Tuesday, May 25, 2010

Tell Me Who Your Friends Are

Even Newsweek, an admirer and supporter of the Brazilian socialist administration, has finally become aware of its disastrous foreign policy (HT Escolhas e Consequências). According to this article by Mac Margolis:

Only a year ago, president Luiz Inácio Lula da Silva was widely feted as the man who had turned Brazil into a competitive powerhouse, the China of Latin America. That's not what has tongues wagging now. Rather than using Brazil's prominence to press outlier regimes to respect human rights and comply with international rules on using nuclear power, Lula suddenly seems bent on ducking controversy and accommodating demagogues. He routinely trades bear hugs with Hugo Chávez, even as the Venezuelan leader silences the media and harasses opponents. Brasília's diplomats abstained on a vote "deploring the grave, widespread, and systemic human-rights abuses" in North Korea. Lula canceled a visit to the tomb of Zionist founding father Theodor Herzl but found time to garland Yasir Arafat's grave. And in February, Lula posed for a photo op with Fidel Castro as protesters a few kilometers away mourned the death of Orlando Zapata Tamayo, a political dissident who died after an 85-day hunger strike in a Havana jail. ...

Now, as Lula's swagger grows bolder, the risk is that he is sending foreign policy on a political jag with little coherence, thereby squandering the remarkable legacy of pragmatism and evenhandedness that have been the country's anchors for the most of the last decade.

Monday, May 24, 2010

Cowen on Countries Living Beyond Their Means

In this interesting NYT article (HT Escolhas e Consequências), Tyler Cowen explains how the citizens of countries such as Greece, the UK, Italy and the US will need to accept sooner or later that they are poorer than they think they are:
GREECE is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of G.D.P., and Italy has a debt-to-G.D.P. ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and we face significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think.

Friday, May 21, 2010

O'Grady on Greece and Venezuela

The WSJ has a good article by Mary O'Grady on the state of monetary mayhem created in Venezuela by its Bolivarian leader, Hugo Chavez:

Critics of the euro seem to think the Greek tragedy vindicates their view that each country should have its own currency and monetary policy. But that wouldn't solve a thing. Let's face it: If Greece weren't today's Argentina, it would be Venezuela. In that country, which has sovereign money—the bolivar—and no monetary rule to prohibit the central bank from financing the government, inflation is now spinning out of control. ...

The lesson here is that without political will, fiat money in any form—be it in a monetary union, anchored to a reserve currency or run by the sovereign—is unreliable. As Messrs. Steil and Hinds note, "money untethered to a commodity gives rise to inflation when managed by corrupt, irresponsible or incompetent rulers," thereby covering Greece, Argentina and Venezuela in one breath.

Harkening back to the wisdom of a 15th century Spanish canon lawyer, the authors capture today's fiat currency problem: "The ruler's power to create value from the valueless by designating it 'money' was bound to lead to inflation."

Thursday, May 13, 2010

Sen on Smith's "The Theory of Moral Sentiments"

Here's a good article by Economics Nobel winner Amartya Sen on the misconceptions regarding one of the founding fathers of Economics, Adam Smith (HT Escolhas e Consequências), who wrote not only The Wealth of Nations but also the extremely important The Theory of Moral Sentiments. Sen explains:
Beyond self-love, Smith discussed how the functioning of the economic system in general, and of the market in particular, can be helped enormously by other motives. There are two distinct propositions here. The first is one of epistemology, concerning the fact that human beings are not guided only by self-gain or even prudence. The second is one of practical reason, involving the claim that there are good ethical and practical grounds for encouraging motives other than self-interest, whether in the crude form of self-love or in the refined form of prudence. Indeed, Smith argues that while "prudence" was "of all virtues that which is most helpful to the individual", "humanity, justice, generosity, and public spirit, are the qualities most useful to others". These are two distinct points, and, unfortunately, a big part of modern economics gets both of them wrong in interpreting Smith.

Wednesday, May 12, 2010

Got Coffee? Not in Bolivarian Venezuela

Ah, the miracles of Bolivarianism... This political fad was able to transform one of the largest producers of coffee in the world into a country uncapable of providing even for its own domestic demand. Another excellent example of extreme government failure. As Mary O'Grady summarizes in this WSJ article:

The late Milton Friedman once quipped that "if you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand."

