Thursday, May 31, 2012

Energy Change Plans in Germany

Germany passed a plan last year to shut down all nuclear plants by 2022.  Not that Germany had built a new plant in many years; like the U.S. the nuclear plants are older.  There has been a strong anti-nuclear movement in Germany since Chernobyl.  But, plans for the change are behind schedule. Part of the reason may be that the euro crisis has consumed so much time of the government leaders.

The plans include a much greater reliance on renewable energy. The goal is 50% of energy produced by renewable sources by 2030.  This is mostly wind power generated mostly by turbines in the North Sea.  But much of industry is in the southern part of Germany so a new network of power lines are needed.  This will requires an investment of $25 billion over the next decade.  This process has been slowed by paperwork and regulations in the various German states.  Also, farmers are demanding more money for the land taken for the power lines. As a spokesman for the German Farmers Federation notes--land is limited.

For those who are concerned about global climate change, nuclear power is a good option to replace coal plants, but the Green Party in Germany is also very anti nuclear.  But relying so heavily on wind power presents problems too.  Since electricity cannot be stored, what happens when the wnds are down?  Another problem is that there is power loss as the electricity flows through power lines, so the further the power has to travel, the greater the loss.

After the earthquake and tsunami in Japan hit last year, Warrren Buffet said that many died in the tsunami and few will die from the troubles at the nuclear power plants. But, people will still build homes on the coast but nucelar power will be killed.  At the time I heard him say this, I thought he was right. I still do.

Wednesday, May 30, 2012

Martin Wolf on German Self-Interest

Martin Wolf has an interesting piece in today's Financial Times. The newspaper also has a series on the euro crisis, including a diagram showing how Greece could exit the euro zone and what the consequences would be. I believe a subscription is necessary to see the full column though so I will briefly summarize Wolf's column, "The Riddle of German Self-Interest."

Wolf says the crisis is clear, and he focuses on Spain and Italy because of their size. They are unable to manage their debts without some assistance. Much of the government's debt is held by the banks in the countries.Some of the debt has been generated to help the financially weak banks. Wolf uses a common metaphor to describe this--two drunks trying to hold each other up. Wolf argues that the austerity required by the EU is ineffective because the private sector has already gone to austerity and declining government spending keeps GDP going down. As he puts it, "The reward for pain today is pain tomorrow."

He then looks at how Germany wants the euro zone organized. He believes it is no to eurobonds, no to increase in funds for the European Stability  Mechanism, no to monetary expansion, and yes to austerity. So how do the German authorities think the slide in the periphery nations will be halted? Wolf offers two hypotheses. First, Germany believes the weaker nations will eventually pull out of the euro leaving a smaller but more stable euro. Second, they think their policies will work and things will turn around. Wolf doesn't think it will work. In fact, he thinks Germany is shooting itself in the foot since Germany relies on exports to other EU countries so heavily.

Wolf's final paragraph is:

"In October 1939, Winston Churchill said: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” The key in Europe today is Germany’s perception of its national interest. Once it becomes evident that their conditions will not work, German leaders will have to choose between a shipwreck and a change in course. I do not know which Germany will choose. I do not know whether its leaders know. But on that choice hangs the fate of Europe."

Tuesday, May 29, 2012

Feldstein on the Euro

Martin Feldstein has a column on the euro and how France had wanted it to encourage more political integration. Of course, France thought they would lead the political union.  Things are not working out as France had hoped.
Given the  crisis in Greece and the realization that a breakup of the euro zone could happen, we are getting a lot more analysis of the issues.

The Role of Government

David Brooks' column in today's NY Times discusses Hamilton's approach to government, arguing that it was a healthy one. I don't know enough about Hamilton, and presume that when people use a historical figure as a model, they often convert the historical figure into the image they want.  Even so, I think Brook's arguments are interesting.  He sees the problem as one in which government has over reached several times in the past, which has led to a more antigovernment approach by the current Republican Party, especially the Tea Party members in it. Instead of focusing on government as good or bad, Brooks argues for discussing what government can do, which I presume also means what government cannot do well.

I take the approach that people are people.  The people who go into government are not less self-interested than people who go into business. Constraints are needed on them.  In the economic sector, competition provides the needed constraints. In the government sector, compeition is also involved, but so is the structure of govenrment. Hence, the need for separation of powers and a reliance on federalism.  The end result for me is that the private sector does a lot of things well, but also needs basic support from the government in terms of property rights, rule of law, and so on. There remains things that government can contribute, with obvious ones like national defense.  For the rest, more discussion on the level of government that should be involved for a particular program would be helpful.  The federal government should not always be the first option.

