Success and Morality in a Market Economy

There has been a lot of talk about economic success and moral virtue recently: the Tyler Cowen encomium to the morality of Teutonic creditors I jumped on yesterday, the Zingales conflation of meritocracy and justice that Andrew Gelman skewers today, and, on the other side, the complaint one sometimes hears from the 99-percenters that we are being dragged down by the greed of the other 1%.  My favorite observation on all this comes from one of the most eminent of Victorians, John Ruskin.  (Incidentally, I first came across this quotation in P. S. Atiyah's magnificent The Rise and Fall of Freedom of Contract.)

In a community regulated by laws of demand and supply, but protected from open violence, the persons who become rich are, generally speaking, industrious, resolute, proud, covetous, prompt, methodical, sensible, unimaginative, insensitive, and ignorant.  The persons who remain poor are the entirely foolish, the entirely wise, the idle, the reckless, the humble, the thoughtful, the dull, the imaginative, the sensitive, the well-informed, the improvident, the irregularly and impulsively wicked, the clumsy knave, the open thief, and the entirely merciful, just, and godly person.

I Hope “The Moral Superiority of the Germans” Isn’t Translated Into German

Merkel et al. hardly need more encouragement. But if they must read this latest howler from Tyler Cowen, let them also bear in mind:


1. The entire premise of the argument is incoherent. On the one hand, TC says he is not comparing the morality of the German people to other Europeans—that would be “false and repugnant”—but rather the “system-wide” virtues of Germany versus those of the peripherals. On the other, he judges the peripherals to be morally inferior because they wish to default on their debt obligations. But the “they” who choose to default are not systems but individuals. So, yes, this is an argument about some people being more moral than others.

2. Saving and borrowing are partly matters of choice, but also matters of circumstance. Consider, for instance, the permanent income hypothesis, which tells us that when your income rises unexpectedly you save more, and when it falls you save less—even though your preferences for saving out of permanent income remain constant. This is where the trade surpluses and deficits come in. Without adhering to any particular model of savings behavior, it is clear that Germans have had more income because of their exports (half of German income is earned in the export sector), and countries with trade deficits have, for this reason, lower incomes. Of course, net savings and the current account are two measures of the same thing.

3. Even worse is the claim that default is simply a matter of choice—that those who propose defaulting on debts are less moral than their creditors. Except for Greece, loans taken out by public and private borrowers were generally in good faith. The economic catastrophe that decimated their finances was unanticipated. You could say they engaged in poor judgment by not taking the risk of such a catastrophe into account, and you would be right, but this verdict applies equally to the lenders. It is simply foolish, for instance, to say that, if interest rates remain at their current level, Italians are “choosing” to default. At 7% they have to pay 8.5% of GDP just to roll over, and the economic shrinkage this implies would raise that share year after year. Yes, Italians have assets, but if they sell them so that the state can tax the sales and redirect the revenues to debt service, then the returns on those assets will no longer accrue to Italians, and we are back, more or less, at the same point.

4. To sum up, the injunction to honor debts is like a lot of other obligations in this world. You should provide for the needs of your children. You should return your books to the library on time. If I lend you my car, you should avoid having it damaged in a collision. If you can do these things you should. If you can’t it depends on the reasons. Throwing poor parents into prison because they don’t give enough support to their children is neither good morality nor good economics. Same with people who get sick, can’t go out, and have overdue library books. Same with someone in a borrowed car who ends up in the middle of a giant crash. If the real estate market crashes in Spain, and the government is forced to step in to prevent a financial meltdown, what is the morality or economic sanity of demanding that the people of Spain be punished and forced to undergo a generation or more of austerity?

Quote of the Day

"....distributive justice without participative justice can only ever be coincidental."

W. Neil Adger, Jouni Paavola, Saleemul Huq and M. J. Mace, Fairness in Adaptation to Climate Change (MIT Press, 2006)

The Genealogy of Occupation

Much has been written recently on the question of where the Occupy Wall Street movement came from. The assumption seems to be that it represents a new manifestation of the counter-globalization ethos that first showed up in Seattle, 1999.

In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.

Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.

The Problem with Pop Economics, Paul Seabright Edition

Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning.  If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc.  This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way.  Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.

Quote of The Day

I am currently making my way through Hume's History of England - a pure joy - and ran across a quote to share. In his discussion of the 1640 Long Parliament and the execution of Lord Strafford, he has this to say about the Puritan leaders Pym, Hambden and Vane:

Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.

Some Like it Hot. So What?

In the world of climate economics, Richard Tol is a major name.  If his most recent post on the topic is any indication, he should pick another line of work.  Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”.  His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:

Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.

Yes, people move to warmer climates.  They lie under sun lamps and bake in saunas.  Thermo- and phototropism have nothing to do with the risks of climate change, of course.  The major risks are:

• sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population

• the extinction of species that cannot adapt at the rate at which their environment is changing

• an increase in the frequency and severity of severe weather events

• the loss of water storage in glacial formations

• shifts in rainfall patterns that could subject more regions to drought, fire and other hazards

• loss of agricultural productivity in tropical and many temperate regions

• and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.

Personal preferences for a few degrees of temperature more or less have nothing to do with it.  Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else.  Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?

Montserrat Figueras

This extraordinary singer died a few days ago at the age of 69.  She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song.  If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.

She was one of a kind.

Critique of the Political Scene Today?

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.

--Charles Davenant. 1698.

Is The Italian Crisis A Possible Self-Fulfilling Prophetic Negative Bubble?

Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?

Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?

Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.

What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.

The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.

That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.

In Politics, Let No Mean No

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right?  More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside.  The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition.  Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection.  The final tally would be the number of votes for minus those against.  In a two party/candidate race the final result would be the same.  In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative.  In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones.  They should have had that chance.

Lessons for the Eurozone from US Fiscal Federalism

If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues.  Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.

A Business Cycle Theory Suitable for a Parallel Universe

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

Education with a Twist—An Oliver Twist

Let’s let the newt speak for himself:

You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.

I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details.  Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Piggy No. 3: German?

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks.  He wears overalls.  In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm.  Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much?  (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)