Thursday, September 30, 2010

The Meaning(s) of “Economic Reform”

Scott Sumner's analysis of the changing sense of the word:

“The term ‘economic reform’ meant more government between 1875 and 1975, and has implicitly meant less government since.”

Readers of my “Second Twentieth Century” know why.

He further notes that the recent financial crisis pushed the US towards statism, while the rest of the world seemed to be moving in the opposite direction.

Read the post here .

How Everyone Could Soon Accept Credit Card Payment

Simply with a cell phone: a small device that hooks up to an iPhone allows a person to scan and charge a credit card. Read the New York Times article.

A boon for individual entrepreneurs.

Immigration and the Economy: Food for Thought

Is everything that people usually believe about immigration and employment dead wrong? That’s what Rosemary Joyce, an anthropology professor at Berkeley, claims in a post on the Berkeley Blog.

A note for European readers: remember that the US labor market is characterized by much more flexibility of wages than European ones, making employment of low qualification immigrants much easier in the US than in Europe. Moreover the welfare protection is more extensive in Europe, attracting a larger pool of immigrants even though it weakens the effective labor supply and labor demand through higher cost of employment for firms and lower net wages for labor, due to a higher tax on labor.
Thus, the analysis of the immigration issue cannot be separated from an analysis of the unemployment effects of the regulation of labor markets and of the similarly negative effects of the payroll tax.

Friday, September 24, 2010

David Henderson on the New Attack on Capitalism

Remember the Club of Rome and zero growth ideology? Now it turns even worse according to Henderson :

« Somewhere along the way, during the last 50 years, the critique of capitalism changed from condemning its failure to spread the wealth to condemning the very opposite. Suddenly the great sin of capitalism was that it was producing too much, making us all too materialistic, fueling economic growth at the expense of other values, spreading middle-class decadence, and generally causing society to be too caught up in productivity and too focused on the standard of living. »

A bad case of “Damn if they do, damn if they don’t”.

And if you want to learn about the reason bedbugs are returning, read The Attack on Civilization.

Thursday, September 23, 2010

Rich Countries’ Protectionism Hits the Poorest Nations

“US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty. … Egregious subsidies are handed out to US cotton producers, which flood the world market, depressing export prices. These hit the lowest-cost cotton producers in the global economy, which also happen to be some of the poorest nations on earth: Mali, Burkina Faso, and Chad.”

Read the complete article by William Easterly in the Financial Times.

His punch line: “According to an Oxfam study, eliminating US cotton subsidies would “improve the welfare of over one million West African households – 1O million people – by increasing their incomes from cotton by 8 to 20 per cent”

Conclusion: Trade-fueled growth could help developing nations much.

Gorillas and the Origin of Malaria

The western lowland gorilla of the Congo is found to be the most likely source of Plasmodium falciparum, the most deadly parasite in humans. It apparently crossed the “species barrier” only once in evolution, as a result of a mosquito bite, and a long time ago.

Researchers believe identifying this link will lead to greater knowledge of how to combat the spread of the parasite, which currently infects 500 million people a year, killing about 2 million.

It is a major hope for Africa. Read the article in The Independent.

The Rise of “Franglais”

“Kelhorreur!” Phonetic spelling is proliferating in advertisement and media, probably due to the expanded use of SMS (short message service) on cell phones. But, to add insult to injury, this rudimentary new language is more and more based on phoneticised English words. What is the “Académie française” doing asks The Economist?

A reminder: the number of languages in the world is increasing, not decreasing, with globalization.

Saturday, September 18, 2010

10 Myths About Gold


Read this Wall Street Journal 4th most popular article before investing.

Caution: not for the goldbugs!

Friday, September 17, 2010

Payroll Tax Cuts Gain Support


Read the Huffington Post article here and my detailed analysis (in French) of how to reduce the payroll tax without curtailing social transfers for health insurance here .

Thursday, September 16, 2010

Nouriel Roubini’s Reality Check


All the factors that will lead to a slowdown of growth in most advanced economies in the second half of 2010 and 2011 are at work in Germany and the rest of the eurozone writes Roubini in “The Eurozone’s Autumn Hangover” .

The punch line:

“… my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies.”

Wednesday, September 15, 2010

God, Sex, Heroin and the Brain

Have you already heard of Matthew Alper’s book, “The God Part of the Brain”? The teasing subtitle is “ A Scientific Interpretation of Human Spirituality and God”. This is a book that provides “excellent reading” according to Edward O. Wilson, two-time Pulitzer Price-winner and a leading, world renowned, evolutionary biologist. “An essential book for those in search of a scientific understanding of man’s spiritual nature” writes Elena Rusyn, from the Harvard Medical School.