My mentor, Harold Demsetz, wrote an article in which he argued for a comparative institutional approach. In situtaion where we recognize that the market system is not functioning as well as we would like, we should not automatically turn to government for a solution. We have to examine the actual solution government would provide (rather than some ideal solution), and determine which is better. I would add, we also need to look at what level of government would actually be providing the solution. In a world of information costs, asymmetric information, an uncertain future, and so on in the real world, the information problems and uncertainty apply to business and government personnel.

Monday, May 28, 2012

Is Jack White an Economist?

The rocker, Jack White, issued a vinyl album and limited the number of albums produced to meet the demand from some fans for something rare, ineresting and valuable. He recognized that rare and valuable had to go together.  Instead of selling them for a regular price, and letting the price rise in the secondary market, his company sold them on e-Bay and captured the higher price themselves. As one might expected, many fans were upset and complained of exploitation. He countered with some basic economic analysis. For an article on this in Forbes, see here

There have been economics articles on why ticket prices for concerts or sporting events are not higher when the demand for the event is much greater than the supply at the sale price. Examples include concert tours of big acts and the Super Bowl. Selling ticket prices for a concert at the market-clearing price may not be the long-run profit-maximizing strategy because the fans who buy the CDs may not be able to afford the concert tickets, and the group wants to keep them as fans. Even if they fail to obtain a ticket to the concert, they blame it on the popularity of the group rather than the ticket price.  In the Jack White example, the album is probably a one-time thing so the long-term consequences are likely to be slight.  Another rationale for the lower ticket prices for concerts is that there are other revenues to be had. For example, t-shirts and gear advertising that the fan attended the concert.  The profits from these are likely to be greater if the fans at the concert and younger.

Question: the article refers to a rock star who attended the London School of Economics and you can see who the star is by clicking on the link. Do you know who it is? (I did, and actually used it in an extra-credit question in History of Economic Thought. No one got it right.).

Sunday, May 27, 2012

Tyler Cowen on the Euro Zone

Tyler Cowen has an interesting column in today's business section of the NY Times. He describes the euro zone's instititutional failure in dealing with the crisis.  While the euro creates a "monetary nation", it does not create a true nation. The governments of Greece and Spain are sovereign so all the agreements that brought about the euro are international agreements.  The nation that should be the leader of the group is Germany, but Germany's past makes it difficult for Germany to exert such leadership. (Another leader could be Britain where there is a great deal of human capital in international financial arrangements, but they aren't in the euro zone). Cowen's piece is pretty negative regarding the prospects for a solution that is not very costly.  I am visiting Germany to teach a course for the third consecutive May and the Greek crisis has been in the news each time.  The first time I thought it was interesting but not terribly important, last year I thought it was important and would probably lead to further integration in the EU. This year, I am much more pessimistic about prospects for a successful solution. Something I began to think about being in Germany is that the unification of Germany over two decades ago now offers insight into what is happening in the euro-zone today. After a little research, I'll write more on it in a future post.

Thursday, May 24, 2012

Euro Leading to Political Union?

I have written a couple of times about how I thought the creation of the euro was a political and not an economic act.  There is a column on CNBC's http:/ / that says the same thing.  To see it, go to http:/ /

Wednesday, May 23, 2012

Here We Go Again with Greece

This will be the third May in a row in which I teach a course on economic policy in Germany.  The first time I included a case study on the Greek crisis since it was in the news at the time.  Later in the summer, the Greek story settled down only to come on strong again the next April/May. So, I used it again.  Now, we see Greece is again a major story and I will use it a third time.

There are some differences though. While I introduce the students to optimum currency area theory and apply it to the euro-zone, I didn't seriously consider whether Greece might exit the euro in the past.  Now I think the probability is at least 50-50 that they will exit the zone.  A lot depends on the Greek election in June, but even if the more radical elements do not win, will the people put up with "austerity" to the point where it might pay off? How long will it take?  Can they even do it or are their debts too high?

To add to the concerns is the recent French election and how the relationship between France and Germany will alter.  For most of the post-war period, France called the shots with Germany often financing the projects. But, with the passing of years and the growing strenth of Germany's economy, Germany is asserting itself more.  Both the French and German leadership have been committed to the European Union and increased political integration, but this may be changing too.

