Two great blogs to check out

I've been meaning to alert you to two great blogs, one for economics by Andrew McCarthy (elearning and economics) and another one for English by Eric MacKnight.

These are the links. I'll add them to my list on the right asap:

elearning and economics

english

Enjoy!

On QE, Germany, China and Friedman

This is the link to Krugman's op ed piece today in The NY Times / IHT. IB Economics students should be able to understand it perfectly well. Useful for examples in long essays etc.

Food prices and poverty

It's been a loooong time and I really am sorry to have neglected this blog but today, Sunday, even though I am still way behind in my work, I did tumble upon a very interesting post while browsing the Free Exchange Economist blog. It is an article by Timothy Wise in Triple Crisis (post link here)titled 'Are high agricultural prices good or bad for poverty'. I have always told my students that it depends upon whether the poor are net buers (net importers) or net sellers (net exporters) but is seems that this may be missing important issues.

Read the post!

(btw, I read there that Dani Rodrik is posting again which is great news in my opinion)

Hope to resume posting soon!

For IB Economics Year 1 students/ Candidates 2012

I have already mentioned to some of you the importance of watching now (and again, later) the video 'Commanding Heights' produced by PBS a few years ago.

You can view the video here or here (choose captions 'on' here).

The link for the 'home' page is here.



Trust me and click on the links above!

Rehn, the European commissioner for economic and monetary affairs on Greece (WSJ)

A ray of optimism - but we'll have to keep on eye on what happens in September and October in the streets of Athens:

Recall March 2010. Tensions over the Greek debt crisis were running high within the euro zone and among our international partners. People were talking about the end of the single currency. After weeks of intense consultations, phone calls, long days and even longer nights locked in meetings, a sense of determination and solidarity prevailed among European policy makers: "We swim together or we sink together."

Then came May 2010. Europe agreed on a joint euro area and IMF loan-support package for Athens, conditional on Greece's strict implementation of a credible fiscal adjustment program. Many outside critics doubted whether Athens could get the job done.

Now, August 2010. The Commission's first review of the program's implementation shows that, so far, Athens has proved the doubters wrong. Greece's ambitious and front-loaded adjustment program is on track to deliver a return to macroeconomic and financial stability, and stronger and more balanced growth in the medium-term.....

Read it all here.

'Needed: A New Economic Paradigm' / Stiglitz

Stiglitz is always interesting and illuminating to read. In his Aug 18 FT piece titled 'Needed: A New Economic Paradigm' he once again argues (convincingly in my opinion) of why much of the toolkit available in Economics may be inappropriate / distorting and even dangerous.

...It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.

Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks. No wonder former Federal Reserve chairman Alan Greenspan, in his famous mea culpa, could express his surprise that banks did not do a better job at risk management. The real surprise was his surprise: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behaviour with excessive risk-taking....

...Fortunately, while much of the mainstream focused on these flawed models, numerous researchers were engaged in developing alternative approaches. Economic theory had already shown that many of the central conclusions of the standard model were not robust – that is, small changes in assumptions led to large changes in conclusions. Even small information asymmetries, or imperfections in risk markets, meant that markets were not efficient. Celebrated results, such as Adam Smith’s invisible hand, did not hold; the invisible hand was invisible because it was not there. Few today would argue that bank managers, in their pursuit of their self-interest, had promoted the well-being of the global economy....

...Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do.

The full article can be found here (subscription required) or (most of it) here.

(one more reason why our 'evaluation'-mania in IB Economics is so important...)

On Fiscal Policy again...

Well, the academic year is about to begin and, slowly, work effort is picking up! I checked out Project Syndicate and there was an article by Skidelsky titled 'Fixing the Right Hole" which concerns fiscal policy and why the position of the 'fiscal hawks' may not make all that much sense:

Yet the budget cutters have a fallback position. The problem with fiscal stimulus, they say, is that it destroys confidence in government finances, thereby impeding recovery. So a credible deficit-reduction program is needed now to “consolidate recovery.”