Friedman was using hyperbole to make a point about central planning. Or so I thought until Hugo Chávez put himself in charge of Venezuela's coffee sector. Last year, for the first extended period of time in the country's history, Venezuela did not produce enough of the little red berry to satisfy domestic demand. It has now become a coffee importer and is facing serious shortages.

Tuesday, May 11, 2010

Neil Gaiman Knows the Economics, but the State of Minnesota Doesn't

Neil Gaiman of Sandman fame understands the economics behind the value of his work (and leisure) time. On his website he makes some interesting points about the most absurd public demands on a celebrity writer and on what some people consider to be exorbitant talk fees (HT Mankiw): $45,000 per talk.

On the other hand, I can only shake my head in disbelief when I realize how badly my Minnesota taxes are used by our government. This all happens while the University of Minnesota has been cutting back salaries and some arguably more important programs (although, to be fair, some salaries and nonessential programs deserve to be cut - but the pearls go with the waste). File this one under government failure, big time.

Monday, May 10, 2010

Ferguson on Posner's "The Crisis of Capitalist Democracy"

Here's an excellent review by Niall Ferguson of Richard Posner's latest book The Crisis of Capitalist Democracy that appeared in the NYT (HT Escolhas e Consequências). Ferguson summarizes the problem with Posner's arguments in this paragraph:
Posner makes it clear that he understands the risks the United States now faces as the crisis of private finance continues its metamorphosis into a crisis of public finance: an exploding debt relative to gross domestic product; larger risk premiums as investors prepare for higher inflation or a weaker dollar; rising interest rates; a greater share of tax revenues going for interest payments; a diminishing share of resources available for national security as opposed to Social Security. “As an economic power,” Posner concludes, “we may go the way of the British Empire.” Indeed. It seems not to have struck the judge that British decline and the rise of Keynesianism went hand in hand.

Friday, May 7, 2010

More on the Kauffman Survey of Leading Economics Bloggers

As a nice follow up to my last post, the new Kauffman report just came out, including answers to new survey questions. Among them, I found these to be interesting:

Leading bloggers think that budget deficits and inflation will increase in the short term. I assume that the answers are based on the notion of structural deficits (meaning, discounted the temporary effect of bailouts and the stimulus on the deficit) and on the idea that the effects of loose monetary and fiscal policies should start to be felt in a three-year horizon.

Here is a surprising one (at least to me):
What? The Brazilian Real is seen by 3% among the leading bloggers as the 2050 reserve currency? No way in hell this is gonna happen. Maybe I find it loony just because I worked for the Central Bank of Brazil for so many years, but those are my two cents anyway.

PS: Oops, my mistake, those 3% among the bloggers voted for the EU Euro, not for the Brazilian Real. A more sensible result, although clearly biased by the Greek crisis.

Thursday, May 6, 2010

The Kauffman Economic Bloggers Survey

The Ewing Marion Kauffman Foundation conducts a survey of leading economic bloggers, in which I now participate. It's a great initiative, the results of the first quarterly survey can be found here.

One of the main results of the latest survey is that there's a substantial consensus among top bloggers that supporting entrepreneurship is fundamental for a strong economic performance. On the other hand, most also agree that excessive budget deficits, like the ones we're seeing now, are one of the main factors that will negatively affect economic performance.

The video below explains it all. Enjoy!

Wednesday, May 5, 2010

More on the PBS NOVA Blunder

Here's my latest OrdemLivre.org article (in Portuguese) that delves deeper into the PBS NOVA blunder with the episode Mind Over Money. I translate one of the main passages below:
Caplan's theory of rational irrationality explains the good performance of free economies, where decisions are taken through markets, and the bad performance of socialist and centrally planned economies, where decisions are mostly political. It explains how highly educated Germans could have become infatuated with the madness of Nazism. It explains why the results of behavioral economics are not necessarily in conflict with the results of other economics fields. And, finally, explains why the NOVA episode gives a wrong answer to the question asked in its own title: markets stimulate rational behavior even if humans sometimes act irrationally.