Why did the panic of 2008 spread abroad?

Why did the Great Recession spread outside the United States? In particular, why did almost all Western industrial countries enter a deep and pronounced recession together? The failure of Lehman Brothers sent ripples throughout international financial markets, plus European banks were heavily involved in the US subprime mortgage market. Yet, financial and goods markets are not perfectly integrated and this should not have lead to such perfectly coordinated business cycles.

Philippe Bacchetta and Eric van Wincoop show that you do not need complete market integration to get there, only partial. All you need is that market integration be sufficiently high. In addition, tight credit, very low interest rates and inactive fiscal policy "help" tremendously with creating a panic, and we certainly were in such a situation at the time. And this panic is what makes it different from "normal" recessions, where synchronization is not perfect. The model hinges on the fact that there are possibly multiple equilibria and a global panic is the optimal coordination on a bad one. Crucial to the model are a couple of rather strange assumptions, though: prices are preset while wages are fully flexible, I would have thought wages to be less flexible than prices; and there are two periods in the model, meaning that the panic state must be permanent. As a consequence, am not quite sure what to make of this paper.

Introducing "Economic Logic, Too"

I have been pondering for a while what to do with my blog, Economic Logic. My job responsibilities have made it difficult for me to attend to it as much as I would like. Sometimes I would have to skip days, sometimes I have not had time to read as much as I wanted (or I should as I got it wrong in one case). And I certainly have less time to write things up. Somebody suggested I should invite guest bloggers to help out. I am now ready to do this, but on a different blog, Economic Logic, Too.

Why keep them separate? EL got a reputation, and I would hate to ruin it. I have no idea how well this initiative will turn out with guest bloggers. I guess am too risk averse for allowing guest posters to alter EL. I hope they prove me wrong.

Here is how you can contribute to EL2 (this may be amended if need be):

1. I will accept discussions of interesting research and interesting discussions of research. That means it can also be rejected.
   
2. I may make a few small editorial corrections to the text.
   
3. There needs to be a link to an IDEAS page.
   
4. The research needs to be recent and in working paper form. This means it needs to be in Open Access (NBER and CEPR are OK) and unpublished.
   
5. You cannot discuss your own research. This is not voxEU.
   
6. You need to submit your text under your real name. It can be published anonymously, though.
   
7. Send me an email with your write-up, mention if you want it under a pseudonym or your real name.
   
8. I let you know about my decision as soon as I can.
   

Help make this a lively and interesting blog.

Is Europe Overrepresented at World Cup? Nope

It's the weekend and it's time we had another feature dealing with international sport. Perhaps inevitably, let's talk about football. Some are lamenting that the ranks of World Cup participants for next year's event is in Brazil are filled with European teams. Why does Europe get represented by 13 teams--over 40% of the participants? Don't Europeans represent only slightly over 10% of the world population? Certainly this is an unfair remnant of a bygone, Eurocentric world?  With the group draws done and dusted, it's time to have a closer look at the matter.

The easiest way to go about our task is to look at the number of European teams in FIFA's rankings of national teams. Since there are 32 participants in the World Cup, how many of them are European? By this metric, things look rather fairer. Here are the Europeans in the world's top 32 as of November 28, 2013:

01. Spain
02. Germany
05. Portugal
07. Italy
08. Switzerland
09. Netherlands
11. Belgium
12. Greece
13. England
16. Croatia
18. Ukraine [did not qualify for World Cup 2014 - Brazil]
19. France
21. Bosnia-Herzegovina
22. Russia
25. Denmark [DNQ]
27. Sweden [DNQ]
28. Czech Republic [DNQ]
29. Slovenia [DNQ]
30. Serbia [DNQ]
32. Romania [DNQ]

Also consider two European teams that fall just outside the top 32:

33. Scotland [DNQ]
34. Armenia [DNQ]

So actually, Europe is (gasp!) underrepresented at the World Cup. If we dealt away with regional qualifiers which make it harder for Europeans to reach Brazil due to tougher competition--ie., each other--and instead select teams by virtue of their world rankings, then 20 out of 32 (62.5%) participants should be European instead of 13. Sorry, but the rankings imply that 7 teams from other regions of the world got in on football's equivalent of "affirmative action." We speak of a "group of death" featuring top-ranked national sides during the World Cup group stage that is hard to progress from into the knockout stages, but Europeans are invariably drawn into a "region of death" just to qualify for the event. Does anyone really doubt that European non-qualifiers alike the Czech Republic, Denmark or Sweden would beat the stuffing out of Costa Rica, Honduras or Iran?

