The Power and the Money

Observatorio Argentino 35: be careful with prices, very careful

In our last installment we reported that, to our surprise, the blue market was still functioning in Argentina! Reader J.H. provided the likely explanation: once created, the market stuck around as a convenient way to avoid taxes. 

The Fernández administration started another program in 2014: “Precios Cuidados,” which literally means “careful prices” but better translates (as much as Argentine Spanish can be translated) as “monitored prices” or “price watch.” Think of it as a weak sort of price control. The government would negotiate of list of products with retailers. The government then posted reference prices for those products on a website. All retailers in the program would have to charge the same price for said product. Retailers that did not go along would face fines, albeit not terribly large ones. (These fines were, in theory, voluntarily agreed to by the supermarket chains.) 

The idea was similar to the stronger controls imposed in Panama around the same time. The assumption was that rising prices were a product of an uncompetitive wholesale sector. Under their model, when input prices rose (for whatever reason) wholesalers took the chance to raise prices by rather more than inflation. With little competition, they could get away with it. Consumers would go along, chalking the hikes up to the general rise in the price level. The precios cuidados, then, would break the cycle by proving consumers with a reference point to hold down price hikes. 

The precios cuidados were carefully marked in the supermarkets. Competing products were usually available right alongside.

Sometimes the prices were negotiated too low, and goods would occasionally run out. It that happened, consumers could demand compensation from the stores: the newspapers would helpfully explain how. 

It wasn’t quite a price control. No Venezuelan-style general shortages emerged. Every so often something would disappear completely (like ketchup for a brief moment in 2014) but that was generally due to exchange controls, not the precios cuidados. 

But unlike in Panama, the price controls failed to slow inflation. The reason is pretty simple: unlike in Panama, which uses the U.S. dollar, Argentina really was ramping up the printing presses. Price hikes had little do with an uncompetitive wholesale sector. Just another bit of Kirchnerista control-freakery.

So you might have thought that the precios cuidados would have been one of the first things President Macri got rid of upon taking office. 

And you would be wrong! When Leticia Arroyo told me the program was still around in 2017, I was stunned. The program now covers 545 products. Products sold at the watched prices make up about 7% of sales. Now, the breadth of products on offer for the monitored prices is pretty low: Argentine supermarkets offer some 25,000 different items, on average, and some supermarket chains, like Mondelez, offer only 8 brands covered by the program.*

But here’s the thing: some small companies lobby to have their products included! Why? Well, weirdly enough, the Precios Cuidados brand has become sought after. You buy at the precio cuidado, and you can be sure you’re getting the best possible bargain! Consumers love it. And some producers know that consumers love it. So they lobby to get their brands into the program, even if they have to give up pricing control. The supermarkets are less happy, but with upstream producers and downstreams consumers in love with the program, it continues onwards, and may never die.

As the former commerce minister, Augusto Costa, said, “The program has a net approval rating between 50% and 70%. The government doesn’t have that level of approval!”

And so, as with the blue market, Cristina Fernández may have permanently changed how business is done in Argentina in an odd and completely unexpected way. 

————

* In case of link rot, google El Cronista: “Precios cuidados: pasado, presente y futuro,” from Feb. 24, 2017.

Some slightly heavier parts of Trinidad’s recent boom

In the last post, I presented evidence that Trinidad’s recent boom had no impact on median household incomes. To be clear, that data is highly inconclusive. Without the time to process the raw data, we have no way of knowing if the 2014 estimate measures the same thing as the 1997 estimate.

So what other data can we use to measure changes in Trini living standards? Well, I went to the census and pulled up the percentage of households with access to various durable goods in 2000 (Table 7.16) and 2011. Here are the results:

These figures show some increase in living standards, but not a revolution. Internet access soars, but that is unsurprising and easily explained by a fall in cost. Ownership of washing machines and microwaves jumps a lot; enjoyment of air conditioning rises a lot in percentage terms but remains fairly low. 

Other indicators show more impressive gains, albeit from an already-high base. The number of households with access to private toilet facilities went from 87% to 94%. Access to electric lighting went from 91% to 98%. Direct access to piped water went from 61% to 76%. 

These increases were due to a housing boom over the decade: by 2011, fully 23% of all houses on the island had been built in the 21st century. (This number is a lower-bound estimate.) That is good! In fact, I noticed the housing boom back in 2007. In total, around 74,000 new units hit the market in 2000-11.

So that is where some of the money went: new and better houses and mundane public investments in sewers and electric wires. That should be captured in the GDP figures (as an increase in investment followed by a increase in output). But it is easy to imagine that it might not be captured in the figures for median income, unless housing costs were very carefully adjusted for quality and imputed benefits. (They were in 1976 and 1997; for 2014, I have no idea.)

Still, the housing boom, while real, is not quite as dramatic as it migh appear. The country built about 7400 units per year in the booming 2000s, but it also managed to build 4800 units per year in the boring 1990s. So not nothing, but not as big as might have been expected in a country whose real GDP doubled between 2000 and 2008. 

In short, the boom saw some improvement in Trinidadian living standards. And the improvement is visible on the ground: in the new suburbs that have spread out to the south and east or the traffic-choked roads. (More on that later.) We therefore have two potential explanations of where the money went:

1. The one citation we have for median income in 2014 may not be properly adjusted for non-monetary income, poor reporting, and improvements in housing quality;
2. Plenty of money went into improving the housing stock and associated public investments.

Those do not quite seem to be enough; after all, we are talking about a full doubling of GDP in a low-population growth country. Any thoughts?

The unbelievable lightness of Trinidad’s recent boom

Trinidad experienced a massive boom between 2000 and 2008. That boom was reflected in government revenues. And you could smell the optimism when I first started travelling here around 2007. 

So what happened? We know that government revenues soared, as did GDP growth between 1994 and 2008. But how much have people’s lives improved?

Turns out that’s not as easy to answer as you would think. Trinidad has a very sophisticated statistical apparatus. They do good work. But the country has recently been going out of its way to make that work hard to access. The central bank has a statistical database that is okay; the Central Statistical Office is miserable. 

So with the caveat that it is not clear that the data is comparable, due to varying methodologies to adjust for unreported data, here are some snapshots of median household income.

In 1980, the World Bank carefully analyzed the 1975-76 Household Budgetary Survey. After adjusting for under-reporting, it found that 57% of Trini households earned less than TT$499 per month ... which comes out to TT$120,466 per year in 2014 TT dollars. 

Some time later, Shlomo Angel used the Continuous Sample Survey of Population to estimate incomes in 1997. He found a median income of $132,110 in 2014 TT dollars. So, some improvement over what is generally regarded to have been an awful two-decade period: the 50th percentile in 1997 earned about 10% more than the 57th percentile did back in 1976.

Finally, Charisse Griffith-Charles (UWI) and Robin Rajack (IADB) estimated that in 2014 the median household income was $126,700 ... slightly down on the level from before the boom. (The paper is here; scroll to find it, then go to page 8.) 

Now, I am not sure how Griffith and Rajack produced their estimate or how it accounts for unreported or non-monetary income. So it is quite possible that median incomes have in fact increased since 1997. (It is shameful that comparable data is not readily available. It exists, but you have to write the CSO; even then, you will get it in raw form.) 

But the indications are that the recent boom did not produce a great increase in middle class incomes. Nor did it result in a dramatic upgrading of the island’s physical infrastructure, despite the massive rise in the resources available to the government. 

So where did the money go? Where is it going? More anon as I think on this question.

Radicalism is mainstream

Yesterday, there was a speech. Seven quotes:

1. “Many citizens in advanced economies are facing heightened uncertainty, lamenting a loss of control and losing trust in the system. To them, measures of aggregate progress bear little relation to their own experience.”
2. “When the financial crisis hit, the world’s largest banks were shown to be operating in a ‘heads-I-win-tails you-lose’ bubble; widespread rigging of some core markets was exposed; and masters of the universe became minions. Few in positions of responsibility took theirs.”

3. “High income inequalities are dwarfed by staggering wealth inequalities.”

4. “Trade and technology do not raise all boats.”

5. “Higher uncertainty has contributed to what psychologists call an affect heuristic amongst households, businesses and investors. Put simply, long after the original trigger becomes remote, perceptions endure, affecting risk perceptions and economic behaviour. Just like those who lived through the Great Depression, people appear more cautious about the future and more reluctant to take irreversible decisions. That means less willingness to put capital to work and, ultimately, lower growth. These dynamics are clearly visible in financial markets.”

6. “There appears to be little evidence that stimulative monetary policy makes groups worse off.”

7. “For free trade to benefit all requires some redistribution.”

I put quote #5 in italics, because it is extraordinary: a claim that markets don’t work. Quote #6 also deserves scrutiny: it is a claim that some inflation is good. And #7 speaks for itself.

The author? Well, he heads the Bank of England.

To be honest, I have posted this for a specific audience. It is one that takes as an axiom that Ricardian rents should not be reduced or redistributed. But when the head of the Bank of England starts to doubt that markets work or that finance adds value, it is time to start rethinking basic assumptions. 

Robert Shiller is a genius, but ...

... this essay is just weird.

I mean, he predicts that there will be a movement to abolish nation states, not from some right-wing spectre of angry foreigners bearing down on the gates, but from citizens clamoring for more free-trade agreements, the demand for which will ... uh ... “stem from daily interactions on computer monitors with foreigners whom we can see are intelligent, decent people – people who happen, through no choice of their own, to be living in poverty. This should lead to better trade agreements, which presuppose the eventual development of orders of magnitude more social insurance to protect people within a country during the transition to a more just global economy.”

I mean, okay. Moral impulses prompted by electronic interactions with faraway poor people will lead to a popular groundswell that will both usher in an era of global free trade and increase social insurance transfers by a factor of ten. Even ignoring for a moment that OECD social spending is already at 22% of GDP and is therefore unlikely to increase to 216%, it is hard to see the theory of human behavior that causes people with sympathy for faraway poor people to demand more trade with them. 

The irony? Shiller has done so much to demolish the idiocy of using some imaginary homo economicus to set policy. But now, suddenly, homo economicus is back and plotting revolution in the most off-base essay I have read in a very long time. 

Filed under 2016 election for lack of a better place. After all, without the current election I would not have bothered to write this response. 

The Brexit recession and the cost of self-discovery

I am very hesitant to discuss something that confuses Paul Krugman. Very hesitant. 

There is a great paper by Ricardo Hausmann and Dani Rodrik from 2003: “Economic Development as Self-Discovery.” The basic story is that it really isn’t just what it is that poor countries are best at producing. Are Salvadoreans really making the most of the country’s endowments of human capital and raw materials? Probably not ... but what then should they be doing? That isn’t clear either. Figuring out what industries a country is best at doing is very hard. Moreover, the first people who figure out what a country is best at won’t reap all the benefits: others will imitate their business models and pile in. That reduces their incentive to figure out those business models in the first place. Of course, you could try granting monopolies or some such — a nation-wide version of a patent — but then you have the problem of picking which industries to back. If you back all of them, then investment will flow into monopolies that turn out to be bad bets as well as ones that are good ... and you saddle your countries with lots of, well, monopolies.

Sticky! But what does this have to do with the idea that Brexit will cause a recession followed by slow growth? Well, Prof. Krugman gives the following example:

Let’s be slightly spuriously concrete. Suppose you think Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year.

At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back, a period of above-normal growth as the delayed investment kicks in.

That makes sense! But there is another way to think about the problem. You believe that Brexit might have seriously adverse effects on service exports from the City of London. This means that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in ... uh ... well ... by gosh, just what is Britain going to become better at exporting? Manufactures from the north of England? Maybe. Wind power from offshore Scotland? Could be. Videogames written up in London exurbs? Possible. Music and are from London? Hmm! Or maybe the U.K. could build giant spaceships, like this one I saw off in the distance in Birmingham back in ‘12? 

