Quotulatiousness

March 18, 2013

Will the Cyprus bailout set the fuse to a new Great Depression?

Filed under: Economics, Europe, History — Tags: , , , — Nicholas @ 00:01

History may not repeat itself, but it’s quite likely that it paraphrases itself instead:

So, this is going to be a very sour reading of what has happened in Cyprus this weekend. It will also be a very partisan one, possibly even a partial one. But if Milton Friedman and Anna Schwartz were right in their insistence that it was actually the Federal Reserve that caused the Great Depression (which is something that Ben Bernanke himself has insisted that the Fed will not repeat) then one way of interpreting what has happened is that the European Central Bank has just set us all up for another Depression. The trigger is that “tax” of a little over 6% on all depositors.

This isn’t an analysis that you’ll be able to get all economists to sign up to. But the basic story told by Friedman and Schwartz in A Monetary History of the United States was that the 1929 crash was indeed a serious crash. But it would not have led to the Great Depression without the Federal Reserve making some serious mistakes. Two of which were to allow the intertwined collapses of both the money supply and the banking system. Given that it is the banks that create credit and thus the wider money supply they are, to a great extent, the same thing.

[. . .]

But please note the central part of Friedman’s argument. Yes, there was the crash. Yes, there would have been a deep and painful recession as a result. But the tipping of that recession into depression was a result of the cascading series of bank failures in the absence of deposit insurance: that led to the calamitous shrinking of credit and the money supply.

So let us now look at Europe and the eurozone. Certainly there’s been a crash (or even a Crash). We’ve so far avoided the depression part (although not everywhere. Greece is certainly in one, Spain possibly and looking out my window at rural Portugal I see certain signs of a reversion to a non-cash economy.) but the important question is whether we manage to continue to do so?

[. . .]

Yes, I do know, they’ve called it a tax: but here we’ve got to make reference to that duck thing. The difference between a 6% or more “tax” on your bank deposit and a failure of the previously agreed deposit insurance to protect your deposit is quackery enough that it’s a duck.

As I’ve said before the importance of this is moot at present. It depends on who believes what. If the citizenry believe that they don’t have deposit insurance any more (whether we call this a tax or a duck) then we will see more mass withdrawals from banks and we will see more bank failures. And cascading bank failures are exactly the thing that will tumble us into a new depression.

January 27, 2013

Reason.tv: Two Cheers for the Coming Collapse of the U.S. Economy!

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 11:13

“At some point, holders of Treasury securities are going to recognize that these unfunded liabilities are going to affect the fiscal capabilities of the government and then you’re going to have the same situation that happened in Greece happening in the U.S.,” says Jeffrey Rogers Hummel, who is a professor of economics at San Jose State University and the author of a recent paper on the consequences of a U.S. government default. “In the short run it’s going to be painful, but in the long run it’ll be a good thing.”

Reason‘s Nick Gillespie sat down with Hummel at FreedomFest 2012 for a wide-ranging discussion on monetary policy, business cycle theory, the longevity of the welfare state, and why libertarians who rail against the Fed are like “generals fighting the last war.”

Held each July in Las Vegas, FreedomFest is attended by around 2,000 limited-government enthusiasts and libertarians a year. Reason TV spoke with over two dozen speakers and attendees.

January 25, 2013

The wrong maple leaf forever: the new $20 bill controversy

Filed under: Cancon, Humour — Tags: , — Nicholas @ 10:00

Oh, hang your heads in shame, Canadians: you put the wrong maple leaf on your new $20 bill. The entire rest of the civilized world is laughing and pointing:

The mix-up began a hundred-some years ago when Canada, a small club founded by French misfit children, decided to create its own currency. These bills and coins would function much the same as Chuck E. Cheese tickets at a modern-day Chuck E. Cheese, in that it would be tradeable for goods (and services). It would be valid in all of Canada.

For many years, the system was a success. Canadians used their Canadian money with ease. Every once in a while a Canadian penny or dime would slip down into the United States but that was no big deal because all the coins look about the same and everyone could just leave them in tip jars, like “not my problem.”

Then, in 2011, Canada decided to redesign their banknotes.

