Sunday, March 29, 2009

Angelina and Jeff Sachs

By popular demand! Sofia M. sent me an email with a good idea: why not bring to your attention the work that AJ has done with Prof. Sachs? I guess she's right, so here they are. Watch them - a picture (of Sub Saharan Africa) is worth a thousand words.

BTW, as embarassing as it may be, when I used the name Angelina in my IB Economics Guide (....Consider it a role-playing game: imagine yourself as a junior economist sitting at a round table discussing an issue with other fellow economists when the person in charge of the meeting turns around and asks you ‘what do you think, Angelina?’)I had in mind this Angelina...!


Sustainability is a key concept for IB Economics students. It is, for that matter, a key concept for anyone, young or old, on this planet. Earth Hour yesterday was successful in at least increasing awareness about the problems we all face. But even if Earth Hour was repeated on a daily basis, the problem that we, our children and our grandchildren face will only get worse, if the developing world is neglected. And the biggest cost of the current crisis may be exactly that what needs to be done in the developing world is shelved. No matter what the advanced economies do to promote sustainability it can never succeed if the developing world is left behind.

Jeff Sachs explains why and also what should be done in his opinion:
The global economic crisis will be with us for a generation, not just a year or two, because it is really a transition to sustainability. The scarcity of primary commodities and damage from climate change in recent years contributed to the destabilization of the world economy that gave rise to the current crisis. Soaring food and fuel prices and major natural disasters played an important role in undermining financial markets, household purchasing power, and even political stability.

Viewed in this way, an essential policy that developed and developing countries should pursue in overcoming the crisis is to build infrastructure suitable for the twenty-first century. This includes an efficient electricity grid fed by renewable energy; fiber and wireless networks that carry telephony and broadband Internet; water, irrigation, and sewerage systems that efficiently use and recycle fresh water; urban and inter-city public transit systems; safer highways; and networks of protected natural areas that conserve biodiversity and the habitats of threatened species.

These investments are needed in the short term to offset the decline in worldwide consumption spending that underlies the global recession. More importantly, they are needed in the long term, because a world crowded with 6.8 billion people (and rising) simply cannot sustain economic growth unless it adopts sustainable technologies that economize on scarce natural resources.

In practice, the global crisis means that sustainable investments are being curtailed rather than expanded in the developing world. As access to international bank loans, bond flotations, and foreign direct investment is lost, infrastructure projects talked about in the past are now being shelved, threatening the political and economic stability of dozens of developing countries.
Moreover, policymakers in the rich world believe that they can continue to neglect the developing world, or leave it to its fate in global markets. This is also a recipe for global failure, and even future conflict. Developed countries will have to do far more to help poor countries through the transition to sustainability
The above are from his commentary The Transition to Sustainability posted in Project Syndicate.

Read also this Vanity Fair article about Jeff Sachs and watch this short video on Ruhiira, a "Millennium Village, in Uganda.

Friday, March 27, 2009

Scary trade developments...

When international trade is collapsing we should all get worried:
Argentina's exports were down 35.8%. Canada's were off 34.6%. Chile's by 41.3%. China's were down 17.5%. Ecuador's fell by 47%. Germany's by 28.7%. France's by 30.7%. India's by 15.9%. South Korea's by 32.8%. Malaysia's by 35.3%, etc.
Read Trade is collapsing, everywhere posted in Free Exchange ( blog)

On automatic stabilizers etc

IB Economics students currently doing Macro will find plenty of what they have been learning on automatic stabilizers, discretionary fiscal policy, the impact of imports on the expenditure multiplier etc in this IHT article. Read it!
Europe, aided by safety nets, resists stimulus push

Thursday, March 26, 2009

Data Response Exam Preparation: HL P3Q Q2 May 2006

IB Economics - Higher Level - Data Response Question - May 2006, Paper 3, Question 2
(What follows can be soon found as a file -including the diagrams- at our wikispace here)

This one is a macro data with questions (a), (b) and (c) very easy and with (d) somewhat demanding but manageable.

