Sunday, August 2, 2015

How infallible is the Pope?

The Pope is in the news recently for his critique of capitalism.  He grew up a Peronist from his early days of Argentina, a populist movement responsible for the wreckage of millions of lives in the name of “inclusion.” Here is an historical perspective:
How did a Christian country, with a European population, a negligible racial problem, and enormous natural and agricultural wealth screw up? How did a country with a liberal constitution cycle in and out of dictatorship? How did a country that was the fourth-richest per capita on the planet in 1929 fall so hard? How is it that Argentina regularly cycles between enormous first-world wealth and third-world economic collapse? 
The answer, in a word, is government. Argentina is a frightening example to prove that bad government can destroy even a potential heaven on earth.

And here is a more recent critique:
It boils down to the basic concept of spending more money than you can make, and cutting off long-term sources of potential financing in order to make short term ends meet. Businesses have been fleeing Argentina since 2010 due to impossibly high taxes, the inability to repatriate gains, and the inability to acquire imported inputs. Agriculture exporters hoard their products rather than fork over ungodly sums to the government. Foreign investors sit on the sidelines waiting for something to break, and Argentina has to pay extremely high interest rates to lenders.
And he wants to lecture us about capitalism…

Friday, July 31, 2015

How hard is it to start a business in the US?

The Financial Times laments the fall of America, from 7th to 46th on the ease of starting a business:

One important reason for this dismal position is that in America entrepreneurs need, on average, to navigate six different legal and regulatory hurdles to start a company. In New Zealand and Canada, which top the league, there is just one procedure. The complexity faced by Americans means that it takes them on average about six days to create a start-up; in many other countries the process is much faster and cheaper.

I give credit to President Obama for flagging the issue in regards to occupational licensure,


Five decades ago, occupational licences were required only in specialist arenas such as nursing. But, in recent years they have proliferated so dramatically that a quarter of all American workers must secure one from individual states. Sometimes this is justified: airline pilots need licences. But often, as in the three years of training needed to become a security guard in Michigan or the thousands of hours required for hairdressers in Utah, the rationale is less clear.


but wish he were more aware of the many regulations he has promulgated that have the unintended effect of making it more difficult to do business.

Friday, July 24, 2015

What's up with emerging markets?



The WSJ reports on an interesting puzzle:  While emerging market currencies have fallen, ...

The Brazilian real has lost one-third of its value in the past 12 months, and is just above a 12-year low. Indonesia’s rupiah hit a fresh 17-year low against the dollar Thursday, while Thailand’s baht accelerated its recent slide, hitting its weakest in more than five years. Earlier this month, the Malaysian ringgit hit its lowest level since 1999; it is down 13.6% since the start of 2014.

...their exports have not picked up.  A weaker currency is supposed to make exports cheaper, and imports more expensive, so the "current account balance" (exports-imports) should improve, and stimulate the domestic economy.

The answer to the puzzle is declining demand in China:

These countries, especially those reliant on export-led growth models, “are being forced to adjust to weak external demand, low commodity prices and a rebalancing in China,” said Alex Wolf, an emerging-markets economist at Standard Life Investments.

Remember that causal statements in economics, like "a weaker currency implies an increase in exports," are sometimes masked by other causal forces. In this case a slowdown in China, a major trading partner, has led to a decline in demand for their exports, which has more than offset the increase in demand caused by a weakening currency.

When describing causality, economists sometimes use latin jargon (to make us sound more learned than we really are) "ceteris paribus," meaning "holding everything else constant." In other words, if China demand for emerging country exports had not declined, we would have seen emerging country exports increase.

Tuesday, July 21, 2015

Finland: the cost of using the euro

NY Times reports that Finland’s economy has faced a number of shocks:  the collapse of its biggest trading partner (Russia); a decline in demand of its biggest export (trees); and the decline in demand for the product of its largest employer (Nokia).

 This has resulted in 11.8 percent unemployment rate and with contracting G.D.P. in each of the last three years. If Finland had its own currency, the markka, it would have fallen relative to the Eurozone, made its exports cheaper and its imports more expensive, which would have cushioned the shocks.
Suddenly other Finnish industries would have had a huge cost advantage over, say, German competitors, and they would have grown and created the jobs to help make up for those lost because of Nokia and the paper industry and Russian trade.

Renminbi's rise against the dollar

FT has a nice article on the rise of the yuan against the dollar:
The renminbi’s rise also helped China’s trade surplus to fall, easing tensions with other countries, notably the US, and slowing its accumulation of dollars.

Wednesday, July 8, 2015

Moody's weighs in on Nashville Mayoral Race...

...albeit indirectly, when they downgraded Nashville's debt last year. (It is as if Moody's had been reading my blog posts on Nashville's unfunded pension problems).  In any case, David Fox seems like the only candidate interested in addressing the issue.

TRUTH IN BLOGGING DISCLOSURE:  I am leaning towards Fox, and his wife is a former student.

Friday, July 3, 2015

Why are all the productive people leaving Puerto Rico?

Its the incentives:

For those who stay, rich welfare benefits provide a disincentive to work. A household of three can receive $1,743 per month in food stamps, Medicaid, utility subsidies and welfare compared to minimum-wage take-home pay of $1,159.

So the generous safety net makes it more profitable to not work.


Employers are required to provide 15 days of vacation and 12 sick days annually and a $600 Christmas bonus. Government employees make up a quarter of the island’s workforce.


In addition, the employer mandates raise the cost of employing people so there employers are leaving the island as well.

Sunday, June 28, 2015

RECOMMENDED READING: "The truth about Greece"

Good article by my predecessor at the FTC, Jeremy Bulow, and coauthor Kenneth Rogoff on Greece. They point out that Greece has been receiving net inflows (austerity would imply net outflows), at least until Syriza got elected and stopped implementing reforms.  He concludes by telling Greece why they should re-impose the reforms and struggle to stay in the EU:

  • First, a default would likely have cost it the €5 billion a year it receives in annual EU subsidies;
  • Second, it would have put at risk other benefits Greek citizens derive from being in the EU, including the ability to work in other countries, move capital across borders, and trade freely;
  • Third, even when the Europeans were not providing cash transfers directly to the Greek Government they were providing financing to the Greek private sector, basically to offset the capital flight from the banks, on terms that were vastly more generous than what the banks could have hoped to obtain from private lenders – who in fact probably would not have been willing to lend nearly as much on the same collateral regardless of the interest rate.


Tuesday, June 23, 2015

Why is the euro falling on good news from Greece?

Its all about the “carry trade.”
Currency investors often borrow in a currency with low interest rates to buy another with much higher interest rates, and pocket the difference, known as “carry.” The eurozone has some of the lowest interest rates in the world, making the euro a favorite for funding such trades—a role it has gradually wrested away from the dollar over the past two years. 
The borrowed euros are typically used to fund bets in riskier markets. If risks rise in financial markets (as they did while Greek talks were deadlocked), investors tend to exit these bets. That causes the euro to rise as the borrowed money comes home. 
But if risks fall, so does the euro.
So if final deal between Greece and its creditors is reached, then the Euro will fall; but if not, it will rise.