New School Economic Review

When the U.S. last defaulted

by Benjamin on July 15, 2011

I am grabbing this across from a seperate blog (the history of economics playground) because I think this is something to bear in mind as the media enters its final stage of Debt-ceiling coverage over the coming fortnight. Of course there may be more, but for now…

Two things seem to be taken for granted in the current debt-ceiling debate: 1. The parties will come to an agreement on the debt ceiling because 2. These United States have never defaulted and will not start now. Well, Lexington has eight pretty good reasons why an agreement is not inevitable and as far as I can tell, the United States has defaulted in the past, and we need to recognize that fact…

The historical trick revolves around ‘these united states’ because these 50 States are somewhat recent. Hawaii and Alaska would finalize statehood in ’59. but various make-ups of the USA have indeed defaulted or re-structured its debt. Most recently – I think – was in 1933 when the then 48 State government refused to repay the gold annuity it owed to Panama. This was eventually repaid in 1936. I take that observation, and many more from Rogoff and Reinhart’s book (2010: 112-3) which I have commented on earlier.

We can add to that list debt restructuring in 1790, where interest was deferred by the government for ten years. Then there are State cases where the central government allowed default on debts and – I would suggest – implicitly accepts government default: 1841-42 when three States repudiated their debts altogether and 1873-83/4 where ten states were in default, with West Virginia not settling its account till 1919. One could throw in the confederate army debentures and bonds which for various reasons were never repaid to foreign investors, but whether that is legitimate US debt, I am not sure.

My point is simply that the USA has deferred, restructured or cancelled its debt before. If Lexington is right that “compromise may still be possible, but there is nothing inevitable about it,” then on track record you might expect to see an announcement to delay repayment of certain debts, for a long while, on 2 August.

Forget the Big Mac index, try penguin books instead

by Benjamin on June 5, 2011

Wandering about New Delhi I am always struck by the way that the markets are organised. Special areas are set aside in each residential quarter (or ‘colony’ in the vernacular) and people know what markets are good for what. So off we went to get some books at Aurobindo Market, and if you want price disparities, forget about the Big Mac index and have a look at the price of books. Books are homogenous products, they are easy to replicate (so piracy is usually easy) and global publishers sell the same good in all markets under the same rules (unlike McDonalds who will need to consider rent prices, franchise costs, hygiene regulation and local tastes).

I ended up buying a very large Penguin Classic, Kautilya’s The Arthashastra - think Macchiavelli meets Adam Smith but anno 300 BC in India, preceding and influencing Greek writers such as Xenophon. The total price was 599 rupees, or $13.36 US. That seemed a bit steep to me, but turns out that the same Penguin edition is $42.95 in the US. Of course $14 buys  you a lot more here than at Barnes & Noble on Union Square, but a quick check on the PPP rates suggested that what I paid for The Arthashastra was about $33 in PPP terms. It seems that Penguin is pricing this very academic book a little below par value for the world. But academic special interest books can be very expensive so I had a look at Stieg Larson’s The Girl with the Dragon Tattoo on the next shelf. 499 rupees, so $11.19, and how much for the same book on Amazon? $14.95 RRP, but yours on-line for $8.25… The nominal price on Union Square is lower than the price in Delhi??  The PPP price of this fiction work is around $27.

That only seems really mad if you consider that the average wage of well-paid, albeit low to medium skilled, labour in Delhi (lets take a driver) is around 10,000 rupees a month: So a paperback would constitute  5% of the monthly wage.  That is almost a full days wage to buy a book. Most New Yorkers can earn the price of a book in an hour or two. So where does that leave the market? Targetting a very small niche group for educational texts – with a global price point – and an even smaller niche for fiction and general reading material, which costs more than the global price. I am told similar patterns emerge for CDs, DVDs and other entertainment material. I wonder what the founder of Penguin Books would make of this, given that:

The first Penguin paperbacks appeared in the summer of 1935 and included works by Ernest Hemingway, André Maurois and Agatha Christie. They were colour coded (orange for fiction, blue for biography, green for crime) and cost just sixpence, the same price as a packet of cigarettes. The way the public thought about books changed forever – the paperback revolution had begun.