Question (a)(i) asks you to define the unemployment rate. It’s the number of unemployed individuals in an economy expressed as a proportion of the labor force (the number of unemployed divided by the labor force). That’s it! No need to explain who is considered unemployed (BTW, it’s the individual actively searching for a job and unable to find one) or to define the labor force (the sum of those employed and unemployed).
Question (a)(ii) asks you to define the business (or, trade) cycle. A precise and concise definition is that the business cycle refers to the short run fluctuations of real GDP around its long run trend. Again, there is no need to define real GDP or trend output here. Mind you that you could sketch a diagram with real GDP on the vertical and time on the horizontal illustrating these ups and downs which could help you earn the 2 points if the definition you gave was vague.

Question (b) asks you to explain using an appropriate diagram how a government may attempt to close a deflationary gap. Well, the diagram here could be an AD / AS diagram with average price level (P) on the vertical and real output/income (Yr) on the horizontal. A vertical long run aggregate supply curve at the full employment level of output (Yfe) is necessary, an upward sloping short run aggregate supply and an aggregate demand that intersects the SRAS at some level of real output to the left of the full employment level of real output Yfe (below that is full employment; left of the vertical LRAS)). The distance on the vertical axis between the equilibrium level of real output and the full employment level of output is the deflationary gap (also referred to as the recessionary gap). You should also draw a second AD (call it AD’) such that it intersects the SRAS and the point the SRAS intersects the LRAS (so that the equilibrium level of output coincides with the full employment level of output). Remember the (correctly drawn and labeled) diagram earns you 2 points automatically. Now, for the remaining 2 points you could explain that a deflationary gap results when the economy is at equilibrium at a level of output/income below the full employment level (refer to the diagram at this point) and that it is a result of insufficient aggregate demand. It follows that if somehow aggregate demand increased to AD’ the gap would close. The government could thus use either expansionary fiscal policy (increasing government spending and/or lowering taxes) and/or easy monetary policy (lowering interest rates)

Question (c) asks you to explain why deflation creates conditions that make it ‘unfavorable’ for businesses to invest. Here you are not asked to illustrate using a diagram. Well defining deflation will not only set you up but help you organize your thoughts. Deflation refers to a sustained decrease in the average level of prices (negative inflation rates). Deflation is typically the result of AD decreasing. As such, periods of deflation are accompanied by falling output (recession). You could draw an AD/AS diagram with AD shifting left but there is no need to do so. Deflation is serious and is difficult to get rid off. (see Krugman, slide 7, here ). If AD (i.e. total spending) is falling then it will not be necessary for businesses to expand their capacity (to invest). If households and firms come to expect prices to continue falling then consumers will cut down on their purchases and firms will witness a fall in their revenues, hardly a time to invest. In addition, falling prices imply that the real debt of businesses (their debt expressed in terms of goods) increases thus making it unlikely to borrow more to make investments.

Question (d) asks you to evaluate (using the extract, as always) the extent to which unemployment would still be a problem if inflation were allowed to increase. One must read the question very carefully. It really asks whether rising inflation in Singapore would imply lower unemployment. It thus seems to ask you to evaluate whether and to what extent a (short run, at least) Phillips curve trade-off is present. I think that looking at the data of the table gives is quite some information (remember, always squeeze every bit of info out of whatever data is given). Looking at the 2000-02 3 year period seems to illustrate that the increase in unemployment from 3.1% to 3.3% and then to 4.4% was accompanied by a decrease in inflation from 1.3% to 1.0% and to -0.4% (deflation). This fits the original Phillips curve trade off (which you could describe). You could also draw a Phillips curve diagram with inflation on the vertical and unemployment on the horizontal making sure you use on the axes the figures above. The fact that in 2003 (expected) inflation picks up to 0.5% and unemployment further rises 4.7% can be explained by noting that the increase in the inflation rate is not accompanied by higher growth (growth drops from 2.8% in 2002 to 2.3% in 2003) so there is a chance that prices rose a bit because of cost-push factors. As a matter of fact something like that is hinted in paragraph 1 when it mentions that ‘increases in the cost of food, clothing and housing had resulted in the price index rising’. On the other hand one could note that when in 2000 Singapore registered a 10.1% growth rate unemployment was at 3.1% suggesting that 3% unemployment may be the natural rate for the country. You must explain the natural rate of unemployment concept here and perhaps draw a vertical Phillips curve (LRPC) at the 3% unemployment rate in your diagram. In paragraph 2 it mentions that ‘the increase in inflation is welcome’ and that the rise in unemployment is a result of low economic growth. You could also note that in paragraph 3 it becomes clear that there is a deflationary gap in Singapore as there is ‘excess productive capacity in Singapore’s economy, which is dependent on trade’. Singapore is in the ‘slump phase of the business cycle’ as ‘trade (read, exports) have fallen by 30% from the previous year’. One may thus argue that if trade (export demand from the US) picks up, then Singapore’s AD will increase (shift to the right) increasing prices and lowering unemployment, as to produce more exports they will need to hire more people.

