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March 6, 2012

"Amazed by the Short-Term Psychology in the Market"



(p. A1) Even after European leaders appeared to have averted a chaotic default by Greece with an eleventh-hour deal for aid, worries persist that a debt disaster on the Continent has merely been delayed.

The tortured process that culminated in that latest bailout has exposed the severe limitations of Europe's approach to the crisis. Many fear that policy makers simply don't have the right tools to deal with other troubled countries like Italy, Spain, Ireland and Portugal, a situation that could weigh on the markets and the broader economy.

"I don't want to be a Cassandra, but the idea that it's over is an illusion," said Kenneth S. Rogoff, a professor of economics at Harvard and co-author of "This Time Is Different: Eight Centuries of Financial Folly." "I am amazed by the short-term psychology in the market."


. . .


(p. B3) "I don't think we're anywhere near the endgame," Professor Rogoff of Harvard said.



For the full commentary, see:

PETER EAVIS. " NEWS ANALYSIS; For Greece, a Bailout; for Europe, Perhaps Just an Illusion." The New York Times (Weds., February 22, 2012): A1 & B3 (sic).

(Note: ellipsis added.)

(Note: the online version of the commentary is dated February 21, 2012.)



Rogoff and Reinhart's thought-provoking and much-praised book is:

Reinhart, Carmen M., and Kenneth Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.






January 20, 2012

Gary Becker Says "Economics Trumps Culture"



At the Chicago American Economic Association (AEA) meetings, I attended an 8 AM session on Sun., Jan. 8, 2012 in honor of the 30 anniversary of Gary Becker's Treatise on the Family. At the end of the session, Becker discussed five issues related to the book.

One of these was the question of whether the features of the family are best understood on the basis of economic issues or cultural issues. He mentioned two examples: the Irish family and the Asian family. In the past it had been claimed that the Irish family would have enduring features due to religion and culture, features such as many children and women who stayed at home. Today, Becker noted, the Irish family looks much like other European families. He then paraphrased Singapore's former ruler Lee Kuan Yew as having claimed in the past that the Asian family is superior to the Western family in its cohesiveness and loyalty. Today, Becker noted, Asian families look much more like Western families. Becker concluded that in the short run cultural factors may dominate, but that in the long run economic factors dominate. He said "Economics trumps culture."

Becker's discussion has broader relevance. One of the issues that I am grappling with in my research and teaching is the extent to which success at entrepreneurial innovation depends on cultural differences and the extent to which it depends on differences in constraints and policies.

If policies matter more, then it is easier to see a clear path toward progress, than if murkier cultural issues matter more.





February 7, 2009

Economic Freedom Correlated with "Every Indicator of Well-Being"


FreedomIndex2009.gif Source of table: online version of the WSJ article quoted and cited below.

(p. A17) For 15 years, The Wall Street Journal and The Heritage Foundation have been measuring countries' commitment to free-market capitalism in the "Index of Economic Freedom." The 2009 Index, published this week, provides strong evidence that the countries that maintain the freest economies do the best job of promoting prosperity for all citizens.

The positive correlation between economic freedom and national income is confirmed yet again by this year's data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as "repressed." This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.

. . .

In a special chapter in this year's Index, the Journal's Stephen Moore chronicles the critical role that tax cuts, particularly cuts in corporate taxes, have played in economic growth in Eastern European countries and others like Ireland. The citizens of those countries lived for decades with state-directed economic planning and regulation, which many now advocate for the U.S. and other advanced economies. They remember the clumsiness of socialism and the government missteps that fostered economic disaster. To switch dance partners now that they have adapted to the quick step of capitalism and are enjoying its many benefits would be a tragic mistake.

It would be ironic indeed if the world's advanced economies, in seeking to address current woes, abandoned the system that has brought them and others around the world the amazing levels of prosperity experienced over the last half century. The "Index of Economic Freedom" provides a record of that progress. It charts the path to economic advancement and proves that the best way forward is to hang onto our partner and step to the music of the market.



For the full commentary, see:

TERRY MILLER. "Freedom Is Still the Winning Formula." The Wall Street Journal (Tues., January 13, 2009): A17.

(Note: ellipsis added.)




June 27, 2008

The Role of the Irish Potato Famine in the Repeal of the Corn Laws


In one of his more famous, and outrageous, essays, George Stigler argued that economists do not matter, because changes in policy do not arise from changes in ideas, but from changing circumstances and special interests.

One of the cases that he briefly mentions is the repeal of the English Corn Laws that had restricted the importation of wheat (in England "corn" is what we call "wheat) into Britain. The usual account is that the free market arguments of Cobden and Bright made the difference.

The account quoted below, might be taken as support for Stigler's position. But it might also be evidence for the more optimistic position of Stigler's buddy, Milton Friedman. Friedman held that on major issues, economists' policy proposals go ignored until some crisis occurs that sends the politicians looking for policy alternatives. (Friedman thought that this is what occurred in the case of his own proposal for floating exchange rates.)