A pack of smokes costs above $11 in New York and 100 rupees in Delhi (although the local rolled variety are much less). Book prices have a long way to go in one of these locations, if Mr. Allens intentions are to be realised.

a new politics?

by Benjamin on May 20, 2010

This week something exciting / scary / interesting / curious… well, something NEW is happening. And it’s happening on both sides of the Atlantic. In Kentucky, a Tea Party candidate has won a republican primary to run for Senate, and in the UK, a conservative-liberal democrat coalition has formed the first coalition government since WWII. The popular name for the coalition is lib-con, although some have referred to it as con-dem’d. Maybe it is. Maybe the tea party will be short-lived. But for the moment we have a new UK coalition agreement, which thinks it “has the potential for era-changing, convention-challenging, radical reform.”  Only time will tell.

‘Middle class’ start at $40,000, so who’s poor?

by Benjamin on April 26, 2010

Who the devil are the middle-class? Development people talk of the ‘rising middle class’, political theorists of the ‘middle-class voting blocks’, pundits of the increasingly discontent middle classes. But who are these people and am I middle class? Are you? Is that a bad thing? Going by Wikipedia there’s a number of different definitions, based on educational background, employment, income, or simply as those people who are not ‘upper class’ and not ‘working class’. The middle class is the Solow residual of society. Nice.

Avoiding all this, and playing with US census data on family income distribution, it can be done differently. Take the median and mean family income (turns out it’s $61,355 and $78,845), and with a bit of linear extrapolation you can work out the income that the ‘middle’ of the income distribution earn, or the 50% of the population who earn between the mean-median and those evenly distributed around it.  (In the below graph, population as a percentage of total are at the top of the bars).

So what does that all mean? Well, the middle class, in terms of the ‘middle’ 50% of families, starts at approximately $40,000 p.a. It ends somewhere slightly above $100,000, and indeed there are more people below the middle class than there are above. So if you have a household income of $40,000 you are unofficially middle class.  Approx 30% of the population live below the middle class threshold and 20ish percent are above. None of this is exact, and we don’t know what the top of the distribution looks like, but we can say that society is not exactly even. The U.S. Gini coefficient has been rising, and peaked (temporarily?) in 2006 at 47, standing at 46.6 in 2008. What the recession will bring I don’t know. The poverty threshold in the US for a four-person family is $22,050, which leaves a lot of people under the line, as indicated by this beautiful graphic. From light to dark it illustrates the Poverty rates from 5% (light pink) to >40% (darkest red).

Courtesy of Wikipedia Commons

It seems to be getting darker and redder towards the middle and the bottom… Curious that.

The USA is really big

by Benjamin on April 2, 2010

I mean it’s economy is really big. Have a look at these very nice visualisations which make exactly that point from a GDP point of view:

Or if you’re more interested in the other ‘powerhouse’ economies of the world, consider this:

Big place and nice pictures to make that point…

Scary unemployment, worse than… well ever?

by Benjamin on September 7, 2009

The guys over at Calculated Risk drew a very nice graph on Friday showing just how bad the job loss situation is getting in the US. The graph compares the peak month of employment and shines some light upon the effect the recession is having on the economy. Only yesterday I found myself watching an interesting documentary by Current tv arguing that the U.S. first exported its jobs and has now exported its unemployment to China. Reliable Data from China is notoriously hard to come across, but the (little) anecdotal evidence seems to suggest that things might be worse there than in the U.S.

Click image for full screen version.

A tip of the hat to Rudi von Arnim for discussing the newly released U.S. unemployment figures.

Robert McNamara Passes Away

by Benjamin on July 8, 2009

A Young McNamara

Robert McNamara, Secretary of Defense during the Vietnam War, head of the World Bank until 1981 and the Washington Consensus, President of Ford and WWII strategist passed away on the 6 July 2009. A controversial figure who had an incredible impact on both development economics and economics in general, he will probably always be remembered as the person who first carpet bombed Vietnam only to go back an try to rebuild it. The British Guardian Newspaper have written a very good Obituary for a person who was so influential and so controversial.