One could of course conclude that you need more disaggregated labor force and industry related data to make a better evaluation of the labor market effect of higher inflation. On the other hand, both the extract and the table seem to suggest the existence of a clear short run trade off between the two variables so that it is reasonable to expect that unemployment will decrease if inflation picks up but not below the 3% rate which probably is Singapore’s NRU.

Hope this makes sense and helps you prepare! Remember, you should practice writing short and long essays as well as data questions at home. The more you write, the better your chances. Also, remember to practice under a time constarint. That's the real problem with the HP3 and SP2 paper.

Wednesday, March 25, 2009

All is well in candy land....

If tough times are here to stay for a while be prepared to gain a few kilos and add a few centimeters to your waistline!
The recession seems to have a sweet tooth. As unemployment has risen and 401(k)'s have shrunk, Americans, particularly adults, have been consuming growing volumes of candy, from Mary Janes and Tootsie Rolls to gummy bears and chocolates, particularly inexpensive ones, candy makers, store owners and industry experts say.
That's of course good news to candy companies:
Many big candy makers are reporting rising sales and surprising profits even as other manufacturers are struggling to stay afloat. Cadbury reported a 30 percent rise in profits for 2008 while Nestlé's profits grew by 10.9 percent, according to public filings. Hershey, which struggled for much of 2008, saw profit jump by 8.5 percent in the fourth quarter. Lindt & Sprungli, which specializes in high-end products like Lindt bars and Ghirardelli, said that even though it expected to close its luxury retail stores in 2009, it would remain profitable because of strong chocolate sales through middle-class retailers like Wal-Mart and Target.
Booming sales in recession times is an old story:
There may be historic precedent to the recessionary strength of the candy business. During the 1930s, candy companies thrived, introducing an array of confections that remain popular today. Snickers debuted in 1930. Tootsie Pops appeared in 1931. Mars bars with almonds and Three Musketeers bars followed in 1932.

Hershey, the dominant candy brand during the Depression, remained profitable enough through the 1930s that the company financed its own Works Progress Administration programs, said Pamela Whitenack, Hershey Community Archives director.

"Candy companies are relatively recession proof," said Peter Liebhold, chairman of the Smithsonian's work and industry division. "During the Great Depression, candy companies stayed in business."
So, better be careful as summer is approaching fast!

The full article is here.

Tuesday, March 24, 2009

Data Response Exam Preparation: HL P3 Q2 M08

IB Economics - Higher Level - Data Response Question - May 2008, Paper 3, Question 2
(What follows can be found as a file including the diagrams at our wikispace here)

We've done this one in class but as May approaches I'm posting some of our thoughts for you to have. Here it goes (May08, HP3, Q2):

You are asked in (a) to define ‘structural unemployment’ and ‘average costs’. Remember that definitions are worth 2 points each; it follows that you should try to be very precise and concise. No reason to explain at length – only to define. You only have 40 minutes for each data question. Never allocate more than 2-3 minutes to definitions!

(a)(i) The unemployment that results when there is a mismatch between the skills available by the unemployed and the skills demanded by firms in the labor market. (no reason to explain why there may be a mismatch of skills or how policymakers may deal with structural unemployment)
(a) (ii) Costs per unit of output; average costs are thus total costs divided by the number of units produced (no reason to explain the typical behavior of average costs; note though that if you felt insecure about your definition you could sketch a U-shaped average cost curve with Q on the horizontal and ATC on the vertical)

In (b) and (c) remember that if the question asks you to explain something using a diagram you earn 2 points for the diagram and 2 for the explanation. It follows that in such a case your explanation does not need to be extensive and should use the diagram you draw.

