Anna Schwartz Dies

Anna Schwartz died yesterday in Manhattan at the age of 96. She is best known for her collaboration with Milton Friedman, A Monetary History of the United States, 1867-1960. The book changed the way people regarded the Great Depression because it showed how far the money supply fell from 1929 to 1933.  Monetary policy went from a neglected tool by Keynesians to the dominant tool in economic policy.  Her obituary is here.

Randall Parker has an interesting book, Reflections on the Great Depression, in which he interviewed a number of famous economists who lived through the depression.  Anna Schwartz was one of the economists in the book.  Friedman's interview is also in the book.

On Five Keys to Restoring America's Prosperity

I finished reading John Taylor's First Principles: Five Keys to Restoring America's Prosperity and enjoyed it very much. It is very good in its analysis and policy recommendations.  The five key principles he lists are: predictable policy framework, rule of law, strong incentives, reliance on markets, and a clearly limited role for government.  In other words, a focus on economic freedom as much as possible.  They are fairly similar to the "modest proposal" I offered in one of my lectures at Acton University.  The suggestions I made included: observe federalism, let the government do what the private sector cannot, let taxes be collected to cover expenditures (making some allowance for expenditures that are truly investments), let the Fed apply a monetary rule, and let the goverment create an environment in which entrepreneur's can flourish. The latter would certainly include strong incentives and predictable policy framework.

Taylor argues that, "If people are forward-looking and adjust their behavior to new circumstances, then economic policy works best when formulated as a rule. Government's adherence to known rules allows people to have a clearer sense of what is coming, and therefore to make informed decisions about long-range plans."  To me, this is the most important statement Taylor makes in his book. It offers in a nutshell an argument for rules and against constant discretiionary behavior trying to fine-tune the economy.

Taylor offers support for his claims.  He argues that when policymakers support economic freedom, they rely on automatic stabilizers rather than Keynesan discretionary interventions, the Fed applies rules, and regulatory policy enforce known rules rather than deviate from them to help certain people.

Taylor looks at the post-war history of the U.S. to illustrate his arguments.  From the 1950s ot the late 1970s, the federal government and the Fed tended to be interventionist.  Keynesianism was the official doctrine employed in the government and monetary policy tended to waver in light of current economic conditions. Then, Paul Volker led the Fed to concentrate on price stability, arguing that unemployment wouldn't fall until stable prices were achieved. The election of Ronald Reagan brought a less interventionist approach for the executive branch as well. This approach lasted through the Clinton years, but President George W. Bush pusured more interventionist policies, and the Fed began to deviate from the rules-oriented approach it had followed. Today, interventionism abounds.

Taylor then provides chapters on how to get out of the mess we currently have. One is on debt, another on monetary rules, a third on ending crony capitalism, a fourth on entitlements, and a final on rebuilding American economic leadership. 

All-in-all, I found the book thoughtful and helpful.  It is worth taking a look at.

On Acton University

I  spent the last several days in Grand Rapids attending Acton University--a program for people who want to know more about market economies, liberty, and theology. I gave two lectures--one on theologians vs. capitalism and another on basic macroeconomics.  I also attended some lectures, including one on John Ryan and the New Deal and another on fair trade. The latter was presented by my former colleague, Victor Claar. He has an excellent monograph on the subject entitled, Fair Trade? It's Prospects as a Poverty Solution. I highly recommend the monograph.

On Europe, Again!

Europe remains the focus of much of the business news.  In the NY Times, German economist Hans-Werner Sinn offers an op-ed on why Berline is balking at a bailout.  His basic argument is that the kind of risk-sharing demanded by some pundits and politicians is only possible if the euro-zone were actually a nation with a contitution and a common legal superstructure.  Meanwhile, Gerald O'Driscoll opines in the WSJ that the euro will fail.  He cites Milton Friedman who predicted the euro would fail within ten years.  It has lasted longer than that, but O'Driscoll thinks failure is almost certain. He concludes his column with the idea that the EU should have adopted political union before creating the euro and not the other way around.  Another column offers support for Merkel's approach, arguing the lack of leadership is in the debtor nations. The lead article in the WSJ is on the spreading threat in Europe over the euro crisis. Another article focuses on Italy.

