of apes and men

Scientific American has an excellent article on group violence and socio-economic stress, by Eric Johnson:

The portrait of a powerful leader was pulled from the wall and sent dangling from a balcony as angry voices below cursed him and the other “fascists” believed responsible for their condition. One man, a lathe operator who had gone on strike, ran onto the balcony holding up two plates loaded with cheese and sausage. “Look and see what they eat,” he shouted to the crowd below, “yet we cannot get such food!”
The Novocherkassk riot on June 2, 1962, was Soviet Russia’s largest public uprising to date. More than two thousand took to the streets in response to the Communist Party’s decision to increase food prices by 30 percent at the same time that wages were being reduced. Workers walked out on the job, students left their classrooms, and men and women of all ages joined the chorus of protest. The crowd marched peacefully through lines of soldiers backed by armored vehicles that had been hastily assembled and went to voice their grievances directly with a communist government that claimed to be on the side of the worker.

There are clever observations from biology as well... a great read.

The Finally Final Deal

... to save the Euro. Yawn. I was on Monocle Radio and Berlin Inforadio during the recent Brussels summit, trying to explain how the latest package was going to help. It's not an easy question. While British isolation garnered a lot of headlines, the substance could hardly be more depressing. First of all, the much-touted "fiscal union" is no more than a growth-and-stability (for which, read, austerity-and-stagnation) pact writ large. Let's forget the problem that the old rules were never implemented, and skip over the question why these ones should be. Austerity is the answer, with debt-brake rules to be written into constitutions, etc. The idea that this will solve anything is more of a collective form of delusion (along the lines Benabou's brilliant paper) than economic policy proper. Sure, it would have been nice if Greece and Italy had saved a bit more during the noughties. But take Spain - it ran government surpluses for much of the post-Euro time. It had debt-to-GDP ratios way below Germany's for much of the time. Even if the current treaty had been in place (and implemented) have helped? Not at all. Spanish wages and prices won't fall by 20%, to make the country more competitive, any time soon. It'll take 10 or 20 years until German wages have risen enough so that Spain restores competitiveness and can seriously start to export. Of course, as house prices slide ever faster, it'll become easier to fill the export gap with asset sales. But effectively - a few niceties apart - the current setup condemns the Club Med to decades of stagnation and high unemployment.

The best thing that could happen? Another Black Wednesday. On Sept 16, 1992, Britain was ejected from ERM, due to a speculative attack by George Soros - an event much lamented in the press back then. It turned out to be a great blessing for Britain, which avoided the worst of the early-1990s recession and entry into the Euro as a result. The recent rout in bond markets, if it were to resume (and I see little reason why it shouldn't) could play a similar role, ejecting Spain and Italy from the Eurozone. In the short term, there would be real blood on the floor -- banks needing recapitalization, capital flight, etc. But in a few years time, people would recognize it for a heavily disguised blessing -- the only plausible way out of the current stagnation and austerity union.

my Spanish elections review...

on Bavarian radio [in German].

optimism out of nowhere

Markets today were "upbeat" about the prospects of an eventual Eurozone rescue... the basis? Some vague reports that the Germans are pushing for....? You guessed it, tougher fiscal rules. Exactly what Europe needs. Sigh. Just like Germany definitely needed another wage-and-price-cutting package in 1931. How is that going to help? Let's see... more austerity will be a tit-for-tat. In exchange, the ECB will buy everyone's bonds in a bid to make that nasty PSI aftertaste go away (that grand idea of scr**ing Greek bondholders so as to reassure the others). That is what some people think. It's part of that true-and-tested model that says - if things are really bad, they will get better, because now people need to do something. Except that they haven't. For about 18 months. My take? Never underestimate human stupidity. I will believe it when I see it. The German government has decided that, after pretending that Greece had a liquidity problem (when it actually had a solvency one), everyone now has a solvency problem (even if the issue is liquidity and self-fulfilling prophecy scambles for the exit). I am waiting for the market counterreaction when people realize that there is only tit, and no tat...

more war, better states...