(b) This question asks you to explain how increased unemployment could lead to a fall in the output of a nation using a production possibility curve (PPC) diagram.
A production possibilities curve shows that maximum output combinations an economy can at the most produce if it fully utilizes its scarce resources (labor, capital etc) using available technology. The existence of unemployment implies that the economy is operat-ing at a point (a combination of goods X and Y) inside the PPF, such as point A in the diagram. If unemployment increases it means that the economy has moved to a new point (such as B) further away from the curve and closer to the origin (in a south-west direction). The reason is that higher unemployment typically implies lower output. (Your graph has a typical concave PPF with (units of) good X on the horizontal and (units of) good Y on the vertical. Choose two points inside the PPF, A and B, with B closer to the origin so that it reflects fewer units of both X and Y)

(c) This question asks you to explain why average costs in Canadian timber firms might fall in the long-run using an appropriate diagram. Since the question is about average costs in the long run that are falling you should recognize that we’re dealing with a case of economies of scale. The diagram would thus illustrate a (long run) average cost curve that is falling (perhaps you could show it rising after some level of output but it is not necessary). The relevant info from the extract is this sentence: ‘With production now concen-trated at the larger, more efficient timber firms, the industry’s average costs have fallen significantly’. Thus:

Average costs have decreased because the Canadian timber firms are enjoying economies of scale. Economies of scale refer to lower average costs that are a result of bigger size. The extract mentions that now production of timber in Canada is concentrated ‘at the larger, more efficient timber firms’. In the diagram, the typical firm has grown in size from SAC1 to SAC2 for which average costs are lower as illustrated by the downward sloping LAC curve. The larger size may permit these firms to buy inputs in bulk achieving better prices from suppliers or to use specialized machinery that was not available for smaller size firms.

(d) This question asks you to evaluate the effects of the removal of US timber tariffs on US consumers, US producers and the US government (using information from the text and your knowledge of economics, as usual). First note exactly what you are asked to evaluate: the effects of removing a specific tariff on 3 specific entities: US consumers, US producers and the US Government. Note one very important issue present in all such 'evaluation’ questions: you are not asked to simply mention the effects but to evaluate these. Evaluation in data questions is an informed, theory-backed and issue-specific judgment.

Next, carefully read the extract noting the specific phrases / sentences / points that you could use in your answer (a great answer in a ‘vat’ i.e. without reference to the specifics of the question can not earn you more that 5 of 8 points).

The points that may be used in your answer include
-- that the ‘US and Canada have ended a long-standing and bitter $4.5 billion trade row’ (paragraph 1). Frictionless international relations between countries decrease risks of trade wars and provide a conducive environment for more welfare enhancing trade to take place; this is a most important effect of removing the timber tariffs.

-- that ‘Canadian timber mills have been forced to close or cut their output because the demand for Canadian timber from the US has fallen. This has created an increase in struc-tural unemployment in Canada and a consequent fall in income, expenditure and output’ (paragraph 3). This point can be used when explaining that the removal of the tariff by the US government will create symmetric (short term at least) costs to US timber firms and to the workers it employs. If you draw the standard tariff diagram (remembering that here the tariff is removed and not imposed) the effect on US (domestic) timber firms is that production will decrease (and unemployment {structural} may increase. This definitely makes US timber firms worse off as they will witness lower profits and some may be forced to exit the market. Specialized US labor employed in the timber industry will also be hard hit. The US government may have to spend on training and re-training to lower the adjustment costs. On the other hand other US firms that use timber as an input (hous-ing construction, furniture makers etc) will be better off as the price of timber will de-crease. This means lower production costs. They may expand their output and increase their employment. The net overall US employment effect is thus not necessarily negative as a result of the tariff removal.

-- ‘However, despite this, the Canadian timber industry has emerged more competitive than before. With production now concentrated at the larger, more efficient timber firms, the industry’s average costs have fallen significantly’ (paragraph 3). This is perhaps the most important expected effect on the US timber industry of removing the tariff. US tim-ber firms will be forced to become more efficient. The least efficient will exit or be taken over by the more efficient firms so the average size of US firms will probably increase so that they too will probably benefit from scale economies.

