Friday, May 22, 2009

Another Example of How Governments Can Make Our Lives Worse Off

Here's Mankiw on another example of how governments can make our lives worse off when markets would have made them better off:
I got a copy of the Consumer Reports auto issue... CU recommended zero percent of the Chrysler vehicles they tested. That's right--zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their
business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system.

Thursday, May 21, 2009

Tol on the Economic Effects of Climate Change

The last JEP has an interesting survey article by Richard Tol on the economic effects of climate change. In his own words (italics are mine):
Only 14 estimates of the total damage cost of climate change have been published, a research effort that is in sharp contrast to the urgency of the public debate and the proposed expenditure on greenhouse gas emission reduction. These estimates show that climate change initially improves economic welfare. However, these benefits are sunk. Impacts would be predominantly negative later in the century. Global average impacts would be comparable to the welfare loss of a few percent of income, but substantially higher in poor countries. Still, the impact of climate change over a century is comparable to economic growth over a few years.
There are over 200 estimates of the marginal damage cost of carbon dioxide emissions. The uncertainty about the social cost of carbon is large and right-skewed. For a standard discount rate, the expected value is $50/tC, which is much lower than the price of carbon in the European Union but much higher than the price of carbon elsewhere. Current estimates of the damage costs of climate change are incomplete, with positive and negative biases. Most important among the missing impacts are the indirect effects of climate change on economic development; large-scale biodiversity loss; low-probability, high-impact scenarios; the impact of climate change on violent conflict; and the impacts of climate change beyond 2100. From a welfare perspective, the impact of climate change is problematic because population is endogenous, and because policy analyses should separate impatience, risk aversion, and inequity aversion between and within countries.
In other words: the debate on the subject until now has been mostly driven by dogma and not by science.

Monday, May 18, 2009

My Early Years in South Park

Cartman: "Hasta la vista, Pedro!"
Pedro: "Cartman, how many times I'll have to tell you that I don't speak Spanish?!"
To those who knew me when I was a kid...
Facebook Development

How Stalin Won World War II

The excellent PBS/BBC documentary World War II: Behind Closed Doors explains how Stalin, having actively contributed to the outbreak of the war, also got the biggest prize at the end of it by the ruthless and immoral manipulation of all parts involved (on the right, Stalin as TIME's "Man of the Year" in 1942).

The documentary also depicts a somewhat dictatorial, sometimes unethical FDR, in contrast with a more virtuous and human Churchill.

Here's a good clip from the documentary:

Friday, May 15, 2009

Government Failure: Welcome to the Detroit Horror Show

The efforts of the current administration to bailout American automakers represent one of the most shameful episodes in the economic history of this country. Economically speaking, the administration policies are nothing more than absolute nonsense. The politics of them however are much simpler to understand: political quid pro quo of the vilest kind.

Here is a good article by George Will on the subject. Note the following passages:

Many months and many billions of dollars are being wasted by the administration's determination to spare the car companies, and especially the UAW, the rigors of a straightforward bankruptcy. The president's "surgical" bankruptcy plan for Chrysler requires some of the company's lenders, mostly non-banks, to receive less than they would as secured creditors under bankruptcy law.

The law may still make itself heard over the political thunder. Meanwhile, the president faults these "speculators" for not being as cooperative as are most of the banks that have lent to Chrysler. But the banks are compliant because they are mendicants: Having taken the government's money, they are the government's minions. ...

It is Demagoguery 101 to identify an unpopular minority to blame for problems. The president has chosen to blame "speculators" -- a.k.a. investors; anyone who buys a share of a company's stock is speculating about the company's future -- for Chrysler's bankruptcy and the dubious legality of his proposal. Yet he simultaneously says he hopes that private investors will begin supplanting government as a source of capital for the companies. Breathes there an investor/speculator with such a stunted sense of risk that he or she would go into business with this capricious government?

