A new book by John Calverley,called Bubbles and How to Survive Them is making waves. The central premise of the book is that the housing and dot com booms were not one off events but rather are a harbinger of the way things will be if action isn’t taken. At present the principle threat today is from housing bubbles, but other asset markets look vulnerable.
The problem has arisen in part because, over the last couple of decades, Central banks have become so good at controlling the business cycle that periodically large rises in unemployment and inflation are no longer commonplace. The price however, fueled by the persistently low interest rates in the US, is a wall of liquidity that is currently sloshing about the world’s asset markets.
Some of these bubbles, such as in the UK and Australian housing market are well known. Others such as the recent bubbles in shipping are also I believe part of this bubble economy. As you can see from the graph below at the beginning of 2002 tanker (and most bulk shipping rate) tripled in the space of a couple of months. Most of this was put down to speculation and prices fell back again but at the beginning of this year they started heading for the stars again. I’d speculate that the current high oil prices are a not entirely unrelated to the bubble in the tanker market. Of course you could argue that the tanker price rises are simply the natural response to higher oil prices caused by higher demand and restricted supply. But the ramping in the tanker market looks to me more indicative of a bubble so I’m predicting 30 dollar oil by January next ye
Once, Mrs Joan Robinson, my radical teacher at Cambridge University, and Professor Gus Ranis of Yale University, a 'neo-liberal' economist, were observed agreeing with each other that Korea had been a great success.
The paradox was resolved when it turned out that Mrs Robinson was talking about North Korea and Professor Ranis about South Korea!
That is taken from an interview with Jagdish Bhagwati. Vi Marginal Revolution
Christy Davies has an interesting article “WHY SHOULD CHILDREN HAVE TO LEARN SCIENCE?” which takes a critical look at one of the educational truths of our age:
“There are those with a gift for science or a capacity for enduring boredom who will go on to become what the Russians call specialists but they will not profit from it. We are always being told that there is a shortage of scientists yet their price remains low. Perseverance leads to poverty. Some scientists become rich from their discoveries but most of them find that they are less well rewarded than the patent lawyers who corral their inventions or the marketing executives who entice the customers into using them. Perhaps that is as it should be. In the Soviet Union where great emphasis was placed on science education scientists were respected and relatively well paid and the economy collapsed from an inability to innovate.”
It often seems that the incentivisation of scientific research leads not to more innovation but stasis and that markets only really function well in relation to the product itself. As the article alludes, from a market perspective the decision to pursue scientific research is seldom a rational on e– at lest from a purely economic perspective. Thus anyone pursuing a scientific career is unlikely to be someone who responds rationally to economic incentives. Thus the imposition of any economic incentive program in relation to scientific research is likely to have little or no effect. Perhaps a more telling question to would be to ask under what circumstance it might also have a detrimental effect – as perhaps it did in Russia. Perhaps the cause might be that the offering of “rewards” selects the wrong sort of people to become of scientists?
I suppose there’s an application of Coase’s theorem or some other principle in here but otherwise it pretty much speaks for itself:
"Sitting in Auckland today, the Select Committee heard a submission from representatives of Tuhoe, who claim absolute sovereignty through their rohe with title over the sea extending 400 nautical miles offshore," Mr Shirley said.
"In answer to my questions, they also confirmed their claims of absolute sovereignty over all air space to the heavens above. It was specifically stated that, once the Foreshore and Seabed legislation is resolved, they would be approaching Air New Zealand and other airlines to negotiate compensation for all incursions into their air space.
"They drew the parallel of other sovereign states where missiles are deployed to shoot down unauthorised aircraft. The group also confirmed that it would be approaching NASA and other authorities in respect of their satellites that orbit the Earth.”
Hey way to go, how about suing the Sun and the Moon for overflight rights, guys!
Alan Reynolds writes:
“The Economist (11 September) repeats the editors' habitual lecturing about a "reckless" U.S. budget deficit, which amounts to 3.6 percent of GDP. In a related essay, C. Fred Bergsten recycles his ill-fated "hard landing" scares of the 1980s, based on a metaphysical assertion that "larger budget deficits will produce larger American trade deficits . . .. [and] higher interest rates."
