Monday, August 25, 2014

Economics from The Simpsons

Joshua Hall, editor of the new book Homer Economicus, discusses how to teach economics via The SimpsonsGetting students to understand the economic way of thinking might be the most difficult aspect of a teaching economist's job. The counterintuitive nature of economics often makes it difficult to get the average student to think "like an economist." To this end, the need to keep students engaged and interested is essential when teaching economic principles and interdisciplinary approaches to engaging students are becoming increasingly common.

Professor Hall, from the University of West Virginia, extends this interdisciplinary approach to economic education by providing examples from the long-running animated television show The Simpsons that can be used to stimulate student discussion
and engagement in an introductory course in microeconomics. To create the book, Hall recruited 22 contributors, most of whom are professors of economics at universities such as George Mason and Baylor, allowing the reader to hear from several different voices as they unconventionally illustrate a wide range of economic topics.
The book is primarily meant to function as a teaching resource for students, but can also be a fun read for those who enjoy pop economics – and of course the Simpsons fanatics who buy anything related to the show.
Find on Amazon     Barnes and Noble   Goodreads

Listen to the author on Tom Woods radio show

Hall explains his approach in The Journal of Private Enterprise  and on the Stanford University Press blog

Review on Bloomberg   Boston Globe   The Daily News

Paper on Homer Economicus or Homer Sapiens? Behavioral Economics in The Simpsons by Jodi N. Beggs






Saturday, May 17, 2014

Piketty Becomes Superstar Economics Author

Capital in the Twenty-First Century, already a best seller, is an invaluable contribution to how we understand inequality and its possible consequences.

Thomas Piketty—economist from the Paris School of Economics and ground-breaking researcher on income inequality--examines data from more than twenty countries spanning in some cases as far back as the 18th century to assess the dynamics of income and wealth distribution, with a particular focus on the role of capital ownership as a driver of long-run trends in income inequality. He argues that when the rate of return on capital exceeds the rate of economic growth, as it has for most of history, then rising income inequality becomes inevitable. He says that if this rising inequality is allowed to continue unchecked, the results could be deep political and social disruption.

While Piketty notes that inequality has different dimensions across countries, he concludes with a recommendation: significantly increase the progressivity of both income and wealth taxation. Given the extraordinarily globalized market for capital, he further argues that the reach of such taxes must be global as well.

Here"s a quick guide to the book from The Economist: Thomas Piketty’s “Capital”, summarised in four paragraphs

PBS Economics correspondent Paul Solman interviews Piketty for his take on why inequality of wealth has reverted to a lofty level last seen in 19th century Europe.




The Economic Policy Institute and the Washington Center for Equitable Growth host a presentation by Thomas Piketty:




The Guardian on What You Need to Know

CEPR and the Bank of England joint workshop (includes videos)

Reviews:

Paul Krugman, in the New York Review of Books

Larry Summers      Robert Solow        Brad DeLong    Jeffrey Frankel

Mervyn King, former Governor of the Bank of England

Why is it a bestseller?

Brad DeLong (again)    A critique from Daron Acemoglu and James Robinson

Dani Rodrik  "Piketty and the Zeitgeist"                    The Spectator magazine

Financial Times:Piketty’s Data Is Full of Errors     Piketty's Response

and Piketty's longer (10 page) response

NYT: Did Thomas Piketty Get His Math Wrong?

The Economist on Piketty's calculations

The view from France

Saturday, March 22, 2014

An Alternative Easterly Road to Development

Over the past century, global poverty has largely been viewed as a technical problem that merely requires the right “expert” solutions. Yet all too often, experts recommend solutions that fix immediate problems without addressing the systemic political factors that created them in the first place. Further, they produce an accidental collusion with “benevolent autocrats,” leaving dictators with yet more power to violate the rights of the poor.
In The Tyranny of ExpertsNew York University economics professor William Easterly, bestselling author of The White Man’s Burden, traces the history of the fight against global poverty, showing not only how these tactics have trampled the individual freedom of the world’s poor, but how in doing so have suppressed a vital debate about an alternative approach to solving poverty: freedom.
 Presenting a wealth of cutting-edge economic research, Easterly argues that only a new model of development—one predicated on respect for the individual rights of people in developing countries, that understands that unchecked state power is the problem and not the solution —will be capable of ending global poverty once and for all.