O'Driscoll referred to the time as a crisis, meaning the original idea of the Greek work that underlies the English word--a turning point. Either the currency will fail or it will recover by the euro-zone adopting more fiscal and political integration.  While O'Driscoll thinks it will fail, I still think there is a good chance the greater political integration will occur.

In Defense of Germany

Gideon Rachman's op-ed piece in today's Financial Times offers support for Germany's approach to the euro crisis.  He cites the newest Economist, in which it is argued that an international consensus on what Angela Merkel should do--shift from austerity, develop a banking union with euro-wide deposit insurance, and a type of debt mutualization (like euro bonds).  President Obama is among the world leaders pushing Germany to do something.

But Rachman argues otherwise. He thinks the demands are politically dangerous as well as unrealistic. Take a Europe-wide bank deposit system like the FDIC in the U.S. Rachman quotes a senior Dutch politician, "'We cannot push through a banking union when the French have just cut thier retirement age to 60 and we have raised ours to 67.'"

I have argued numerous times that the euro was a political decision, designed to force more political integration in the EU. But, as Rachman notes, the necessary integration cannot happen that quickly.  Among things needed would be to have a European government that could override the current national governments. They would need to harmonize the various European social security systems.

Rachman also claims that Merkel has had a political success that is little noted as yet.  She has been able to keep the far-right and far-left parites on the sidelines.  Meanwhile, in the last French election one-third of the voters supported either a far left or a far right party. Currently, the extremist parties are leading in the polls in the Netherlands.  The political center is holding in Germany and this is no small accomplishment.

Is Berlin Worrying Too Much About the Wrong Historical Period?

There is an interesting op-ed in the Financial Times by Niall Ferguson and Nouriel Roubini. They point out that Europe has dithered over recapitalizing their banks, often relying on sovereign debt to do so. Of course, the sovereign debt is part of the problem now.  They also argue that Germany is key but Germany is focusing too much on the hyperinflation after WW I and not enough on 1933.  They offer some solutions that could be worked, and note that the monetary union always implied further fiscal and political integration, a point I have often made.

They conclude with:

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.

Corruption in Europe and India

While on sabbatical at the University of Göttingen, I met Johan Graf Lambsdorf, whose reserach was on corruption across nations. He has been involved in compiling a Corruption Perceptions Index as part of Transparency International. This organization just came out with a report on corruption in Europe. Italy, Greece, Spain, and Portugal fared much worse than most of the other members of the euro zone.  The problems they are having today may not be directly related to corrpution, but I don't think it is a coincedence either. Corruption reduces economic growth and efficiency. It discourages entrepreneurship. It can increase government spending without providing benefits. Honest government is one of the institutions needed for economic growth.

Corruption is cited in an article about India in today's NY Times as well. Food often rots while the poor go hungry.  India provides subsidies to farmers to encourage more food production and sells food to the poor at prices lower than the would pay in stores.  But, corruption leads to much of the food being diverted. Some poor cannot get ration cards--a bribe may be needed.

The harm to people caused by corruption is real and significant.

Some Interesting Reading

A couple of interesting op-eds from the NY Times/International Herald Tribune.  One is on life in Athens today and the other on debt and the Walker recall election in Wisconsin.

Is College Still a Good Investment?

NY Times "Economix" offers a look at the value of a college education from those who didn't go to college.  Apparently high school graduates are finding their job market awful and think college grads have it better.

Debt is an issue for college grduates in  the U.S. today.  But debt taken on for investment purposes is preferable to debt taken on for consumption purposes.  Higher education is an investment, although there are consumption aspects as well--football games, parties, friends, and hopefully, some classes.  When looking at the success of recent graduates in getting good jobs, we have to consider more than raw numbers. For example, the college or university attended, the major chosen, and whether the graduate is willing to relocate.