(p. A23) THE feast of Ireland's patron saint has always been an occasion for saluting the beautiful land "where the praties grow," but it's also a time to look again at the disaster that established around the world the Irish communities that today celebrate St. Patrick's Day: the Great Potato Famine of 1845-6. In its wake, the Irish left the old country, with more than half a million settling in United States. The famine and the migrations changed Irish and American history, of course, but they drastically changed Britain too.

. . .

The first intimations of Ireland's looming calamity reached the British government in August 1845. Although Britain was responsible for the social and economic iniquities which had made Ireland so susceptible, the government of the day deserves some credit for its efforts to avert mass starvation. There were political as well as logistical difficulties.

. . .

To Peel it was obvious that the Corn Laws would have to go, but his electorate of large landowners was vehemently opposed to their abolition. The Duke of Wellington, leader of the House of Lords, complained that Ireland's "rotten potatoes have done it all -- they put Peel in his damned fright." Peel drew heavily on the news from Ireland as he urged Parliament to vote for abolition:

"Are you to hesitate in averting famine which may come, because it possibly may not come? Are you to look to and depend upon chance in such an extremity? Or, good God! are you to sit in cabinet, and consider and calculate how much diarrhea, and bloody flux, and dysentery, a people can bear before it becomes necessary for you to provide them with food?"

The bill abolishing the Corn Laws was passed in May 1846 in the House of Commons, with two-thirds of Peel's party voting against it and the entire opposition voting in favor. A month later, Peel was out of office.

. . .

. . . Ireland's famine, by ending the Corn Laws, prompted the beginning of the free trade that established the success of Britain's industrial economy.



For the full commentary, see the article referenced immediately below, or see his forthcoming book Propitious Esculent: The Potato in World History:


JOHN READER. "The Fungus That Conquered Europe." The New York Times (Mon., March 17, 2008): A23.

(Note: ellipses added.)


The Stigler essay mentioned above is:

Stigler, George J. "Do Economists Matter?" Southern Economic Journal 42, no. 3 (1976): 347-54.

(I will try to dig out a reference for the Friedman position when I have more time.)




April 1, 2008

Lower Taxes Encourage Entrepreneurship in Ireland


WebReservationsOfficers.jpg "Feargal Mooney, left, is chief operating officer for Web Reservations International. Ray Nolan is the founder and chief executive officer. Web Reservations provides booking and management for hostels that cater to economy travelers." Source of the caption and photo: online version of the NYT article quoted and cited below.


(p. C8) DUBLIN -- Ireland is now alive with enthusiasm for entrepreneurs, who seemingly rank just below rock stars in popularity.

. . .

The relatively new emphasis on entrepreneurs in Ireland is the culmination of nearly four decades of government policies that have lifted the economy from centuries of poverty to modern prosperity.

The change began when Ireland entered the European Union in 1973. In subsequent years, the government rewrote its tax policies to attract foreign investment by American corporations, made all education free through the university level and changed tax rates and used direct equity investment to encourage Irish people to set up their own businesses.

"The change came in the 1990s," said James Murphy, founder and managing director of Lifes2Good, a marketer of drugstore products for muscle aches, hair loss and other maladies. "Taxes and interest rates came down, and all of a sudden we believed in ourselves."

The new environment also encouraged Ray Nolan, who founded Raven Computing in 1989 to provide software for lawyers to keep track of billable hours. He sold that company and founded another that created software for companies to manage billing and receipts. And in 1999, he founded Web Reservations International to provide booking and property management for hostels that cater to backpackers and economy travelers.

"Hostel owners needed to keep track of people sharing rooms, and bookings for Americans coming to Dublin for three nights," said Feargal Mooney, chief operating officer of Web Reservations. "Hostel accommodations go for 10 to 20 euro a night," he said, or $15 to $30 at today's exchange rates, "so booking reservations in them wasn't profitable for the big travel companies."


For the full story, see:

JAMES FLANIGAN. "ENTREPRENEURIAL EDGE; Ireland Uses Incentives To Help Start-Ups Flourish." The New York Times (Thurs., January 17, 2008): C8.

(Note: ellipsis added.)




August 26, 2007

Firms Install Internal Betting Markets for Better Forecasting

 

Charles Plott, of Cal Tech, co-authored a nifty study several years ago in which he installed a betting market inside of Hewlett Packard to do internal forecasting.  The nifty part was that the forecasts produced by the betting market were generally more accurate than the official forecasts that HP's official forecasters were producing. 

The likely reason is not that the official forecasters were stupid or incompetent, but that they were under considerable pressure by corporate higher-ups to spin the forecasts in a favorable way.  In contrast, the participants in the internal betting market remained anonymous, and received higher payoffs, the more accurate their forecasts turned out to have been.

The result was not surprising, once you think it through.  But what I did find surprising was that HP didn't keep the betting market going, after the Plott study was finished.  (From a long-run perspective, top management should benefit more from accurate forecasts, than from consistently optimistic forecasts.) 