The problem is that you have no idea what the best thing to invest in is, if finance does not pan out. You know that Brexit means finance is not the future, but you have no idea what the future is. And failure certainly is an option, as the slow growth of many many countries in many many time periods tells us.

So right now, investment goes on hold, which triggers a recession. (If that is indeed what is happening.) If Prime Minister May somehow stops Brexit, “or the charms of Paris and Frankfurt turn out to be overstated,” then investment roars back into finance!

But if she does not, well, uh ... it slowly trickles back as Britain undertakes that long slow process of self-discovery. There is no countervailing boom once the policy uncertainty is resolved.* Just a slow recovery followed by slow growth.

Somehow I suspect that there must be a giant hole in this logic. 

Is racial discrimination increasing in the NBA?

 OK, you want a truly surprising result? Two Japanese scholars constructed an unbalanced panel of NBA players from the 1985-86 season to the 2015-16 season and found this:

Contrary to the results of previous studies, we find that non-white players are paid equally to white players with similar characteristics in the 1980s and 1990s, but that white players started to be paid 20 percent more than non-white players in the last 10 years. Our results are robust in all specification checks such as the quantile regressions, controlling the sample selection and controlling different contract types. Non-parametrically estimated density of the counter-factual salary of non-white players confirms our results. In addition, we find that neither the employers preference nor income gap of white and black fans explain this increasing salary gap.

You want to know how much we are talking about? Well, with the caveat that these estimates are very imprecise, you can go to page 3: “Consistent with the previous literature, which shows that racial salary discrimination was disappearing in the 1990s, we find that during the 1980s and 1990s, there was no white premium. However, in the 2000s, we find that the white premium becomes about 9 percent (p < 0.05) and in the 2010s, it reached 26 percent.”

Italics mine. And warranted, I think. Is the result convincing, and if so, what is going on?

Democracy is bad for capitalism?

 The answer is no, not really. But it is interesting that democracies show no sign of the Marxist definition of exploitation, whereas non-democracies do. 

In need a new tag for posts like this one.

When affordable housing isn’t affordable

 Even when exurban housing remains affordable in booming American metros, the result is to push poorer people into longer and more expensive commutes. In this post we linked to the evidence that such commutes have adverse effects on upward mobility. Something bad happens to children whose parents need to travel long distances every day. 

Now, John Renne (Florida Atlantic University) and Shima Hamidi (University of Texas) have examined a similar question. (Hat tip: Will Baird.) How high are the commuting costs faced by the recipients of federal housing subsidies? As rents have increased in urban centers, subsidy recipients increasingly live in the far suburbs. In theory, that should drive up their commuting costs. The question is: by how much?

Context: The federal government (reasonable if somewhat arbitrarily) defines commuting affordability as 15% of their household income. That would be around $7,500 a year for the median American household. In a poor urban county, like the Bronx, that would be about $400 per month for the median household. Not coincidentally, the median income in the Bronx is just a hair under the Section 8 income limit for a family of four. Most subsidized households are considerably poorer, however, with an average market income around $14,000 per year. For them, the affordability limit would be around $170 per month. That would get you an unlimited pass on the New York subway or the D.C. buses. It isn’t quite enough to get you an unlimited pass on the D.C. metro, but it could get you a pass that would allow you take unlimited trips inside the District proper.

Results: 44% of the households in the sample faced commuting costs that exceeded 15% of their income. In smaller southern metros, none of the Section 8 properties had reasonable commuting costs. They also found, however, that in expensive but transit-served metros like the Bay Area, 97% of the properties were affordable. 

So that might bring a sigh of relief. The problem is the urban structure of America’s small stagnant metros, not rising costs in its big vibrant ones. Except there is a catch. In their words, “Section 8 Multifamily Programs are relatively small and thus dwarfed by tenant-based vouchers and low-income housing tax credits. In addition, these programs are mostly in preservation and operation mode, no longer subsidizing new construction/substantial rehabilitation.” 

In other words, their data comes from existing properties that have been in the Section 8 program for a while. It does not come from families receiving vouchers that they can use anywhere. In places like San Francisco and New York, these properties have been in the system for a while. The evidence does not tell you how badly the situation may be worsening.

But it is interesting. 

California’s new minimum wage is not quite unprecedented

 California just announced that it will raise the minimum wage to $15 per hour by 2022. It will go up from $10 now to $10.50 in 2017, increase by another 50¢ in 2018, followed by one-dollar increments until it hits $15. After that, it will be fixed to inflation.

Assuming that inflation runs at 2% per year between now and 2022 (using the IMF projection), the new minimum wage will be only 8% above its 1968 peak in 2015 dollars, using the California CPI:

To be fair, the minimum wage was only briefly in that range, so it is quite possible that it will have bad effects on California’s economy. But it is not as unprecedented as it looks if you remember that American inflation in not likely to drop to zero over the next six years.

Why is Mexico cutting budgets?

 Last year, Mexico spent $1.09 billion to hedge its oil sales at $49 per barrel. (In 2014, Mexico spent $773 million to hedge at $76.40.) The current budget assumes $50 per barrel and production of 2.247 million barrels per day. That is, it assumes $41 billion in gross oil revenue. The remaining $1 per barrel is hedged by a federal savings fund.

Right now, this is looking like a pretty good bet. Mexican crude is trading around $25 per barrel. The below figure (from SHCP) shows Mexican federal revenues as a % of GDP from 2000 to 2015. It would look much worse in 2015 without the hedges:

But if revenues are holding up and revenues are hedged, it does make the announcement of small cuts discussed here even more mysterious. Why?

Well, there would seem to be three reasons. The first is stupid, although I suspect that Mexican policymakers believe it: they are chasing the confidence fairy.

The second reason has more serious implications. The government may believe that low prices will persist for more than a year. If that is true, then it setting the stage for more serious cuts ahead. The good news is that they are also setting themselves to be pleasantly surprised if oil prices rebound.

But the third possible reason is the most serious of all. Despite the efforts of the past two CEOs, Pemex is an institution in trouble. The company has been losing money after taxes; now prices are so low that it is just plain losing money. That is why the administration replaced the administration two weeks ago. Emilio Lozoya was out; José Antonio González came in from heading up the Social Security Institute. Lozoya reorganized the company into clear upstream and downstream subsidiaries (making analysts lives much easier!) and squeezed out some inefficiencies. But he could not put the company in the black. 

González is not going to have it any easier. In fact, falling prices may have a terrible feedback: less revenue leading to declining investment leading to even less revenue. There are many costs to be cut in Pemex, but those involve taking on powerful unions ... and layoffs would not go over well in the states of Hidalgo, Tamaulipas and Veracruz, both of which are holding state elections this year. So the government might be thinking that Pemex is unfixable. In the long run, that is fine. But over the next few years, it poses a serious problem for the federal government.

Pemex accurately claims that its lifting costs are around $10 per barrel, but that does not take into account the money the company needs to spend to keep up its reserves. That would drive costs up to something more like $23 per barrel. 

In short, the government may be thinking that even if oil prices rebound, revenues from Pemex will do so more slowly. 

Carbon capture is hard

 Carbon capture and storage (CCS) is one of the holy grails to combat climate change. (Cheap utility-scale electric storage is another. Cheap and safe small-scale nuclear is the third.) In theory, it sounds easy. Take the exhaust from a big fossil fuel plant, extract the CO2, and send the CO2 somewhere besides the air.

The obvious rub is: where do you send the CO2? Fortunately, there are answers. CO2, for example, is useful in the secondary recovery of liquid hydrocarbons. (It can also be used for natural gas.) So you can site CCS-equipped coal plants near old oil fields and sell them the CO2. 

So the Mississippi Power Company decided to build a CCS-equipped coal plant near some older oil fields in the state. Ignore, for the moment, whether anyone wants to try to extract oil from old Mississippi wells at current prices; you can still always pump the CO2 underground regardless.

Well, Mississippi Power just announced another $142 million overrun on the project, taking the cost up to $6.6 billion from a projected $2.9 billion. With a capacity of 582 MW, this may well be the most expensive power plant in the world. The recent overruns were due to problems with the coal gasifier unit which turns soft lignite into natural gas (well, synthetic natural gas, which sounds oxymoronic) and extracts carbon dioxide. Earlier problems had to do with linings on the tubes carrying gas heated to 1800 degrees. And before that they just plain underestimated the amount of tubing needed and the cost of installing it. A 2013 filing blamed overruns on “abnormally wet weather and lower-than-planned construction labor productivity.”

Nuclear power has not overcome similar problems.

So I would not bet on CCS to save us.

American aid and Greek economic growth

 Two years ago, I wondered about the importance of property rights in economic growth. The reason for my doubt was the example of Greece. The country has terrible property rights, yet managed to grow remarkably quickly between 1950 and 1980. As illustrated in the below figure (nicked from here), its annual output per worker rose from the level of Colombia to the level of France, before falling slightly behind. 

Well, what happened? One useful line of inquiry might be to dig deeper into history. In 1950, Greece had suffered greatly from World War 2 and the subsequent Greek Civil War. It is entirely plausible that the country possessed reserves of human capital far in excess of its contemporaneous Latin American counterparts. Maybe there is nothing miraculous about its catch-up economic growth in the subsequent decades.

But then I came across a recent paper by Carmen Reinhart and Christoph Trebesch. On page 11, I spotted this rather stunning figure:

Wow.

Now, the aid between 1946 and 1949 went to fight the war, but it meant that the opportunity cost of equipping the Greek National Army was essentially zero. It also meant that Greek civilians avoided much privation that might otherwise have been expected. In fact, the economy managed to grow during the war, albeit from the depressed levels at the end of the Axis occupation. (See page 30 here.) 

American aid continued after the war, however. In fact, it was not until 1961 that high levels of direct support metamorphosed into (rather soft) loans. 

To be frank, I do not think that American aid caused rapid Greek postwar growth. I am still not sure what caused that. But even had Greece avoided a Communist takeover without the aid, the chances are very high that the country would have slid into counterproductive redistributionist battles had American taxpayers not agreed to cover Greece’s continuing current account deficits. My prior would be that a counterfactual Greece without American aid would go the way of Argentina, at best. Some catch-up growth, rapidly petering out, followed by relative stagnation at the level of a wealthy Latin American country. 

Of course, we did it to keep the Communists at bay, not promote Greek economic growth. But it makes you wonder. Could foreign aid at the right time have kept Argentina, for example, from running off the rails in the postwar decade?

And what was it about Greece, anyway, that let it catch up so fast to the rest of Western Europe once aid covered the cracks? There had to be something else different about the place compared to Argentina or Mexico. No? 

Vultures attack Peru!

 In 1968, a left-wing military government ascended to power in Peru. It expropriated a lot of things, not least a bunch of American investments. The Americans had the power of the United States behind them: as I explain here, they were more than fairly compensated. Domestic Peruvian landowners, however, were of no interest to Richard Nixon. They were forced to accept Agrarian Reform Bonds denominated in the local currency and paying between 4% and 6%  interest over 20-30 years. (See page 5.) 

Unfortunately for everyone involved, the Peruvian government stopped paying interest on the bonds around 1982. (See page 4.) Why they defaulted, I could not tell you: the country was entering a period of hyperinflation that reduced the effective value of those bonds to zero. If the Belaúnde and García administrations had just kept on paying, the debt would have been inflated to nothing and the current government would have been spared a major headache. 

