The thing is, when you’re living in the world of perfect markets and rational actors—the world of “basic principles of economics,” where human life behaves like the ideal gas of physics lore—intervention in the market is a net cost by definition. (That this neatly dovetails with conservative ideology and the interests of powerful industries is, um, worth noting.) You can point out ways that human life isn’t like an ideal gas, but some economists are religious believers: if facts contradict faith, it is facts that must give way.
What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises... Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck.... The late Charles Kindleberger of MIT argued that an open economy required a hegemon. One of its roles is to be spender and borrower of last resort in a crisis. The hegemon, then, is the country with the best credit. In the eurozone, it is Germany. But Germany is a lender, not a borrower, and is sure to remain so. This being so, weaker borrowers must fulfil the role, with dire results for their credit ratings...
[T]his portion of Ross Douthat’s [New York Times] column.... "Social democracy has its benefits, but global competitiveness isn’t one of them. As Jim Manzi points out, in an essay [in National Affiairs] on 'Keeping America’s Edge'... America’s share of global output has been constant at about 21 percent. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40 percent of global production in the 1970s to about 25 percent today.” The implication here is of a huge shift in relative living standards that never happened.... Jon Chait... discovers... Manzi is comparing US economic performance since 1980 to European performance since 1973.... Manzi is defining “Europe since 1973″ to include the Soviet Union and sundry Central European countries.... So, let’s look at a straight-up measure. How did the United States perform in comparison with European social democracies? Well, since 1980, the original 15 members of the European Union saw their real per capita income grow by 58%. Real per capita GDP in the United States grew by... 63%. And... include Switzerland, Norway or Iceland — three countries that clearly qualify as European social democracies... had 71% growth in per capita GDP since 1980.... [T]he real meaning of social democracy for a developed country [is that] you get more equality and more vacation, with no real impact on the rate of growth. There’s a case to be made that less vacation and better televisions are a better deal... and there’s a tradition of philosophical argument which holds that the failure of modern mixed economies to be sufficiently solicitous of the interests of the wealthy is a major source of injustice. But... within the range that actual developed countries exist at there’s no evidence that inegalitarian policies boost growth.
Nick Bloom talked about an experiment (also with coauthors) with large textile firms in India. Some received expert operational consulting for a month. Others just a consulting visit. They found horrendous practices–disorganized factory floors, open garbage, little cleaning, no spare parts, lost tools, and little preventative maintenance—and pushed 38 best practices on their treatment firms. Two thirds of the practices were adopted and the majority seem to have lasted more than the first few months. The firms saw huge improvements in quality and profits.
Antoinette Schoar and coauthors did the same with smaller firms in Mexico... subsidized consulting services, mainly sales, marketing and HR advising for owner managers. Again, sales and profits rose.*
What’s happening here? Why aren’t firms investing in knowledge that provides enormous payback? Several market failures are possible: credit constraints, absence of incentives, behavioral defects (like procrastination), to information that is too messy and inaccessible for non-experts to absorb, even if it’s available. Even though the mechanism isn’t yet clear, the results suggest a lot of potential for industrial policies that provide short-term subsidies to address start-up costs, technology transfer and human capital. For a serious industrial policy, though, figuring out why the experiments work is probably more important than figuring out how well they work.
I am about to go work at a place that puts lots and lots of stuff behind a paywall, I really better not complain too much. But still: Frustrating! Now I'm back home with a paper copy of the New Yorker in front of me. And the article's still good. Cassidy talks to three sorts of Chicago scholars. There's my buddy Gene Fama and his son-in-law John Cochrane, who by defining all the accomplishments of post-World War II financial theory down to the commonplace observation that it's hard to outguess the market are able to argue that there's nothing wrong with this theory. They may be right, but they also don't have much of anything interesting or useful to say about the events of the past couple of years. They have defined themselves out of the discussion...
I hate the phrase “casino capitalism.” It’s rather unfair to casinos, which know how to do risk management: make an offer that is close to fair, enough to cover your expenses, and offer non-monetary benefits (inexpensive food, table-service drinks, floor shows, etc.) so that even the losers enjoy the experience. Unless you forget that Atlantic City is a dreary place in the Winter, it’s a license to print money. Capitalism, on the other hand, thrives because people have a dollar, a dream, and the inability to calculate odds correctly. (This is a good thing—at its worst, it leads to more frictional unemployment as those dreams fade or are restructured.)...
