The United States of Europe

While national parliaments in Europe are voting for the new Greek bailout, here’s an excellent counterfactual showing where Europe could be now if it had a real union:

OECD
OECD

That’s the summary of the choices that Europe made (and continues making) since at least 2000. If the year of 2009 explains itself with toxic assets and international shocks, the second dip is a European invention. It started with politicians denying the intention to bailout the indebted EU members. This ambiguity provoked the sovereign debt crisis in 2011-2012. The debt crisis, in turn, increased the cost of borrowing for the European countries that had to counteract high unemployment. Unable to do so, the periphery retained its 20-plus percent unemployment and the loss of output that followed.

To that the European Union responded in slow motion. The European Financial Stability Facility — the major vehicle of intra-EU bailouts created in 2010 — had been expanding constantly in response to the deteriorating situation in indebted economies. But actions took place only after the bad things had happened.

Now take the United States, which settled its major debt issues via the TARP in 2008-2009. More importantly, it was the federal government that paid $700 bn for this program. The American states didn’t waste time figuring out which state government was unacceptably immoral and, therefore, should have been reformed. In a hypothetical scenario, they could. The poorest American states have only a half of output per capita produced by the richest states. Also, the recovery was uneven:

BEA
BEA

Secondly, the US had the Fed that provided liquidity regardless of the bank’s state of origin. Meanwhile, as the first figure reminds, the ECB-led eurozone performed worse than the EU on average (and much worse compared to the nine EU countries that retained their national currencies).

This problem is much bigger than the Greek case alone. With Greece, European politicians ignore the most respected macroeconomic experts making reasonable arguments. But these politicians are not supposed to listen to the reason, if by reason we understand the wellbeing of an average European. Merkel and Schauble are accountable to the German voter, not to the Greeks. And the German voter is fine with paying nothing to Greece. He can continue enjoying low unemployment at home — even if this became possible thanks to the euro weakened by the indebted EU members.

Update:

Paul Krugman shows the divergence between Sweden and Finland. Finland is a eurozone member lagging behind Sweden, with an overall picture similar to the first figure here.

What If Germany Annexed Greece?

The obsession with Greek debt shadowed the whole point of borrowing—that is, helping Greece grow again. While the debt matters, it matters even more when it’s well spent on policies that would reverse the recession. And this genre is totally different from today’s media coverage.

What plans does Europe have for Greece?

Greece itself doesn’t stick to any long-term plan. That’s both good news and bad news. Having several years of economic decline in a row, people try to rotate the left and the right in power, and new elections introduce new policies. The Papandreou government prioritized the business climate. In the best-practice style, it committed itself to the 2012 bailout terms and Greece even earned 48 positions in the World Bank’s Doing Business ranking since 2010 (praise by St. Louis Fed’s economist). This is how GDP responded:

screenshot
Source

Getting rid of bureaucracy solved no urgent economic problem. Business can include red tape in the price, but it can’t escape the falling demand on its own. Eventually, Greece got a good business climate without business.

Syriza had tried to argue with the creditors, so in response, the ECB cut the Greek banks off liquidity. Surely, the ECB did so in compliance with the June 30 official deadline, but it could negotiate the extension. Such events shake the public opinion, and Greek governments change each other. So which plan of long-term growth should we assess?

The plan of the creditors, of course. They have a large impact on short-term economic stability, which is a lever for making long-term decisions. With a small abuse of democracy, the troika writes a detailed plan for Greece and waits till the Greek officials accept this plan as their own.

This plan escapes the debtor’s fluctuating politics, so the bottom line remains the same since 2012. It includes the “milestones” that unlock new tranches from the EU:

Source
Source

The full manual concerns just everything:

screenshot

(Along with some alternatives by academics, this plan tells something about the contribution of economic growth theory to the current affairs, or, rather, the lack of thereof. While growth theory speaks esoteric ideas, like creative destruction and rule of law, practitioners reduce recommendations to straightforward cost-cutting.)

But isn’t there a conflict of interest in this plan? A creditor’s planning horizon ends where his bonds mature. The debtor hopefully lives a little longer. So, their plans don’t coincide. If the troika wants its interest from the Greek bonds (that mature in 5−10 years), then its plan may be short-termed, compared to the recovery cycle. For example, the US stimulus was opting out of the economy for six years:

screenshot

Maybe Angela Merkel loves the Greek people as much as the German people who elected her. But if not, which system would provide a German plan consistent with the Greek interests? Perhaps, the one where the Greek and German people elect a single representative.