But default they did, and thus the current problem. In 2001, the Constitutional Tribunal declared that the government had to repay the bonds with some adjustment for inflation. To do otherwise violated Article 70 of the Peruvian constitution: “No one shall be deprived of his property, except, exclusively, on grounds of national security or public need determined by law, and upon cash payment of the appraised value, which must include compensation for potential damages.”

The decision was not a surprise to the Peruvian government. In 2000 the Fujimori administration (then on its last legs) issued a decree which said that the government would honor the unpaid debt by converting it into U.S. dollars at the exchange rate prevailing at the date of issue and then applying a 7.5% interest rate, compounded annually. So far so good ... except the government did not move to pay cash. Rather, it moved to issue interest free debt for the face-value of the bonds due in 2030. In other words, the compensation offered was fair, but wouldn’t be paid for three decades. (Page 16.)

The creditors were not satisfied. When the new Toledo administration proved unwilling to alter the terms of the Fujimori offer they went back to court. In 2004 the Tribunal declared that bondholders could accept the government’s terms, but only if they wanted to. So it went back into the government’s lap.

The Toledo administration ran out the clock and handed things over to incoming President Alan García in 2006. (Yes, that would be the same García who helped create the problem when he was president in 1985-90.) President García did nothing, handing off the problem to the newly-elected Humala administration in 2011.

Three months after President Humala’s inauguration, the bondholders sued again. In 2013, they got a decision. The Tribunal once again ruled that the government had to pay. But the Tribunal also said that the government didn’t have to simply run the value of the debt through the Peruvian CPI, because that would lead to number so high that it would break the Peruvian fisc. (Page 18.) It suggested rather that the value of the bonds be converted into U.S. dollars, which would then be compounded at the contemporary rate on one-year U.S. Treasury obligations.  

Basically, the method gives the bondholders what they would have earned had they plonked their money into one-year T-bills back in 1969 and kept renewing them. Maybe not fair, but not patently unfair either: the rates on T-bills were higher than the 4%-6% coupons on the original Peruvian bonds until around 2001. (See below.)

How much money are we talking about? In 2006, the total unpaid principal came to about 2.5 billion old soles. (They were actually called “gold soles,” but old soles is more straightforward.) Adjusting for inflation the simple way (which, remember, the Tribunal said not to do) would bump that up to 10.0 billion new soles, or US$3.5 billion, plus unpaid interest. The investors claim that they are owed $5.1 billion with interest using this method. (Page 7.) 

Using the suggested Peruvian method (compounding at contemporary T-bill rates, see page 2), the 2006 value of the debt would be around 1.9 billion new soles, or US$568 million, assuming that it all dates back to 1969. (I have interpolated for the missing years. Data from the Fed here.) Unpaid interest included. 

Alternatively, the government could just convert the debt to dollars at the exchange rate at the date of issue and compensate investors at the interest rate they were promised. At 6%, that would come to 1.7 billion new soles, or $531 million. (The actual amount would be lower, since the actual coupons varied between 4 and 6 percent.) The result would also be similar to assuming that the investors would have plonked their money into long-term T-bills: the 20-year Treasury bond yielded 6.32% in 1969. At that interest rate you get a 2006 value around $595 million. 

So far, so good; it may not be what the bondholders want, but the proposed method seems to give fair and reasonable values. So why are vulture funds involved? What is all the yelling about?

Well, the government proposed that the value of the bonds be converted to U.S. dollars not at the 1969 official exchange rate of 38.7 per dollar, or the open market rate of 43.5 (which the above calculations use) but the somewhat absurd rate of 1,029 per dollar. (Page 8.) 

Under that calculation the debt would have been worth in 2006 (for comparability) 78 million new soles ... or only $24 million. 

My. That is some difference! Add to that insult the injury that the government intends to compensate different bondholders in different ways and still has not made it clear whether they will be paid in cash, bonds with a market value around the equivalent amount in cash, or some other method. Plus other stuff. But that exchange rate calculation is where the Peruvians are giving the bondholders a giant middle finger and the real source of the trouble. 

So now the vulture funds intend to attack Peru, first in Peruvian courts, then using the stipulations in its Free Trade Agreement with the United States. If that fails, they will presumably do the full Argentina. I cannot say if they will be successful, but Peru (unlike Argentina) needs outside funding. 

I understand why Peru is wary. The national debt is a little under $38 billion, with about $18 billion of that owed to foreigners. Interest on the foreign debt amounts to about $1 billion per year. Why add to that? 

But still. There is something a little gratuitous about this, even for me. The $5 billion that the bondholders want is too much, but something on the order of $500-$600 million is entirely reasonable and entirely affordable. Lima should pay.

Emerging market Keynesianism revisited

 Today Paul Krugman pointed out that Brazilian monetary policy is hamstrung in a way that Canadian policy is not. Canada can keep interest rates at rock-bottom in the face of falling commodity prices. Brazil can’t. Extensive foreign-currency borrowing by private entities means that a falling real would push Brazilian borrowers into insolvency. Cutting interest rates in Brazil as much as in Canada, however, would cause the real to plummet as investors took flight. So Brazil can’t cut as much as Canada. 

I would just like to point out that Brazilian fiscal policy is similarly hamstrung. Canada can (rightfully!) go on a borrowing spree with no ill-effect. Even if it doesn’t prompt a recovery (and I think it will) it will leave Canada with badly-needed shiny new roads and trains. But if Brazil tried the same, investors would run for the hills, causing the real to fall and forcing the central bank to raise interest rates or watch an ugly combination of insolvent companies and soaring inflation make the economy worse.

We mentioned that problem on this blog back in 2008. 

(By the way, the conservative government did a pretty good job with countercyclical fiscal policy. Take that, James Nicoll, you hippie.)

A modest proposal: reparations for Jamaica

 Prime Minister Cameron has rightfully faced questions about reparations for slavery during his recent trip to Jamaica.

How much is owed? Well, that gets controversial, but let’s take a stab at it. Slavery seized the wages otherwise due the slaves, minus the cost of keeping the slaves alive. Since slaves were considered an investment, the price of slaves reflected the value of that stolen income. 

One rough estimate of the value of Jamaica’s slaves in the late 1820s, before Parliament started seriously debating abolition, comes to £14.0 million. 

There is a problem with this method, which is that slaves were tortured into working far more hours at far higher effort than any free worker would have agreed to. (The best work on this comes from Roger Ransom and Richard Sutch on the American South.) This measure only captures the damage inflicted by that torture inasmuch as it created higher value for the torturers. It does not capture the damage the torture inflicted on the tortured.

It also captures only the value of the wages to be stolen from enslaved Jamaicans who were alive in the 1820s. It does not take into account the value of the wages stolen from enslaved people who had the bad luck to die before abolition. In fact, it does not account for wages already stolen from the people alive at abolition. 

But let us start with the number we have. How do we convert that into a 2015 value? One possibility is to simply adjust for inflation. That would give us £1.3 billion.

Wow! That is not a lot of money. Add in the rest of the West Indies and you get only £4.3 billion. In 2013, the U.K. spent £11.5 billion on overseas aid. Come on, Cameron! Cut a check and go home. 

Or at least that is what a reasonable government would do if it believed that the above was the correct and unassailable calculation. Of course, it is not. The value extracted from the slaves was invested in other things. One quick-and-dirty assumption is that the value of those investments increased with the value of the United Kingdom’s GDP. Use that assumption, and you get a current value of £53.3 billion, which is a substantial amount of money ... and still does not account for all the costs of slavery. 

If you think that £53.3 billion is the correct amount (or possibly something even higher) then I can see why you might be reluctant to admit to even £4.3 billion in damages. At current long-term rates, it would cost the U.K. about £1.5 billion per year to compensate Jamaica for that. 

Maybe the Jamaicans should demand to become part of the United Kingdom. Why not? Let Scotland go and replace it with Jamaica! Consider that in 2014 the United Kingdom subsidized the Scottish budget to the tune of £10.9 billion. (That figure allocates North Sea oil and gas revenues to Scotland.) Jamaica would be much cheaper! Public spending per person in England is about £8500. The price level in the U.K. is 2.2 times higher than in Jamaica, so equalized real spending would cost the exchequer only £3900 per person; roughly £10.6 billion per year. 

But Jamaica already generates tax revenues around £2.3 billion. And helpful people at the IMF (see pages 16 and 26 here and page 44 here) have calculated how much could be collected with better enforcement brought to you courtesy of the good people of Her Majesty’s Revenue and Customs, which would up the amount to £3.1 billion. Add in the £300 million collected by brining Jamaican VAT rates up to U.K. levels, and you have  £3.4 billion, for a net cost to the Exchequer of only £7.0 billion! (Rounding explains the discrepancy.) 

Take off the part of that due as reparations for slavery, and Jamaica requires only £5.5 billion to join the U.K! Moreover, considering that Jamaica has a GDP of only £8.6 billion, you would need to phase that subsidy in over at least two decades. Include the phase-in, and you get a net present cost of bringing Jamaica into the U.K. of only £66.7 billion over 20 years, scarcely more than the £53.3 billion reparations bill! 

Plus savings if Scotland walks out in the meantime. 

And then there are the growth effects on Jamaica. If Jamaica became as rich as French Guiana (the poorest overseas department of France), its nominal GDP would increase to £36 billion. 

What is not to like about that? Sure, it would still be a net drain on U.K. coffers, generating taxes of £14 billion against expenditures of £23 billion, but now you are quibbling. It is still cheaper than Scotland! 

So the solution is obvious. Cameron should offer membership in the United Kingdom to Jamaica.

Vox fails to defend open borders

 Removing all immigration restrictions is a pretty fringe idea. There are reasons for that, as a careful reading of this defense at Vox will show. Dylan Matthews is trying to justify an ideological belief by claiming that indulging it will have no costs on anyone, and what costs it does have can be compensated, and anyway those costs don’t matter because the gains to non-Americans are so much greater.

He makes those second two points because his claim that there are no costs is complete bullshit.

Some Vox  columnists have a skill at making me recoil from positions I hold. That is some sort of talent. 

Is it worth fisking the article? I will, but only if there is demand.

A new research fail, previewed!

 I have not had too much luck over the past few years with big new research projects aimed at Mexico. In part, that has been because I ratcheted back slightly over the past two years, after finishing The Empire Trap, for psychological reasons. Also in part, it has been because I have been taking on a bit more paid work than I used to. Thus, the posts on Albanian electricity, Colombian coal, Ecuadorean foreign relations and Puerto Rican finance that you have not seen. I assure you, they were brilliant. But mostly it has been because I either been unable to find the data I needed or failed to get it released. Or in one case, have not been able to figure out how to operationalize the hypothesis.

So here is my next research fail, previewed for you before I even begin! There is a long-standing argument in political science that the best way to combat corruption is raise civil service salaries. Two papers make the case more generally. In Brazil, Claudio Ferraz (PUC-Rio) and Frederico Finan (Berkeley) found that higher wages for legislators attracts better-educated people into politics and increases political competition. A follow-up paper by Finan along with Ernesto Dal Bó (Berkeley) and Martín Rossi (San Andrés) found that higher wages in Mexico attracted better candidates, although the effect on outcomes was not really measured.

It turns out, however, that corruption also varies a lot across Mexico. 

More interestingly, and to my surprise, so do police salaries! And not by a little bit. A lot. In 2011, Querétaro paid cops 18,173 pesos per month ... That was around US$19,000 per year (at 13 months pay). Not riches by American standards ... but rather higher than the US$7,930 per year average. On the other hand, the state police in Tamaulipas earned just 3,618 pesos per month, a miserly US$3,784.

But just to mess you up, Nuevo Laredo, a city in Tamaulipas, had the highest salary for its municipal police in 2010: roughly US$14,100 per year.

