Category: Economic Crisis

Reduce Spending for Stronger Economy

GovernmentSpendingGraph2011-04-25.jpgSource of graph: online version of the WSJ article quoted and cited below.

(p. A17) To the extent that government spending crowds out job-creating private investment, it can actually worsen unemployment. Indeed, extensive government efforts to stimulate the economy and reduce joblessness by spending more have failed to reduce joblessness.

Above all, the federal government needs a credible and transparent budget strategy. It’s time for a game-changer–a budget action that will stop the recent discretionary spending binge before it gets entrenched in government agencies.
. . .
We can see such a sensible budget strategy starting to emerge. The first step of the strategy is largely being addressed by the House budget plan for 2011, or HR1. Though voted down in its entirety by the Senate, it is now being split up into “continuing” resolutions that add up to the same spending levels.

For the full commentary, see:

GARY S. BECKER, GEORGE P. SHULTZ AND JOHN B. TAYLOR. “OPINION; Time for a Budget Game-Changer; Assurance that current tax levels will remain in place would provide an immediate stimulus. House Republican budget planners are on the right track.” The Wall Street Journal (Mon., APRIL 4, 2011): A17.
(Note: ellipsis added.)

In Greece It Is Illegal for Brewers to Produce Tea

PolitopooulosDemetriGreekEntrepreneur2011-03-09.jpg “Demetri Politopoulos at his microbrewery in northern Greece. He says Greek leaders need to do more to make the country an easier place to do business.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) DEMETRI POLITOPOULOS says he has suffered countless indignities in his 12-year battle to build a microbrewery and wrest a sliver of the Greek beer market from the Dutch colossus, Heineken.

His tires have been slashed and his products vandalized by unknown parties, he says, and his brewery has received threatening phone calls. And he says he has had to endure regular taunts — you left Manhattan to start up a beer factory in northern Greece? — not to mention the pain of losing 5.3 million euros.
Bad as all that has been, nothing prepared him for this reality: He would be breaking the law if he tried to fulfill his latest — and, he thinks, greatest — entrepreneurial dream. It is to have his brewery produce and export bottles of a Snapple-like beverage made from herbal tea, which he is cultivating in the mountains that surround this lush pocket of the country.
An obscure edict requires that brewers in Greece produce beer — and nothing else. Mr. Politopoulos has spent the better part of the last year trying fruitlessly to persuade the Greek government to strike it. “It’s probably a law that goes back to King Otto,” said Mr. Politopoulos with a grim chuckle, referring to the Bavarian-born king of Greece who introduced beer to the country around 1850.
Sitting in his office, Mr. Politopoulos took a long pull from a glass of his premium Vergina wheat beer and said it was absurd that he had to lobby Greek politicians to repeal a 19th-century law so that he could deliver the exports that Greece urgently needed. And, he said, his predicament was even worse than that: it was emblematic of the web of restrictions, monopolies and other distortions that have made many Greek companies uncompetitive, and pushed the country close to bankruptcy.

For the full story, see:
LANDON THOMAS Jr. “What’s Broken in Greece? Ask an Entrepreneur.” The New York Times, SundayBusiness Section (Sun., January 30, 2011): 1 & 5.
(Note: the online version of the article is dated January 29, 2011.)

Estonia Re-Elects “Government that Continued to Embrace Laissez-Faire Capitalism”

(p. A5) MOSCOW — Early results in Estonia’s parliamentary election on Sunday showed the ruling coalition headed for a victory, in a remarkable show of support for a government that has imposed harsh austerity measures to lift the country out of recession.
. . .
The vote reflects approval for a government that continued to embrace laissez-faire capitalism during the painful months after the global downturn. After Estonia’s economy shrank nearly 15 percent, the state reduced its budget by the equivalent of 9 percent of gross domestic product. Demand fell steeply, and unemployment crept up, early in 2010, to 19.8 percent.
But in contrast to their neighbors in Latvia, where economic troubles led to riots and the government’s collapse, Estonians stoically absorbed the suffering. These sacrifices allowed Estonia to join the euro zone in January, a move its leaders hailed as a sign that the country was on its way to achieving Western European standards of living. Meanwhile, the economy has been projected to grow by 4 percent this year, and unemployment has dropped to around 10 percent, according to the Estonian Unemployment Insurance Fund.