College costs have risen faster than inflation for some time. There are several reasons for this. One is Baumol's Law--some activities are inherently more labor-intensive than others.  Science students still need time in laboratories and writing skills will not be enhanced in a class of 500. Technological improvement that increases labor productivity in manufacturing does not have the same impact in education. But colleges have to provide wages that reflect opportunity costs of working in industry. A second reason is that the percent of personnel in colleges and universities that are involved in teaching has fallen over several decades. Some of this is due to government regulations regarding discrimination, safety, and other issues. Some of it is due to competition--providing student activities, sports teams, and so on.

College remains a good investment for most students. But, if a student cannot go without taking on debt, he or she should consider carefully some decisions: what are my plans after college and how does my major/minor and nonclassroom activities aid in achieving those plans? Can a cheaper college be found? For example, a student going to a state university will spend more if attending a state university from a different state than his or her residence.  Also, read carefully the acceptance letter that contains the aid being offered.  Make sure you can distinguish aid from loans.

Soros on the Euro Crisis

An interesting speech by George Soros on the euro crisis and the financial crisis. While not endorsing all of his points, it is worth a read.

Doom and Gloom

The news remains bad.  A NY Times article reports that the Greek government may not have enough revenues to pay its bills, such as paying employees, as early as July. The steep recession is reducing government revenues. Another article reports that Spain may need help soon because the risk premium on their bonds is becoming too high. The G-7 are holding meetings on the crisis in Europe and maybe something will come out of that. (Article here). 

A column by Martin Wolf is entitled, "Panic Has Become All Too Rational." He notes a lot of reasons to be gloomy about he world economy.  He describes the West as in a contained depression. Deflationary forces are at work as households are reducing debt levels by spending less and savng more. Government policies have prevented it from becoming a full-fledged depression, but austerity is altering that. The scariest comment he makes is that he used to wonder how the 1930s could have happened. Now he understands. Clearly, Wolf thinks it could happen again.

Air Quality Monitoring in Beijing

Having lived in Pasadena, California for four years, I know something about polluted air.  During a visit to Beijing with a group of students. it was clear (pun intended) that Beijing's was at a whole other level. The best description I heard from someone who lived there was "apocalyptic." The Asia Pacific edition of the NY Times has an article on the Chinese government wanting embassies to stop monitoring and tweeting on the air quality in Beijing. The picture with the article is of the Beijing I saw while there in March.  I was told by an American living in Beijing that the readings on the meters are often at the maximum--the readings are off the chart.  China's policy appears to be concentrate on economic growth and then clean up. Come to think about it, that is what most of the industrial countries today did.

Is Europe Lurching Toward a United States of Europe?

Being in Germany and reading a lot on the euro crisis, I wonder if it is similar to what it would have been like in the months leading up to the Constittutional Convention that generated the U.S. Constitution in 1787.  The loose confederation of states was perceived as not working well. The men at the convention tried to hammer out a new government that would provide more integration among the states and establish a federal system with checks and balances, powers retained by states, and a federal government above all.

Each day here new articles appear that suggest further integration, then counter views, and then another step towards further integration.  Today is an example. According to an article in today's NY Times,  Germany is signalling some willingness to pooling of debt but not eurobonds. (Article is here). An article in Financial Times writes of Germany banks oppositon to some forms of a stronger banking union. The European Central Bank meets Wednesday and some speculate it may try to do more because Europeans are getting very nervous about the euro crisis. (Article is here.)