The problem, of course, is that the federal government only conducted the survey once, to check and see if local police forces were complying with new laws aimed at professionalizing the police. So there is no time series. That I know of.

But if there is, and a follow-up, then you have an experiment ...

Wish me luck. Sigh. I have not had luck with this lately.

Greece really has no comparison

 A commonsense definition of “austerity” is “cuts in government spending.” Now, that isn’t quite the correct macroeconomic definition: a cut in spending combined with a bigger cut in taxes is not contractionary. But it matches a good political definition: are countries imposing pain on their populations?

And so, I give you the level of nominal government spending in Greece and the Baltic States, plus Slovakia, because the Slovaks have been incredibly annoying. The figures have been normalized so that 2008 = 100.

Whaddaya know? Greeks have endured austerity beyond anything imagined in the Baltics. Yes, the Baltics are poorer than Greece. But that is not how people feel pain: we are far more averse to losses than to unrealized gains. The pain among, say, Greek pensioners or government employees has been beyond anything the Baltics have seen since the Soviet Union fell apart.

Now let’s look at the other side of the ledger: taxes. How much pain have the Greeks imposed upon themselves in order to pay for their state? As a % of GDP:

My. Puts things in perspective. I really do wish the Balts would just pipe down already. Their countries would be in chaos were things as bad as they are in Greece. 

Greece has no comparison

 Some smug folks recently insisted to me that if the Baltic states could muscle through the current crisis, than so can Greece. Why are the Greeks so upset about more austerity?

Uh ... well, here is the real GDP of Greece and the Baltic countries, indexed to 2007:

 

There really is no comparison.

This applies even if we look outside the universe of countries that either are in the Eurozone or peg their currencies to the euro. According to Gabriel Sterne at Oxford Economics:

The decline in Greek GDP has precedents, but only in wars, commodity collapses, and Argentina. Even without exit, it is likely to have been in the bottom 4% of crisis recoveries seven years on if IMF projections for 2015 prove correct. Greece’s $-GDP will likely have declined at least 42% between 2008 and 2015. Below Greece are five extreme cases:

• Ghana (1982), whose $-GDP never recovered for years after plummeting 80% in two post-crisis years, partly related to a commodities slump;
• War-torn DR Congo, whose $-GDP fell 48% in the seven years after 1991;
• War-torn Ukraine, whose $-GDP has fallen by over 50% since the 2008 financial crisis;
• Guinea Bissau’s 1995 crisis was not so bad, but the civil war that followed meant $-GDP had fallen by over 50% five years later;
• Argentina (for crises in 1980 and 1995, not 2001)

Sterne goes on to argue that this implies that the situation really cannot get much worse in Greece should it be forced into Grexit. 

Personally, I still do not understand why an agreement is proving so hard. Greece should not cut pensions or agree to a big primary surplus. The Europeans should agree to roll over debts that will otherwise inevitably go into default. Everyone should then use the breathing room to think about how to reform Greek tax collection and cut Greek debts. Voila.

But no. I really do not understand it. The only logic I can imagine is that they want to scare the bejeebus out of Spanish voters or anyone thinking of voting for a radical new party. What am I missing?

Heterodox Friday: Panamanian price controls

 This blog has long taken the position that Hugo Chávez was uniquely incompetent. There was a time, back in 2008, where we gave him political props for building an effective machine. That admiration began to fade with the electricity crisis. Then some of this blog’s old readers (where have you gone?) made good arguments that the Chávez boom wasn’t all that it was cracked up to be, although we remained on the positive side of neutral. Sure, there were some shortages caused by price controls. But other than the insanity in the electricity sector, the controls could be justified as a means of income redistribution in a country that lacked the administrative ability to impose punishing income taxes. (This gets to a question from Randy that I will try to get back to.) 

Unfortunately, the Socialists proceeded to run completely off the rails. Their cardinal sin was keeping the bolívar pegged at 6.3 to the dollar. The resulting capital controls have led to massive shortages of imported goods. Had the exchange rate regime been liberalized after the 2013 elections, living standards would have been hit, but the economy would be in better shape now. As importantly, the Maduro administration would have the space to engineer a mini-boom before the midterm elections. As it stands, however, Venezuelan exchange rate policy stands as an incredible example of economic and political incompetence. 

After all, in a another world the people lined up to buy cheap goods at a state-owned supermarket would be grateful to the government which got it for them. But in this world they are quite angry at the government. Here is a good article by David Smilde of Tulane University that argues that it is too late to effectively reform. The Socialists are going to (a) lose the next election; (b) pull some sort of hat-trick involving Chinese money and a short-election season; or (c) actually turn Venezuela into a dictatorship. (The link goes to an earlier post here that argues that the Polity IV score ranking Venezuela as already dictatorial is bullshit. But we were would agree that it is not far-fetched to imagine Maduro abandoning democracy, possibly via unconstitutionally postponing the midterm elections. That Polity IV ranker may have been prescient.) 

Or maybe Trinidad will come to the rescue? On Wednesday, the Trini prime minister, Kamla Persad-Bissessar, offered to swap tissue paper for bitumen. “The government of Trinidad and Tobago will purchase goods identified by the government of Venezuela from T&T’s manufacturers, such as tissue paper, gasoline, and parts for machinery.” It is part of the Trinidadian charm offensive that just enabled a deal for joint exploration for natural gas in the Gulf of Paria.

But as strange as it is to see T&T riding to the of the Bolivarian Republic, I would argue that it is probably too late for (b). The government certainly has started to throw a lot of opposition leaders in jail. That is more (c) than (b), even if they manage to pull off a win without election fraud. (Stealing elections, we have to add, is hard to do in Venezuela. Some things Chávez did right.)

So what does all this have to do with Panama? Well, mainly a demonstration that I am not an orthodox right-wing buzzword-of-the-day. 

When President Juan Carlos Varela took office on July 1st, 2014, Panama faced an inflationary spiral. (See page 4.)To some extent, the idea of inflation in Panama sounds odd: the country uses the U.S. dollar. There has been no sign of inflation in the United States, so why were prices escalating in Panama? Simple: Panama was in the middle of a huge economic boom. (See page 19.) Incomes were rising fast and pulling up prices.

The traditional diagnosis in such a situation is that supply bottlenecks are the cause of the inflation. In that view, the right answers are (a) wait it out; or (b) slow economic growth via austerity. There were two problems with (a). First, the inflation hit the poor hard. In Panama, unlike the United States, overall turnout tops 75% and most people are still relatively poor ... governments cannot safely ignore them the way they do in North America. Second, prices are sticky. Increases in the price of food will translate into wage increases. In a dollarized economy, that means a loss of competitiveness and a serious adjustment problem ahead. (To some extent, that is what happened to Spain during the early years of the euro.) If you can keep inflation from escalating, you should.

The problem with solution (b), of course, is that austerity is painful. And there is a diagnosis in which austerity is unnecessary. What if the bottlenecks aren’t physical? Rather, what if they are caused by an uncompetitive wholesale sector? In that world, rising demand leads to rising prices not because goods are scarce but because wholesalers and retailers are using the opportunity to take profits. If that view is correct, a big if, then the government can use price controls to break the inflationary spiral. Merchants will have lower profits, but there will be no shortages: it will still pay for them to provide goods. 

My esteemed colleague in what remains of the blogosphere, Fausta, confidently predicted that shortages would result if Panama imposed price controls. (She is correct in pointing out that former-president Martinelli was a supermarket magnate!) Economists were more divided (the headline of the article is misleading) although they did universally insist that the controls should be temporary. 

President Varela went ahead with his campaign promise and imposed controls. The decree with the list of the prices can be found here. The ones I recognize are lower but not that different from the price in D.C.: frex, we buy chicken breasts for about 90¢ a pound. 

So what happened? No shortages. Lots of fines. A dramatic fall in inflation. The Varela administration has decided to extend the controls until July 2015. For more details you can find an August 2014 analysis from the Economics and Finance Ministry here. 

In short, a victory for economic heterodoxy, hooray! (FWIW, President Varela is from the conservative party in Panama.)

Of course, with no independent monetary policy, nobody in Panama has any incentive to take advantage of the controls to, say, print money and engineer an electoral boom. But still.

So there. I am against the Chavistas because they are incompetent and authoritarian, not because they are left-wing or heterodox. May there be an election in Venezuela and may the Socialist Party lose.

Tyler Cowen is a very smart guy but ...

 ... this is just crazy hyperventilation. 

For the last few weeks there have been three models in the running:

1. The Greek government is calling the Germans Nazis because they figure Grexit is coming no matter what and they want to get the populace riled up as a distraction from the disasters, or

2. The Greek government will cave so cravenly on the substance that they want to have it on the record books that they supplied some expressive goods for a few weeks’ time, namely insulting the Germans and claiming that the Troika is dead and buried, or

3. The Greek government is simply full of out-of-control, ideological maniacs.

Right now it is looking like #2 — however unlikely it may sound as a model of retrospective voting and intertemporal substitution — is closest to reality.  What the relevant legislatures will go along with, however, still remains to be seen.  Arguably the insults and posturing have narrowed the possible bargaining space by hurting feelings all around.

Seriously, Professor Cowen? There are several other options, you know. I really would like you to explain your logic. I still don’t understand why a Greek default would lead the ECB to sink their banking system. And if that’s what you think will happen, I still don’t understand why I shouldn’t consider that to be an expression of out-of-control ideology from a bunch of maniacs in Frankfurt and Berlin.

Help! I am honestly confused.

Here is a rather more sedate look at the same events.

The Greek problem for dummies

 Since I am really not well versed on Greek finances, I’ve been looking at the numbers. The bottom line is that debt forgiveness will help the Greeks, but not by a whole lot this year. They just do not have a lot of money to spend.

The Greek state ran a primary surplus of 1.2%, according to the Ministry of Finance. This is rather less than the 4.5% target for 2016. It is even less than the 1.5% that the IMF projected for 2014.

Greece needs to make interest payments of 2.9% of GDP in 2015, assuming zero growth. It also needs to make principal payments worth 8.6% of GDP. Greece will receive payments from the ECB via the Outright Monetary Transactions program (formerly the Securities Market Programme) worth 2.2% of GDP.

Upshot: unless there is growth in tax revenues (good luck) the country will have only 0.5% of GDP to use for stimulus. (1.2% primary surplus + 2.2% from the ECB − 2.9% interest = 0.5% total balance.) That assumes that all of its principal due is rolled over or refinanced.

On the other hand, the Greeks still do not have a whole lot of room for manuever. A full default would net them only 1.2% of GDP and even that would depend on default being orderly. Moreover, their primary surplus jumps around a lot, so they will still need a lot of short term borrowing to keep the lights on.

In numerical terms, the whole battle is over 0.7% of Greece’s GDP.

Of course, that isn’t really the battle. The Greeks want two things (1) independence from Brussels/Frankfurt/Berlin and (2) avoiding the further spending cuts and tax hikes that the troika wants for this year. Much more austerity would be needed to hit the 3.0% primary surplus the troika demands for 2015. 

It would seem to me that it would not be terribly hard for the Germans Europeans to relax the austerity targets for this year and next. No need for write-downs or anything that would disturb a cranky German voter. In fact, it would seem to be easy to concede 0.7% of GDP to the Greeks in a way designed to avoid offending German sensibilities. But instead we are in full fire drill mode. Why? Is the answer really only that the Greeks have been too loud about asking?

I am still confused about the Grexit talk

 It appears that the recent attempt at Greek financial diplomacy did not go well. The link is to Wolfgang Münchau writing that the crisis is coming to a head. Münchau lists four options for Greece:

1. Cave in to European demands. Everyone agrees that this will not happen.
2. Demand that the ECB release interest payments and profits from its purchases of Greek government bonds. The problem is that this money will not be “enough.” (Quotes explained below.)
3. Find the money elsewhere.
4. Issue a parallel currency to fund domestic spending.