The statistical tables at the back of The Economist, by contrast, tell a different tale. Budget deficits in France and Germany are just as large as in the U.S., and the budget gap in Japan is twice as large. Yet all three countries have a current account surplus, not "twin deficits." And the interest rate on 10-year government bonds is only 1.6 percent in Japan.
Australia, by contrast, has maintained budget surpluses since 1998. Yet Australia's current account deficit is larger than that of the United States, as it was in all but one of the past six years. Australia's 10-year interest rate is 5.6 percent -- substantially higher than the U.S. rate of 4.2 percent. Canada, with a budget surplus since 1997, also has a higher interest rate than the U.S, 4.7 percent. These are regular patterns, not anomalies.
From 1994 through 2003, annual budget deficits averaged 5.8 percent of GDP in Japan, compared with 1.6 percent in the U.S. If budget deficits really increased interest rates and current account deficits, then Japan should be experiencing high interest rates and a large current account deficit by now. Countries with budget surpluses, like Australia, should be experiencing much lower interest rates and current account surpluses. The facts obviously don't fit the conventional theory.”
This view also contrast with the points made in the recent paper on the “twin deficits” by Roubini and Setser The US as a Net Debtor:The Sustainability of the US External Imbalances”:
““The rapid deterioration of US net external debt position implied by large trade andcurrent account deficits cannot continue indefinitely. At some point, the interest rate that the U.S. needs to pay to attract the external financing it needs to run ongoing deficits will rise, slowing the U.S. economy and improving the trade balance even as higher interest rates increase the amount the U.S. must pay to its existing creditors. The U.S. will increasingly have to learn to live with the vulnerabilities associated with being a major net debtor -- vulnerabilities that are attenuated by the dollar’s continued position as a reserve currency, but not entirely eliminated.”
In my view both are probably right; None of the US current account deficit, budget deficit and the relevant stocks of external debt and domestic debt are large (relative to GDP) by either historical standards or international standards. Nor indeed are they large by absolute standards – the gross external debt of the US is only about 20% higher than that of the United Kingdom alone while its stock of government debt is comparable to that of Japans. Thus attatching the reckless epithets is hardly justified.
On the other hand mean reversion implies that the deficits are more likely to get smaller than larger and interest rates on that debt are more likely to rise than fall. So the views expreseed in Roubini’s paper are farily safe bets even if the tone is alarmist.
The point however that is lost by the repeated accusation “recklessness” is the rationality of the deficits; as long as China, Japan and the rest of the world capital markets are prepared to lend at around 1%, it perfectly rational for the US to take advantage of these rates to borrow as much as it can (provided of course that the expected return is larger).
What is perhaps less easily explained is why so many other countries are not prepared or able to take advantage of these generous lending terms.
Alison Wolf of the University of London writes.
“We are told that in a "knowledge economy," a country needs ever more graduates and formal qualifications to stay competitive. But education simply does not deliver economic growth the way our politicians - and businessmen - believe: more education in does not mean more growth out....large international studies often find a negative relationship between education and growth rates.”
Egypt is a classic example of this. Between 1970 and 1998, its primary school enrollment rates grew to over 90%, secondary schooling soared from 32% to 75%, and university education doubled. Egypt started the period as the world's 47th poorest country; it ended the period as the 48th poorest.
But it is not only among developing countries that links between education and growth prove elusive. Switzerland has been one of the richest countries in the world for a century - and not because of its natural resources. Yet it has the lowest rate of university attendance in Western Europe. “
Contextually this is very much aimed at the British Labour government which has out of the air plucked a target of 50% enrollment in higher education. This seems to have arisen either through a misreading of human capital growth theory, or, more likely, a perceived but probably spurious correlation between voting labour and getting a degree.