“Paper is out and polymer is IN!” Canada exclaimed in an email newsletter that the rest of the world deleted without reading.

The new bills were made out of plastic. They had fancy updated pictures and a holographic whoozy-whatsits and a big clear window to make them harder to counterfeit.

They featured a big ol’ maple leaf.

But not a Canadian maple leaf.

A Norwegian one.

“Big deal,” you say. “Leaves are leaves; who cares?”

The problem is that maple leaves are Canada’s thing. Like how some nations’ thing is communism, or being the world economic leader, or producing generation after generation of beautiful supermodels. Canada’s thing is that there are leaves there.

And they fucked it up.

H/T to David Akin for the link.

January 16, 2013

The odd concept that is “money”

Filed under: Economics, Government, History — Tags: , , , , , — Nicholas @ 00:03

In his nominally NFL-related column, Gregg Easterbrook talks about the phenomenon that is money:

Currency is surprisingly abstract as a concept. Money is whatever you agree to accept in trade, with the understanding that others will accept it in turn. If there’s a $20 bill in your wallet or purse, you view it as valuable because you know that others will as well. If you have $1 million in a bank account, you view it as valuable because you know that others will as well. But you can’t eat a $20 bill or sleep under a bank account. Money is valuable only if others agree that it is.

Even if money is backed by some precious substance such as gold, the abstraction doesn’t change much. You can’t eat or wear gold. You view gold as valuable only because you know that others will as well. Whether a thin sheet of linen-like paper or a gold ingot or a string of digits on an electronic financial statement, money is, itself, worthless.

That money has value only when others think it does is why currencies collapse. The ruble and the Zimbabwean dollar lost value when no one wanted them, because a person holding this currency couldn’t be sure that others would also view it as valuable. But if Barack Obama ordered the minting of a trillion-dollar platinum coin, and it was viewed as having a trillion dollars’ worth of value, then it would.

[. . .]

Bear in mind, that’s how the past six years of irresponsible debt-based federal giveaways — two years under George W. Bush, now four years under Obama — have been funded. The Federal Reserve keeps buying Treasuries, or mortgage-backed securities issued by Fannie Mae and similar federal agencies. That gives the executive branch money to spend. One division of government tells another, “Here is a new string of numbers,” and money comes into existence.

What’s underlying these transactions? Nada, beyond the belief that strings of numbers issued by the United States are more likely to be useful in trade than strings of numbers issued by, say, Greece. Because the credibility of the United States is so high, its strings of numbers bear heft. But if government keeps printing money and talking about obvious gimmicks such as trillion-dollar coins, how long will that credibility last?

Economists including Friedrich Hayek have contemplated the idea that privately issued money would be more solid than government-issued money, since privately issued money would be cross-checked by market forces, while government is run to please campaign donors. Governments from the Roman emperors of the far past to the liberal Scandinavian democracies of today insist that they alone control the supply of money. One reason is to ensure taxation. At a deeper level, governments know how easily it could all unravel, and money be viewed as worthless.

January 9, 2013

Why stop at a mere trillion dollars?

Filed under: Economics, Government, USA — Tags: , , , , , — Nicholas @ 08:59

Zero Hedge on the trillion dollar platinum coin nonsense:

A year ago, out of nowhere, the grotesque suggestion to “resolve” the US debt ceiling with a platinum dollar coin came, and like a bad dream, mercifully disappeared even as the debt ceiling negotiations dragged until the last minute, without this idea being remotely considered for implementation, for one simple reason: it is sheer political, monetary and financial lunacy. And yet there are those, supposedly intelligent people, who one year later, continue dragging this ridiculous farce, as a cheap parlor trick which is nothing but a transparent attempt for media trolling and exposure, which only distracts from America’s unsustainable spending problem and does nothing to address the real crisis the US welfare state finds itself in. And while numerous respected people have taken the time to explain the stupidity of the trillion dollar coin, few have done so as an integral part of the statist mainstream for one simple reason — it might provide a loophole opportunity, however tiny, to perpetuate the broken American model even for a day or two, if “everyone is in on it.” Luckily, that is no longer the case and as even Ethan Harris from Bank of America (a firm that would be significantly impaired if America was forced to suddenly live within its means), the whole idea is nothing more than “the latest bad idea” straight “from the land of fiscal make believe.” We can only hope that this finally puts this whole farce to bed.