The argument: the belief in the existence of a God, a soul, an afterlife, is cross cultural, which means that it is “wired” in our genes, a universal human condition and not the product of culture and imitation. Man is the only creature endowed with self-consciousness, including the conscience of his own inevitable death, which generates high anxiety. Anxiety and fear are evolutionary useful and even necessary for survival, but up to a point beyond which it becomes debilitating and paralyzing.

The pain that the conscience of our future death creates is relieved and accommodated through a belief in the existence of a God, of a spiritual reality, of another world, and of immortality. God is the product of an inherited human perception, the manifestation of an evolutionary adaptation, a coping mechanism that emerged in our species (as we progressively acquired self consciousness through our long evolution away from our primate ancestors) to enable us to survive our unique and otherwise debilitating awareness of death. In a way this belief is a pain reliever. Thus the link with psychedelic drugs and such practices as prayer, chant, dance, that many world cultures have used a means through which to evoke a mystical experience. As noted by C.D. Batson, “Psychedelic drugs have been used to stimulate religious experience since the dawn of history”. And of course Karl Marx defined religion as “the opiate of masses”.

Our progressively bigger brain also evolved and was selected for its survival value. It included a belief in God and an afterlife which produced a drug-like intensely pleasurable experience.

Is there scientific evidence of a link between the way the brain functions and pleasure intensity or pain reduction?

Yes indeed. Biologists are making much progress in the precise understanding of how that big brain produces pleasure.

Max Miller posts a fascinating report in bigthink.com, “Braingasm: Sex and Your Synapses” here .

Here is a short summary:

In his Big Think interview, Rutgers psychologist Barry Komisaruk, a pioneer of neuroscientific sex studies on the female orgasm, told us what science knows about “la petite mort”. One early study of orgasms, he explains, suggests that the subjective experience of orgasm is very similar between men and women. They seem to be hardwired to experience sexual pleasure in the same way.

Newer brain imaging technology shows that the part of the brain most activated during orgasm is the one responsible for the release of dopamine, the neurotransmitter most essential for the brain’s reward circuit, the same circuit that is exploited by drugs like cocaine and heroin. This accounts for both the fact that heroin addicts experience orgasmic pleasure as a result of their drug use as well as the fact that heroin addicts have suppressed sex drives, likely because this region is already stimulated so intensively by the heroin.

During orgasm, areas involved in self-control and social judgment are deactivated. Komisaruk also identified a notable difference in women: the activation in the release of oxytocin, a hormone involved in increasing trust and human bonding.


My comment: this finding relates well to what we know of the biology of reproduction and child production and rearing. The maternal investment in children is much higher than the father’s one, and the division of labor, the specialization of women in raising children for several years (which reduce their mobility and resource gathering ability) induces them to look for a man capable of a strong and durable commitment to provide them (and their children) with adequate resources. Men on the other hand maximize their "inclusive fitness" (the overall dissemination of their genes) by having as many intercourses with as many women as possible, thus preferring low commitment. It is thus evolutionary efficient for women to experience attachment during an intercourse that can lead to pregnancy, while it is not for men.


The progress of scientific knowledge of the brain’s chemistry, allied to evolutionary theory, is thus explaining many aspects of human behavior, from sex to God and to drugs, that puzzled philosophers and moralists since the dawn of civilization.

Tuesday, September 14, 2010

Best-selling Authors and Football Players

Alex Tabarrok (Marginal Revolution, September 13) has a very clear post (“Winner take-all economics”), explaining in simple terms the economics of superstars analyzed by the late Sherwin Rosen in the early 1980s, and why J.K. Rowling (the author of Harry Potter) is the first author in the history of the world to earn a billion dollars, while Homer and Shakespeare earned obviously much less.

One could add that the leverage of modern communication also explains why soccer players were not rich in the 1950s or 1960s but win “superstars’ money” today.

Friday, September 10, 2010

The Little Book of Economics: How the Economy Works in the Real World.

Greg Ip, The Economist’s U.S economics editor promotes his new book on his blog here . It's mostly about macro and there is a short summary of each chapter on the blog.

I did not read the book but Burton Malkiel and Greg Mankiw recommend it highly. That’s two good reasons to buy it. On the other hand the American editor of The Economist is probably influential enough to attract rather favorable comments from American academics … More on the book later.