How would it happen if merely adopting a single European currency took fifty years? Through the crises like the current one. The troika pays Greece for being more like Germany. As the new agreement is getting closer, this crisis management team continues controlling Greece even after the ruling party has been replaced. Then, wouldn’t the Greek people have more power if they affected the German politics directly, in joint elections?

That would be possible if the Greeks couldn’t quit. But Germany can’t take over its neighbors like the Thirteen Colonies did. And there’s already much disagreement about voluntary unification:

PEW
PEW

Greece, Spain, and Italy don’t enjoy being a hostage of the euro, even if this allows them to borrow cheap. Whatever these countries get from being more like Germany, they get it after giving up independence. How much could they get? The local unifications of Italy and of Germany didn’t lead to the full convergence of the regions, so the prospects are unclear. Meanwhile, it’s not even clear what “being more like Germany” means because the north of Germany is poorer than some South European regions:

FT
Income per capita in European regions (FT)

If the Greek people could affect German politics, this would lead to more consistent plans, but not necessarily effective. Again, we know some general things about taming GDP fluctuations, but too little about the impact of structural reforms. And after the troika switched from macro to structural reforms, it must explain well why their experts think they know Greece better than the Greeks do.

Thinking Like Lee Kuan Yew

This is Lee Kuan Yew’s miracle everybody’s talking about today:

Data from Maddison
Data: Maddison

The rising green line includes better healthcare, education, security, housing, and other benefits of economic growth. A distinctive feature of Singapore—compared to virtually all developed countries—it hasn’t closed its borders after becoming rich:

Data: WDI
Data: WDI

Which shows how good institutions adapt immigrants and the country continues to grow in per-capita terms. “They’re stealing our jobs” and other forms of intellectual racism never look for the examples like this.

How much did Lee contribute to this success? Scarce evidences on personal contributions to economic growth (like Jones and Olken, “Do Leaders Matter?” [ungated working paper]) leave some space to leaders to affect history. But in specific cases, impact evaluation is informal. In this case, endorsements are also overwhelmingly positive—for the last thirty years or so. Then how did he do it?

Lee shares his executive experience in his well-known book From Third World to First. Perhaps, it’s a bad guide to development because readers may screen it for confirmatory evidences that reenforce their own opinions about economic policies. But the book has two valuable qualities that rarely coincide. First, it’s written by a top politician. Second, it’s written by someone who thinks hard.

In the book, Lee explains his decisions and their reasonable foundations. Why is his reasoning important for others? Because economic development is all about context. When a policy maker copies a decision without reasoning, for a start, he doesn’t understand the decision. Then he applies it to a wrong situation. Industrial policies in developing countries are full of this misunderstanding.

A politician rarely explains himself, and when he does, he is torn between embarrassment and empty words. In contrast, Lee has the point and refutable defense. His colleagues also recall that he’s okay to change his opinion. It seems trivial with all sophisticated economic research on topic; but when leaders lack these qualities, it’s irrelevant how much we know about development (or anything else, for that matter).

So, unlike most commentators of the day, I’d pay tribute not to what Lee Kuan Yew has done but how he thought about these things. The book is a good source to learn it.

Election Day that Decides Nothing

The New York Times publishes an op-ed about voting motives. The authors first say that voters make choices out of self-interest, but the piece basically ends stating that conservatives win “economic policies” and liberals take “social policies,” regardless of what self-interested voters think.

Looking carefully, “economic policies” stand for anything concerning affluent interests: taxes, government spending, social security, and healthcare. These issues are “more conservative.” “Social policies,” on another hand, are those top earners don’t care about, like immigration, gay marriages, and abortions. Policies here are “more liberal.”

Gilens and Page recently studied a natural explanation of this idea (gated article). After going through nearly 1800 policy issues, they find that

[…] economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence.

That is, a policy works when it favors business interests or at least coincides with them.

It doesn’t happen through voting, of course. Elections are the outcome of what happens inside the electoral cycle, not a decisive moment when changes happen. This Election Day promises victory to the Reps. But regular elections shade a more important trend of the Dems becoming more conservative themselves. Regardless of the victors, effective policy becomes conservative.