In any case, the excerpt from the commentary below indicates that some other companies have gotten the point:

 

(p. C1)  Over the last few years, Intrade -- with headquarters in Dublin, where the gambling laws are loose -- has become the biggest success story among a new crop of prediction markets. The world's largest steel maker, Arcelor Mittal, now runs an internal market allowing its executives to predict the price of steel. Best Buy (p. C6) has started a market for employees to guess which DVDs and video game consoles, among other products, will be popular. Google and Eli Lilly have similar markets. The idea is to let a company's decision-makers benefit from the collective, if often hidden, knowledge of their employees.

But there's a broader point here, too. For a couple of centuries now, long before Intrade or even the Internet existed, financial markets have been making it easier to bet on what the future will bring.

In the mid-1800s, contracts tied to the future price of wheat, pigs and other commodities began to change hands. In 1972, the Chicago Mercantile Exchange introduced futures for foreign exchange rates. Treasury bonds tied to the future rate of inflation came along in the 1990s, and last year, the Merc began selling contracts based on the direction of house prices in 10 big metropolitan areas.

In every case, the market price reflects the sum of the traders' knowledge -- about the extent of the housing bubble in Los Angeles, for instance, or the likely size of next year's wheat crop.  . . .

N. Gregory Mankiw, a former adviser to President Bush, who has written about Intrade on his blog, explains it this way: ''Everybody has information from their own little corner of the universe, and they'd like to know the information from every other corner of the universe. What these markets do is provide a vehicle that reflects all that information.''

 

For the full commentary, see: 

DAVID LEONHARDT.  "ECONOMIX; Odds Are, They'll Know '08 Winner."  The New York Times  (Weds., February 14, 2007):  C1 & C8.

(Note:  ellipsis added.)

 




September 22, 2006

"Free to Choose" Turns Estonia into "Boomtown"


  Source of book image:  http://search.barnesandnoble.com/booksearch/imageviewer.asp?ean=9780156334600

 

If, like Mr. Laar, you are only going to read one book in economics, Milton Friedman's Free to Choose, is not too bad a choice:

(p. A23) Philippe Benoit du Rey is not one of those gloomy Frenchmen who frets about the threat to Gallic civilization from McDonald's and Microsoft.  He thinks international competition is good for his countrymen.  He's confident France will flourish in a global economy -- eventually.

But for now, he has left the Loire Valley for Tallinn, the capital of Estonia and the economic model for New Europe.  It's a boomtown with a beautifully preserved medieval quarter along with new skyscrapers, gleaming malls and sprawling housing developments:  Prague meets Houston, except that Houston's economy is cool by comparison.

Economists call Estonia the Baltic tiger, the sequel to the Celtic tiger as Europe's success story, and its policies are more radical than Ireland's.  On this year's State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the U.S. (North Korea comes in last at 159th.)

It transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated.  He was 32 years old and had read just one book on economics:  ''Free to Choose,'' by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice.  Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs.  He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba).  He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

 

For the full commentary, see:

JOHN TIERNEY.  "New Europe's Boomtown."  The New York Times  (Tues., September 5, 2006):  A23.

 




May 27, 2006

Capitalist Enclave Celebrates Diversity

Barkeep Jae Hyuk Lee in Dublin.  Source of photo:  online version of NYT article cited below.

 

Ireland is a capitalist enclave, in a Europe infused with high taxes, heavy government regulation, and the welfare state.  Captitalism is sometimes portrayed as inhumane, but it is under capitalism that diversity and tolerance thrive:

Like traditional Dublin pubs, bars catering to immigrants operate according to an Irish barman's basic principles: drinks served promptly, customers treated with respect and, when the occasion calls for it, readiness to listen to the troubles of the day.

Since members of many other ethnic groups — from Asia, Africa and Eastern Europe — have also opened businesses in the area, Mr. Lee's short, gritty stretch of Parnell Street feels like a bewildering experiment in diversity. This part of Ireland's capital is a microcosmic study of how global migration trends can transform a formerly homogeneous city.

One of Mr. Lee's neighbors displays an array of dangling hair extensions for African women; another sells sausages and bags of pretzels imported from Poland, in three or four different flavors.

The Ice Bar itself has been decorated by an eclectic imagination: Chinese drinking poems are painted on one wall and deer skulls are mounted on another. The patrons are a jumble of students and artsy types, Asian and European, and music fans drawn by Mr. Lee's policy of letting local D.J.'s and Spanish bands take over the sound system.

Mr. Lee likes the "good balance" and says his customers, in an unspoken gesture of good will, drink each other's national beers. "We are curious about another culture," he said. "I'm Korean; I want to have a pint of Guinness instead of Korean beer." And Irish patrons tend to order bottles of Asian brews like Tsingtao from China and Chang from Thailand.

. . .

"Life is quite short, and I wanted to have a look all over the world," he said. "That was my plan. But I realized I quite like this place."

 

For the full story, see:

BRIAN LAVERY.  "DUBLIN JOURNAL; Now, the Barkeeps May Come From the Ends of the Earth."  The New York Times (Tues., May 16, 2006):  A4.

 

 DublinThaiDrinkingPoem.jpg "his customers, in an unspoken gesture of good will, drink each other's national beers."  Source of caption, and photo: online version of NYT article cited above.




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