Thursday, September 9, 2010

The Gold Standard and the Great Depression

A useful reminder of how the gold standard contributed to the Great Depression by James Hamilton (Econbrowser) here .

The 13 countries that abandoned first their gold parity (1931) performed best, with average growth rate of industrial production turning positive in every year from 1932 on.

A lesson for countries that stick with fixed exchange rate regimes, or common currency areas, or quasi-fixed regimes, in the current Great Recession?

Policy Analysis of High-Speed Rail

Ed Dolan on the comparative costs and advantages of high-speed rail over road and air transport here .

Japan’s Decline Relative to the U.S.

Japan’s per capita GDP has fallen from 88 percent of the U.S. one in 1992 to 76 percent in 2007 according to Paul Krugman, who explains that two-thirds of that decline can be explained by an aging population.

But Michael J. Roberts here has a different estimate: three quarters of the relative decline (75%) would be explained by demographics.

Hat tip: Mark Thoma

Tuesday, September 7, 2010

Exit from Pegged Exchange Rate Regimes

How costly for an economy is an exit from a pegged exchange rate regime? The answer might provide some lessons for countries contemplating an exit from a common currency area such as the eurozone, the extreme case of a heavily managed exchange rate peg.

Recently Barry Eichengreen (Voxeu, 17 November 2007), apparently after searching extensively (and unsuccessfully) for good reasons why eurozone members should not even try to do that, claimed that he found the definitive answer: the euro is “effectively irreversible” because the prospect of a major post exit devaluation would incite “national households and firms to shift deposits to other Eurozone banks, producing a system-wide bank run.” Moreover the devaluation would increase the real burden of foreign-held, euro-denominated bonds, relative to national income, leading to defaults and bankruptcies.

In a previous post I noted that no bank run and no catastrophic financial crisis would take place if the euro itself had been devalued sufficiently in advance of the exit, so that a further devaluation of a national currency leaving the system would not be necessary.

I was not aware at the time of a paper by Joshua Aizenman and Reuven Glick, published in the June 2008 issue of the Journal of Money, Credit and Banking which analyzed the experience of several countries that exited pegged exchange rate regimes since 1980 (“Pegged Exchange Rate Regimes – A Trap?”) downloadable as a Federal Reserve Bank of San Francisco Working Paper.

The authors work on a data set assembled by IMF researchers Detragiache, Mody, and Okada in 2005, downloadable here.

They identify 63 episodes over the period 1980-2001 in which countries with heavily managed exchange rates ended in an exit, defined as a move to a more flexible exchange rate regime.

Interestingly, they define “disorderly” and “orderly” exits. An exit is deemed “disorderly” when the currency fell freely at some time during the 12 months period after the exit; the remaining episodes are deemed “orderly”. Indeed, this definition is not very different from what I defined as a condition for an exit not to be catastrophic: if there is no massive devaluation in the months following the exit they define it as “orderly”, while I concluded that none of the apocalyptic consequences that Eichengreen foretold would then take place. Indeed there is no need for the newly independent currency to fall freely if the very currency to which it was linked was massively devalued beforehand. In that case there will be no bank run, no financial crisis, and no major contraction of the economy.

In the data set under review, Aizenman and Glick note that, of the 63 exit episodes observed, 32 were “disorderly” and 31 “orderly”.

They further observe that overall, “economic growth typically slows in the periods leading up to the exit, is almost zero on average in the year after the exit occurs, following which growth recovers.”

Indeed, growth typically declines during the two years preceding the exit and during one year after the exit, while thereafter growth resumes. In fact two third of the growth decline is not due to exit but antedates it, and is leading to exit. It would thus be wrong to attribute all the contraction of the economy to the exit policy, since on the contrary exit helped the economy to recover.

Thus while it is clear that “… exits from pegged exchange rates have not occurred under favorable circumstances” (Eichengreen, “Kicking the habit: moving from pegged rates to greater exchange rate flexibility”, Economic Journal, March 1999) it is not correct to conclude that “They have not had happy results.” (Eichengreen, 1999). Except, of course, if you define recovery after a crisis a “not happy result”.

Another interesting conclusion from the paper is that “the longer the duration of a pegged exchange rate regime, the lower (greater) is the output growth (decline).” And this effect is even more pronounced in the case of disorderly exits.

A clear warning for eurozone members who are currently seriously affected by disequilibrium implicit real exchange rates (degraded competitiveness) within the euro: do not wait too much to exit. Act now.