This all made sense, until I went to the Greek ministry of finance and pulled up monthly data on revenues and expenditures, not including interest or debt repayments. Here you have it, for all levels of the Greek government, including municipalities:

When Münchau writes that the money will not be “enough,” what does he mean? It certainly won’t be enough to make the country’s debt repayments. But the figures graphed above indicate that it should be enough to cover its current spending. 

The solid line is the primary balance. It occasionally goes into the red, but it was positive for all of 2014, to the net tune of €2.2 billion. Greece has a smoothing problem, but unless these numbers are wrong it should be able to cover it easily through short-term borrowing. I have not been able to find data on the Greek government’s cash reserves. All I can tell you is that they went up by  €0.9 billion in 2013 and down by  €2.2 billion in 2014.

Now, the ECB may do what it can to prevent Greece from any short-term borrowing. And it may decide to deliberately wreck the Greek banking system. But from here it seems like Greece will only have to resort to option (4) if the European imperial authorities decide to take deliberate action to force it to do so. 

Even if the parties involved can’t compromise on debt, it would be relatively easy to just let the Greeks default while letting them still have banks that function and a government that can pay its current bills. If that default then crashes the Greek economy, fine. So why all this threatening of additional sanctions that will serve only to push Greece out of the eurozone while costing the European government central bank a boatload of money?

The weird thing is that Greece doesn’t even want more money. It just wants an extension on loans that certainly won’t repay if the Germans Europeans unload on them with both barrels. 

So WTF? 

My initial guess would be that this is just bad public diplomacy on the Greeks’ part. They could have tried to frame the issue in a way that Merkel could accept without enraging the more irrational parts of her electorate. 

But that guess assumes that the Germans would have been willing to make the obvious compromise that leaves everyone better off. I am not sure that assumption is correct. I therefore implore my co-blogger to write a post explaining what in the name of Mary is going on, because this all looks eminently super-easy to resolve to the satisfaction of all parties. Help?

ADDENDUM: One very perspicacious view can be found here. In this view, the Europeans won’t destroy the Greek banking system. Rather, they will inflict just enough pain to make the Greeks suffer for their inevitable default and debt write-down, but not so much that they leave the eurozone. The success of such a plan, of course, depends on Greece being able to pay its current expenditure. It also, if I understand it, involves the Greeks not paying their current debts. So I am still unclear as to what is gained, but it does seem like a plausible strategy. Go click the link. 

He also lays out the obvious compromise here.

So, once again I call upon our co-blogger to explain why the obvious compromise does not seem to have the backing of the imperial leader of Europe chancellor of Germany.

Making the zero bound even squishier

 The zero-bound is a situation where nominal interest rates hit, well, zero. In theory, they cannot then be lowered any further. After all, why would someone lose money by depositing their wealth into an account that shrank over time when they could just hold cash?

Well, it turns out that there are some reasons. Interest rates are turning negative in Europe. Holding cash has a cost.

The higher that cost, the more people will be forced into the financial system. So how can we make it really high? Well, you could ban cash, but that’s draconian. 

Our suggestion? Abolish paper money. Make the largest denomination a $10 coin, weighing a full ounce. (That would be about 28 times the weight of a $10 bill.) That would $100,000 weigh about three tons. You could still store cash in your basement, but it would be hard.

Of course, eventually someone would start to allow you to deposit coins with them and write drafts against the coin piles. Oh, wait, there already is an institution that does that ... 

Saudi strategy is working

 Saudi Arabia wants oil prices to remain low for a while. The reason is that they hope to avoid demand destruction. A period of low prices could set back attempts to switch away from oil. The reason for the could is that such an effect is not inevitable. It will only happen if (a) regulators ease up on efficiency requirements; (b) consumers believe that prices will stay low forever and start making long-term wasteful investments.

And courtesy of Severin Borenstein, it looks like all three are happening. Regulators are coming under fire, consumers are buying more light trucks, and average fuel efficiency is dropping.

I would not read too much into that last; these numbers are noisy. And I suspect that the EPA will hold firm to the new standards. (Current law requires the agency to review the 54.5 mpg-by-2025 mandate over 2016-18.) 

But it is worrisome.

More reasons that the price of oil will stay low for a while

 It will be a while. We have stated some of the reasons, but there are two more to consider. First, just like the Mexican government, many U.S. firms are hedged. The price they face will not fall below $70 in 2015. Second, many U.S. firms are indebted: they need to keep generating cash flow. Ergo.

Plus the other stuff. How long is a while? Make me an offer and I might tell you. ☺

More seriously, if you can figure out a way to go long on oil and have a reasonably low discount rate, then you should do it. The price will rise and rise a lot. But it will not be this year. Nor would I bet on next year, unless you can afford a loss.

If you impose capital controls, you need to take some risks

 Capital controls are state-imposed restrictions on moving money in or out of a country. If you have money inside a state with capital controls, then it is legally-difficult to lend that money to foreigners or use that money to buy foreign assets. In fact, to be binding, it even has to be difficult to use that money to freely import stuff. Otherwise you could move money out simply by buying something overseas on credit, importing it, and selling it to yourself at an inflated price.

Why might a government want to impose them?

1. Governments sometimes impose capital controls during economic crises. They might do this to stem a panic. Say that people have started dumping assets and taking the money out of the country. (If they are not doing that, then they are likely using the money to buy other assets, which is less of a problem.) The fire sale is driving down asset prices and pushing otherwise healthy companies towards insolvency. In that situation, capital controls basically stop the foreigners from being able to dump their assets. It’s a way of forcing everyone to calm down, the way a bank facing a run might stop withdrawals for a little while.  
2. Capital controls can also be used to give central banks the ability to fight a crisis without worrying about the exchange rate. They can prints lots of money and do other unorthodox things without the fear that people will start dumping the currency. In countries where lots of companies have foreign-denominated debt, that is a good thing.
3. Finally, governments can shift the pain of external adjustment by using controls. A collapse in the exchange rate has all sorts of distributional effects. If a government doesn’t like those effects, then it can use capital controls to shift them around. (Venezuela is doing this ... for so long that it long became massively counterproductive. But that is a different issue.) 

Kris James Mitchener and Kirsten Wandschneider have a good working paper on capital controls during the Great Depression. What did they find?

1. Controls worked on the most basic level, as in governments succeeded in making it hard to take money out of the country;
2. Controls abetted recovery from the Depression ... but no more so than in the countries that just let their currencies depreciate;
3. One of the reasons for (3) is that central banks seemed very reluctant to take advantage of the manuevering space that the controls provided. In short, they stuck with basically the same policies as the countries that let their currencies float, even though they no longer needed to. 

What are the implications for the current Russian predicament? I see two. If the crisis really is a panic-driven flight, then the controls may work well. The Russian government has been informally imposing such controls for several weeks, mostly by ordering state-owned businesses to refrain from taking money out of the country.  

On the other hand, if the crisis is more systemic, then the Russian government could use controls to keep the ruble from plunging further while it uses its foreign reserves to bail out various companies. That might be useful! It would keep import prices from spiking and keep various exporters solvent. But it is not clear that it would really produce less overall pain than just letting the ruble fall.

The problem does not seem to be driven by a short-term panic, so it seems that the Russia government has a difficult choice. But the lesson seems to be that capital controls do not do much good unless you have a plan for using the breathing room. Does anyone in Moscow?

More evidence that U.S. shale will not collapse in 2015

 In October, we predicted that one of the reasons why U.S. tight oil production would not collapse in the face of low oil prices is that “when prices slump, so does the demand for all the specialized inputs that oil operations need. Geologists, rigs, roughnecks, all will cut their prices.”

Yesterday, the Financial Times reported that the oil majors were cutting the rates they paid contractors by 10%. An oil services company cut wages for 1,300 workers. And the majors have slashed their internal pay by 15%. 

The data comes from the United Kingdom, not the United States, but the same trends apply. We do not expect American tight oil (aka, “shale”) to fall significantly next year.

Observatorio argentino 27: Correlation is not causation

 Argentine financial markets have been on a roller-coaster. A lot of headlines attribute that to the falling oil price. But others say low prices are good for Argentina! What is going on?

Only ... no. It is true that low oil prices are terrible for YPF, but YPF makes up a small chunk of the Argentine stock market. (The BCBA had a market capitalization around 3.9 trillion pesos on December 18. YPF had a market cap around 108 billion pesos.) So it is not the direct effect.

Low oil prices should be good for Argentina. The country is a net oil importer. It is also a net gas importer ... and the price of its pipeline gas imports from Bolivia are linked to the price of oil. In total, net imports could drop by $2.7 billion next year. Now, that ain’t huge in a $609 billion economy, but at 0.4% of GDP it’s not nothing.

The thing is, low prices will mess with YPF’s plans to make Argentina into the second major producer of tight oil after the United States. But investment plans were greater than $2.7 billion for 2015. A fall in investment spending could cancel out the benefit from lower hydrocarbon imports. 

That still is not enough to explain the selloff. So what is it? Well, the recent decline in oil prices has all the hallmarks of a demand shock, albeit one enabled by the recent rise in North American oil production and the return of Libya to world markets. (See the chart below, from the IEA.) The economic slowdown in Europe and China that is cutting demand for oil will also cut the demand for other Argentine products. And that does not augur well for the Argentine economy.

In short, the same factors driving international oil prices down are hitting Argentina hard. But the effect is not causal.

I had plans to travel extensively in Argentina in 2015, investigating YPF. It now looks like it will not happen. Life intervenes: new job, opportunities in Albania and the Philippines, and I happen to prefer spending time with my children. (I feel for my co-blogger, who continues to travel!) And it is particularly disappointing since Argentina just may be my favorite country on the planet, both in terms of the culture and in terms of its intellectual fascination. 

Ah, ni modo. There’s still Mexico!

Please stop claiming that the economy is stopping Putin when there is no proof of that proposition

 Clearly the pithiness of my post titles is on the decline. Apologies.

Vox is arguing that international investors are keeping Vladimir Putin from invading Ukraine. The logic is that investors have pulled back from Russia over the past months. This pullback has damaged the Russian economy. Therefore, to protect his economy, Putin is also pulling back from his attempts to cleave off parts of Ukraine.

Well, consider these two hypotheses:

1. Putin has chosen to pull back because of the economic costs (recession caused by changing investor sentiment);
2. Putin has chosen to pull back because of the strategic costs (the risk of involvement in a brutal counterinsurgency against fellow white orthodox Slavs).

In other words, the Vox author has proposed an hypothesis without evaluating the counterhypotheses. And in this case, the counterhypothesis is much more compelling.

To be fair, it does appear to be true that capital is leaving Russia at an accelerated pace. This was not clear in March, when the markets appeared to care little about Crimea. As we predicted here, however, the prospect of war in eastern Ukraine has been another story. Capital flight has raised interest rates and in turn damaged the Russian economy. 

The problem is that it is clear that Putin has incentives to pull back even if his economy was booming. It is clear that there is no popular support for secession in the east. (See also these poll results by province.) The Ukrainian government and some large minority of Ukrainians are prepared to fight. The referenda have no legitimacy. An invasion (even one invited in by the Donetsk People’s Republic) could easily spark a war that would blow apart the nascent Eurasian Union and possibly cause Putin to lose power.

This is not to say that all big wars would have negative strategic consequences for the Russian president; it is to say that a war with Ukraine right now over this would.

So Putin is playing it smart. Even if he wants to annex Novorossiya for its own sake, he is playing it smart, because you can’t always get what you want. But if you try sometime, you just might find, you get what you need ... which is, for the Russian Federation, a federalized Ukraine that grants Russia access to the arms factories located there. 