A recent book in Germany, written by a former banker with the German central bank, is roiling things more.  Thilo Sarrazin's book is entitled, Europe Doesn't Need the Euro. Chancellor Merkel has been quoted as saying the the euro fails, then Europe fails.  It should be an interesting time in Germany

Monday, May 14, 2012

Getting Angry While Reading the New York Times

In general, I try to be dispassionate when thinking about economics or reading people with whom I disagree.  However, I failed a couple of times over the weekend.  An opinon piece in Sunday's NY Times written by William Deresiewicz, "Capitalists and Other Psychopaths," began my anger.  He refers to a recent (unnamed) study that found that 10% of the people who work on Wall Street are "clinical psychopaths." He then goes on to say that he cannot understand why anyone would find this puzzling. He writes, "Wall Street is capitalism in its purest form, and capitalism is predicated on bad behavior." He cites Mandeville's, "The Fable of the Bees" to support his claim. He pokes fun at business colleges, asking if they have courses called "Robbing Widows and Orphans" and the like.

To this point I could have just ignored the piece, but he continues by denigrating entrepreneurship, and then to claim that ethics in capitalism is purely optional.  He states that capitalis values our antithetical to Christian ones and that capitalist values are antithetical to democratic ones.

Mr. Deresiewicz has a simplistic version of capitalism, Christianity and democracy.  It is worth noting that he begins with Mandeville rather than Adam Smith.  Smith did not like Mandeville's work.  Smith's first great work was The Theory of Moral Sentiments, in which he provided an examination of morality in a commercial society.  Most scholars today think the book underpins The Wealth of Nations.  Capitalism relies on people honoring contracts even when it isn't in their short-term interest.  Reputation is important for most firms, and people work hard and take losses rather than allow their reputation to be tarnished.  Of course examples can be found of people who fail to live up to these minimal standards, but such people can be found in any line of work, including politicians who lie, writers who plagarize, atheletes who cheat, and teachers who are lazy.

Since Mr. Deresiewicz believes that profit-seeking implies bad behavior, he sees capitalism as inconsistent with Christianity. Given his assumption, he would be correct. But capitalism does not imply or depend on bad behavior.  Self-interest is not selfishness.  People work together in teams, people are employed with jobs that can support their families, and goods and services are produced that have enriched many, as well as lead to longer and healthier lives.

It is also noteworthy that Mr. Deresiewicz offers no alternative model.  The socialist model of the Soviet Union failed.  Some kind of third way has been offered by many, but failed to be implemented or to succeed when an attempt at implementation has been made.

On another, though not totally unrelated, note--I was thinking about JP Morgan's $2 billion loss that came out before the weekend.  It is being used to increase demands for regulations on banking and a strong version of the Volker rule.  The idea is that people in some industries cannot be trusted to reduce risk and government regulators need to be involved to prevent systemic problems.  I thought also of Solyndra and the loss of taxpayer money it signified. I turns out I was not alone. So did Paul Krugman (in his blog), although we came to different conclusions. He argued that he loss at Solyndra is no big deal since such losses happen in the private sector also.  He also used his blog to denigrate Jamie Dimon in an ad hominum way as is his want.  The example of Solyndra is important in my view because of the presumption that mistakes that can be costly to the taxpayer should be monitored by the government in some way. But, who monitors the monitor?  Firms try to influence regulators, but when subsidies are offered by the government, it is likely that efforts to use personal relationships or other methods to win the subsidy will be used.  If banks need regulation, might not government agencies need regulation when awarding subsidies? But, how effective is one agency monitoring another? 

Finally, on a totally different note, the "news" that Mitt Romney may have bullied someone in high school.  Many have raised the question of how far back in a candidate's life can the press go to look for potentially damaging events.  As a Viet Nam veteran who lived through the tumult of the 60s and early 70s, I long ago decided that a candidate's behavior during those times is not relevant in my decision making about the candidate. They were difficult times and young men often made difficult choices.  I don't presume that the decision an 18-year-old makes is necessarily a good predictor of decisions he or she will make at 48.  This goes in spades for someone who is 16 years old.  Yet, two of the op-ed pieces in Saturday's NY Times discussed the story about Romney and tried to make him look bad while still making token statements about how we shouldn't look at cadidiates' lives at such a young age. How hypocritical.  (I don't think either writer claims to be a capitalist either.)

Friday, May 11, 2012

China's Growth Rate is Slowing

There are stories in the newspapers today about China's growth rate is slowing down and some other concerns about their economy are discussed.  When the U.S. and most of the West had the financial crisis in 2008, China tried to set itself up as a model of how to run a successful economy.  Now some say that it may not be such a great model.  I don't know why anyone thought it was. Yes, China has been  growing at rapid rates for some time. But, it is easier to grow when you are catching up with the advanced economies. Japan did so in the 50s and 60s, South Korea more recently and now China.  Like China, Japan used more government direction than we do in the U.S., and many here thought it would be better if we had an industrial policy.  But, Japan has not been the economy we want to copy for a couple of decades now.  China will not be in the future either.