What is it about cutting the deficit that is supposed to restore confidence? Well, deficit reduction may lead consumers to believe that a permanent tax reduction is on the horizon. This will have a positive wealth effect and increase private consumption. But why on earth should consumers believe that cutting a deficit, and raising taxes now, will lead to tax cuts later?

One implausible hypothesis follows another. Fiscal consolidation, its advocates claim, “might” lead investors to expect improvement on the supply side of the economy. But it is unemployment, loss of skills and self-confidence, and investment rationing that are hitting the supply side.

We are told that the “credible announcement and implementation” of fiscal-consolidation strategy “may” diminish the risk premium associated with government debt. This will reduce real interest rates and make “crowding in” of private spending more likely. But real interest rates on long-term government debt in the US, Japan, Germany, and the United Kingdom are already close to zero. Not only do investors view the risks of depression and deflation as greater than those of default, but bonds are being preferred to equities for the same reason.

Finally, the reduction of governments’ borrowing requirements “might” have a beneficial effect on output in the long run, owing to lower long-term interest rates. Of course, low long-term interest rates are necessary for recovery. But so are profit expectations, and these depend on buoyant demand. No matter how cheap it is for businessmen to borrow, they will not do so if they see no demand for their products.

The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy.

He makes reference to an article in the July issue of the ECB Monthly Bulletin ('The effectiveness of euro area fiscal policies', p. 67) and I would advise IB year 2 Higher Level (but even interested standard level) economics students to read carefully section 2 (pp. 68-71) titled 'Fiscal policy effectiveness: theoretical considerations". Skidelski's piece can be then thought of as an evaluation of the ECB position. The July issue of the ECB's monthly bulletin can be found here.

Fiscal 'hawks'

The link to this was found at the Economist blog. It describes Alesina's position on how to tackle a crisis:

Quoting

This is Alesina's hour. In April in Madrid, he told the European Union's economic and finance ministers that "large, credible, and decisive" spending cuts to reduce budget deficits have frequently been followed by economic growth.

Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes.

The last sentence is worth noting:

Clearly, economists are as divided as politicians. The problem is that if austerity budgets are pursued and they prove ill-advised, many more people will suffer than just a few economists.

Cross your fingers....

The post is found here

No comment - must watch

Ken Robinson, again:

Wow!

Always suspected it, but this 'confirms' it!

From Free Exchange:

Luck”, James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “plays a meaningful role in everyone’s lives.” Mr Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%.

and,

Where other funds might recruit employees with financial or economic backgrounds and have them test hypotheses against data, Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm's advantage is in its willingness to trade what doesn't necessarily make sense.

Read it here: 'If it works, bet it'

Rodrik on Germany's role in this mess

Rodrik offers an interesting viewpoint on who may also be responsible and who has to act now before it is too late in this crisi.

Just a quote:

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, “growth can’t come at the price of high state budget deficits.”

But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence.

In fact, it sets in motion a vicious cycle. The poorer an economy’s growth prospects, the larger the fiscal correction and deleveraging needed to convince markets of underlying solvency. But the greater the fiscal correction and private-sector deleveraging, the worse growth prospects become. The best way to get rid of debt (short of default) is to grow out of it.

So Europe needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. The greatest obstacle to implementing such a strategy is the EU’s largest economy and its putative leader: Germany.

Even though its fiscal and external accounts are strong, Germany has resisted calls for boosting its domestic demand further. Its fiscal policy has been expansionary, but nowhere near the level of the US. Germany’s structural fiscal deficit has increased by 3.8 percentage points of GDP since 2007, compared to 6.1 percentage points in the US.