In short, the Vox author wants to believe that big interstate wars are now impossible, and so he looks for evidence that globalization or postmodern pacifism or some other thing will force Moscow to pull back while completely ignoring the counterhypotheses. 

I should add here that absent deliberate sanctions or a large-scale prolonged war (both of which are strategic problems) the economic damage has already been done. If more market reactions were Putin’s only concern, then he might as well ignore the sunk costs and keep going. That is not what he is doing.

Finally, Meghan O’Sullivan has a good piece about why sanctions won’t stop Putin. Her arguments also apply to un-orchestrated economic damage. 

Vox appears to be caught in a Norman Angell moment. Angell famously wrote before WW1 that interstate war had become unprofitable. Angell, however, did not believe that fact made war impossible, just that it made war stupid. That was a mistake made by others. Vox appears to be resurrecting that mistake for the 21st century.

Is the decline in entrepreneurship a bad thing? Yes, probably

 Much has been made of this Brookings Institution report showing that Americans are starting new businesses at a much slower rate than before. 

The reason for the decline? We don’t know for sure, but the consensus seems to be the rise of the chains and the Internet. (Actually, that should be chains or the Internet; one might be more important than the other ... and the pre-Great Recession timing strongly suggests a late-1980s victory of the franchise.) 

It would be reasonable to assume that this is a bad thing, in the sense of maximizing the general welfare, or at least that of near-median citizens. Slate, unsurprisingly, makes the opposite case.

It isn’t a bad case. Here is the gist:

1. Chains are good. They innovate more, provide things more cheaply, and grow faster. 
2. There has been no decline in the number of small companies that grow large. The fall has been concentrated in startups that do not grow much after their foundation.

These are reasonable points. But they have to overcome one piece of evidence:

(Data from here.)

Incomes really haven’t budged for anybody in the lower 95% since 1987, save for a brief period in the late 1990s. If the triumph of the chains really were all that, then one would expect to see the opposite, no? Ditto if the growth of winner start-ups trickled down to the average American in any sort of direct fashion.

Sadly, however, all we see is stagnation. This puts the burden of proof back on Jordan Weissmann; an unsubstantiated dig at Italy for combining economic failure with lots of mom-and-pop shops doesn’t convince, because it is not clear to me either that Italy has lots of mom-and-pop shops or that they are the cause of the country’s recent stagnation.

Still, it is possible that the rise of the chains prevented the stagnation in American living standards from being even worse. Perhaps they increased labor demand, paying above-median wages and only following other establishments down after their wages dropped. Or perhaps they offered cheaper goods on a large-enough scale to cushion income declines.

That should be testable. Has anyone tested it?  

More on America’s housing insanity

In 1993, I rented with some friends a large three-bedroom apartment on Whisman Road in Mountain View. We paid $1,690 per month in 2013 dollars. ($1050 nominal.)

For a bit of 1995, I rented a one-bedroom apartment on Treat Avenue in the Mission District of San Francisco. It had its own one-car garage attached. (A very tiny garage, but I could and did park my little 1980 Plymouth Champ in the spot.) I paid $1,220 in 2013 dollars. Four years later, in the summer of 2000, I re-rented the same place for the same nominal price; the real rent had declined to $1,030.

Most miraculously, I also rented a tiny one-bedroom in Mountain View between 1995 and 1998, with occasional sublets. The rent. Hold your breath: $604 in 2013 dollars. Yes, it was terrible (the “kitchen” was only big enough for a mini-fridge) and there was drug-dealing in the cul-de-sac. (Higdon Avenue, if you know the area.) So what? It was cheap.

It may be hard to believe, but back in 1992 you could grab a two-bedroom on Alma Street in Palo Alto for $1,330 in 2013 dollars without needing to search for more than a single day. A housing search consisted of driving around looking for the “for rent” signs and then calling the landlords. This situation briefly changed during the high point of the late-nineties Internet bubble, but appeared to return to normal right after the dot-com bubble burst in early ‘00.

I cannot find what the Treat or Higdon Avenue units rent for now (although both buildings still exist, unchanged from the outside) but the Whisman Road complex is professionally managed and can be found on the Internet. There are currently no three-bedrooms available,but the website states that the floor plan we rented for $1,690 (the Gramercy) now goes for between $3,030 and $3,580. (Two-bedroom flats can be had for $3,060.) That is a real increase somewhere between 1.8 and 2.1 times our old rent.

Think about the housing market in the Bay Area and weep for America. Then get really really really angry at every middle-class homeowner in the damn state of California.

For a well-researched article on how the Bay Area got to its currently surreal point, see this piece.

The article tries to find a bit of relief in the fact that the Bay Area has a great deal of intergenerational income mobility. In San Jose, for example, a child born into the bottom fifth of the income distribution had a 12.9% chance of making it to the top fifth; San Francisco was second with 12.2%. (Mountain View is considered part of San Jose for the purposes of these data.) This puts them in the top five, along with Salt Lake City, Boston, and Pittsburgh.

So how dire can the situation be? Sure, expensive housing is bad, but the Bay Area remains good for poor people.

Only that may be wrong. Consider that the study looks at people born in 1980-82. It then measures their parents’ income in 1996-2000 and their personal income in 2011-12. The problem with using the study dismiss the effect of the recently-created housing shortage is twofold.

First, the Bay Area does not do well in some mysterious unexplained California miracle sort of way. The spatial variation in intergenerational mobility is strongly correlated with : (1) residential segregation, (2) income inequality, (3) school quality, (4) social capital, and (5) family structure. Inasmuch as the current housing insanity affects those five variables, it will alter future intergenerational mobility. High rents, for example, make it harder for poorer people to live in good school districts or partake in the collective social capital of rich areas.

Second, a lot of poor households in the Bay Area owned their homes in 1996-2000. Those homes  increased immensely in value. It is quite possible to believe that the Bay Area overperformed places like Minneapolis and Houston because of that increase in wealth. If that is true, then the Bay Area will fall down in the rankings as home-ownership moves increasingly out of range. (And, presumably, as price increases slow down by pricing out even high-income buyers. Although who knows what the limit of that process actually is?)

In short: (a) The housing crisis really is never-explored territory for much of the United States; and (b) past performance may therefore not predict future results.

The American housing crisis

I am beginning to think that the United States is facing a terrible housing crisis. The fact that we are is pathetic. We know how to build high-density housing in inexpensive ways. But we do not allow it. So places that boom in the northeast and California see little housing growth. But they see price explosions.

We are moving to Washington this summer. Our rent on a two-bedroom apartment (big enough for two adults and two small children) is $2525. When we moved in back in 2009 it was $2300. That is an increase of only 1.9% per year. In real terms, no change.

But the owners want to charge the new tenants $3200 for the same unit. That is an increase of 6.8% per year: well over inflation and a clear indication that something is off the rails in the Boston housing market.

The ultimate problem, of course, is that you simply can’t knock down the short buildings on this block and build more high-rises like the one in the background. It’s ridiculous. We are less than a quarter-mile from a T station; residential buildings here should reach 20, 30, 40 stories. But you can’t build them because, uh, Franklin Street is just so pretty as-is.

WTF? What in the name of God is wrong with Brooklyn? Build Brooklyn here! And for those of you in Brooklyn, go build Manhattan over there. Manhattan is great!

Here is my proposal for a tough tight restrictive zoning code.

1. Adjacent units shall not lose more than two hours of sunlight on the shortest day of the year unless their current occupants so agree.
2. Monthly rents on a third of the units in any new rental buildings shall not exceed 0.003% of the median household income in the municipality per square foot. The price of one-third of any new for-sale units shall not exceed 2.5% of the median household income in the municipality per square foot.
3. New developments must at least double the number of units of any housing structures demolished in their construction.

And we’re done! No parking requirements, no height restrictions, nada. Just the above. And truth be told, I would prefer to replace clause (2) with a tax on luxury units. Calling Bill de Blasio! (Or Muriel Bowser.)

Note that this is an incredibly restrictive code. Just less so than the bullshit we currently have. Historical preservation is stupid, un-American, and contributes to income inequality.

Massively. How much of the increase in income inequality is due to changes in housing costs? I suspect it is large; someone should do the decomposition.

Is there an environmental upside to ever-increasing inequality?

No. There is not.

In fact, it is scary to me that rising wealth inequality at the top make it possible to consider buying out and shutting down the entire U.S. coal industry for environmental reasons. “Only” fifty billion dollars? Private wealthy individuals making social decisions of that magnitude? Frightening.

It is unlikely to happen. First, usually when somebody tries to buy a company they have to offer more than the current market capitalization. The reason is that the price represents the marginal seller of shares. When the demand for those shares goes up, as happens when you want to buy a controlling stake in a company at once, the price goes up. So even if the $50 billion number correctly represents the market capitalization of all current coal companies, the price to buy a controlling stake would be higher.

Second, there are other costs. Much of the assets will have very little realization value, but the debts will need to be paid. There may be other hidden costs: cleanup, for example.

Finally, if one group can bid for political reasons, another group can counterbid for political reasons. That will also serve to drive up the costs.

In short, it is a provocative idea, but having environmentally-conscious rich people buy out the coal industry is (a) terrifying in-and-of-itself; (b) more expensive than advertised; and (c) is a game that other more-evil rich people can play.

Do the markets care about the invasion of Crimea or do they care about war in Ukraine?

Last week we asked about the market reaction to the Russian silent invasion of Crimea. The data were not yet in. Now the data are in.

Above is the RTS index for the past two weeks. The collapse on Monday, March 3rd, is hard to miss. There is a recovery over the next two days, but it is only partial. The markets did not like the Russian invasion.

That would seem to be clear-cut. The problem is that a slightly longer view muddles the issue. The vertical bars show intra-day variation, with the horizontal lines being the open and close.

On this view, the markets were terrified of an all-out war and with good reason. It would cut off most Russian gas exports through Ukraine, directly slamming the economy, and court severe Iran-style sanctions from the west ... if not outright combat. Once that fear passed, the previous downward trend reasserted itself.

If you doubt the severity of the panic, consider that the Russian central bank had to raise interest rates on Monday. That is not something that a central bank would do lightly.

In short, unlike the Russo-Georgian War of 2008, the markets did care about the appearance of Russian troops in Crimea. But it is not clear whether they are punishing Russia for the violation of international norms or whether they were panicky about the impact of an all-out interstate war right along the biggest gas export routes.

These are very different things with very different implications for international relations in the 21st century. Any ideas for how to sort it out?

Never mind, nothing to see, do not read that essay in the Economist

It seems that I missed the last page of the essay entirely the first time around. It is shrink-the-state pablum. Save democracy by ending government. Or something.

Sorry, folks. I hope nobody took my advice on the first post. The essay has interesting insights, but ends on a sophomoric note, the kind of dime-store libertarianism I found convincing when I was twenty.

(Smacks head)

Another tear-out-your-hair moment from the Economist

Maybe I should not have recommended the essay on democracy. I read it while playing with my boy. I am re-reading it now. And it has this:

“Plato’s great worry about democracy, that citizens would ‘live from day to day, indulging the pleasure of the moment,’ has proved prescient. Democratic governments got into the habit of running big structural deficits as a matter of course, borrowing to give voters what they wanted in the short term, while neglecting long-term investment. France and Italy have not balanced their budgets for more than 30 years. The financial crisis starkly exposed the unsustainability of such debt-financed democracy.”

WTF? No no no no no it has not! Both countries have entirely sustainable debt loads. Even given that they have abandoned their own currencies they have sustainable debt loads.