[. . .]

Taking these sorts of actions would almost certainly worsen, not ease, the coming battles over the spending — a second reason to be skeptical of the idea of the trillion dollar coin. As we have noted before, the debt ceiling is just one of three brinkmanship moments looming in the next few months. The across-the-board spending cuts that constitute the sequester have only been delayed for two months, and absent new legislation, will start in March. Even more troubling, on March 27 the latest continuing resolution ends and, absent new legislation, all nonessential government programs would have to shut down for lack of funding.

Third, throwing the trillion dollar coin into this mix would not only intensify these two other fights, it would likely poison the well even further in future budget negotiations. With split government, fiscal policy making requires bipartisan agreement. The cliff compromise earned support from both parties, marking a welcome — if brief — respite from partisan politics. The last thing Washington needs is a further escalation in gamesmanship.

Finally, there is a slippery slope from avoiding the debt limit to outright debt monetization. Although proponents see it as a technical fix to a problem that, in their view, never should occur, it means the Treasury would have established a precedent to thwart Congressional limitations on spending and the debt ceiling.

Outside of the legal questions, nothing precludes the Treasury from issuing a coin to pay down the full $16.4 trillion in debt in one fell swoop: true monetization. A trillion dollar coin also would subvert the whole budget process, undermining already fragile public confidence and spooking financial markets. And based on the criteria put forth by the rating agencies, it would represent a stunning failure to devise credible political processes to resolve the longer-term budget issues for the US. A downgrade would very likely follow, in our view.

December 23, 2012

Goldbugs, behold the CombiBar

Filed under: Business, Economics, Europe, Germany — Tags: , , , , , — Nicholas @ 10:48

If you’re a big gold fan, you might want to look at the CombiBar, which is a gold wafer that can easily be broken down into one-gram portions:

Private investors in Switzerland, Austria and Germany are lining up to buy gold bars the size of a credit card that can easily be broken into one gram pieces and used as payment in an emergency.

Now Swiss refinery Valcambi, a unit of U.S. mining giant Newmont, wants to bring its “CombiBar” to market in the United States and build up its sales presence India — the world’s largest consumer of gold where the precious metal has long served as a parallel currency.

Investors worried that inflation and financial market turmoil will wipe out the value of their cash have poured money into gold over the past decade. Prices have gained almost 500 percent since 2001 compared to a 12 percent increase in MSCI’s world equity index.

[. . .]

The CombiBar is particularly popular among grandparents who want to give their grandchildren a strip of gold rather than a coin, said Andreas Habluetzel head of the Swiss business of Degussa, a gold trading company.

Other customers buy gold for security reasons.

“Demand is rising every week,” Habluetzel said. “Particularly in Germany, people buying gold fear that the euro will break apart or that banks will run into problems.”

H/T to Tyler Cowen for the link.

December 16, 2012

Stephen Gordon on “The Carney Affair”

Filed under: Cancon, Economics, Media, Politics — Tags: , , , , — Nicholas @ 11:34

His latest post at Maclean’s talks about the distressing revelations from a Globe and Mail article the other day:

It took 20 years and two recessions — both of which were more severe than the one we just had — before we were able to come up with a monetary policy framework that works well. The current practice in Canada is that the government provides the Bank of Canada an inflation target, and the Bank of Canada is free to exercise its discretion in how it meets its mandate. This is not full independence — the Minister of Finance has the legal authority to override the Bank in extreme circumstances — but it’s been enough so that when the Governor of the Bank of Canada speaks, people know that there are no unspoken partisan political considerations through which his message should be filtered. Explanations of how monetary policy is being conducted can be taken at face value, even if they are couched in cautious and nuanced language.