For the full story, see:
ELLEN BARRY. “After Cuts, Voters Back Ruling Bloc in Estonia.” The New York Times (Mon., March 7, 2011): A5.
(Note: ellipsis added.)
(Note: the online version of the article is dated March 6, 2011.)

Warren Buffett Says “the American System” Unleashes “Human Potential”

(p. 16) Mr. Buffett said Berkshire last year spent more than $5 billion on property and equipment in the United States – more than 90 percent of the company’s total expenditure – and that the overwhelming part of the company’s future investment will be at home.

“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective,” he wrote.
“Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

For the full story, see:
PETER LATTMAN. “Buffett Plans to Buy Local, Investing Mostly in the U.S.” The New York Times, First Section (Sun., February 27, 2011): 16.
(Note: the online version of the article was dated February 26, 2011 and has the title “As Berkshire Improves, Buffett Sings Praises of U.S.”)

Caballero Worries about the Relevance of Mainstream Macro Modeling

In the past, I have found some of MIT economist Ricardo Caballero’s research useful because he takes Schumpeter’s process of creative destruction seriously.
In a recent paper, he joins a growing number of mainstream economists who worry that the recent and continuing economic crisis has implications for the methodology of economics:

In this paper I argue that the current core of macroeconomics–by which I mainly mean the so-called dynamic stochastic general equilibrium approach–has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in “fine-tuning” mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in “broad-exploration” mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

Source:
Caballero, Ricardo J. “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome.” NBER Working Paper # w16429, October 2010.

The paper has been published as:
Caballero, Ricardo J. “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome.” Journal of Economic Perspectives 24, no. 4 (Fall 2010): 85-102.

Occupational Licensing Adds Billions a Year to Cost of Services

PercentageWorkersLicensedGraph2011-02-27.jpg

Source of graph: online version of the WSJ article quoted and cited below.

(p. A1) . . . economists–and workers shut out of fields by educational requirements or difficult exams–say licensing mostly serves as a form of protectionism, allowing veterans of the trade to box out competitors who might undercut them on price or offer new services.

“Occupations prefer to be li-(p. A16)censed because they can restrict competition and obtain higher wages,” said Morris Kleiner, a labor professor at the University of Minnesota. “If you go to any statehouse, you’ll see a line of occupations out the door wanting to be licensed.”
While some states have long required licensing for workers who handle food or touch others–caterers and hair stylists, for example–economists say such regulation is spreading to more states for more industries. The most recent study, from 2008, found 23% of U.S. workers were required to obtain state licenses, up from just 5% in 1950, according to data from Mr. Kleiner. In the mid-1980s, about 800 professions were licensed in at least one state. Today, at least 1,100 are, according to the Council on Licensure, Enforcement and Regulation, a trade group for regulatory bodies. Among the professions licensed by one or more states: florists, interior designers, private detectives, hearing-aid fitters, conveyor-belt operators and retailers of frozen desserts.
. . .
Mr. Kleiner, of the University of Minnesota, looked at census data covering several occupations that are regulated in some states but not others, including librarians, nutritionists and respiratory therapists. He found that employment growth in those professions was about 20% greater, on average, in the unregulated states between 1990 and 2000.
Licensing can also drive up costs to consumers. Licensed workers earn, on average, 15% more than their unlicensed counterparts in other states–a premium that may be reflected in their prices, according to a study published by the National Bureau of Economic Research and conducted by Mr. Kleiner and Alan Krueger, an economist at Princeton University.
Mr. Kleiner estimates that across the U.S. economy, occupational licensing adds at least $116 billion a year to the cost of services, which amounts to about 1% of total consumer spending. In a look at dentistry, Mr. Kleiner found that the average price of dental services rose 11% when a state made it more difficult to get a dental license.