What in the name of God is the author talking about? The essay is a weird mash. Lots of good points, some subtle, with the occasional bizarroland statement that reads like it was tossed out there to make sure the Tories (and Republicans) keep reading.

By the way, Alex Harrowell, we still need you.

Observatorio argentino 24: The blue market for the peso is not long for this world

I have a huge backlog of Argentina posts. Life and work kept me from posting most of them. I will start to try to rectify that.

I earlier mentioned my first contact with Argentina’s exchange controls, in May 2012, when I saw a Brazilian couple stopped by police and arrested on Calle Florida. 

In May 2012, the breach between the blue market rate and the official rate was not serious. It was still reasonable for a tourist to avoid the hassle. The business pages had stories about companies that were having problems with a lack of dollars, but nothing particularly serious and nothing that would affect day-to-day life.

By June 2013, the gap had become more serious. No tourist in their right mind would buy pesos at the official rate. For the rest of the economy, the economic effects were relatively small but beginning to be felt. Imagine, for example, that you were an Argentine manufacturer. Some of your inputs are imported. If you wanted to import them at the official exchange rate, then you would have to apply to the central bank. The red tape was increasingly onerous. (The negative effect of the controls on trade is part of Argentina’s ever-worsening beef with Uruguay. They have also brought down a host of WTO suits.)

It was possible for firms to work around the controls, but that was costly. There were two varieties of workaround. The first was to buy or contract with an export business which would earn dollars outside Argentina. Those dollars could then be used to purchase imported inputs. Pirelli, for example, makes tires in Argentina. It partnered with a honey exporting business in order to meet its import bills. As you can imagine, the honey exporters did not provide this service for free.

The second workaround involved the blue-chip swap market, in which a company would buy foreign securities with pesos and then sell those securities for dollars. That market, however, was costly to access ... after all, you had to convince somebody who owned foreign securities to sell them to you for pesos. They would not do so at the official rate.

Still, as late as last summer, the controls were more of an annoyance than a disaster. Companies that needed to import could do so, even if they needed to pay extra for the dollars and their shipments took forever to get through customs. Moreover, many imported inputs could be swapped out for local substitutes. Inasmuch as the Argentine authorities wanted to promote self-sufficiency, the implicit trade restrictions were a feature, not a bug.

There were some weird effects, of course. For example, demand for high-end cars soared. The cars were imported at the official rate but sold at the blue market rate, providing an irresistible bargain for anyone who earned in dollars. (Luxury cars were also considered an inflation hedge, but that was just people being silly.) In addition, luxury goods began to vanish, since there was no easy way to (say) replace an Ermenigildo Zegna suit with an Argentine substitute. But that was also minor: I still have two $200 local suits that I bought in Buenos Aires back in 2005. They started to generate lintballs fairly quickly, but they have not frayed. An annoyance, not a disaster ... and for a left-wing government you could even call the disappearance of imported luxury items an additional bonus.

The problem is that the macroeconomic imbalances have continued to worsen. The costs of getting dollars (or clearing customs) have gone higher and higher.

And so, since it turns out that Argentine-sold ketchup is actually made in Chile ... McDonalds has just run out of the red stuff.

OK, that is minor, and an Argentine substitute will be found pretty easily. But these sorts of problems are starting to pile up. At the limit, you make imports impossible and wind up with Venezuelan-style shortages, only without a giant oil export machine to cushion things.

Argentina is not Venezuela. The policy is fast-approaching its breaking point. The government is terrified of an inflationary spike, but there are worse things. (Like fuel shortages.) The recent liberalization is going to continue. Soon enough Argentina will be a normal high-inflation country, rather than an odd throwback to the 1970s. The liberalization will not be easy (the government needs the dollars to pay debts!) but the alternative is politically worse.

Either that or they will have to figure out how to make do without imports.

Recommended reading on migration

Three recommendations. First, for those of you with a casual interest in the topic, there is a very brief review paper by Joseph Ferrie (Northwestern) and Timothy Hatton (Essex) on the last two centuries of international migration. (The paper actually covers the last four centuries, although it moves quickly over the 17th and 18th centuries.)

Second, Paul Collier’s new book, Exodus. It is a very well-written and thought-provoking brief in favor of immigration restrictions. If you click the link, it will take you to multiple reviews of the book. Most of the negative ones are tendentious and a little strange. This fellow here argues that countries should abandon all income redistribution in order to facilitate open borders. In that, he concedes Collier’s main argument, which is precisely that unlimited immigration could destroy the national sentiments that underpin liberal democracies. (Collier has a fascinating discussion of the theoretical circumstances under which this might happen; it is not a blanket argument. A blanket argument would obviously be stupid.) Nathan Smith at Open Borders starts by conceding Collier’s main point and calling for countries to impose special taxes on migrants instead of preventing their entry. (As an American, I recoil at that idea: differential taxation based on birthplace is contrary to the 14th Amendment. It is an odd suggestion for a proponent of open borders.) He follows up by saying that democracy is bad as part of an attack on Why Nations Fail, by Jim Robinson and Daron Acemoglu.To be fair, I am not sure that he realizes that he is arguing that democracy is bad. (I should mention that Jim Robinson is a friend.) Kenan Malik argues against a caricature of the book. One of the best parts about Exodus is how Collier lays down the conditions under which a diaspora will grow indefinitely and those under which it will not. Malik, however, writes, “A key argument in Exodus is that the levels both of migration and of problems created by it are linked to the size of diasporas.” Well, sometimes! But not always. I was left unclear what troubled Malik, other than that Collier is wrong about Great Britain. (Not being British, I can’t say, although Collier explicitly gives large shout-outs to the U.S. and Canada for our ability to assimilate immigrants.)

Finally, here is an incredible bit of investigative reporting into a Nigerian human trafficking ring. It is horrifying ... and quite amazing how the reporters made their escape.

The black market rate of the Syrian pound

The Syrian government, unlike the Venezuelan one, allows data to be published on the black market rate for the Syrian pound. There are occasional crackdowns, but in general the market is open. In fact, the Syrian central bank regularly engages in currency transactions at what it calls the “intervention rate,” often to stabilize the black market rate. It is much more of a gray market than a black one, akin to Argentina’s “blue market” for the peso.

The below chart shows the gray market value, derived from more-or-less weekly quotations found in the Syria Report.

Before the war, Syria had a fixed exchange rate, with capital controls, but the central bank could more-or-less supply enough the national currency at the pegged rate. There was a brief run on the pound in May 2011, when the government deployed the Army against the protestors. The central bank then tightened exchange controls and flooded the market with dollars. Things rapidly returned to normal.

Problems emerge around the end of 2011. In March 2012 the value of the pound plunged, but heavy dollar sales by the central bank soon stabilized the market rate. In July 2012, there was another brief crisis when the Free Syrian Army attacked the National Security building in Damascus.

The wheels started to come off the bus around the end of 2012, probably because that is when it became clear that inflation was starting to accelerate . The government briefly got  a handle on things, but the pounds almost continuously lost value throughout April and May of 2013. In June, however, it looked like the central bank had regained control.

The big crisis hit in June 2013, when the Obama administration announced that it will arm the rebels. Interestingly, the central bank restabilized the currency a month before the first credible accusations of large-scale chemical weapons use by the Syrian regime. The threat of Western attack did not cause any large-scale currency dumping in favor of dollars. That might have been because nobody in Damascus worried about an attack, or because they thought it would do little harm, or because of something else. At worst, the threat of war may have slowed the rise in the Syrian pound back to 150.

(An earlier version of this post transposed sentences dealing with 2012 and 2013. A good timeline can be found at Politico, of all place.)

Since then, the market seems to have more-or-less stabilized. Take what you will what this says about the projected lifespan of the current Syrian government.

Data available on request.

It is not true that the data on the minimum wage “conforms so strongly to basic economic intuition”

In the mid-1980s, I handed out flyers on an Upper East Side streetcorner for a now defunct drugstore chain for $4.25 per hour ($9.07 in 2012). During the summers, I cut fiberglass and installed ducts in Miami for $5 an hour ($10.70 today). The minimum wage at the time was $3.35. A bump in the minimum was not likely to affect my employment prospects.

But that’s anecdote! Kevin Erdmann (via Marginal Revolution) has proof!

Uh ... um. Hmm. OK, take a look at the inflection points. Something happened in 1957. And something happened in 1973. And I vaguely recall something important in 1990. Not to mention 2007.

I wonder what I’m thinking about? (Click the link, please.)

And it seems a little counter to the hypothesis that in his second two examples teen employment accelerates above his post-hike trend well before his two-year post-hike window closes. And then there is 1996.

So ... four of his seven two-year post-hike windows are coterminous with recessions. (Perhaps minimum wage hikes cause recessions?) And two (1961 and 1996) don’t say what he thinks they say. That leaves 1967. I guess. Maybe.

Aaargh!

But Erdmann earned a lot of goodwill from me in his About the Author page. And he seems to have walked back his conclusions. I am impressed! Not a lot of people do that.

But why then did Tyler Cowen link to him after he had already walked himself back? I honestly do not understand.

Global warming denial is alive and well, except in quiet rooms

The U.S. Chamber of Commerce just issued its new energy plan, an update to its 2008 plan. The 2008 document was favorable to hydrocarbons, but it included a call for reducing the environmental impact of energy consumption and investing more in climate science, as well as a call for the U.S. to lead on climate change.

The new plan, not so much. In fact, not at all. And why not? Well, Karen Harbert, CEO of the Chamber’s Institute for 21st Century Energy: “It is a different world in 2014 than it [was] in 2008: We are dealing from a hand of strength.”

At least she’s honest.

But it is strange, considering as the New York Times let the cat out of the bag: the big energy companies all assume a price on carbon emissions when assessing new projects. If the projects don’t make sense with a carbon price, then they don’t happen. In other words, they all assume a carbon tax, cap-and-trade system, or costly command-and-control regulation is coming.

But none of them want to admit that they plan for a carbon price! One colleague of mine recently completed a case on a large hydrocarbon project. The company refuses to release the case unless he removes all references to the fact that the company builds a carbon price into all its financial analyses ... even though the cat is out of the bag on the fact that all the major energy companies (and a lot of other ones) do just that.

WTF, you may ask? Well, the answer is simple. The Times is incorrect when it writes that the use of carbon pricing in boardrooms is part of “a deeper rift in the [Republican] party, as business-friendly establishment Republicans clash with the Tea Party.” It is not.

Rather, it represents the fact that the energy companies do not believe that the odds are against then in the fight against carbon emission restrictions ... but that they also believe that there is a chance that they win. Publicizing their internal use of a carbon price gives aid to their enemies who want to impose one. But ignoring the likelihood that one is coming will only hurt their shareholders. Thus, they build one in.

The similarity to the quiet rooms in which Mitt Romney believed that income inequality should be discussed is not a coincidence.

P.S. One implication that should not be drawn, however, is that a carbon price (or regulation) won’t affect CO2 production if companies are already taking it into account. There are two reasons why it will still matter. (1) The big companies aren’t the only CO2 emitters. (2) The big companies will only invest if the projects make sense with a carbon price; nonetheless, those projects will produce less if carbon prices or regulation raise the cost of their product.

The impact of the Syrian refugees on Lebanon

Having the population of your country increase by a fifth in three years is, well, somewhat problematic. That said, the country is handling it remarkably well, at least in economic terms.

Important context: the GDP of Lebanon in 2012 came to $42.9 billion and government expenditures of $13.3 billion against revenues of $9.4 billion.