On 1 November 1967 he [McNamara] expressed his reservations [about the Vietnam War] in a confidential memorandum to President Johnson. “I never received a reply,” he recalled later. “Four weeks later President Johnson announced my election as president of the World Bank and my departure from the defence department at an unspecified date. I do not know to this day whether I quit or was fired.”

Lord won’t you buy me, a Mercedes Benz

by Benjamin on April 22, 2009

The U.S. and UK always seem a bit desperate to save their flailing car industry one way or the other and build some demand for new cars, but why? Why not take a page out of the Danish book and keep the old car but get better servicing and fuel efficiency. That would also require a lot more mechanics…

The U.S. $14bn car bail-out failed in Senate a couple of weeks ago, but the government did find $300m to buy some energy efficient cars for themselves as part of the recovery spending (which can be tracked on the great and official recovery.gov). The UK today announced its ‘grand’ plan for the recovery and after blowing hundreds of billions to save a handful of banks,which have just started paying themselves bonuses again, one might have expected a little more. The government plans to cut spending. Yes… Cut spending. Go figure.

However, they have found a £2,000 ($2,900) discount for every person in the country who trades in a ten year old car which they have owned for more than 12 months for a new one… More demand for cars – but why?

Yes the auto industry employs a lot of people, but isn’t it time we start thinking a little about  what could be done? Denmark might have an option which could be useful. They have no auto manufacturing industry, so are free of lobbies in this industry and charge a rather monstrous 180% tax on the sales price of any new car (this is included in the sales price so you just notice that cars are really really expensive).

Seriously cheap in the US: $2.10 per gallon in NYC, compared to $4.92 in UK, $5.90 in Denmark, and $3.14 in India!

Then the gas/petrol is taxed heavily, making sure people try and avoid Humvees as much as they can, which is similar to the UK approach. Petrol is just $2.10 around New York City, but a hefty $4.92 per gallon in the UK, and $5.90 per gallon in Denmark. Note that even India charges more for the petrol ($3.14 per gallon) than New York City, so it is seriously cheap in the U.S. Finally Denmark has a green tax on cars – there’s no road tax or anything else any more, it’s just based on emissions etc. Everyone in Denmark has a car though, and everyone drives, so maybe such strict laws are not that detrimental.

So what can be done, first off, it probably won’t kill the U.S. auto industry to stop subsidising petrol prices and start taxing them, it would however shift the incentives away from ‘gas-guzzlers’ toward more efficient cars – which again would re-focus the car manufacturers towards cars that are internationally competitive. Then how about a big tax on selling a new car, and a simple green tax? In Denmark this has meant that new cars are bought very infrequently (never every second year as is usual in the UK), and the ones that are owned are serviced very regularly. Would this cut back on demand in the US and UK, possibly (although, it is hard to cut demand much further by now I suspect), but it would also create demand for a lot more car industry people, in terms of mechanics and repairmen, a vocationpeople from the auto industry already possess – so why not?

High Income and bad health?

by NSER Editorial Board on January 14, 2009

The World Bank in 2004 sought to explain socialist Cuba’s success in public health, and juxtaposed Costa Rica as a contender for similar public health gains, through the orthodox model which stresses ‘broad based growth’, backed by increased private investment. However a unique public institution (the Caja Costarricense de Seguro Social) for health and social security insurance better explains Costa Rica’s health advances, and its superior performance to some higher income Latin American countries such as Mexico and Argentina. The relationship between increased income and improved health is positive, but weak and fragile. Other factors which may be more important are: levels of education (especially of women), numbers of trained health workers, universal access regimes for health services, well coordinated public health institutions, decent housing, and the adoption of new technologies. The experience of Latin America tells us that greater attention must be paid to well-organized public institutions, including those which train health workers, arrange universal access to health services and ensure adequate water, sanitation and housing.

Download full paper here

Anderson, Tim. 2007. “Health, income and public institutions: Explaining Cuba and Costa Rica.” New School Economic Review 2(1): 22-37