What makes this perverse is that Germany runs a huge current-account surplus. Projected to amount to 5.5% of GDP in 2010, this surplus is not far behind China’s 6.2%. So Germany has to thank deficit countries like the US, or Spain and Greece in Europe, for propping up its industries and preventing its unemployment rate from rising further. For a wealthy economy that is supposed to contribute to global economic stability, Germany is not only failing to do its fair share, but is free-riding on other countries’ economies.

It is Germany’s partners in the eurozone, especially badly hit countries like Greece and Spain, that bear the brunt of the costs. These countries’ combined current-account deficit matches Germany’s surplus almost exactly. (The eurozone’s aggregate current account with the rest of the world is balanced.)

Read it here.

Αν - Δ. Μητσοτάκης & Ευδαίμονες.wmv

We did this essay in class the other day:


Using an appropriate diagram, explain how a government decision to decrease income tax rates could lead to a movement along the short-run Phillips curve. [Nov 09, 5]

I have posted the ideas discussed in my wikispaces site for any interested IB Economics (higher level) candidate to look at. If you are not my student, please keep in mind that what your own instructor expects is more important.


There are many ways to tackle this question. One could start off by mentioning that taxes can be distinguished into direct (e.g. taxes on income, on profits, on wealth) and indirect (taxes on goods and on expenditures).

You would then explain that a decrease in income tax rates would increase disposable income (defined as income minus direct taxes plus transfer payments). Consumption (spending by households on durables, non-durables and services per period) is thus expected to increase and, since consumption expenditures are typically a large component of aggregate demand (total spending per period on domestic output), AD is expected to increase and to shift to the right from AD1 to AD2 (you should, in my opinion include a simple AD/AS diagram):

(the rest of the stuff is found here)

Enjoy!

Joe Stiglitz on R. Skidelsy and his new book on Keynes

Robert Skidelsky has published a new book, 'Keynes: The Return of the Master', and my ex-student Alexandros Stavrakas who is now editor-in-chief of Bedeutung, a magazine of Philosophy, Current Affairs, Art and Literature was kind enough to bring to my attention a review of the book written by Joseph Stglitz.

Here are the opening paragraphs:

It has become a commonplace to say, in the aftermath of the Great Recession, that ‘we are all Keynesians now.’ If this is so, then Keynes’s great biographer, Robert Skidelsky, should have much to say about the recession, its causes and the appropriate cures. And so indeed he does. I share with Skidelsky the view that, while most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities), a considerable portion of it lies with the economics profession. The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.

We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.

The review is, of course, much more than a review so it would be a good idea to read it and get a sense of how things are in the profession and in the world right now.

On page 5 of the article Stiglitz discusses the situation that Greece and other PIIGS are facing:'

... There are speculative attacks against the weakest countries, which find themselves caught between a rock and a hard place. They worry that deficits will lead to higher interest rates, not because (as is usually argued) public spending will crowd out private spending, but because of growing ‘risk premiums’. But the effect is much the same: more government spending will force cutbacks in private spending, with the obvious adverse effects on the economy. The financial markets that caused the crisis – which in turn caused the deficits – went silent as money was being spent on the bail-out; but now they are telling governments they have to cut public spending. Wages are to be cut, even if bank bonuses are to be kept.

If markets were rational, there would be an easy policy response. Spending on investments that yielded even moderate real returns (say, of 5 to 6 per cent) would lower long-term debt levels; such spending increases output in the short run, thus garnering more tax revenue, and the future returns generate still more tax revenue. If markets could be convinced, for example, that European governments can and will meet their debt obligations, interest rates would fall, and even the countries with the highest levels of debt would find it easy to meet their obligations. But markets are not necessarily rational, and even when they are, they are not always well intentioned. The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to the rest of society. They can make money by inducing panic and then feel pleased with their ‘insight’: their concerns were justified, but only because of the responses to which their actions gave rise.