For the full story, see:

STEPHANIE SIMON. “A License to Shampoo: Jobs Needing State Approval Rise.” The Wall Street Journal (Mon., February 7, 2011): A1 & A16.
(Note: ellipses added.)

JobsNeedingStateLicenseTable2011-02-27cropped.jpg“Some of the jobs that require licensing in one or more states.” Source of caption and table: online version of the WSJ article quoted and cited above.

Kappos Says Private Company Would Have Run Patent Office Better

KapposDavidPatent2011-02-27.jpg “David Kappos of the Patent Office, with an Edison bulb.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) “There is no company I know of that would have permitted its information technology to get into the state we’re in,” David J. Kappos, who 18 months ago became director of the Patent and Trademark Office and undersecretary of commerce for intellectual property, said in a recent interview. “If it had, the C.E.O. would have been fired, the board would have been thrown out, and you would have had shareholder lawsuits.”

Once patent applications are in the system, they sit — for years. The patent office’s pipeline is so clogged it takes two years for an inventor to get an initial ruling, and an additional year or more before a patent is finally issued.
The delays and inefficiencies are more than a nuisance for inventors. Patentable ideas are the basis for many start-up companies and small businesses. Venture capitalists often require start-ups to have a patent before offering financing. That means that patent delays cost jobs, slow the economy and threaten the ability of American companies to compete with foreign businesses.

For the full story, see:

EDWARD WYATT. “U.S. Sets 21st-Century Goal: Building a Better Patent Office.” The New York Times (Mon., February 21, 2011): A1 & A3.
(Note: the online version of the article is dated February 20, 2011.)

Bloggers See Bad Conditions for Entrepreneurs

conditions.gif

The chart above and the one below are from the recently-released results of the First Quarter 2011 influential blogger survey conducted by the Kauffman Foundation. (Tim Kane gave permission to put the charts on my blog.) artdiamondblog.com is one of the blogs included in the survey.

The results above show a perception that conditions are currently tough for entrepreneurs. The chart below displays one of the main reasons: the current economy is perceived as uncertain and fragile. There are many reasons for the uncertainty, but one of them is surely that the bloggers have doubts about the depth of support in government for the institutions and policies upon which entrepreneurship depends (like private property, restrained regulations, and low taxes).

For a full PDF report on the 2011 Q1 survey results, see:
http://www.kauffman.org/uploadedfiles/econ_blogger_outlook_q1_2011.pdf

word-cloud.gif

Those Who Paid Attention to Risk, Did Better in Crisis

DownsideRiskCROcentralityGraph2010-1.jpgSource of graph: screen capture from p. 43 of NBER paper referenced below.

At the American Economic Association meetings in Denver from January 6-9, I attended several sessions dealing the causes and cures of the economic crisis of the last few years.
One issue that came up more than once was whether, and to what extent, various decision makers were blameworthy in what happened. Was this a crisis that well-trained, hard-working and prudent managers, regulators and legislators should have seen coming? Or was it a once in 100 year storm that nobody should be expected to have foreseen?
One compelling bit of evidence was presented in a talk on January 8th by Charles Calomiris in which he presented a graph from a 2010 NBER paper by Ellul and Yerramilli. The graph, shown above, indicates that firms that took risk seriously, as proxied by their giving an important pre-crisis role to a Chief Risk Officer (CRO), tended to suffer less downside volatility during the crisis.

Source:

Ellul, Andrew, and Vijay Yerramilli. “Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies.” NBER Working Paper # 16178, July 2010.

A Late Bronze Age “Cornucopian Example of Multiculturism”

BronzeAgeContainer2010-12-20.jpg“Influences from Egypt and Mediterranean Asia appear to merge in this container, from around 1390 to 1352 B.C.” Source of caption and photo: online version of the NYT article quoted and cited below.