Is it a throwback to a bygone era of Western political-economic dominance, then? No, Europe still rules over this sport if we go by international team rankings. Also keep geopolitics in mind: with the demise of the former Soviet Union and Yugoslavia, the number of world-class European national sides has significantly increased. Among the top 32, the former begat Russia and Ukraine while the latter begat Croatia, Bosnia-Herzegovina, Slovenia and Serbia. Why Europe still dominates is an interesting question which I suspect deals with the most lucrative and competitive of professional leagues being in Europe. If you want to sharpen your talents against world-class competition, then European professional leagues remain the place to be.

WTO Welcomes Its 160th Member, Yemen

Yemen, there's no need to feel down
I said Yemen, pick yourself off the ground...

A little neglected in the hullabaloo surrounding the conclusion of the "Bali package" at WTO negotiations in the eponymous Indonesian resort location has been the organization's acceptance of its 160th member. A stop on the Silk Route of centuries past, to say Yemen has fallen under hard times due to religious extremists and assorted nutcases taking up their various dubious causes is an understatement. However, it now joins the growing ranks of least-developed country members:

Immediately after the heads of delegations’ meeting, members formally accepted Yemen as a new WTO member — its “accession” to the WTO. At a ceremony to celebrate the decision, Mr Azevêdo congratulated the Yemen government for the domestic reforms it is undertaking after 13 years to finally become a WTO member. “We celebrate accessions both because of what it means for the individual country, but also because of what it means for this organization,” he said

The Republic of Yemen will be the 35th least developed country in the WTO. “This group makes up a fifth of the whole WTO membership. It is an important constituency — and, as we have seen in recent days, it is one that is increasingly making its voice heard,” said the Director-General. Yemen’s Industry and Trade Minister Sa’aduddin Bin Taleb expressed his country’s gratitude and excitement at finally becoming a WTO member.

“Sometimes things change for countries and fortunes change. But the very essence of a country and the history and the civilisation remains. Ours has been trading for the last at least five or six hundred years, in fact, since the spice route," he told the assembled ministers from the WTO’s current membership.“We aim to take back that road again and to connect with everybody in the world. ... I hope that after a few months, we will have a new Yemen born." The Yemeni Parliament will have six months, until 2 June 2014, to ratify its accession package. It will then inform the WTO and 30 days later it will officially become a member.

What can I say? Yemen's membership comes just in time to enjoy duty-free, quota-free access by least-developed countries to richer ones as well as preferential rules of origin. Meanwhile, the domestic debate is awfully similar to what countries considering joining the WTO have--we will be inundated with imports, our domestic industries will be wiped out as a consequence, domestic firms are not yet ready, etcIts :

Sana’a University economics professor Salah Al-Maqtari said the move was a bad one for Yemen. “Yemen already has no customs restraints, and international products have invaded its markets, even before accession to the WTO,” he said. Al-Maqtari said Yemen imports 85 percent of its food commodities from abroad and does not produce many goods for export.

“Yemen is on the losing side because its consumption [of imports] is higher than its production [of goods for export],” he said. Car importer Sami Sabiha said the Yemeni government has not made any preparations to help industries or the economy deal with the difficulties they will face as a result of joining the organization. 

The Progressivity of the Current Tax Code

Source: CBO.  Click on graphic to enlarge.

How do immigrants assimilate in job search?

How immigrants integrate into the native population has been a concern in many countries for a long time. Typically, this has been done by looking at how they marry, they educate themselves, how much they earn, and how they conduct criminal activities. Their labor market behavior, particularly how they search for a job, is less studied.