Or at least, that was the case before the Globe story broke. The second paragraph puts this hard-earned reputation for non-partisan professionalism into question. Unless Mark Carney can swiftly and convincingly demonstrate that he responded to those Liberals’ overtures with a quick and unequivocal refusal, we shouldn’t be surprised if non-Liberals start looking through his recent speeches through the corrosive, distorted lens of partisan politics. Was his speech to the Canadian Auto Workers simply a play for union support? Was his dismantlement of the Dutch Disease talking point simply a tactic to put the NDP off-balance? For me, these are rhetorical questions written with a sense of sickening dread; others will doubtlessly repeat them in earnest and with angry, partisan vigour.

But even in the best-case scenario in which Mark Carney’s conduct is blameless, we are still left with the prospect that not-insignificant elements in the Liberal Party of Canada were willing to risk one of the most crucial elements of our governance for partisan gain. If we are extremely lucky, this episode will be quickly forgotten. But if by taking a run at Mark Carney, these Liberals have initiated a never-ending cycle of speculation about the possible political ambitions of future Governors of the Bank of Canada, they will have weakened — perhaps fatally — the foundations of Canadian monetary policy.

December 6, 2012

Zero Hedge talks Keynes and Hayek

Filed under: Economics, Europe, Government, USA — Tags: , , , — Nicholas @ 09:52

Most politicians have a time sense that lasts just about as long as the current electoral cycle. Economics doesn’t fit neatly into that kind of cramped timescale. Politicians have a lot of influence over the long-term economy, but lack the sense of involvement over that long term because they have to stay tightly focussed on the next election (or they don’t get re-elected). This is one of the systemic faults that’s landed us in the long-term problems we’re facing right now:

Salma Hayek is beautiful, rich and famous. Friedrich Hayek is a deceased Austrian economist. He wasn’t very good looking, certainly not wealthy but he did become famous — but only 20 years after his death and then only within the make believe world of nerdy economists. Fortunately for the World today, if we are lucky, Friedrich Hayek may become the most famous Hayek of them all. Until then, the World remains firmly trapped in an economic hell created by Friedrich’s (and therefore Salma’s) arch enemy — John Maynard Keynes. IceCap’s Keith Dicker points out that, as most politicians and central bankers view the World in very short time frames, to truly understand the devastation wreaked by Keynesian economics, one has to take a step back and see how the financial destruction accumulated over time. It is true that these policies initially provided sugar highs for the economy — but the 3 step cycle of cutting interest rates, cutting taxes and borrowing money to create growth has finally reached its end point. If Mr. Keynes was alive today, we are confident he would be embarrassed that his lifelong work had been so severely distorted.

[. . .]

Since WWII, the Americans, Japanese, British and Europeans have spent way more money than they owned. But that was ok because the money they borrowed wouldn’t have to be repaid until some far away day in the future.

Unfortunately the future has now arrived and today, the next generations of Americans, Japanese, British and Europeans have all plunged into a deathly debt spiral.

Today it is no coincidence that the Americans, Japanese, British and Europeans have all set interest rates as close to 0% as possible.

Also today, it is no coincidence that the Americans, Japanese, British and Europeans are all printing money.

And finally, today it is also no coincidence that the Americans, Japanese, British and Europeans ignored Friedrich Hayek and instead followed the economic principles of John Maynard Keynes.

Today the entire global economic and financial system is rooted in unwavering support for John Maynard Keynes and his beliefs in deficit spending and debt-fueled growth.

September 22, 2012

Charles Stross on the diminishing marginal utility of just about everything

Filed under: Economics — Tags: , , — Nicholas @ 10:08

A post at his blog looks at an economic concept that is becoming familiar to more of us than ever before (even in the middle of a long-term economic crisis):

There’s a concept in economics called the diminishing marginal utility of money. Loosely put: if you give a £20 bill to a homeless dude, it will make his day — it’s worth a bunch of hot meals or a hostel bed for a few nights. If you give £20 to an average wage earner, it’s nice but not a game-changer: it’s worth a couple of cinema tickets or a round of drinks at the pub. And if you give £20 to a billionaire they probably won’t know what to do with it — they have employees to carry the money around for them, and anyway, they earn more in the time it takes to open their wallet and stash the bill than the £20 note is worth. They’re losing money by taking it!