Conservatives and liberals may agree to disagree with that. For each of the parties, the other is too radical. The difference between the two parties is scrutinized, despite being small. It happens when you don’t see the real radicals. The radicals of the Great Depression type, from both wings.

These radicals never came to power in the United States. However, they made moderates accept more left- or right-leaning policies. If you wanted to avoid expropriation in the 30s, you had to give up a smaller piece, like a social safety net for the poor. Or you could try to maintain the status quo. Say, the Russian Government tried it in 1917 and was replaced by extremist brutal left-wing dictatorship.

Evidences may show that business interests guide policy making. But business interests depend on what other people are doing around. Public opinion has de facto veto power over business lobbying—something you can see in comparison to 20st-century Latin America. And this veto power comes not from elections, but from everyday deeds.

Learning obedience

Back in the 90s, growth economists explained income differences among countries with human capital (Mankiw, Romer, and Weil, “A Contribution to the Empirics of Economic Growth”). Formal education was a typical proxy, with either fraction of educated population or years of education entering regressions.

The human capital story had to integrate the institutional component since then, but formal education remained correlated with national output. One channel or another, nations have to have good education to develop.

Universal formal education came from governments in the 19th century. Peoples actually thought it was a bad idea. They cared more about what is now called social security, unemployment, and inequality.

“Universal,” however, typically meant “compulsory.” The reason is suggested in the first graph (taken from Alesina and Reich, “Nation Building”). Each time the French rioted, European rulers reformed education in their territories. The education system helped keeping children busy with the “right” thoughts and reduced the risk of insurrections. It didn’t help European monarchs for long, but the habit remained. Say, “education” is still the most popular issue in the US Congress bills.

While many are concerned, no one started asking children what they would like to learn. Sparse surveys (like the one by NYC or Gates Foundation) ask typical satisfaction questions—the ones that ensure you don’t protest much in the classroom. Authors don’t question the curriculum. Questions about biased history classes would be outer space, but no survey even asks “Do you want to learn biology?”

So, education is really sacred, unlike any other services on the market. You are supposed to spend ten plus years on being good at things you don’t care about. It’s like a 20-year mortgage, but here they also take your time.

Any hope? If 100 years ago the factory-like training in the school produced suitable workforce for real factories, now employers expect more flexibility from hires. Mainstream technology becomes skill-biased and requires from employees to be “quick learners.” Employers in competitive industries have to respond. And maybe this new demand for quick learning will change the education system more than democracy did in the 20th century.

NYT-speak continued

The New York Times’ choice of words tells much about history and the media. As seen before, their Chronicle shows great snapshots of the newspaper’s wording evolution.

Here, a few more cases.

Information sourcing

As Robert Fisk once noted, the media now rely more on what officials said, rather than sourcing news by themselves. That’s a confirmation:

Money and knowledge in crises

Though in general money and knowledge move in the same directions, money moves in greater magnitudes. Also, notice that in the Great Depression, as well as in the Great Recession, the NYT mentioned money less frequently. And the opposite happened during stagflation in the 70s.

Inflation and unemployment

Mentions of unemployment and inflation went in different directions before the 70s: right until the economy happened to have both. But it was a short period and right now there’re no mutual relations (at least, in wording).

In- and equality

Inequality never was an issue for the NYT. Even in the late 20s, when inequality was extremely high. So, it’s a new topic. Meanwhile, previous mentions of equality are generally associated with civil rights movements, as in the 60s.

“Make war, not love”

At its peak, war themes took up to 30% of the newspaper materials. But local wars, like Iraq and Afghanistan, never draw so much attention.

Referring to minorities

A similar graph was in the previous post, but here changes in wording are clearer. Especially right after the Civil War, when politicians no longer needed support from the black population, and one hundred years later, when politicians and media had to update their vocabulary.

Sports becoming more popular

Transition from Planned Economy to Market

The Soviet Union collapsed in 1991. But this 1989 paper by Victor Nee provided an interesting insight that had closely described the forces behind Russia’s market reforms in the 1990s.

Nee outlines two centers of power in a centralized economy: producers and distributors. Producers are Soviet CEOs, running factories and other elementary economic units. Distributors comprise the Soviet government and allocate resources across the economy. Under central planning, the power of producers is weak and that of distributors is strong. Both were in the Communist Party, but producers belonged to a relatively dependent group of the privileged. Distributors from the Government made major economic decisions.