Since the time of Keynes, the ability of markets to mount such speculative attacks has increased enormously. But governments are not powerless to tame them, and in some cases can counter-attack, as Hong Kong did in foiling Wall Street’s famous ‘Hong Kong double play’, when speculators simultaneously sold short both the currency and the stock market. The speculators knew that governments traditionally respond to a currency attack by raising interest rates, which lowers stock prices. If Hong Kong failed to raise interest rates, they would make money by shorting the currency. If Hong Kong did raise them to save its currency, the speculators would make money by shorting the stock market. Hong Kong outsmarted them by simultaneously raising interest rates and supporting the stock market by buying shares. Taxes on short-term capital gains, regulations on the ever more powerful speculative instruments (like credit default swaps), and – especially for developing countries – the imposition of barriers on the uncontrolled movement of short-term capital across borders, can reduce the scope for and returns from this kind of behaviour.

The article is found here.

PS: May 2010 IB candidtates taking the Higher or Standard Level Economics exam on May 19/20 should definitely read this and take down a couple of notes. Examples and awareness of what is going on in the world are always much appreciated by examiners. Do not forget that. Even a mediocre essay will earn higher marks if it includes some relevant examples.

oh, how true...

Europe does not need the French plan for coordination of tax policies, or another IMF, but there does need to be fiscal discipline to prevent other countries from free riding, as the Greeks seem to have done. They apparently assumed that the rest of Europe would overlook continuing high deficits, and that, as eurozone members, the market would consider their debt to be just like German bonds, though issued by friendly and welcoming people in an agreeable climate, and with a glass of ouzo on the side.

The rest here.

On indutrial policy

We are discussing supply side policies and we mentioned industrial policy as an interventionist and rather controversial type.

Dani Rodrik of Harvard recently wrote a beautifully enlightening short article on it.

British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right.

Industrial policy is back.

In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.

China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. State-owned enterprises have acted as incubators for technical skills and managerial talent. Local-content requirements have spawned productive supplier industries in automotive and electronics products. Generous export incentives have helped firms break into competitive global markets.

Chile, which is often portrayed as a free-market paradise, is another example. The government has played a crucial role in developing every significant new export that the country produces. Chilean grapes broke into world markets thanks to publicly financed R&D. Forest products were heavily subsidized by none other than General Augusto Pinochet. And the highly successful salmon industry is the creation of Fundación Chile, a quasi-public venture fund.

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse. It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.

Yet the US owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Nor is America’s embrace of industrial policy a matter of historical interest only. Today the US federal government is the world’s biggest venture capitalist by far. According to The Wall Street Journal, the US Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels. During the first three quarters on 2009, private venture capital firms invested less than $3 billion combined in this sector. The DOE invested $13 billion.
The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government. The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support. But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.

Read the rest here.

PS: required reading (and, note taking -for examples- for my own little dorks)

no comment.....

Once again, doesn't look good...

on deregulation

These days in class we are discussing supply side policies and we initialy discussed two ways of distinguishing them. One route is to make the distinction between interventionist and pro-market policies and another way is to divide them into policies that are commonly accepted and policies that are considered more controversial which, in my opinion at least, include the 'pro-market' set and industrial policiy.

In discussing 'deregulation' I mentioned that quite a few consider the US banking and financial deregulation of the 1980s as being to a significant extent responsible for the current crisis.

Today, I was reading in Project Syndicate a short article by Hector R. Torres, a former Executive Director of the IMF.

The whole article is of nterest but these paragraphs are especially interesting for us:

Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.

Read the piece here.

revenue and profit maximization

Ideas on past IB Economics HL P2 questions on profit vs. revenue maximization can be found here at the IB Freeway.

A short on trade

If you are a May 2010 candidate and you are taking higher economics you should be comfortable with the analysis of a tariff.

These are 2 past IB questions relating to tariff analysis:

* How do tariffs affect economic welfare? (Short trade 3)

* Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff (Short trade 34)

An analysis that may be considered useful can be found in my wikispace here. The usual warning: make sure you listen to your own teacher before adopting what I say to my students....