New School Economic Review

Renminbi is up 5-25 percent: What global imbalance?

There has been much complaint from the US administration that the Chinese authorities should increase the value of their currency (vis-a-vis the dollar especially), because that would help re-adjust global balances and help the world out of recession. Having been forced to exchange money today, I noticed an interesting trend: Seems to me the Renminbi has already been revalued – but by the markets.

Against the Euro and British Pound the Chinese currency is up 8.42% and 7.45% over the last 12 months, less than its heights of 18-19% in November 2009 – but it’s up. For North American currencies, who are members of NAFTA of course, the picture is even starker: Against the Mexican Peso it’s up 21.35% and a staggering 26.39% against the Canadian Dollar (rates and graph here).

If we look to China’s neighbours, the picture is the same. Japan, Taiwan and India hover around the same levels as the European nations with a 8%, 9% and 13.5% depreciation of the local currencies relative to the Renminbi over the last 12 months. Other Asian nations, and major trading partners of China have seen their local currency depreciate by North American levels: Russia (21.7%), Indonesia (30.8%) and South Korea (36.6%) are all falling against the Renminbi. (data and graph here) .

That means the renminbi has already gone up in value against all the world currencies which make up their top 10 trading partners, both for imports and exports. It is only against the US Dollar, to which the Renminbi is pegged that the exchange rate has remained constant. So what to make of the US calls for a depreciation? Clearly this is not a call for a global re-adjustment, but a domestic re-adjustment. Two questions immediately come to mind: If US lobbying efforts are succesful, what should the magnitude of a re-adjustment be? 5% like Europe or 25% like North America? Secondly, could it be that U.S. monetary policy, as far as the exchange rate goes, is no longer set in New York but in Beijing?

93% of Icelandic voters refuse to pay back loan

This morning, Icelands voters said no thank you to the compromise between their government and the Anglo-Dutch claim for recompensation after the collapse of Landsbanki and the ICEsave scheme they ran, where British and Dutch people had saved a hefty $5.3bn. Reading that back, it seems unfair that the people of Britain and the Netherlands should not be compensated, but there is a rather important detail which is missed by the usual commentary on this. This money was not saved. It was invested. The people who chose to send their money to Iceland, did so as a calculated investment decision. In the UK that happened via a savings account with Landsbanki or putting your money into bonds or ISA’s.  The return was high while the perceived risk of an ISA – promoted by tax incentives from the UK government – was low.

5%+ return and no risk... Some things are too good to be true

But then Landsbanki went bankrupt and their English and Dutch branches shut down, unable to repay deposits, the host governments went for the Icelandic government’s jugular - demanding the repayment of all UK/Dutch money held in the banks. Two things strike me: 1. If you put your money into an ISA or bond with a foreign bank, you are an investor. If the investment doesn’t pay off, you lose. Why should the Icelandic population bear the cost of your bad investment choice? (They’re already paying for their own bad choices). If anyone is wondering why the Icelandic people voted NO to a $16,400 debt per capita yesterday, I think it was not just the amount of money. It was about not re-compensating bad investment choices by relatively richer foreigners. By the way, in the UK, the minimum deposits/investments ranged from $10,000-$50,000, which investors could deposit tax free – this is not a domestic savings account for the low income person. 2: If a bank goes bankrupt, it is the host governments responsibility to insure against deposits being forfeited, even when that bank is foreign – although one would expect some guarantees to have been lodged with the central bank prior to the banking license being issued. That leaves the buck with the UK and Dutch governments, not the Icelandic one. Not a pleasant prospect in this day of growing government deficits.

That last part is where the argument is now centered. But the fact remains that a large proportion of the money lost in the Landsbanki collapse were investments into bonds and ISA’s. Investments always have some risk, and I’m sure there isn’t the same outcry of government support for those people who lost money on the Icelandic bond or stock market. Why not? Because I think we’ve confused an investment for saving. Which is an easy mistake to make, they are supposed to equal after all.

The effects of crisis on distribution

Yesterday the New School played host to a veritable who’s who of economists concerned with distribution and inequality as “The Effects of Crisis on Distribution” one-day Conference. Over the coming days I will try and get some more of the content of the conference, but with sessions attended by the UN, World Bank, and several other institutions academic and policy-oriented the session on the perceived worsening of US inequality, development and the fall-out from the crisis there was a lot on the table. [the overview is here] Well done to the conference organisers, all of them students, who have been working at this since June! Conferences take time to do, but they are well worth it. Hope you’ve all had a good nights well-deserved sleep.

Ireland or America in 2050?