The cultural flowering (see above and below) brought about by Late Bronze Age Mediterranean trade, is highly compatible with arguments made in Tyler Cowen’s Creative Destruction, which argues that capitalism promotes the important kind of diversity that within cultures increases creativity and options for individual choice.
It would be interesting and useful to know more about the causes and effects of the dark age mentioned below–the one that started around 1200 BC. An earlier entry mentioned archeological evidence of a small family group near Katilimata on Crete who attempted to hunker down to defend themselves and their property from the invaders from the sea mentioned below.
Sometimes the Phoenicians are given credit for the trade, and Paul Johnson in his recent Heroes book (p. 4), identifies the evil invaders who killed the trade as being the Philistines.

(p. C28) For a truly cornucopian example of multiculturalism, though, nothing matches the contents of the Late Bronze Age merchant ship recovered from the sea off the southern coast of Turkey. Discovered by a sponge diver in 1984 and considered the oldest surviving example of a seagoing ship, it probably sank around 1300 B.C., packed with cargo representing a dozen cultures, from Nubia to the Balkans.

Although the ship’s home port is unknown, it appears to have traveled a circular route through the Mediterranean and Aegean, stopping in Greece, Crete, Turkey, Syria and Egypt, picking up and unloading as it went. Bulk materials included copper ingots, Cypriot pottery, African wood and Near Eastern textiles, all for waiting markets.
Divers also found luxury items, possibly personal possessions of the ship’s crew and passengers. Examples of ivory containers in the form of ducks have parallels with Egyptian prototypes, but were probably made in Mediterranean Asia. The two sources merge in a figure found in a tomb: a nude female swimmer with a chic, Nile-style pageboy who is hitching a ride behind an ivory-headed bird.
More precious and enigmatic is a standing bronze figure of a woman, probably a goddess, her head and face still covered with the sheet gold that may once have encased her whole body in a radiant epidermis. The exhibition catalog suggests that she might be a talismanic charm intended to protect the ship from harm.
Harm came anyway, as it did to much of the Mediterranean world, around 1200 B.C. with the arrival of mysterious, sea-based invaders, who conquered most of the great maritime cities, interrupting trade and easy cultural exchange, and bringing on a dark age, a depression. The depression — or was it severe recession? — didn’t last forever. The passion for acquisition, exchange and accumulation survived it, as it always does.
This passion is, of course, our own. It is one reason that we can, if we try, identify with the diverse people who, thousands of years ago, made the objects in this show. The globalist, all-in-it-together world model they invented is another reason. Their dark age could be one too.

For the full review, see:
HOLLAND COTTER. “Art Review; ‘Beyond Babylon’; Global Exchange, Early Version.” The New York Times (Fri., November 21, 2008): C23 & C28.
(Note: the online version of the review has the date November 20, 2008.)

The Cowen book mentioned in my initial comments, is:
Cowen, Tyler. Creative Destruction: How Globalization Is Changing the World’s Cultures. Princeton, NJ: Princeton University Press, 2002.

The Paul Johnson book mentioned in my initial comments, is:
Johnson, Paul M. Heroes. New York: HarperCollins, 2007.

Government “Gave People the Crazy Juice”

BoettkePete2010-12-19.jpg “Peter J. Boettke of George Mason University is the emerging standardbearer for a revived Austrian school of economics.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. B1) Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls “dress Crocs,” hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people’s ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.
To these free-market economists, government intrusion ultimately sows the seeds of the next crisis. It hampers what one famous Austrian, Joseph Schumpeter, called the process of “creative destruction.”
. . .
(p. B3) It wasn’t a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership “gave people the crazy juice,” he says.

For the full story, see:
KELLY EVANS. “Spreading Hayek, Spurning Keynes; Professor Leads an Austrian Revival.” The Wall Street Journal (Sat., AUGUST 28, 2010): B1 & B3.
(Note: ellipsis added.)