-- ‘The removal of tariffs is bound to affect consumer welfare, producer efficiency and the ability of government to achieve its macroeconomic objectives’ (paragraph 5). As men-tioned earlier the buyers of timber are typically other firms using timber as an input. They will enjoy a larger consumer surplus (plus areas 1,2,3,4 in the typical tariff diagram) as price of timber will be lower. All US (household) consumers will be better off as lower prices may result for all wood using firms. Houses may become somewhat cheaper, boats (cruisers), furniture etc. Greater demand may thus be expressed for a variety of products even though the effect on US aggregate demand will probably by small. In this sense the macro objectives of growth, price stability and employment will probably be small. In ad-dition the US government will not be collecting anymore tariff revenues (area 3 in the standard tariff diagram) but this does not mean the overall tax revenues will be negatively affected as the increased economic activity in the timber using industries and the resulting profit and indirect taxes collected may more than offset this loss.

Bear in mind that you do not have to include all of the above points from the extract. You may include additional evaluation points for which there is no direct reference in the extract but please make sure that even then you refer to the issue at hand (i.e. the US timber industry stakeholders).

If you do draw a standard tariff diagram refer to it in your answer.

These are not 'model answers'! The whole idea of 'model answers' is counterproductive. The aim is to help you realize what examiners expect in paper 3 (and Standard P2). Rem.: HP3 is 40% of your grade and SP2 is a whopping 50%!

Monday, March 23, 2009

Protectionism is increasing - not surprised, are we?
Russia has raised tariffs on used cars. China has tightened import standards on food, banning Irish pork, among other things. India has banned Chinese toys. Argentina has tightened licensing requirements on auto parts, textiles and leather goods. And a dozen countries, from the United States to Australia, are subsidizing embattled automakers or car dealers.

The most vivid example of that policy is the "Buy America" provision in the stimulus package, intended to ensure that only American manufacturers benefited from public-spending projects. The Obama administration persuaded Congress to water it down, and Mr. Obama has taken up Mr. Bush's warnings about the dangers of protectionism.

But pressures are building on other fronts. Last week, the (US) energy secretary, Steven Chu, said he favored tariffs on Chinese goods if China did not sign on to mandatory reductions in greenhouse gas emissions — underscoring how the "green economy" could be the next trade battleground.
Read the article 'Trade barriers rise as the recession's grip tightens' in the IHT.

Sunday, March 22, 2009

Economics Is the 'Just Right' Liberal-Arts Major

That's the title of an article written by David Colander which was brought to my attention by Greg Mankiw (March 21 post).
'Like many liberal-arts institutions, Middlebury College, where I teach, has a problem: Too many
students want to be economics majors. Economics enrollments keep growing, and adding more faculty members to the department seems to only increase the demand. The rumor on the campus is that if the college actually provided enough professors to meet the demand for economics courses, it would have to change its name to the Middlebury School of Economics.Professors at other liberal-arts colleges confirm that the phenomenon is widespread and has been for some time. But what makes the economics major so appealing? As an economist I like to think that economics has become so popular because of its intellectual rigor, broad appeal, and importance to understanding the world. And those are clearly part of the answer, especially given the recent financial crisis. Modern economics is an exciting and dynamic field of study that has changed considerably in recent years; specifically, it has become more quantitative and scientific. Today's economists bring technical expertise to interesting and novel questions. They have also expanded their previous narrow vision of human behavior. Homo economus is now considered purposeful, not ultrarational, and pursues enlightened self-interest, not greed. Psychological insights and traditional economics are blended together in today's behavioral economics; because modern economists do not see the market as the answer to everything, they are able to be involved in all types of real-world policies, from changing default options for people's savings decisions to helping design search algorithms for Google. But as much as I'd like to think so, I suspect that those strengths and improvements are not the main reasons for the economics major's appeal.'
As you (my students - Candidates 2009) are about to enter college, reading this may have some value!

Dani Rodrik on ideologues and hubris

Most will agree agree that:
'without recourse to the economist’s toolkit, we cannot even begin to make sense of the current crisis.'

All will probably agree with his assertion that:
'The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. They forgot that there were many other models that led in radically different directions. Hubris creates blind spots.'