A Financial Times op-ed argues that Europe needs a Lehman moment and a Greek exit could provide that. A former head of UK Investments with Lehman Brothers, Michael Tory, writes that the American public suffered from bailout fatigue after bailouts to Fannie Mae, Freddie Mac and Bears Stearns.   Attempts to stop contagion bank by bank wasn't working and a recapitalization of the banking system was needed. There was just no political will for that action.  The Lehman bankruptcy changed things. Quickly action was taken as Ben Bernanke and Treasury Secretary, Hank Paulsen, scared Congressional leaders into action. TARP was the end result.  Tory argues a Greek exit could provide the same stimulus to action and force European leaders to take action. Tory writes, "They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate."

One part of the Lehman story Tory leaves out.  The American public did not like TARP. This is true for those on the left and the right.  Republicans who voted for TARP faced Tea Party candidates in primaries in the 2010 elections and most of them lost to the Tea Party candidates.  The politicians may have done the right thing, but they paid a price for doing so.  Might some European politicians take that as a lesson from the American experience?

Spain Calls for Centralized Control of National Budgets

Spain has called for centralized control of national budgets in the euro zone. Clearly, this is a move toward more fiscal coordination or even control by Brussels. An article in today's NY Times suggests the euro zone is lurching towards a crossroads--either it will move towards more centralization of fiscal policy or the euro will fall apart. There are renewed calls for creation of a Eurobond, which Germany still rejects.  Germany has called for increasing the powers of the European Commission in Brussels.  Ms Merkel's plans are longer term, requiring treaty changes.  Spain doesn't have that much time. Throughout the "Greek crisis" many have noted that the real concern isn't Greece but Spain. The latter is a much larger economy and any bailout at a scale large enough to be effective will be very expensive.

Not All the Employment News is Bad

The most recent job numbers was disappointing and growth remains anemic. However, there is some good news in the economy, especially for the Midwest. A report on the resurgence of American manufacturing shows that jobs in manufacturing have been growing. The report also mentions some of the top jobs in terms of new hiring and a likely replacement rate for the decade.  Exports tend to be fueling much of the increase.  Tyler Cowen has a piece in The American Interest in which he discusses the implications of an export-oreiented America.  Until recently, the U.S. has been the leading exporter in the world. We often forget that for two reasons--(1) we often ran trade deficits, i.e., we exported a lot but imported more, and (2) exports are not large relative to GDP. But manufacturing has also changed. The new hires have to be more skilled some robotics do most of the assembly work.  The new hires have to be skilled to work with the equipment.  Manufacturing output is increasing much faster than manufacturing employment. This trend is unlikely to change.

In the U.S. in recent decades, the gap between earnings of college graduates and high school graduates as increased.  America is increasingly a country specializing in human capital and humans working with computer-based capital. But college degrees are not needed for all good jobs.  Instead, skills as machinists, welders, and similar trades can provide good jobs as well. Skills are needed in today's marketplace. One question is: Does our education system provide learning opportunities for skills as well as for college preparation?

Is Germany Ready for More Integration?

An article in yesterday's Financial Times states that there are substancial discussions going on behind the scenes in Germany regarding further integration.  The official position of Germany fails to indicate that because Germany is concerned that comments might negatively influence some important elections coming up--the Irish referendum, elections in Greece, and parliamentary elections in France.  Further, there is always a concern of spooking financial markets.

According to the article, there is a broad consensus among the two major parties and the Green Party that greater fiscal integration is needed. It quotes Joschka Fischer, former foreign minister and member of the Green Party, “We are now very close to break-up,” he said. “Either we move ahead very fast, or we will go back to disintegrating. Will we share our wealth? Will we integrate our debt? Will we transfer our power to common institutions?”

Presumably, Germany is willing to put all of these on the negotiating table, but further fiscal integration also has to be on the table. The author also cites a recent Pew Global Attitudes Poll that shows a majority of Germans favor more integration, that is not the case in France, Italy or Greece.

This is not the impression one gets from most news stories and op-ed pieces.  The poll also found Chancellor Merkel the most respected leader in most countries--Greece excepted--which is inconsistent with the reporting that Merkel is isolated from the rest of the leaders.