But the questions it raises about education are perhaps most serious in the developing world – another country that raised its school expenditures was Zimbabwe and perhaps its recent troubles are a backlash against “the growth education promised” that failed to materialize.
Anyway here’s a neat animation from the UN on HDI and income.
"Nobody goes there anymore. It's too crowded." So goes the old joke but here comes the conundrum.
Researchers at the Nelson A. Rockefeller Institute of Government, in their Update on Urban Hardship, find that, in the years 1970-2000, St. Louis showed the most improved Intercity Hardship Index Score while Los Angeles' ranking declined the most.
In reality, St Louis has sustained the sharpest fall in population over the last 50 years of any inner city in the World . Los Angeles by contrast has been one of the fastest growing cities.
So the conlusion from the research might be the same one that Pol Pot drew – clear everyone out of the city if you want to improve their hardship index. The reality might be that Americans just move about regardless if indexes.
Finally an MBA course for the executive who knows nothing – Lecture 1
The Age proves the old adage that if you ask an economist for an opinion, you’re likely to get two answers; first story is
And from the same paper the same day:
The Reserve Bank of Australia has applied Milton Friedman’s profit test in a paper on its foreign exchange intervention operations. The premise underlying the profit test is that to survive, a speculator must, on average, make a profit, and to make a profit they must buy when the price is below its equilibrium or alternatively sell when the price is above equilibrium, which in both cases means conducting a transaction that supports the price moving towards equilibrium. Applying this reasoning to central bank’s interventions, if the bank makes a profit on its foreign exchange dealings it can then claim to be responsible for stabilizing the exchange rate.
Since the float of the Australain Dollar 20 years ago, the RBA has made a profit of A$5.2 billion on its intervention operations, and so the paper concludes that the RBA has had a stabilizing influence on the exchange rate.
Since Friedman devised the test a number of counterexamples have been raised but these are mostly of theoretical interest and unlikely to hold more than occasionally.
A more pertinent criticism is that the RBA’s interventions, if they make a profit, must crowd out private sector speculators. In the long term they may therefore make the market for Australian dollars thinner and hence potentially more volatile. So success today may beget ill tomorrow.
On the plus side though, if the RBA’s traders are making a profit, that means they are recruiting competent economists and traders and hence their credibility in other areas may be enhanced? Provided, of course that they are transferred these traders from foreign exchange desk.
“The sort of dependence that results from exchange, i.e., from commercial transactions, is a reciprocal dependence. We cannot be dependent upon a foreigner without his being dependent on us. Now, this is what constitutes the very essence of society. To sever natural interrelations is not to make oneself independent, but to isolate oneself completely. “
I haven’t read the paper but my first reaction to the news that Paul Samuelson is “coming out with an article in the Journal of Economic Perspectives on outsourcing that contradicts the mainstream economic take” is that this is horse sh*t, even if it is straight from the horse’s mouth. In particular I can’t see how outsourcing differs fundamentally from any other form of trade and this is (one of the lines expounded at some length in Bhagwati’ response ‘The Muddles over Outsourcing”.
Arnold Kling summarizes the argument as follows:-
“The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes”
The argument seems to be to bear some resemblance to China’s turn to isolationism in the 15th century.
Here’s the description from Loise Levanthes ‘s “When China Ruled the Seas”
“During the brief period from 1405 to 1433, seven epic expeditions brought China's "treasure ships" across the China Seas and the Indian Ocean, from Taiwan to the spice islands of Indonesia and the Malabar coast of India, on to the rich ports of the Persian Gulf and down the African coast, China's "El Dorado," and perhaps even to Australia, three hundred years before Captain Cook was credited with its discovery. With over 300 ships--some measuring as much as 400 feet long and 160 feet wide, with upwards of nine masts and twelve sails, and combined crews sometimes numbering over 28,000 men--the emperor Zhu Di's fantastic fleet was a virtual floating city, a naval expression of his Forbidden City in Beijing. The largest wooden boats ever built, these extraordinary ships were the most technically superior vessels in the world with innovations such as balanced rudders and bulwarked compartments that predated European ships by centuries. For thirty years foreign goods, medicines, geographic knowledge, and cultural insights flowed into China at an extraordinary rate, and China extended its sphere of political power and influence throughout the Indian Ocean. Half the world was in China's grasp, and the rest could easily have been, had the emperor so wished. But instead, China turned inward, as succeeding emperors forbade overseas travel and stopped all building and repair of oceangoing junks. Disobedient merchants and seamen were killed, and within a hundred years the greatest navy the world had ever known willed itself into extinction. The period of China's greatest outward expansion was followed by the period of its greatest isolation.”