Nee’s point is that the transition from centralized planning to the market economy leads to redistribution of power in favor of producers. Distributors can’t agree with that. And they didn’t. Mikhail Gorbachev and the Soviet leadership had no plan of moving to the market.

In 1991, they had been displaced by Boris Yeltsin. It was a coup. Yeltsin represented local elites, who managed resources at the level of separate Soviet republics and led republican branches of the Party. The power shifted to the leaders of a newly formed independent republics. The 1991 events had little to do with democracy: it was the second-level distributors getting rid of some top-level distributors.

The new republics started building market economies. But the problem with the transition remained the same: distributors don’t want to lose power by introducing markets. And the didn’t. The new old elites did everything to prevent producers from gaining power. They established crony capitalism to become private owners of formerly public property.

The architects of the privatization, which started in the early 90s and still continues in Russia in a somewhat different manner, recently recognized that their main goal was to privatize property as fast as possible to avoid power going to what they called “red executives”—managers of Soviet factories and service units.

An official version sounded like “Red executives would bring communism back, so let anyone get the state property and forget about efficiency for a while.” But red executives had little incentives to bring back communism, which would deprived them of power over their factories. Effectively, the architects prevented a really decentralized market economy, when each factory is a Smithian independent firm that competes with the others and the invisible hand paves the way to wellbeing.

The property didn’t go to anyone, clearly not to the population, but to specific people, including government officials. The schemes were opaque, and it was difficult to distinguish who owned now-private businesses: government officials or their proteges from nouveau riches.

This privatization was followed by an unprecedented fall of output. That how it looks compared to countries with previously planned economies that had more democratic transitions to the market:

Though it’s important to note that the degree of central planning in these states differed, the picture is the same for most former SU countries, which had lost much of GDP before returning to the trend in late 2010s. Many had not returned. The Baltic states had fewer problems. As the Eastern Bloc minus the USSR, they also got rid of communist elites before going back to markets.

Market reforms in the former SU have been conducted by the same officials who were supposed to give away their powers. Just as a typical case of moral hazard, they had designed the transition in their own interests, so that in just five years there were no free market and no economy.

Knowledge, Witches, and the Church

There are three kinds of knowledge: true knowledge, no knowledge, and false knowledge.

False knowledge is the most dangerous of the three. It gives assurance about things, and we start acting on extremes. Ancient doctors were sure that bloodletting was good for patients. But it was the opposite. It required two thousand years of mistakes to start questioning the practice, and another one hundred years for the doubts to eliminate the practice. Habits die hard, bad habits kill.

These bad habits have their own categories: unintentional delusions and fallacies by design. The latter again deserves more attention. Take one example. The invention of witchcraft by the Church was a tool for eliminating political opponents. Witches appeared pagan competitors, mostly unchecked by official religious authorities, who, in turn, had close connections with political leaders. Joan of Arc happened to be just the most famous victim of this political tool.

Meanwhile, in the medieval society witches served as doctors, more liberal than Church officials. One of the most brutal attacks on their practices occurred in the 15th century. After the Black Death had killed about half of European population, feudal lords sought ways of increasing their rents. Since the lords had their own fallacies about economic wealth coming from the quantity of workers around, they needed to increase birth rates.

And here, as historian John Riddle suggests, witches became an obstacle. You see, they were pro-choice and helped women with abortions and contraception. Feudal leaders couldn’t like the idea of families making independent decisions about the number of children. Still, you can’t attack the entire population that wants fewer children. What you can do is to destroy professionals who knew how to control births.

Witches did remain miles away from what are now clinical trials. But the Church did worse: it declared their practices illegal saying that some of them actually work. Clergy couldn’t just say that witches had skills people needed and elites didn’t want. Clergy had to invent the image of a dangerous woman with spells and black magic. That was false knowledge about demons on one side and angels on another: neither existed, but the illusion kept living thanks to the strong political support.

Carefully designed fallacies bear hundreds of years of attacks and still persist. They are protected because they are important. And overcoming these fallacies is decisive for human survival. It’s easy to see what false knowledge persists now and how it threatens humans. Say, one relates to the average temperature on the globe. It’s far from being clear how to dissolve this false knowledge.