Energy Agency, a European intergovernmental organization.

4. You get your pants sued off by reneging on commitments made by previous governments to run nuclear plants - Germany is hardly our idea of a country high in "political risk," but it may be so in energy. Sweden's state-owned power company Vattenfall has taken the German government to task for doing just that:

In May 2012 the Swedish energy company Vattenfall filed a request for arbitration against Germany at the International Centre for the Settlement of Investment Disputes (ICSID), housed at the World Bank in Washington, D.C., because of Germany’s decision to phase out nuclear energy. Vattenfall relies on its rights under the Energy Charter Treaty, an international trade and investment agreement in the energy sector.

This treaty, like many international investment agreements, grants foreign investors the right to bypass the domestic courts of the host country and to directly file a complaint to an ad hoc international tribunal to challenge proposed government regulations. Vattenfall is expected to claim well over €700 million in compensation in response to the closure of the nuclear power plants Krümmel and Brunsbüttel.

So much for German rationality in all walks of life. They have added to their energy costs, boosted their carbon emissions, reduced their trade surplus as energy imports rise, shifted externalities to neighbors who sell Germany power produced by coal and nukes, and rely more on the wiles of an unpredictable chap named Putin. It's a lose-lose-lose-lose proposition that constitutes the real dangers to denuclearization.