economics productivity

One of the hardest things to explain to non-academics (or non-economists) is the length of time it takes to publish a paper in economics. Quality control? There is a well-known paper by Glenn Ellison (2002) arguing that there is nothing in that. Economists, high-priests of efficiency, actually run a remarkably inefficient system overall (yes, I am waiting for a first-round decision on a submission I made in the summer of 2011). What is the aggregate effect? James Choi reports that economists today are markedly LESS productive than earlier generations:

Negative productivity consequences of long economics journal review times

Ellison (2002) documents that the time an economics paper spends at one journal between submission and publication has more than doubled over the last thirty or so years. ... Intuitively, one would expect that, ceteris paribus, increased publication lags would make it more difficult for members of recent cohorts to produce as long a curriculum vitae in six years as earlier cohorts. ...

[W]hen we look at the number of AER equivalent papers instead of pages published at the end of six years... we find large and statistically significant drop-offs in productivity over time for graduates of both the top and non-top thirty departments. By this measure for graduates of the top thirty programs, the oldest cohort [1986-88 Ph.D. graduates] is 51% more productive than the middle cohorts [1989-94 graduates] and 72% more productive than then youngest [1995-2000 graduates]. The middle cohorts in turn, are 14% more productive than youngest cohorts.
Thus, unless we believe that recent graduates are fundamentally of poorer quality, the same quality of tenure candidate is significantly less productive today than 10 or 15 years ago.

How to rescue the Euro?

I am on the Inet Council on the Eurozone Crisis. Yesterday, we published a statement on what to fix if one wanted to get serious about resolving the current mess... it's a tall order, with possible debt mutualization and changes to the remit of the ECB on the table. The change in what counts as alarmist and excessively negative over the last 9 months or so is really quite striking. Even half a year ago, one could not say "end of the Euro" without the majority of listeners shaking their heads and saying "surely it won't come to that." Personally, I am sceptical that Europe has the political will (and economic acumen) to sign up for such the monumental effort that we wrote into INET program to save this failing project, but we'll see.

How will the end come, if it does come? One can speculate endlessly, but I think we have a likely scenario now: Spain will lose market access in a matter of weeks, meaning that bond yields hit 8%+, and the Spanish government gets a full-blown bailout. A Greek exit, extremely likely now, will hardly matter. But Italy will starts to wobble once Spain goes, and there is no chance in hell that Northern European countries have the stomach for the bailout required in the case of Italy. Then, it is either monetization of debt issues by the ECB, or game over. The hard-money countries are now in a minority on the ECB council... and once they push for vote for the home team, the Germans may decide to bail out. Probability? ~50%, if you ask me. 

Capital

is now leaving Spain at a rate of ~50% of GDP, annualized, according to CreditSuisse. The details are over at creditwritedowns.com

Last week also brought a massive new austerity program from the Spanish government, worth ~65 bn €, or 6.5% of Spanish GDP. Up goes VAT, down the pay for civil servants, etc. While retail sales are falling at 10% p.a., that is a really smart move. As I predicted in January, after the last austerity program, growth will slump, fiscal revenue will dry up, and nothing gets better. That turned out to be exactly right, and this new program will make matters worse. Of course, if you have to make a mistake, make it at least twice... in six months. The bond market is not impressed - it worries more about growth than about the deficit.

Student Guest Post: Monetary Folly Edition

As part of our series of ITFD student project summaries as guest posts, here is the latest thinking (by Alex Ballantyne, Julian Ebner, Thomas Jones, and Sam Chapman) on the potential benefits of QE in the Eurozone:

Last week the ECB cut their main policy rate by 25 basis points in response to decreased inflationary pressure stemming from weak growth outlooks in the Eurozone. Policy rate adjustment is unsurprising given the evolution of financial and economic indicators in the second quarter; however, in light of the severity and persistence of the current crisis it appears trivial. Indicators show that the relief provided by large injections of liquidity from the ECB’s Longer Term Refinancing Operations (LTROs) in December 2011 and February 2012 was only temporary. Once again rising sovereign bond yields and uncertainty over banks’ solvency (particularly within Spain) dominate the headlines of the financial, and mainstream, press. Alleviating Europe’s woes requires addressing three inter-related trouble spots: sovereign default risk, bank solvency, and weak growth prospects. It is unrealistic to believe that small adjustments in the ECB’s policy rate will have a substantial impact in all these areas.

There is mounting evidence that large monetary interventions from the ECB are not only desirable, but necessary. The LTROs were a much publicised attempt at providing such an intervention; however, evidence suggests that their impact has been confined to the banking sector alone and left the other two trouble spots largely unaffected. An impaired bank lending channel has failed to improve lending conditions for non-financial firms, thus preventing the transmission of liquidity to the real economy (left graph). The LTROs’ effect on sovereign yields appears to have been confined to Italy and Spain and even there it has been mostly temporary (right graph).

In place of liquidity provision to banks, monetary policy should address all three trouble spots in a more direct fashion. Evidence from the recent Bank of England and Federal Reserve interventions suggests that purchases of sovereign bonds on secondary markets, commonly referred to as quantitative easing, have been effective in lowering sovereign yields. In turn, this provides banks with the opportunity to improve liquidity while reducing their exposure to sovereign risk. Stimulating growth through improvements in non-financial firms’ borrowing conditions is a less tractable objective. Lending to banks conditional on loan expansion, or even direct lending to non-financial firms, by the ECB are attractive policy options. Recently, the UK Treasury and Bank of England have embarked on a joint initiative to ensure liquidity provided to banks is transmitted to non-financial firms. The ECB should follow suit with similar policies.