Our co-editor Stephen Kinsella recently published a book called “Ireland in 2050: How we will be Living” to a lot of popular press. Now a new book by Joel Kotkin seems to have borrowed its title from Kinsella, although it takes a little longer getting to the point with “The next hundred million: America in 2050.” Going by the reviews it seems that Ireland in 2050 is the better of the two books – but I haven’t read both, so can’t compare – although by their conclusions, it seems it would be better to be living in America come my 70th birthday.

Conservatives want collectivisation

Proof that the forthcoming British elections is confusing the old dividing lines of politics as the conservative shadow chancellor (wannabe Secretary of the Treasury) has declared that public sector workers will be encouraged to form small co-operatives if they want to oust bosses and claim power for the repressed public worker. I don’t know what’s next? George W. Bush as a motivational speaker? Republicans in congress against the war?

Couldn’t happen.

How big is the government really?

I am confused. Since seeing OECD statistics to the effect that the US government represented more than 40% of GDP in 2009 (available on the linked OECD site under USA> National Accounts>…) I have also checked BEA figures and UN data which both suggest it’s around 20% in terms of expenditure as a component of GDP. I don’t really know what’s going on, but I’m pretty sure something is amiss in this empirical debate. Perhaps there’s a mistake in translating quarterly and annual figures or maybe they’re just measuring different things. Either way, it seems rather odd.

This is particularly important to get right with a view to the rising interest in the ‘Tea Parties’ which are seen as a sign that the conservative movement is on the rise. I just wonder if a new more extreme conservatism won’t simply push republican  candidates to be more radical, alienating central voters and losing republican votes in the aggregate. It’s the old 2-party vs 3-party selection problem, and we know voter preferences are not perfect when you introduce a third option into a previous two-horse race.

Writing a great abstract

I’ve written quite a few abstracts by now, but after punching out two pages for my PhD, and having a relatively ok response to it, I read the university regulations: The word-limit is 300 words. THREE HUNDRED?? Are they mad, that’s not even a hundred pages per year at this stage – how the &%!£ is that supposed to be… Come on, conference papers usually get 250 words, so an extra 50 because its a Ph.D. Thanks.

So that was my initial panic. Now I remember working on a film-script which took 4 months some years ago, and we got how long to pitch it? 5 minutes. And of those, we only got to talk for 50 odd seconds. But we’d practiced for that – so how to practice this? I guess the story is similar for a book pitch. You want to write 80,000 words, good, but the editors wants to see 300 words that will make them read the whole abstract, excite them and then give you money to do the work. But I’ve never written a book before. With that mind-set I figured there had had to be lots of ‘how to write a great abstract’ papers out there. How wrong I was.

Thus far I have found two pieces of solid advice. The first is now written in big bold red across the header of my abstract, and the second is just below in black italics:

An abstract is not an introduction. It is a résumé of your thesis
………………………………………-Joe Wolfe, U. of New South Wales

More is in vain, when less will serve
………………………………………-René Descartes, 1638

Right. All I have to do is: Explain what I’ve done, how I did it, and the exciting results. Bad news: This blog post is 300 words long. Shit.

Visualize this

Visualisation is the new vogue in economics – and I think it’s official. I’ve been going on about Hans Rosling, Gapminder and Edward Tufte in the past, and now Rosling’s even been named Foreign Policy’s #96 top global thinker. Going by the top ten, that might not be a very wonderful list to be on, although it has a big chunk of economists in general. But I digress.

Visualisation is the new ‘cool’ thing to do in economics. The World Bank has their own visualiser and has even splurged on direct developer tools and on-line data simulation (called iSimulate, so one might expect the odd R-rated joke, as with the iPad). Both the IMF and even Eurostat has  joined the bandwagon, and the UK government is promoting data visualisation for its civil servants to use in the public sector. This is following a private sector trend, admittedly started by the Gapminder project, which is still – I think – the best of the lot, which explains why Google bought it back in 2007. But google operates their own visualiser straight on the search engine, and the Guardian runs a big data storage and visualisation site, to which David McCandless, of the excellent Information is Beautiful Blog contributes and writes for.

So where does all this visualisation lead? Well… for the moment it is a lot of fun and data can be revealing. That said, it needs to be combined with insight and planning before it will be much use to the day-to-day economist I reckon. Davind McCandless’ new book The Visual Miscallaneum (which I got today) goes a long way to inspire our use of graphics. Garr Reynold’s Presentation Zen books on Presentation and Design are good for helping us think about how to present (the first more so than the second I think). But the reality is that for the moment journals print graphs in black and white, with a bare minimum of design scope. And lets be honest, visualising the supply lines and bottlenecks in the confused and complicated Haitian (and similar) aid operations would probably be the most beneficial of all data visualisations – but that’s not being done, not yet at least.