Review in the Wall St Journal  by Sarah Chayes
"Mr. Easterly's alternative to the autocrat-driven, technocratic model of development is simple: Apply abroad what we know has worked at home—bottom-up solutions, a free flow of ideas leading to innovative experiments and democratic politics."
Review by Geoff Lamb (who works for the Bill and Melinda Gates Foundation)
"It’s an odd jumble of a book."
Review by David Roodman
"Through choice quotes, an Easterly trademark, the book dramatizes how rife is the “technocratic illusion” in the development business today. In particular, the technocratic illusion “would capture Bill Gates and Tony Blair” and World Bank president Jim Kim."
"In sum, I think this book, like its predecessor, gets tripped up in places by ill-defined abstractions. Just as searchers and planners are usually the same (when Steve Jobs’s told his people to create the iPad, was that top-down planning or “spontaneous” problem solving by a market actor?), the phraseology in “tyranny of experts” tends to blur distinct groups. There are autocrats who adopt with various degrees of sincerity the rhetoric of centrally planned development and then use it to rationalize human rights violations. There are foreign institutions that collaborate with them, sometimes for the best humanitarian reasons, sometimes out of geo-realpolitik. There are the less-powerful human beings within those institutions, who are seemingly the “experts” and “economists” in this book’s title. I think it is a mistake to simply tar one group with the sins of another."
Hear it on Audible

Saturday, March 15, 2014

Getting Beyond the "Curse" of Natural Resources


Countries that have an abundance of natural resources—and this includes many countries in sub-Saharan Africa—often show a record of relatively poor economic performance compared with non-resource-rich countries. 

The consensus in both academic and policy circles is that the presence of abundant natural resources poses a number of potential challenges to these countries. 

Six of them can be readily identified:

(i) a loss of competitiveness in potentially dynamic, non-natural resource sectors, (ii) a consequent narrowing of the production base,
(iii) excessive reliance on commodities for both government revenues and export earnings,
 (iv) high vulnerability to fluctuations in commodity prices,
 (v) macroeconomic and financial volatility, and
 (vi) rent-seeking behavior that can undermine governance and exacerbate the difficulty of building robust, growth-enabling institutions. 

The ideas in this book, "Beyond the Curse: Policies to Harness the Power of Natural Resources,"  were first presented at a seminar that was aimed primarily at policymakers in sub-Saharan Africa and brought together ministers, central bank governors, other senior policymakers, and well-known academics.The seminar focused on how to manage these challenges so as to reap the benefits of resource wealth while avoiding the pitfalls.

Diagnosis

Starting from a diagnosis of the wide range of challenges to macroeconomic management and financial policies that resource-rich countries face, the seminar sought to propose solutions that are context-specific, drawn from the most successful experiences, and capable of being implemented in Africa. Discussed at the 2010 seminar, therefore, were fiscal, monetary and exchange rate policies; savings policies; institutional arrangements to safeguard economies against volatility; economic diversification; and institution building.


The consensus among both speakers and participants at the seminar was that government revenues derived from natural resource extraction should be used conservatively in order to avoid excessive real appreciation and to safeguard inter- generational equity.

Preserving intergenerational equity requires saving and investing a large part of the proceeds to benefit future generations. At the same time, when investing these proceeds, it is not easy to make the choice between investing in external financial assets and investing in domestic physical and human capital (including infrastructure).

A deliberate and measured pace of domestic spending, carefully focused on absorptive capacity, can limit real appreciation and attenuate the negative consequences to the economy’s tradable sector. Moreover, history is replete with examples of large government spending programs that have been inefficient and wasteful.
Knowledgeable senior officials at the seminar from Norway, Chile, Botswana, and Mexico outlined the history of how their governments addressed the problems posed by the existence of natural resources. Their measures included conducting countercyclical fiscal policies and setting up institutions that limit rent-seeking behavior.
While seminar participants were cautious about spending policies, they recognized that populations in low-income countries have high expectations regarding higher public spending. Large resource windfalls often trigger political pressures to enlarge government spending, in particular in countries with vulnerable populations. Managing those expectations is an important task in all resource-rich countries, and particularly in those with recently discovered resources.

Better with the private sector

All countries with significant natural resources, especially those whose resources are recently discovered, must choose between putting the extraction activity in the hands of multinational companies or keeping it in the hands of state-owned companies.

The weight of country experiences worldwide tilts the balance in favor of leaving the extraction as much as possible to the private sector, provided that
  (i) the companies are selected on a competitive basis, and
  (ii) the government has the capacity to ensure that contract negotiations lead to a balanced deal where the short- and medium-term objectives of both parties are reconciled.