Audra Bowlus, Masashi Miyairi and Chris Robinson fill that gap by applying a search model to Canadian data. Two crucial parameters in those models are the job arrival and job destruction rates, which the authors allow to differ between natives and immigrants. In addition, they add a switching process wherein an immigrant stochastically acquires the characteristics of a native. This allows to determine that it takes on average 13 years for this to happen, quite a long time I think. More interesting, however, is that immigrants get significantly fewer offers, 36% lower when unemployed and 93% lower when employed, and they lose their jobs faster as well. This means that if an immigrant transitions to another job, it is almost always through unemployment. As a natural consequence, their wages catch up very slowly with that of natives. In fact, the search process accounts for more than half of the wage gap.

Venezuela's Bolivarian Revolution is Dead, Long Live F1!

Sorry 21st century socialist sympathizers, but the economic and moral bankruptcy of Hugo Chavez's Bolivarian Revolution is becoming more apparent with each passing day as his successor finishes off the job. Even rose-tinted glasses cannot obscure the damage done. First, "oil diplomacy" is sagging as the US ups its domestic production of petroleum care of fracking and a slower world economy has limited Venezuela's ability to fund (costly) PR stunts:

The late President Hugo Chavez's dream of leveraging Venezuela's oil wealth to spread revolution across Latin America is crumbling under the weight of an economic crisis that is forcing his hand-picked successor to cut back on generous foreign aid.

Signs of the country's waning influence are becoming more apparent. In early November, Guatemala withdrew from the Petrocaribe oil alliance launched by Chavez, saying it didn't receive the ultra-low financing rates it had been promised by Venezuela when it first sought to join the 18-nation pact in 2008. Also in recent weeks, representatives of Brazil and Colombia have held meetings with their Venezuelan counterparts to collect overdue payment for food, manufactured goods and other imports. 

As some wiseguy said, the world's largest holder of crude reserves has Egypt-like FX reserves due to spectacular mismanagement aimed at generating publicity for Venezuela as some sort of alt-globalization hero and not at competence in managing a resource-rich economy.  Second, we now receive word that Venezuela is upping its police-state-like characteristics in attempting to ban public access to websites that list black market exchange rates for US dollars instead of taking scarcely believable "official" rates at face value which next to no dealers will sell you greenbacks at in exchange for the local currency (bolivars). These guys even outdo the Chinese in cyber-supression:

Venezuelans have been scrambling for dollars for weeks, taking refuge in the greenback as their own currency is in free fall. Rather than address the economic imbalances behind the bolivar's plunge, the government is going after the bearers of the bad news — it's blocking websites people use to track exchange rates on the black market.

Cyber-activists say the crackdown goes to absurd lengths, even targeting Bitly, the popular site for shortening Web addresses to make it easier to send them as links via Twitter and other social media. For more than two weeks, access to the service has been partially censored by several Internet service providers in Venezuela, apparently because Bitly was being used to evade blocks put on currency-tracking websites.

The New York company says such restrictions have only previously been seen in China, which has one of the worst records for Internet freedom, and even then not for such an extended period. Opponents of Venezuela's socialist government say the controls are designed to obscure reporting of the nation's mounting economic woes.

Can you say "police state"? Despite the country's ongoing descent into socioeconomic hell, what's notable is that state-sponsored F1 driver Pastor Maldonaldo has actually upgraded his ride next season from Williams (which scored exactly zero points this year) to Lotus (which finished fourth in the constructor's tables). How did this happen? Maldonaldo did not get his Lotus ride on merit; rather, the hard-up team is banking on Venezuelan state cash Maldonaldo will bring. In contrast to its former driver, world champion Kimi Raikkonen who the team still owes money, Maldonaldo will presumably bring in cold hard cash for his paid ride:

Lotus’ financial predicament was recently laid bare by their Ferrari-bound Finn Kimi Raikkonen, who revealed in Abu Dhabi that he had been paid “zero euros” by the team all year. It is thought that he is owed around £15 million. PDVSA paid just under £30 million a year for the quick but extremely erratic Maldonado to drive at Williams where he was responsible for the team’s first win in eight years, in Barcelona last year, along with numerous collisions. 

It's odd that Venezuela will plump big cash on this bourgeois sport as one of the last few PR stunts it can still afford even if many folks back home live lives of not-so-quiet desperation. Like in Thailand, this is democracy in action for you for better or (much) worse.