And even though many may disagree that:
'Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today’s needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.',
this last point of his may explain why macro at the intro level had for many become most difficult as it was tough to reconcile the 'newer' macro theory taught without the elegance of 'technical rigor' to the real world the intro students witnessed around them. At least when teaching an advanced course you had the fun associated with elegance....
His article is here.

PS: Was just reading a note by Nicolas Vroussalis ('98) in his θεωρειν blog. Another side, well worth reading (in Greek). 'Η Ένδεια της Σύγχρονης Οικονομικής Ι: Κοινωνική Εξήγηση' and 'Η Ένδεια της Σύγχρονης Οικονομικής ΙΙ: Υποταγή του Περιεχομένου στη Μορφή'.

Sunday, March 15, 2009

Costs of Privatizaion: Increased mortality??

An article in a prestigious medical journal (Lancet) presents evidence that:
'Rapid mass privatisation was associated with an increase of 12.8% in mortality rates among men. Possible mechanisms? Rapid social change has been linked to psychological stress, decreased access to and quality of medical care, poverty, unemployment, social inequality, social disorganisation, corruption, and an erosion of social capital. Harmful consumption of alcohol may have been a major cause of increased disease.'
The artile is: 'Mass privatisation and the post-communist mortality crisis: a cross-national analysis' and a summary can be found here.

It came to my attention when receiving the Vox EU weekly digest. A forthcoming article in the (also, prestigious) Economic Journal ('Employment and Wage Effects of Privatization: Evidence from Hungary, Romania, Russia, and Ukraine') using a different methodology claims that there 'is no evidence that privatisation systematically lowered firm-level employment' and so the Lancet result is up in the air as
' is possible that some other link, not suggested by the article and unrelated to employment outcomes, could explain the observed privatisation-mortality correlation at the country level.'
Read the vox eu reply here by one of the authors of the EJ article. A summary of the forthcoming EJ paper is here.
My intuition is that the Lancet article may have a point. Worth checking out both if you have the background and the time!

For IB economics students the possiility of such a link as described above may serve as a possible argument in an evaluation of privatization policies.

(back to grading HP3 - OMG...)

Saturday, March 14, 2009

wow...pretty impressive stuff!

Just got an email from TED on a new MIT Media Lab (Fluid Interfaces Group) presentation titled 'Sixth Sense'. Sounded intriguing - and, it was! The guy behind it is Pranav Mistry.

'SixthSense' is a wearable gestural interface that augments the physical world around us with digital information and lets us use natural hand gestures to interact with that information. By using a camera and a tiny projector mounted in a pendant like wearable device, 'SixthSense' sees what you see and visually augments any surfaces or objects we are interacting with. It projects information onto surfaces, walls, and physical objects around us, and lets us interact with the projected information through natural hand gestures, arm movements, or our interaction with the object itself. 'SixthSense' attempts to free information from its confines by seamlessly integrating it with reality, and thus making the entire world your computer.

Friday, March 13, 2009

What Is Gross Domestic Product?

A Back to Basics article in the magazine Finance and Development that the IMF publishes explains everything an IB economics student needs to know about GDP.

"Many professions commonly use acronyms. To doctors, accountants, and baseball players, the letters MRI (magnetic resonance imaging), GAAP (generally accepted accounting principles), and ERA (earned run average), respectively, need no explanation. To someone unfamiliar with these fields, however, without an explanation these acronyms are a stumbling block to a better understanding of the subject at hand.

Economics is no different. Economists use many acronyms. One of the most common is GDP, which stands for gross domestic product. It is often cited in newspapers, on the television news, and in reports by governments, central banks, and the business community. It has become widely used as a reference point for the health of national and global economies. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not."
To continue reading the article, click here.

Another, interesting article found in the same issue of the magazine is 'The Crisis through the Lens of History':
"Economic history is back in vogue. In the first half of 2008, surging prices of oil and other commodities revived unhappy memories of the stagflation of the 1970s. More recently, the extraordinary intensification of the global financial crisis since the mid-September collapse of Lehman Brothers has brought back an even more ominous specter from the past—the Great Depression of the 1930s.