Indeed, such an “optimal contract” would ensure that the inherent time-inconsistency problem is addressed. In other words, governments in resource-rich countries should credibly commit not to expropriate for themselves foreign investments after they have been sunk in exploration and extraction. In this discussion, many countries around the table recognized their lack of capacity to negotiate such contracts and expressed a need for independent international advice and assistance in this crucial area.

Taxing natural resources

Taxes on rents are relatively efficient and less distorting. Therefore, higher levels of taxation in the natural resource sector make sense and facilitate lower taxes in other sectors. However, this usually leads to a structure of government revenues that is dependent on commodity prices and earnings and so can be highly volatile. There is therefore a need to establish medium-term spending plans, to decouple current spending from volatile government revenues, and to enact a strategy for countercyclical fiscal policy (especially because capital flows that also respond to current account strength, and thus commodity prices, can exacerbate cyclicality).
Fiscal institutions have proven to be instrumental in achieving such decoupling between spending programs and revenues. For countries that cannot establish institutional arrangements capable of credibly committing to countercyclical fiscal policies, the use of financial instruments—such as the Asian puts used to hedge government oil revenues in Mexico—are an effective second-best policy option.

Effect on exchange rate

Chile’s floating exchange rate coupled with an inflation-targeting regime has proved remarkably successful in recent years at sheltering the economy from external shocks. Many African countries are fearful of embarking on a fully flexible exchange rate regime, however. This is not the so-called “fear of floating” in the conventional sense—when a degree of fixity leads to foreign exchange liabilities that constitute a balance-sheet disincentive to floating—but simply a reluctance to embark on major institutional change based on a belief that the supportive institutional structure will take time to prepare.

It is clear that a more gradualist path to exchange-rate flexibility with inflation targeting will be pursued in many countries, with all the transitional difficulties that this will entail. In fact, the experience of Ghana, which adopted inflation targeting with limited exchange-rate flexibility in 2002-03, clearly illustrates this point.
The seminar stimulated much discussion about how to sterilize current account inflows (at times of high commodity prices) and the capital inflows that are correlated with these windfalls. Because their equilibrium domestic interest rates are almost always higher than those in advanced countries, in resource-rich countries the costs of sterilization can be significant and can create tensions between the fiscal authorities and the central bank. As the case of Botswana makes clear, however, insofar as periods of high commodity prices are also periods of large government surpluses held at the central bank, a properly managed countercyclical fiscal policy will provide a degree of automatic sterilization.

Diversifying away from dependence

Experiences with industrial policy around the world suggest that it is not a straightforward matter to design an appropriate incentive structure to help lay the groundwork for economic diversification in resource-rich countries. Seminar participants recognized that some government intervention is unavoidable but also stressed that such policies should be tailored to the context of each economy. It was also recognized that too-active industrial policies would open the door to corruption and thus risk undermining the broader institutional framework.

From the discussions certain things emerged that are clearly undesirable, such as commodity rents that are distributed through very high government salaries, which would have a detrimental effect on private sector development. On the other hand, low, predictable, and non-distorting tax rates on entrepreneurial activity could help foster diversification. Similarly, the use of commodity proceeds to establish a supportive physical and social infrastructure could raise returns and encourage private investment in other sectors.

INSTITUTIONAL ASPECTS

The existence of natural resources tends to distort the allocation of talent. Especially in countries with weak institutions, talent tends to shift out of private entrepreneurial activity and into more lucrative rent-seeking areas, with harmful implications for sustainable growth. Participants in the seminar spent a good deal of time focusing on how institutions should be designed to guard against such developments. For example, strong and reliable property rights can foster financial sector development, allowing the financial system to play a more active and significant role in mediating resources to help build small- and medium-size enterprises in the non-resource-rich sectors of the economy.

More generally, checks and balances and greater transparency in managing natural resource revenues can help counteract the misallocation of talent into unproductive activities. However, it was acknowledged that the problem was less difficult in countries with mature industrial economies than in those that were least developed when mineral resources were discovered. This, if anything, merely underscored the importance of a careful approach to institution building.
Foreign Policy review by Matthew Hulbert and Bas Percival 

VoxEU blog  "Beyond the curse: Policies to harness the power of natural resources"

iMFdirect blog on the escaping the "resource curse"

Barnes & Noble Nook version

Buy on Amazon

Policies for Inclusive Growth 
Bernardin Akitoby and Sharmini Coorey 
Paperback · ISBN 978-1-61635-376-6 · Stock# OWCAEA 
Drawing on new research on managing oil wealth and central Africa’s oil exporters’ experiences, this 
book addresses the challenge of strengthening the management of oil wealth and promoting policies for 
inclusive growth. 
      Review in Foreign Policy

Rolando Ossowski, Mauricio Villafuerte, Paulo Medas, and Theo Thomas 
2008 · ISBN 978-158906-718-9 · Stock# S260EA · $30 
Increases in oil exports and revenues have revealed how governments manage fiscal 
policies in light of changing market conditions and the role of special fiscal institutions 
(SFIs). In this Occasional Paper, IMF experts examine the role of SFIs in fiscal 
management, review the experiences of selected countries, and draw general lessons. 