Money. The more of it you’ve got, the less useful any additional increment becomes. And you don’t have to be a millionaire to get a handle for this.

These days, I’m in the weird position where almost all the stuff I would want to buy with any additional income is either stuff I can simply buy right now … or it isn’t available at any price.

July 31, 2012

Milton Friedman on the Euro in November, 2000

Filed under: Cancon, Economics, Europe — Tags: , — Nicholas @ 08:49

In the National Post, Michael Walker has an article on the great economist, Milton Friedman and his influence on Canada. He also includes this interesting comment on the Euro from a Bank of Canada conference in 2000:

When, at that same Bank of Canada Conference in 2000, Milton Friedman was asked about the future of the Euro, he said:

“I think the Euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy… On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time… “You know, the various countries in the Euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks — and the floating exchange rate gave them one. They have no mechanism now.

“If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. Nineteen ninety-two, 1993, you had the crises. Before that, Europe had the snake [the first attempt at European monetary cooperation in the 1970s], and then it broke down into something else. So the verdict isn’t in on the Euro. It’s only a year old. Give it time to develop its troubles.”

It is highly unfortunate for the European countries that they did not pay more attention to these piercing insights — and that Milton Friedman is no longer here to hold them to account.

Update: Reason.tv did a tribute to Friedman last year:

July 19, 2012

The messy internal state of North Korea

Filed under: Asia, China, Economics, Media — Tags: , , , , , , — Nicholas @ 09:49

Strategy Page on internal affairs of North Korea in the early stage of Kim Jong Un’s leadership:

China remains the foreign power with the most influence over North Korea, but that isn’t saying much. When given unwelcome advice from China, which represents nearly 80 percent of foreign trade and the only source of free food and fuel aid, North Korea still tends to adopt a suicidal attitude. For the northern leadership, it’s “death before dishonor” and that means Chinese demands, even backed by threats of aid cuts, are ignored. For this reason, China is believed involved in the current reorganization of the senior North Korean leadership. China has long developed friends and relationships among the North Korean elite. As corruption became more of a factor in the last decade, China knew how to cope. China is awash in corruption, and Chinese leaders have learned how to use it (even as they struggle to lose it). In effect, China’s decade-long effort to overwhelm the “old school” faction in North Korea appears to have succeeded. But the “old school” crowd are still numerous, scared and armed. This could get messy. This does not bother China, which has plenty of experience with messy.

In the last month or so North Korea’s new leader (Kim Jong Un) has removed hundreds of military and government officials and promptly installed younger replacements. Un has made it clear, in public announcements, that it’s time for a new generation. Many of the dismissed older officials were seemingly loyal to and supportive of Un, so this appears to be more a desire to shake up the leadership, than to purge opponents. Kim Jong Un isn’t doing this by himself, as he has a small group of advisors he relies on a lot. This includes his uncle, Jang Sung Taek, who is married to Kim Jong Ils sister. Jang has long been a powerful government official, and is believed to be quite wealthy. That’s because Jang has a lot to say about how North Korea earns (by legal, or illegal means) foreign currency. In a country so extremely poor, the man who controls the most money has a lot of power. Jang, for example earlier this year ordered house searches of families believed to be hoarding foreign currency (Chinese or American), rather than, as the law demands, putting it in the bank. People do not want to put their foreign currency in the bank because the government pays you less for it (in North Korean currency) than the black market money changers (who give fair market value). Jang understands how the North Korean economy really works, and is trying to increase government control over the “new economy.” Yang and his wife have a lot more knowledge of, and experience with, the North Korea government and economy than their nephew Kim Jong Un and, for the moment, they have his ear, and trust.

[. . .]

The food situation in the north is getting worse, with food prices (in the growing number of free markets) at record levels. Government distributions of food are declining. Worse, the government is printing more money, increasing inflation (because there’s now more money chasing the same amount of food.)