Sorman on Schwartz and the Financial Crisis

Here's Guy Sorman on Anna Schwartz's lucid analysis of the financial crisis. Some important passages (HT Selva Brasilis):

"The present crisis has nothing to do with a lack of liquidity.” President Obama’s stimulus is similarly irrelevant, she believes, since the crisis also has nothing to do with a lack of demand or investment. The credit crunch, which is the recession’s actual cause, comes only from a lack of trust, argues Schwartz. Lenders aren’t lending because they don’t know who is solvent, and they can’t know who is solvent because portfolios remain full of mortgage-backed securities and other toxic assets.

To rekindle the credit market, the banks must get rid of those toxic assets. That’s why Schwartz supported, in principle, the Bush administration’s first proposal for responding to the crisis—to buy bad assets from banks—though not, she emphasizes, while pricing those assets so generously as to prop up failed institutions. The administration abandoned its plan when it appeared too complicated to price the assets. Bernanke and then–Treasury secretary Henry Paulson subsequently shifted to recapitalizing the banks directly. “Doing so is shifting from trying to save the banking system to trying to save bankers, which is not the same thing,” Schwartz says. “Ultimately, though, firms that made wrong decisions should fail. The market works better when wrong decisions are punished and good decisions make you rich.” She’s more sympathetic to Treasury secretary Timothy Geithner’s plan, unveiled in March, to give private investors money to help them buy the toxic assets, but wonders if the Obama administration will continue to support the plan if the assets’ prices turn out to be so low, once investors start bidding for them, that they threaten the banks.

Wednesday, May 13, 2009

Bank Competition Promotes Financial Stability

When I worked with the Central Bank of Brazil, I was one among the few that defended policies that promoted bank competition. Unfortunately however a sizeable share of policymakers in central banks and finance ministries around the world adhere to the bizarre notion that bank concentration is good for financial stability and for a nation's economic performance.

Those policymakers in Europe and Latin America, and recently in the US too, will probably want to read this article in the The Economist, which shows that they're most surely wrong. Here's a relevant passage:

The harm that consumers may suffer from a lack of competition seems clear. A study published in 2004 by the Bank of England found, unsurprisingly perhaps, a clear correlation between market share and pricing by banks. The bigger their share of the nation’s cheque accounts, the less they paid customers on deposits and the more they charged them for loans. ...

In a paper last year for the World Bank, Thorsten Beck argued that most recent international comparisons of banking systems have found that the more competitive ones are also more stable. More importantly, they seem to show that when foreign banks enter markets they increase both competition and the stability of the system. Similarly, a study for the IMF published in 2006 that looked at 38 countries found that more competitive banking systems were less prone to systemic crisis.

Government Failure: Economic Surrealism Comes to Washington

Mankiw's Blog on the shabby standards set by the administration to evaluate the stimulus bill:

The stimulus bill Congress passed a few months ago apparently requires the Council of Economic Advisers to report quarterly on the employment effects of the act. That job is, essentially, impossible. Because we have only one economy, there is no way to know for sure what would have happened without the stimulus bill. It is like asking a doctor, "How much sicker would this particular patient have been if you had not given him treatment up to now?" You can get, as an answer, the doctor's subjective professional judgment, but you cannot expect objective measurement. ...
Here is the question I would have asked: "Going forward, what macroeconomic data would you have to observe before you concluded that the stimulus bill has been a failure? Or will you conclude, no matter how bad things get, that the economy would have been in even worse shape without the stimulus? And if the latter is the case, aren't these quarterly reports just a bit surreal?"

Tuesday, May 12, 2009

Government Failure: Government Soars High Above Lady Liberty

Old stuff now, yet Stephenson says it all in the Division of Labour:

The Air Force One photo tour of New York is not only emblematic of government waste and boneheadedness, the picture of the plane soaring high above the Statue of Liberty pretty well sums up the current state of affairs for freedom vs. government. The imperial government is riding high and liberty is secondary.

American Politics as Viewed by Economists

Here's how most economists, independently of political affiliation, see politics lately in America, according to a study by Davis and Figgins:

Politics in America: A place where special interest groups exert influence over politicians who use creative public discourse with economically incompetent or ignorant voters in an effort to be re-elected, and where the eventual policy consequences are often not beneficial, except to special interests and politicians.

Proof that economists are sensible people.

The Simple Pleasures of Life

Who enjoys them most? According to the magazine The Economist, the French, "évidemment"!...