First, schools. There were about 350,000 students enrolled in the Lebanese public school system. (If that number seems small for a country of 4.4 million people, it is because most Lebanese send their children to sectarian schools.) The Ministry of Social Affairs (MOSA) reported that 33,000 Syrian students have registered since the start of the war, at a cost of about $1,000 per student. (Only 0.4% of government revenue.) The good thing? Syrian schools still have a spare capacity of 90,000 seats. The bad thing? That capacity isn’t where the refugees are. UPDATE: The really bad thing? Even 90,000 would not come close to providing seats for all school-age refugees.

Second, health care. The national government is hands-off, leaving it to NGOs, UNHCR, and local governments. So far, UNHCR has covered about 85% of health care expenses, but MOSA reports that Lebanon is on the hook for $425 per refugee annually, born mostly by local governments. MOSA also reports a total cost of $267 million (2.8% of revenue) ... the implication being that they still have not accounted for the full impact of the current refugee population, let alone what might arrive in the next few years.

Third, public services. MOSA estimated that in 2012 local governments and electrical utilities needed $450 million, or 4.8% of total government revenue, to cope with additional strains on garbage disposal, water provision and electrical grids. Next year MOSA reports that the cost will jump to $1.2 billion ... a very substantial 13% of total revenue. And this in a country that still has not recovered from the damage the Second Lebanon War wreaked on the grid back in ‘06; peakload gaps range as high as 40% of capacity and brownouts are endemic. The state-owned Electricité du Liban has its work cut out for it.

Fourth, inflation. Last year, inflation ran 10.1% in Lebanon. Now, Lebanon has had some recent issues in collecting CPI data. Even if it hadn’t it wouldn’t be fair to attribute the increase from 4.4% to 10% to the refugees. But what is telling is that inflation has jumped by much more in the areas that have received a lot of refugees: 40% in Labweh, 50% in Tyre, 100% in Majdel Anjar and 200% in Saida.

Finally, jobs. In agriculture, the Beirut Research and Innovation Center study commissioned by Oxfam reported that Syrians in rural areas are willing to work for $6 a day, against a prevailing local wage between $15 and $20. That said, in many regions local authorities reported that the refugees had little effect  and in at least one district, Aley, locals are grateful for the opportunity to rent spare rooms to the newcomers. (Page 40.) In general Lebanon has been doing the right thing in a tough circumstance regarding the refugees, but the government has made one boneheaded move: the Ministry of the Economy has ordered the police to prevent Syrian refugees from opening businesses. (Also page 40.)

(The photograph above is at a restaurant south of Beirut founded and run by Palestinians; stopping Syrians from doing the same seems idiotic, although I can understand the political pressures the government is under to do something.)

I do not know how easy this will be if the number of refugees continues to grow. And I am certain that the political reaction is going to be very bad if this goes on. (The war, of course, has already spilled over to some extent.) But so far, despite serious pressure, Lebanon has coped remarkably well.

More study is needed, but so far this looks a lot like Mariel.

Lessons in punditry: leave yourself a way out!

Brad Delong wonders why the signers of a 2010 open letter to Ben Bernanke have not recanted their views in light of inflation’s stubborn refusal to accelerate.

The reason, of course, lies in the text of the letter. (Disclosure: I am friends with two of the signers and have an immense amount of respect for their work.) Before I explain, here is the text:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

The reason lies in the first paragraph. “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”

First, they said only that QE risked inflation, not that it would cause it.

Second, they said that QE would fail to “achieve the Fed’s objective of promoting employment.” That certainly does seem to be the case, no?

The right question for the signers, I think, would be whether the failure of inflation to appear has caused them to reconsider their opinion about the efficacy of quantitative easing. But it is true that the wording of that sentence allows the signers to truthfully claim that they thought the policy ran risks with no hope of reward, which is a different thing from saying that they predicted rampant inflation in the letter.

The Eurozone is not in the Rose data set

Currency unions are a hot topic, for obvious reasons. The Eurozone has gone spectacularly off the rails. There is some evidence that currency unions boost trade (see Andy Rose here and here and this post) but considering the rolling disaster that is southern Europe many would consider that a small gain.

Therefore, a recent paper from Andy Rose has attracted a lot of interest: he finds that currency regimes have no systematic effect on macroeconomic performance. That is quite a find! It implies that the southern European countries would have been in trouble anyway. I found it via Tyler Cowen, who led me to comments by Paul Krugman and Antonio Fatas.

Except there is one thing about the paper. Page 3: “I exclude from the sample the five systematically important economies of China, the Eurozone, Japan, the UK, and the USA.”

Neither Krugman, Cowen, nor Fatas mentioned that the Eurozone countries are not in the data set; perhaps it is too obvious? It is still a great paper. And Tyler Cowen provides a solid explanation of the results.

But I am not sure that it tells us anything about the effect of the euro.

Robocapalyse maybe

Computers have made some startling advances lately in things like voice and object recognition. Put it together, and we are beginning to see some signs that our glorified typewriters-cun-filing cabinets are turning into the robots and computers of classical science fiction. Which brings us to the obvious question: what will they do to the labor market?

A recent paper tries to answer a more limited question: what percentage of jobs are susceptible to computerization? If that number is small, then there is nothing to worry about. If that number is large, then we have to hope that new human-only jobs will emerge that most humans can do ... or watch income inequality expand to unseen levels.

To make this analysis useful, you need to do three things. First, you need to estimate the limit capability of computers. That is, what will they be able to do once Moore’s Law comes to an end. (For the nerds: Koomey’s Law is just as important in this context. After all, a robot that consumed $500 per hour worth of electricity would not be very valuable.)

Second, you need to identify the current jobs that these hypothetical future computers will be able to replace.

Third, you need a methodology that provides you with an upper bound. Why an upper bound? Because the second thing above pushes your estimates upwards. After all, jobs change ... but any reasonable identification strategy will have to identify computer-susceptible jobs as they are and not as they could be. That already implies significant upwards bias, so in order to get a useful estimate one should run with it. That won’t help much if the percentage of computerizable jobs that you come up with is 98%, but it will help if it is, say, 60% or 40% or 25% ... it will provide a useful ceiling.

OK, so how does the paper stack up?

In terms of the raw theory, not too bad. They take a well-worn Cobb-Douglas production functionand replace labor with three labor inputs: perception and manipulation tasks, creative intelligence tasks, and social intelligence tasks.

In terms of its time horizon, it goes out about two decades, to 2035. “The main challenges to robotic computerisation, perception and manipulation, thus largely remain and are unlikely to be fully resolved in the next decade or two.” (Page 25.) This makes me vaguely unhappy: the big challenges are what happens after that, at the limit. After all, my boy will be my age in 2055 ... and if I live as long as my father did, I will also still be around.

If terms of data ... ugh. They used BLS data to group 702 jobs in terms of the three labor inputs. They then validated that model by using the BLS data to ... predict their subjective evaluations.

The results is that restaurant cooks and models wind up in the same easily-computerizable category as radio operators and cashiers. Down on the hard-to-computerize side, we have logisticians ranked with the guys who work in boiler rooms. (The latter is probably not what you think.) Both are hard to computerize ... but the latter is much harder. (I should add that I have worked in both fields, albeit very briefly and in one courtesy of the Army.)

Is there a non-intuitive way to test the plausibility of the rankings? Carlos Yu and I think we might have one. The less-computerizable jobs should also be the jobs where employees have more leverage over employers. Technically, you could use the the negative log of computerizability as a measure of bargaining power regarding future earnings. In Carlos’ words: “That works fine for data entry and telemarketers, who have -log(.99) ~ zero bargaining power, but given the weight of teaching, counseling, and nursing professions on the low-computerizability end of the scale, it suggests other factors are in play.”

In short, an intriguing paper, with what looks like the right methodology ... but not one that gives a useful roadmap to 2035, let along 2055 or 2100.

Always check the metadata!

The World Bank publishes a useful time series entitled “oil rents.” It is a variable defined as the difference between the cost of extracting oil and the value of oil production. It’s utility is obvious. The variable gives a measure of how much value there is to fight over along the value chain in the country — between governments, upstream producers, midstream transporters and (if applicable) downstream refiners. You can use it to test all sorts of hypotheses about oil politics and the industrial organization of the sector. All there, right on the World Bank website.

Only not. I checked the metadata, which explains how the variable was constructed. It sent me to a (fascinating!) article by Michael Ross of UCLA on “Oil, Islam, and Women.” There I went to the equally fascinating “Manual for Calculating Adjusted Net Savings” by Katharine Bolt, Mampite Matete and Michael Clemens.

Which is where I learned that oil rents by the World Bank are not the data you are looking for.

The definition of oil rents, remember, is revenue minus cost. Revenue is more complicated than you might think, since oil prices vary according to the quality of the crude and the difficulty of getting it to a port. Still, the price of oil can be estimated well enough. The problem is cost.

For most countries, the World Bank cost data come from one year: 1993. Only the costs for Latin American countries come from another year: 1981. The oil rent data assume that these real costs over time are constant, which, to put it mildly, bears no resemblance to reality. It is a particular problem for countries that produce heavy oil, such as Canada and Venezuela; or countries that have invested heavily in secondary recovery of declining fields, like Norway and Mexico; or countries that have discovered new technology to develop previously inaccessible reserves, like America and Brazil.

Moreover, direct cost data are only available for Ukraine, Russia, Venezuela, Mexico, Libya, Malaysia, Nigeria, USA, Gabon, Egypt, the United Kingdom, Norway (a 1987 study), Ecuador, Peru, Trinidad & Tobago, Argentina, Bolivia, Brazil, Chile, Colombia Iran, Iraq, Saudi Arabia, Kuwait, United Arab Emirates, Oman, Indonesia and Canada.

Other countries are assigned values given geographic proximity and a similar ratio of offshore to onshore production — which is even crazier than assuming that real production costs did not change between 1980 and 2012. Brunei’s production costs are not Indonesia’s, for example, and Chad bears no relation to Gabon. God only knows how they estimated costs in Central Asia.

In short, what seems like an awesome data set turns out to be not so useful once you dig through the metadata. The number simply moves in parallel with total oil revenue: there is no new of variation.

Buyer beware. Sometimes you gotta get a broom and clean up the numbers yourself.

Falling life expectancy in the United States ... may God save us

Old news, I suppose. It did not register with me at the time. This story makes it more personal and speculates about causes.

It is horrifying. And preventable.

Which is why I believe that as a society we are going to completely botch the ever-greater penetration of robotics and weak artificial intelligence into the economy. Please read the links and tell me why I am wrong. Please.

The real meaning of Sky City

A Chinese company wants to build the world’s tallest skyscraper. As a result, there has been a lot of discussion about the “skyscraper index.” Does the groundbreaking on Sky City mean that the Chinese economy is about collapse? Is the world economy at risk?

Maybe. It could. I am on-record as a medium-term China bear. But that is really not what Sky City means. No, the real meaning of Sky City is the same as the meaning of the locks on the Panama Canal expansion: China’s manufacturing model has reached its limits.

What do the Panama Canal expansion locks have to do with Chinese manufacturing. Well, below you can see a video of the Panama locks being loaded onto the ships that will take them to Panama; they should arrive next month.

You got it: the locks are being built in Italy. Not China. In fact, very little of the equipment for the expansion is coming from China. Engineers on the project told me that Chinese work was cheaper, but they judged it too shoddy and unreliable.

And ... the developers of the Sky City project refuse to use Chinese steel because it is not safe. They will get the steel from Luxembourg instead. (I bet few readers knew that Luxembourg is a historic center of steel production.)

Moreover, the building looks to be mightily unpleasant inside. (I cannot help but think of this great movie.) I also cannot help but think of the infamous skyscraper slum of Caracas.

The upshot is that something is broken at the heart of China’s manufacturing model, at least as it concerns high-performance large-scale capital goods. If nothing else, Sky City exemplifies that concern.