One of the arguments made to successive emperors seems to have been that since, at the time China was the most technologically advanced country in the world, there were no “new” products that it could gain from trade. Further, in addition to the expenses of building and maintaining a sea going fleet, trade could only erode China’s absolute advantage by exporting this technological know how abroad thereby weakening its terms of trade - and security.
So China isolated its self and the rest is history – or more particularly, from that moment on, the Ming dynasty was history.
"I am an autodidact economist; that is, I am self-taught. If I see far it is because I am standing on the feet of giants."
- The Angry Economist
Interesting that in the current Australian election campeign;
"LABOR leader Mark Latham made a concerted bid to turn the election in his favor today by promising tax cuts…The top tax threshold will also be lifted to $85,000 .."
“However, he [Peter Costello, the Liberal Treasurer] refused to say if the government had room to offer its own extra tax cuts to match Labor's plan. “
Here’s a new one for the phrase book:
“Donde está el museo de la deuda exterior?”
Yes, that right, Argentina is opening the world's first museum of foreign debt:
“Argentina has always had trouble paying the bills - from its first default in 1827, shortly after independence from Spain, to 2001, when, amid rioting and political chaos, the country suspended payment on a $142 billion mountain of debt.
Now, creators of Argentina's Museum of Foreign Debt, opening in October, have found an unlikely way to educate the public about - and perhaps curb - Argentina's culture of credit and its negative impact on what was once South America's shining star.”
“Currently, there's no public money to fund the museum, but the city government and national museum are consulting on the project.”
Where's the World Bank when you need it, eh? And, as they say in Buenos Aires, it takes two to tango –well actually they probably say “lleva dos el tango”, ed. So maybe its time to open a Museum of Moral Hazard & Lending in Washington as well.
Interesting article in the NY Times today:-
“ In the late 1990's, Finland sprinted ahead of rivals and neighbors, propelled by the runaway success of Nokia in the mobile phone industry and reveling in a newly minted image as the world's leader in Internet and cellphone use. But now, this land on Russia's flank seems to be pondering whether it has lost its competitive inventive edge.
Last May, an authoritative study of global competitiveness bounced Finland down from the top three to No. 8, countering other polls that gave Finland top marks for literacy, lack of corruption and care of the environment. Nokia itself has stumbled this year, losing some of its share of the booming cellphone market to rival manufacturers. And in a survey of 70 Finnish executives that will be published soon, "all of them said Finland is no longer No.1 “
“State” sized countries (Finland’s population is about the same as Minnesota’s) may therefore only be likely to experience the occasional spurts of high growth followed by periods of stagnation while new industries are developed. Perhaps this Schumptarian pattern of export growth will become more prevalent ?
The catch is that Finland is on the crest of a demographic wave with a large 50-60 year boom generation now looking forward to a comfortable retirement. This downswing in Finland’s technological wave is therefore badly timed. The question is whether the next innovation can be expected to randomly occur or whether in some way depends endogenously on the Finland’s population structure.
The zig zag is whether the soon to be retiring generation was in a sense “exceptional”; the data from this wage age profile suggest that they may have been. There is a peaks in the 35-39 age group in 1980, which was repeated in 1996 in the 50-60 cohort i.e. the same generation and the generation that managed companies such as Nokia.
That’s the sort of question the academic economists will be asking themselves. The armchair economist will, however only need to look at the pictures to deduce the real explanation - prats + hats = low GDP growth. And they’d be right.