Thursday, May 10, 2012

Pieces from Today's Wall Street Journal

Several pieces in today's Wall Street Journal that are of interest.  The first is a long article on the Greek crisis.  I was in Germany two years ago to teach a short course on public policy. Greece was in the news so I included a part of the course on the Greek situation.  Last year I taught the course again and, once again, Greece was in the news so I discussed it again.  I will be there shortly and it appears Greece can be an illustratation again.  This article is likely to be one of the handouts for the class.

There are also two op-ed pieces.  The first looks at how President Roosevelt changed his policy in light of the war in Europe. He quit bashing big business and asked for help from big business to help gear up for the war effort.  The second is by economist Robert Barro concerning stimulus spending. He counters the claim by Keynesians such as Krugman that the problem in Europe is austerity and that massive fiscal stimulus is needed.  He argues that there is a short-run stimulative effect of an increase in government deficits but that it turns negative after a few quarters.  If he is correct, it could generate the same kind of problems the stop-go monetary policy we had in the 70s.  The stimulus in money supply would reduce unemployment shortly, but after awhile the unemployment went back up and was accompanied by ever higher inflation rates.  We could have bouts of stimulus that fails over time at everthing except generating higher debt levels.

Tuesday, May 8, 2012

The Dollar

An article in The American Interest by Barry Eichengreen is worth a read.  There has been talk about the decline of the dollar in prestige and that eventually the Chinese yuan may attain reserve currency status, but I have argued in the past that the yuan is a long way from achieving that kind of status.  Eichengreen offers some reasons why that is the case.

Monday, May 7, 2012

Elections in Europe

As expected, Hollande defeated Sarkozy in France.  This will change the status quo relationship between Germany and France, and may shake up the entire EU.  People are not voting for austerity.  I do not want to try and analyze the situation as yet since there may be other shake ups. But I am looking foreward to going to Germany to teach a course on public policy this summer.  Hearing the views of people there and reading European press provides insights hard to get here.  Especially is one gets his news from TV news. (I watched the first thirty minutes of the Today Show this morning, and the coverage of the European elections was minimal.)

I expected Paul Krugman's op-ed column this morning to argue that the elections show that the people do not want austerity and that it is time to promote growth through deficit spending.l  I was not disappointed.

Are the Rich Worth a Damn?

I take the title of the post from the title of an article in yesterdays New York Times Magazine.  Adam Davidson writes about Edward Conard, a former partner in Mitt Romney's Bain Capital, and author of a forthcoming book, Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong. Conard argues that all the concerns about the 1% and income inequality are mistaken, and that the increasing wealth of the 1% is an indication that the situation of the 99% is improving. Davidson writes, "This could be the most hated book of the year."

According to Davidson's article, the argument is that the capitalist system encourages risk taking, and that risk taking leads to greater wealth for the successful entrepreneurs, but also improvement in the lives of everyone else as the entrepreneurs have created products and services that people value.  The investment in these projects by people seeking wealth have the unintended consequence of improving lives for everyone else.

This is not the way the term, "unintended consequences," is used by economists today.  Instead, it usually refers to the unintended negative consequences of legislation or actions that have good motives behind them.  But the term as unsed in Conard's title is in line with Adam Smith's notion of the invisible hand.  In The Wealth of Nations, Smith wrote:
"As every individual, therefore, endeavors as much as he can both to employ his capital in lthe support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individualo necessaily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

The unintended consequense is the result of the invisible hand, in Smith's statement.

I will read Conard's book when it comes out. Based on the interview, I suspect I will agree with much of it, but not all.  I consider crony capitalism to be a problem and am not convinced that some of the financial innovation actually generated great social gains. But the book and discussion of the book should be interesting.

For the article, see here.

Sunday, May 6, 2012

Odds and Ends

Today's New York Times has a number of interesting pieces, although not all are economics. I will begin with economics and business though.  Tyler Cowen's column is about India, and how troublesome India's slowing growth rate may turn out to be. He argues that India's economy could surpass China this century because of the differences in population growth rates for the two countries.  But, he sees the growing segments of India's economy cut-off from the rest of the country.  There is also a long article on this year's college graduates and how many are turing to internships when they cannot find jobs.