Finance is back on the curriculum

At least, that’s what I saw to my disappointment as I perused the £1,000 plus ($1,500+) Easter school being offered by the venerable Royal Economic Society this April. Last year they talked about Auctions and Markets – interesting, but this year they have gone for “credit, business cycle and finance”.

I am being overly harsh. If the whole thing was a big collection of theoretical Merton-Scholes / Fama financial-theory-is-fantastic-don’t-worry kind of thing there would be good reason to criticise them. I still remember Nassim Taleb’s call to boycott any business school that continued to teach portfolio theory in 2009. They still do teach that stuff, but some of the things slated for the Easter school isn’t all bad. There seems to be a focus on empirical work, at least in the recent working papers on the first lecturer (Princeton’s Prof. Hyon Shin) and a lot of his recent work looks at financial intermediaries. The second lecturer (also from Princeton, prof. Hirotaki) seems interested in empirics, but only to the extent that they fit into “theoretical models”, and an older (pre-crisis, 2007) paper of Prof Shin’s uses the assumption that traders use Value-at-Risk models and finds that this may amplify shocks to the system if traders are risk neutral. A second very timely paper of his and Gara Afonso showed, in October 2008 no less, that:

banks attempting to conserve liquidity cause an increase in the demand for intraday credit and, ultimately, a disruption of payments. Additionally, we find that when a bank is identified as vulnerable to failure and other banks choose to cancel payments to that bank, there are systemic repercussions for the whole financial system.

I think this sounds rather interesting actually, although how much of the course will be talking about exciting empirical results and research, and how much will be on theory remains to be seen. I don’t think we need to throw Taleb’s book at these people, but I am not going to throw a grand their way either. Hey, there’s a recession ending over here, (with 0.1% growth), no need to go nuts just yet.

The Mainstream is Back; with prejudice

Ghostbusters meets Leviathan

If you saw the front page of the economist this week you might quickly conclude that the Washington Consensus and Neo-Classical economics is back in the ascendancy. “STOP!” shouts the front page, “The backlash against big government” and a suitably Leviathan-cum-Ghostbuster’s-Slimer picture swallowing the poor citizen follows. That the poor citizen looks like a suited and booted businessman is probably a freudian slip, but the image tells the story. Let business get on with its work and start cutting back on the government.

For the first time, to my memory, the front page leader runs onto the second page, and the reason is simple. The Economist is confused. It wants to encourage us to cut back on the government, limit its impact but it also wants us to support banks being propped up, government stimulus packages and systems of governance by that same government (a lesson of Haiti if not the global recession).  So why is the Economist promoting and opposing ‘big’ government in the same editorial?

Their problem is one of prejudice, of ideology. Don’t take my words for it, the Economist is refreshingly open in stating the ideology to which it clings after reality has illustrated the problems with lack of government intervention in market places:

In these circumstances, hard rules make little sense. But prejudices are still useful – and this newspapers prejudice is to look for ways to make the state smaller. That is partly for philosophical reasons: we prefer to give power to individuals, rather than governments. But pragmatism also comes into it. (Economist Jan 23: Leader p. 9)

They can’t be serious! They oppose government on the philosophical grounds that individuals need to be empowered and protected from big scary states. So much for empirical evidence. Surely, if there’s anything the last 12 months have shown us it is that the individual is not under threat from the state as the leviathan in the 21st century. Yes in the 17th century when Hobbes wrote his book the state was all powerful (Think Cromwell). And if we talk of Myanmar or such states then yes sure. But in today’s market economy the label of Leviathan should be applied to those enitites ‘too big to fail’ – companies.

Hobbes's 1652 Leviathan was the government. Ours may be the firm

Banks have been given a bad reputation these last months, but for good reason. Oil, media, pharma, cigarettes, software – all of these industries have their monopolists and their scare stories. Aren’t they the 21st century  leviathan? What governments try to do is to support both companies and individual citizens. Where the company is responsible to the shareholder, the government is responsible to the electorate – sort of. The pragmatism refered to by the Economist is their fear of government mandarins directing private activity. A fair concern, but is that any more fair than worrying about the lobbying and advertising campaigns of monopolies and oligopolies? Too quickly will we forget what has happened in the last year, and move back to a trajectory of prejudice and ideology without understanding the economy or its features.

I wish that the academic economic community would be as open as the economist in declaring its inherent biases or perhaps investigating them. Yes, David Colander and others talked about how we should change the way we teach economics as a result of the crisis at this year’s AEA meeting, but he’s been saying that for a while and I don’t think anyone will change their ways. Sad.