North Korean censors finally caught on to the fact that young North Koreans had been taking South Korean or Western popular songs, adding new lyrics that have a double (anti-government) meaning in the north, and spreading them widely. North Korea doesn’t have much Internet access, but there are memory sticks, CDs and floppy disks. Stuff gets around, and now the police have been ordered to crack down on a list of over 500 subversive songs. The cops love this sort of thing, as it creates plenty of new bribery opportunities. That’s because many of those involved in this music conspiracy are children of ruling families, and can afford a fine (rather than anger their parents by getting arrested.)

Update: In the Guardian, Paul Watson says we’re all sheep and ignoring the horrific crimes of South Korea and vilifying the peace-loving, friendly, warm-hearted North Koreans:

Reunification and conciliation are usually portrayed as South Korean concepts, while North Korea is seen as a closed state, hostile to such talk on “idealistic grounds” – a view perpetuated by media outlets’ lack of interest in all recent North Korean initiatives. In fact it is almost impossible to find any piece of positive European journalism relating to the Democratic People’s Republic of Korea (DPRK). The days of cold war pantomime journalism and great ideological battles might be over, but North Korea remains an area in which journalists have free licence for sensationalism and partiality.

The lack of western sources in North Korea has allowed the media to conjure up fantastic stories that enthrall readers but aren’t grounded in hard fact. No attempt is made to see both sides of the Korean conflict: it is much easier and more palatable to a western audience to pigeonhole the DPRK as a dangerous maverick state ruled by a capricious dictator and South Korea as its long-suffering, patient neighbour.

These roles are dusted off whenever there are flare-ups, such as the Yeonpyeong Island incident of 2010 when North Korea was condemned for firing shots at South Korean military and civilians in an “unprovoked attack”. It was not widely reported that South Korea had been test firing artillery in a patch of ocean that North Korea claims ownership of or that North Korea’s repeated demands for an explanation were ignored. While military intervention may not have been wise, it was far from the random act of hostility it was made out to be.

July 18, 2012

QotD: Quantitative Easing is institutionalized theft

Filed under: Economics, Government, Quotations — Tags: , , — Nicholas @ 08:56

In reality, economics is not the fiscal rocket-science you make it sound. Capitalism itself is based on good old-fashioned honesty. The money at the heart of it must be both an honest store-of-value and an efficient medium of exchange. It ceases to be so when the inherent deceits of fractional reserve banking allow trillions of false credit to be pumped into the system, thus forcing up prices (booms) which inevitably lead to over-valued commodities (busts).

What happens next is that the banks, having privatised their gains in the good times, simply socialise their losses onto the tax-payer. It’s a crime. Simple as that really.

Telegraph commentator “dionysusreturns“, responding to “Fed fiddles as America slides back into recession” by Ambrose Evans Pritchard, 2012-07-15

July 3, 2012

“The longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture”

Filed under: Economics, Europe — Tags: , , , , , — Nicholas @ 08:47

The Economist on the long-drawn-out European financial mess:

THE longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture. Like the medieval rack, every turn of the crisis tears Europe further apart. This week Cyprus announced it would seek a bail-out. Spain formally asked for money to recapitalise its banks. The Greek limb is close to being ripped off. How long can the Italian one hold?

Monetary union was meant to be a blessing. The euro’s founders dreamed that it would end chronic and divisive currency crises, promote growth and multiply Europe’s economic power. After the creation of the single market, the euro was the next step toward political union.

[. . .]

Now, after first blaming speculators, then profligate states, then, more broadly Europe’s lack of competitiveness, the cardinals of monetary union have belatedly come to understand that the main problem is the euro itself. A new report by a group of prominent economists — sponsored by Jacques Delors, the former president of the European Commission, and Helmut Schmidt, the former German chancellor — describes in telling detail how the euro is destroying itself.

Start with the European Central Bank’s “one size fits all” interest rate, which the report’s leading author, Henrik Enderlein of the Hertie School of Governance in Berlin, relabels a “one size fits none” rate. Differences in inflation are magnified: in countries with higher-than-average inflation (eg, Italy), the real interest is too low, fuelling more inflation; the opposite is true in countries where inflation is low (eg, Germany). Another problem is that the single market is far from complete, so that competition does not even out price differences across the EU. The market in services, which represents the biggest share of economic output, is still fragmented. Moreover, European workers are less likely to move in search of jobs than, say, American ones. A further curse is that countries of the euro zone do not independently control their own money. Because each lacks its own central bank to act as a lender of last resort, troubled countries can more easily be pushed into default as markets panic. Lastly, cross-border financial integration has spread far enough to channel contagion from one country to another, but not so far as to break the cycle of weak banks and weak sovereigns bringing each other down.