Good things come to those who wait... and Nicola's and my paper on state capacity and war has certainly taken a bit of time. The idea? In many historical accounts of the rise of states in Europe, war does the heavy lifting: You fight more, hence you invest more in centralization, bureaucratization, tax raising, etc. There are two problems with this: First, warfare is not exactly an early modern European exclusive. Hunter-gatherer societies have lots of violent death; there are no strong hunter-gatherer states. Second, war means that you can disappear as an independent power, as did Poland, Burgundy, and a long string of independent states and statelets in early modern Europe.

Nicola and I decided to put things together in a single model that can explain 1. divergence between powers 2. a rise in state capacity as the cost of warfare escalates. The abstract is:

In 1500, Europe was composed of hundreds of statelets and principalities, with weak central authority, no monopoly over the legitimate use of violence, and multiple, overlapping levels of jurisdiction. By 1800, Europe had consolidated into a handful of powerful, centralized nation states. We build a model that simultaneously explains both the emergence of capable states and growing divergence between European powers. In our model, the impact of war on the European state system depends on: i) the importance of money for determining the war outcome (which stands for the cost of war), and ii) a country's initial level of domestic political fragmentation. We emphasize the role of the "Military Revolution", which raised the cost of war. Initially, this caused more internally cohesive states to invest more in state capacity, while other (more divided) states rationally dropped out of the competition. This mechanism leads to both increasing divergence between European states, and greater average investments in state building on the continent overall.

The arithmetic gets better and better

Over at WSJ marketbeat, they report on Goldman Sachs' latest thinking re the Greek restructuring. They seem to have concluded that the proposed 50% haircut is not enough to return Greece to debt sustainability:

In our view the key problem lies with the structure of the PSI itself, namely the insistence on a 50% reduction in face value for bond holders. From an investor’s perspective, a 50% haircut reduces both the final payment but also the coupon payment. Thus the impact on the NPV of the bond is much larger than 50%. The voluntary nature of the deal assumes some incentive for investors. Thus, the IIF have suggested an increase in coupons for the new bonds in order for investors to be compensated in terms of cash flows at least.

 The problem, of course, would be that this by itself undermines sustainability -- higher coupon payments mean bigger deficits. As GS points out, what Greece needs is the exact opposite: lower coupon payments right now, so that the worst of austerity can be undone. Once growth resumes, and interest rates fall a bit, sustainability will look a lot better quite quickly. I guess there is something not altogether great about thinking up restructuring rules as a fly-by-night operation between a handful of overwrought, half-numerate politicos... 

Productivity in Process - this week in the Economist - Economics Focus

The Economist this week discusses research by my old college friend Tim Leunig (LSE) and myself on process innovations - that's two Econ Focus highlights in three weeks... Here is the abstract of the paper (available on SSRN):

Fifty years ago economic historians found surprisingly small gains from 19th century US railroads, while more recently economists have found relatively large gains from electricity, computers and cell phones. In each case the implicit or explicit assumption is that researchers were measuring the value of a new good to society. In this paper we use the same techniques to find the value to society of making existing goods cheaper. Henry Ford did not invent the car, and the inventors of mechanised cotton spinning in the industrial revolution invented no new product. But both made existing products dramatically cheaper, bringing them into the reach of many more consumers. That in turn has potentially large welfare effects. We find that the consumer surplus of Henry Ford’s production line was around 2% by 1923, 15 years after Ford began to implement the moving assembly line, while the mechanisation of cotton spinning was worth around 6% by 1820, 34 years after its initial invention. Both are large: of the same order of magnitude as consumer expenditure on these items, and as large or larger than the value of the internet to consumers. On the social savings measure traditionally used by economic historians, these process innovations  were worth 15% and 18% respectively, making them more important than railroads. Our results remind us that process innovations can be at least as important for welfare and productivity as the invention of new products.