Objections to such unconventional policies are often raised, usually stressing the costs of inflation and moral hazard. Exactly how high these costs would need to be to outweigh the benefits of the policies proposed above is nearly impossible to pinpoint; however, a slightly higher, yet stable, level of inflation is quite unlikely to tip the scales. In any case, the costs of non-intervention are starkly evident and only increase with further hesitation, potentially endangering the prosperity of an entire generation. An obsession with one-dimensional monetary policy targets has proven destructive in past crises, most prominently the Great Depression. If the ECB continues down its current path, one would be tempted to cast it in the role of Nero, fiddling as Rome burns. 

Email from a failing state

It's over a year ago that the Greek education ministry asked me to act as an evaluator for their research projects. One gets many requests like this... over the years, I have evaluated proposals for the Israeli Science Foundation, the NSF, ERC, and the UK's ESRC, inter alia. I thought it might be interesting... and so it proved. First, the program is really generous. As in - I cannot believe they are spending so much money generous. The research project funding is allocated 120 million; maximum for each grant, 600,000. That in a country of 11 million people -- that's more than 10 euros for every man, woman, and child, on average. I don't know what the aggregate number for Spain is, but I can tell you that research funding here is now really pretty miserable - even worthy projects get piddling amounts of funding, if any.

The project I was assigned was GOD AWFUL. I mean, truly, truly awful, as in "i don't know who let these people into a university, let alone teach there". Fine, this happens. I said what I thought, and figured it was the last of it... and then the emails started. One, two, three. Would I not wish to reconsider? Here is how to change your feedback! Do I really want to say that? Amazing. As if I had somehow had a bad day, and giving a low mark to a project was somehow insulting. The emails never quite said it, but they were telling me to give a better mark, indirectly. I didn't. Now, that was last year September. Now (July), I get an email saying they would like to pay me for my services (!). First, this is a bad sign; you don't get paid for this, you do it to further scholarship. Second, it is amazing that it takes so long... a year? Really? For an email? Third, there was no promise of payment initially. The original emails all came from minedu.gr. This request comes from thalis_payments@epeaek.gr, asks for a lot of details about my bank account, and looks about as official as your average Nigerian scam. I think I will give this one a pass...

Spanish bond yields surge

Spain's ten year bond yield hit 7% today. At levels such as these, the other PIGS got support through European bailouts. Nobody can be surprised by the fact that the 100€ bn of extra debt that Spanish taxpayers will have to carry due to the banking rescue has not calmed markets - more European multilateral debt means less debt capacity for everyone else, like the ordinary Joe Bloe's who lost a shirt or two in Greek bonds. The debt dynamics are now getting seriously interesting, in a very Greek kind of way -- at borrowing costs such as these, the primary surplus needs to rise a lot. Taxes have hit the Laffer point, where raising rates won't give you much more yield, and may damage growth so much that revenue actually falls. True, there is a lot of untaxed income, but getting at it takes a long time and plenty of state-building. So spending cuts are logical, but they will also produce a deeper recession. So with a primary surplus too small, it looks as if the debt service is not sustainable; interest rates rise further. In no time, only the European partners will be able to offer funds, and even they may give up given the size of the package necessary. When the Euro dies, remember June 14, 2012, when the first European country that is too big to bail out saw its interest rates rise to unsustainable levels. Of course I hope I am wrong, but it is hard to be optimistic at this stage...

Just hand over the cash

Spain has just announced it will be asking for €100 bn in European aid to recapitalize its banks. This was coming for some time now. The only problem was that the dithering and incompetent Madrid team felt it would hurt national pride too much if, in exchange for aid, there were conditions attached. So now we get aid to Spanish banks, not to Spain. Note that this follows the familiar European pattern of announcing great-sounding initiatives, without much of the nitty-gritty clear at all. Neither the EFSF nor the ESM can actually recapitalize banks at the moment. So instead of clarifying things, this will actually cause more anxiety and uncertainty. Second, the aid will be in the form of loans to Spain, via FROB, the Spanish government's recapitalization vehicle. The success of the Paulson plan (beautifully analysed by Veronesi and Zingales) seems to suggest that one should instead go for direct equity injections, with European shareholders having real oversight.

The Spanish regulators - mainly the Bank of Spain - will remain in charge, and therein lies the problem: The idea that the same clown show that gave us Bankia, Catalunya Caixa and CAM is now receive a cool €100 bn in European money without real oversight is sickening. What's worse is the absence of any discussion WHY these banks should be rescued at all. If Bankia, for example, was wound up, the depositors would still be paid. Would the country suffer? The only reason to do bank rescues is to protect "intermediation capital", a mythical property said to reside in the heads of certain bankers - the ability to say, yes, this is a good borrower and I will lend to him, based on past experience, intimate knowledge of an area, clientele, or industry. The fact that Bankia and CAM are now effectively bankrupt tells you that there was no intermediation capital there in the first place, just a lot of venal rent-seeking. Surely the best thing would be to put the financial institutions that are below a sensible equity threshold into bankruptcy, with depositors paid out and the financial firm shut down. That way, the better banks like BBVA and Santander would pick up the slack, win customers and make money; the incompetent bankers could go and join the long queues of unemployed. Ideally, this should have been done with all the small, bust cajas, instead of merging them into things like Bankia - in the US, small banks fail all the time, and nobody panics.