On a different note--two articles in the sports section.  One on Joey Crawford, a NBA referee for many years.  I found it interesting,especially as it relates to many of the players who have been in the league since he began as a ref. The other is on Ron Guidry and Mariano Rivera. I am not a Yankees fan, but I remember when Guidry--Louisiana Lightening--was a Yank, and I consider Rivera to be the greatest closer even in the game.  With Rivera's injury, his career could be ending, but I hope not.  Although, according to the article, Guidry would often meet with Rivera during spring training and would tell him, "One of these days, your're going to be like I am--old."  Reminds of hearing Joe Garagiola say once while broadcasting a game--You know you're getting old when son's of players you played with are nearing retirement age.

Today is Hope's graduation. Perhaps I am recognizing the aging factor more as I see another group of young men and women graduate to start their lives.  The last article I will mention is from the Travel Section and is on China.  I accompanied the Baker Scholars at Hope to China over spring break. The article is about Beijing, Shanghai, and Hong Kong. We visited the first two of those cities, and also visited many businesses in the two cities.  It was the first time in many years that I thought how great it would be to by young and starting a career today because of the excitement and change I saw in China.  At this point, I would learn Chinese before any of India's languages.

Thursday, May 3, 2012

Lessons of the Recession

Raghuram Rajan's book, FAULT LINES, is one of the best books I have read concerning the causes of the Great Recession. He now has an article in FOREIGN AFFAIRS that brings it forward. He goes over some ground covered in his book, arguing that the United States and other developed nations distorted markets for a couple of decades by making credit very accessible.  People's spending increased even as incomes didn't increase as much.  The bursting of the housing bubble induced households to deleverage, which was necessary.  For some of the European countries, it was government spending more than household spending that took place in the 15 years prior to the crash.  In neither case, Rajan argues, is the answer to increase government deficit spending.  We need to address the longer term problems.
Rajan's arguments run counter to the view that this is not the time to take the long view. We need to stimulate in order to get growth going. Once growth is back, then we can address the longer-term problems. Rajan argues against this on the grounds that the prosperity we had was not sustainable.  Further, the history of public policy has been to ignore the problems when we have prosperity.
He writes, "Fiscal austerity is not painless and will probably subtract from growth in the short run. It would be far better to phase reforms in over time, yet is is preceisely because governments did not act in good times that they are forced to do so, and quickly, in bad times. Indeed, there is a case to be made for doing what is ncessary quickly and across the board so that everyone feels that the pain is shared, rather than spreading it over time and risking dissipating the political will."
The whole piece is worth reading.

Tuesday, May 1, 2012

On Faith-Based Retirement

Joe Nocera, a columnist for the New York Times, wrote an op-ed piece Sunday about his retirement account. As he approaches 60 and acknowledges his mortality, he opines that the idea of people handling their own retirement accounts is a bad one. In fact, he quotes a behavioral economist, Theresa Ghilarducci, who said, "The 401(k) is a failed experiment. It is time to rethink it."

What evidence does Nocera cite? Primarily his own experience.  He writes about how the tech bubble that burst in 2000 cut his 401(k) in half. Then, a divorce a few years later, cut it in half again. Then, he says, he threw another chunk of his 401(k) into a renovation on his house. (He doesn't say whether his house value has fallen lately.) 

Nocera is a couple of years younger than I am.  I actually started the process of saving for retirement later than he did, since military service and graduate school didn't provide opportunities to save.  I taught at Miami University for three years, but took my portion out to help with moving expenses to Louisiana, so had nothing accumulated. I spent nine years at LSU and had about $50,000 in a 401(k) when I left. So, essentially, I started saving for retirement about 43 years of age.  I also experienced the fall in the market in 2000 and the more drastic fall in 2008.  Yet, it appears I have much more saved than Mr. Nocera.  Admittedly, I don't live in a high-cost city like New York. But I also haven't written several books that generate royalties, which can also allow one to increase the amount saved in a tax-deferred account.

He suggests in his column that we may need to rethink retirement plans.  Several people commented on his column on-line in the Times. Some were critical of his decisions and others argued we need to return to pensions.  But, have people not read about how many pension plans are underfunded?  One of the major problems of GM prior to its bailout by the federal government was their pension liabilities.  We also know that many states' pension plans are underfunded.  Many still are assuming a 7 or 8% growth rate, which is almost impossible to get right now.  The pensions liabilities of many state and municipal governments are likely to be a huge problem in the future.  Politicians clearly like making promises without worrying a lot about how they can be met in the future. 

Finally, public policy should not be based on anecdotes--either his or mine.  More systematic analysis is needed.  Then there is the question of how much we should be a nanny state and how much we should expect ourselves and our fellow citizens to take care of themselves?