In late November I talked about how credit cards specifically, and the consumer financial system more generally, was fee and ‘trick and traps’ based and how that amounted to a transfer from the poorest to the richest in our country. I found this to be a really bad thing, one that gave terrible incentives to financial firms to find innovations that would make prices and information more opaque and less transparent for consumers. Instead of challenging the argument itself, or arguing that this system was a necessary evil to get the poorest in our country access to financial markets, I was amazed at the amount of feedback I got that argued this was a great system, because instead of ripping off the poor to give benefits to the rich, it really transferred “from the ignorant and foolish to the informed and prudent”, or as one emailer put it, in a manner representative of many other emails: “It’s the irresponsible borrowers – who are often poor – that are penalized and the ultra-responsible borrowers that are rewarded. I fail to see the problem there.” The argument is that the system works to punish those who are cognitively weak and financially irresponsible and reward those with good cognition and a sense of responsibility. Perhaps you agree, or perhaps you are on the fence but leaning towards agreement. Maybe it is because I’ve binged on Michael Sandel’s Justice series on youtube over the holidays, but I want to create a moral dilemma to see how far you are willing to go in thinking this justification works for our current financial system. But first I’ll need to go into Evil Financial Rortybomb mode. Ever see that Star Trek where in the Mirror Universe everyone is evil and has a goatee? It’s like that...
8) BEST NON-ECONOMICS THING I'VE READ TODAY: Thoreau: The most unconquerable place on earth:
This article in the Economist basically sums up why the escalation in Afghanistan, plus all the flying killer robot shenanigans in Pakistan, will ultimately come to nothing. In a nutshell, the Pushtuns cannot be subdued by outsiders. To be frank, there isn’t a lot to admire about people who enslave their women and engage in constant tribal warfare, but (1) it’s not like our hands are clean and (2) these problems will not be fixed by flying killer robots and armed government employees. They will only be solved by long, patient work, most of it done by insiders and some of it done by friendly outsiders who are there to help and listen rather than use force and give aid money to elites skimming off the top (and the bottom, and the middle).
9) **MOST IMPRESSIVE AND SUCCESSFUL SELF-CRITICISM STRUGGLE SESSION OF THE YEAR: Clive Crook (courtesy of Matthew Yglesias and Henry Farrell):
May 24, 2009: "The Democratic party’s civil libertarians seem to believe that several medium-sized US cities would be a reasonable price to pay for insisting on ordinary criminal trials for terrorist suspects..." December 30, 2009: "[Paul] Krugman supports the [health care] bill as well, even though he regards it as an essentially Republican measure. Interesting for once (off the top of my head I cannot think of another instance) to see him express the view that Republican ideas are not wrong by definition. That's a breakthrough. If it keeps up, he might soon be judging issues on the merits. What his admirers will make of that, I shudder to think..." CJanuary 5, 2010: "'Americans are not just friendly and polite--they are also charming'.... True, very true--of ordinary face-to-face interaction, that is. Jarringly different standards apply in politics, and especially in the political blogosphere. There, "coarsening" is too mild a word. All that swaggering, sneering incivility...
10) HOISTED FROM THE ARCHIVES: Daniel Gross Reads Michael Barone and Shudders (November 25, 2005):
As an analyst of business and economic trends, Michael Barone is a pretty good political analyst. Today, he pens a piece in the Wall Street Journal... places the blame for the decline of big industrial firms in sectors like steel and autoparts squarely on labor.... "Union-driven legacy costs have already force many steel compnaies adn airliens into bankrupty," he notes. It takes two parties to iron out labor agreements. And as much as unions like "legacy costs" -- for yuppies who labor over their keyboards, like Barone, that translates to health insurance and retirement benefits -- management liked them perhaps even more. Throughout the 1980s and 1990s... management of the Big Three continually agreed to deals with the unions that added legacy costs--in exchange for keeping current wages down, and hence [reported] profits up.... Worse, [Barone] celebrates the replacement of the value-adding, high-paying auto industry--which created jobs in dozens of related industries--with the rise of lower-paying, value-subtracting industries like gambling.
On the Michigan freeways going up north, the big attractions are not the UAW's cultural haven of Black Lake but Indian casinos and outlet malls... where people throng to win sudden riches or to take advantage of low prices.... The attempt, made when the economy seemed static, to promise security and leisure and restrained good taste, has failed. We remain, as we have been in most of our history, a nation of hustlers... who strive mightily to get ahead and advance their interests, enjoying the sometimes vulgar opportunities a dynamic economy provides.
Casinos are affirmatively not "places where people throng to win sudden riches." They're places where suckers, many of them people without much in the way of resources, throng to engage in rigged games in which the odds are always -- always -- against them.