June 23, 2012

The real ending to Krugman’s favourite example, the Capitol Hill babysitting co-op

Filed under: Economics, Government, Humour — Tags: , , , — Nicholas @ 08:32

Tim Harford recounts the tale of the Capitol Hill babysitting co-op, which Paul Krugman is very fond of using as an example to support his economic prescriptions, but he includes the part that Krugman tends to ignore … the ending:

One of the most renowned parables in economics is that of the Capitol Hill babysitting co-operative. It became famous because of Paul Krugman, a winner of the Nobel memorial prize in economics and a pugnacious columnist for The New York Times.

Long, long ago (the 1970s) in a town far, far away (Washington, DC) there was a babysitting co-op with a problem. The 150 or so families in the co-op, mostly congressional staffers, shared babysitting duties and kept track of who was owed babysitting, and who was owing, with a system of “scrip” – tokens good for a half-hour’s sitting.

Thanks to an administrative misstep, the co-op ended up short of tokens. Most families wanted more, as a buffer in case they had a run of social engagements, and so most families wanted to stay in and sit for others. Of course, if everyone wants to babysit, nobody goes out, and that means nobody babysits either. The co-op suffered a demand-led depression: there was no shortage of people willing to supply babysitting services, but because of a failure of monetary policy, this potential supply was not called into play. [. . .]

Two-and-a-half cheers, then, for Krugman. But something has been nagging at me ever since I read the original story of the Capitol Hill babysitting co-op, published in 1977 by Joan and Richard Sweeney. Paul Krugman’s most recent retelling does not mention how the original story ends: the co-op prints too much scrip, inflationary pressures spring up and are suppressed, and the co-op seizes up again because nobody wants to stay at home babysitting. Krugman is right when he says that economies sometimes suffer from problems that have technical solutions. Perhaps he is too quick to suggest that those technical solutions are simple.

But let me look for compromise. The babysitting co-op was ruined because it was run, incompetently, by a bunch of Capitol Hill lawyers. In this respect I think we can all agree that it remains an important cautionary tale.

June 18, 2012

Rerun of the Greek election

Filed under: Economics, Europe, Greece, Politics — Tags: , , , — Nicholas @ 09:16

The Economist summarizes the results of yesterday’s election in Greece:

WHEN deciding whether to grant citizenship to an outsider, the Ancient Greeks would put the matter to a vote, tossing coloured pebbles into a clay jar. On June 17th almost 29.7% of voting Greeks picked the colours of New Democracy, a centre-right party that broadly supports the country’s EU bail-out agreement. It was seen as a vote to remain citizens in good standing of the single currency. New Democracy narrowly beat Syriza, the “coalition of the radical left”, which was threatening to rip up the bail-out agreement. That would have resulted in ejection from the euro area or at least ostracism (another Ancient Greek practice) from its fellow members.

On the face of it, this do-over election has generated the kind of result euro-officials were hoping to see in the first election on May 6th. The leader of New Democracy, Antonis Samaras, will now seek to form a coalition with other parties that broadly support the bail-out. The Greek people can look forward to the sweat of fiscal austerity, not the tears of financial chaos. They can expect chronic misery rather than acute disaster.

[. . .]

What about the economy? As our piece last week reported, it has spent the last six weeks in suspended animation. Unfortunately, economies do not keep well in the freezer. The hesitation has wreaked great and irreparable harm. The banks have lost more deposits. The government’s arrears have grown. Erik Nielsen, chief economist of UniCredit, reports that pharmacists have suspended credit to the government, hampering the supply of medicines. The pebbles cast in May have spread damaging ripples through world markets, which have not reversed themselves. They “introduced yet another round of uncertainty” that the second bail-out programme “was not built to deal with.”

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