Comparing the present financial crisis to the deepest and most devastating economic cataclysm in modern history may seem a stretch, but there is now no question that the ongoing crisis has become the most dangerous of the post–World War II era. It is not so much the depth of the downturn in individual countries—devastating financial collapses have occurred before in advanced as well as in emerging economies—but its pervasive reach into all corners of the world economy that has created a threat to global prosperity not experienced in 70 years.

But how large is the present financial crisis by past standards? And, crucially, what will be its likely economic impact and what can be done to contain the damage and pave the way for economic revival? Economic history can help answer these questions, offering both a useful perspective for understanding the relative magnitude and seriousness of the current crisis and invaluable lessons that can be applied to resolving it."
Click here to continue reading it. PDF versions to download, save and print are also available. Do me the favor and check out the magazine site as I'm sure you will find other interesting (and often helpful for the May exams) material.

Saturday, March 7, 2009

LA walkabout

No IB Economics here - but since you are preparing for paper 3, the data response questions, here is something to check out when taking a (short) break....

(pic by Mathieu Young)

Wednesday, March 4, 2009

The real crisis? We stopped being wise

This is Barry Schwartz (again) in a TED talk. Definitely worth your 20 minutes. If by any chance you are a teacher or you happen to run a school (especially in the greater Athens area), pay extra attention to the last few minutes...

Monday, March 2, 2009

Do you demand soft and comfortable?

No forest of any kind should be used to make toilet paper," said Dr. Allen Hershkowitz, a senior scientist and waste expert with the Natural Resource Defense Council.
Externalities here, externalities here, externalities everywhere...Who would have thought that our 'soft-tissue habit' could be so deleterious to the environment? Read the article 'Americans' love of soft tissue is rough on forests' in the online edition of the IHT.

BTW, the author claims that
Other countries are far less picky about toilet tissue. In many European nations, a rough sheet of paper is deemed sufficient.
'Many' European nations?

The need for macroeconomic cooperation

This is about the latest contribution to Project Syndicate by Jeff Sachs. He argues that the G-20 countries should seize the opportunity that the current crisis offers and to increase investment spending that will address the 'critical needs of the planet':
The world has yet to achieve the macroeconomic policy coordination that will be needed to restore economic growth following the Great Crash of 2008. In much of the world, consumers are now cutting their spending in response to a fall in their wealth and a fear of unemployment. The overwhelming force behind the current collapse of jobs, output, and trade flows, is even more important than the financial panic that followed Lehman Brothers’ default in September 2008.

There is, of course, no return to the situation that preceded the Great Crash. The worldwide financial bubble cannot and should not be recreated. But if the world cooperates effectively, the decline in consumer demand can be offset by a valuable increase in investment spending to address the most critical needs on the planet: sustainable energy, safe water and sanitation, a reduction of pollution, improved public health, and increased food production for the poor
His analysis focuses on developing countries and to the responsibilities of the G-20. Note the transmission of the crisis to the poorest countries: falling export revenues, falling remittances and falling cpital inflows:
There is a strong case for global cooperation to increase these public investments in the developing economies, and especially in the world’s poorest regions. These regions, including Sub-Saharan Africa and Central Asia, are suffering harshly from the global crisis, owing to falling export earnings, remittances, and capital inflows.

Poor regions are also suffering from climate changes such as more frequent droughts, caused by rich countries’ greenhouse-gas emissions. At the same time, impoverished countries have huge needs for infrastructure, especially roads, rail, renewable energy, water and sanitation, and for improved current delivery of vital life-saving services, including health care and support for food production
In his concluding paragraph he stresses why such a course of action would be a 'triple victory':
Cooperation can turn the sharp and frightening decline in worldwide consumption spending into a global opportunity to invest more in the world’s future well being. By directing resources away from rich countries’ consumption to developing countries’ investment needs, the world can achieve a “triple” victory. Higher investment and social spending in poor countries will stimulate the entire world economy, spur economic development, and promote environmental sustainability through investments in renewable energy, efficient water use, and sustainable agriculture.
I should mention that I'm not so sure how Sachs envisions the financing of such spending and whether he thinks such spending could pose a threat to the long term fiscal and overall health of the US, the EU or Japan. Given all the debates on the risks of huge debts I would have liked some discussion of this issue in his article.