Philip Daniel, Michael Keen, and Charles McPherson 
2011 · Paperback · ISBN 978-0-415-78138-1 · $38.95 
2010 · Hardback · ISBN 978-0-415-5692-7 · $150 
Copublished with Routledge. For more information, please visit www.routledge.com. 
“A timely and welcome guide to policymakers and advisors in the area of resource 
taxation, combining theoretical underpinnings and sound practical advice over a 
range of relevant topics, from tax design, through fiscal and financial modeling to 
tax administration.” 
Joseph Amoake-Tuffour 
Ministry of Finance and Economic Planning, Republic of Ghana 

Rabah Arezki, Catherine Pattillo, and Marc Quintyn 
Paperback · ISBN 978-61635-379-7 · Stock# CPVIEA 
This title discusses the challenges posed by commodity price volatility and discusses policies to promote 
growth that is inclusive of all the citizens in low-income countries. It also explores macroeconomic policy 
options and the building of fiscal institutions to prevent boom and bust cycles.

Seminar at the IMF on Commodity Price Volatility

Wednesday, February 19, 2014

Financial Crises and What to Do About Them

Financial Crises: Causes, Consequences, and Policy Responses, edited by Stijn Claessens, M. Ayhan Kose, Luc Laeven, Fabi├ín Valencia, provides a comprehensive overview of research into financial crises and policy lessons learned. 


The book covers a wide range of crises, including banking, balance of payments, and sovereign debt crises. It begins with an overview of the various types of crises and introduces a comprehensive database of crises. 

Broad lessons on crisis prevention and management, as well as the short-term economic effects of crises, recessions, and recoveries are discussed. 

The medium-term effects of financial crises on economic growth, as well as policy measures to prevent booms, mitigate busts, and avoid crises are analyzed. Finally, policy measures for mitigating the adverse impact of crises and ways to restructure banks, households, and sovereigns are presented. 

The collection of research in this book provides an excellent overview of critical policy areas, with valuable lessons on how countries can better monitor their economies and financial systems. Read a blog by Stijn Claessens on the issue.

IMF eLibrary   IMF bookstore  Amazon Kindle version

RePEc -- Understanding Financial Crises



Tuesday, February 11, 2014

New Books on China

Couple of good books on China from the IMF

China's Economy in Transition: 

From External to Internal Rebalancing


China’s current account surplus has declined to around one-quarter the peak reached before the global financial crisis. While this is a major reduction in China’s external imbalance, it has not been accompanied by a decisive shift toward consumption-based growth. Instead, the compression in its external surplus has been accomplished through increasing fixed investment so that it is now an even higher share of China’s national economy. 

This increasing reliance on fixed investment as the main driver of China’s growth raises questions about the durability of the compression in the external surplus and the sustainability of the current growth model that has had unprecedented success in lifting about 500 million people out of poverty over the last three decades. This volume examines various aspects of the rebalancing process underway in China, highlighting policy lessons for achieving stable, sustainable, and inclusive growth.

on Amazon   Google  Discussion at Carnegie


China has reached a stage where further financial sector reforms appear essential. As the reform process progresses and macrofinancial linkages deepen, the preservation of financial stability will become a major policy preoccupation. China is already working toward enhancing its surveillance and monitoring capabilities and is actively determining ways to undertake a series of reforms that would lay the foundation for a strong, sustained, and balanced growth. 

"China’s Road to Economic Stability" focuses on the key financial policy issues facing China today. The volume draws upon contributions from senior Chinese authorities and academics, as well as staff from the IMF to discuss the financial policy context within China, macroeconomic factors affecting financial stability, and the critical role of financial system oversight. It seeks to improve the understanding of the financial sector policy processes underway and the shifts taking place among China’s economic priorities. 

The book also covers issues such as the financial stability framework, systemic linkages, liquidity management, risk and vulnerability analysis, and sequencing financial reforms. The book is something of a must read for academics, researchers, and stakeholders interested in China and the shifts taking place in the manner in which China views its financial sector policies and oversees the stability of the financial system.