Category — Current Events

James Galbraith argues that falling bank stocks are a sign of good things to come with respect to the planned regulatory overhaul of the financial sector. To the extent that such regulation is intended to limit rent-seeking and moral hazard, Mr. Galbraith makes a fair point. Perhaps the Obama administration is on the right track.

However, if the same indicators apply to the health sector, skyrocketing health insurance company stocks can hardly be taken to be a sign of better and more affordable health care around the corner for most Americans.

The authors of this blog merrily receive about 82000 Norwegian kroner (NOK, €10 000) every academic year in living support for students from the Government of Norway. As we study in Estonia and do not engage in currency hedging, our standard of living (in economic terms) is subject to the NOK/EUR exchange rate. (Estonia has pegged its currency to the Euro and is most probably joining next year)

Over at Financial Times they report that Credit Suisse has made its currency predictions for the next year and betting on the strength of the krone and selling the Euro. With the budget balance and current account surplus larger than 10 percent of GDP, lowest unemployment rate in Europe and buoyant stock and housing markets Norway looks like a sure bet. It looks like we can expect a lenient new year in Tallinn.

Of course there are certain caveats to such a prediction. Foreign exchange markets are notoriously hard to predict and from what I remember investment banks tend to fare worse than just predicting the current exchange rate. Further, as a small economy, Norway would suffer under the curse of small currencies if a new financial crisis was to arise (which many are predicting). Last, the krone correlates rather well with the oil price which might / might not be a benefit for an eventual speculator.

Thanks go to Radu, a loyal evolution-revolution reader, for sharing the FT-article.

Update (May 4th, 2010): More on the Future Prospects of the Norwegian Krone (it’s still on the way up) – New article

Der Spiegel has a very interesting article on three Swedish guys who have started their own jeans brand, Noko Jeans. Noko has chosen a quite unusual country for the manufacturing of its jeans: North Korea. Apparently the People’s Republic has its own web site where it offers opportunities for foreign investors. Maybe we are actually seeing the first few steps of a softening up of North Korea and its eventual emergence as a part-taker in the global community.

For Noko the deal was closed in the same way as most early investors in China did it. Heavy drinking and socialization with the locals to build trust and making a deal with a conglomerate that really seems to make everything. They couldn’t get all that they wanted though; the jeans had to be black since blue denim jeans were considered too much of an American symbol. Some old habits die hard after all.

The argument is simple;  in times of distress wage reductions will lead to a decrease of aggregate demand, reducing sales in turn decreasing demand for labor and wages.  One has a vicious circle of decreasing wealth and employment.

Some industries where wages / prices are very flexible are particularly vulnerable to this dynamic, agriculture being one. In the great depression farmers where hit particularly hard, prices collapsed and many defaulted on their mortgages. The goal of Franklin D. Roosevelt’s Farm Strategy And The Agricultural Adjustment Act of 1936 was precisely to stabilize agricultural prices and reestablish the purchasing power of the farmers. 

The common notion among economists, is exactly the opposite, that lower wages will increase employment. This sounds logical and is probably most often true, but its important to understand that the dynamics of economics are ever-changing and no universal laws can be made. By looking at – not only – the supply-side of the economy, but also at the demand-side, one realizes that if there is no one to buy your goods it doesn’t matter how cheap you produce them. This follows the reasoning of Henry Ford who argued that the role of a good industrialist was to set wages as high as possible and that all of his workers should afford a Ford Model – T. He reasoned that without demand, there is nothing to sell.

For more on this  see “On the Consequences of Nominal Wage Flexibility” at Economist’s View

The Chicago Tribune reports that several top donors to the Obama campaign are beginning to grumble about not getting enough face time with the President and top members of the cabinet. Apparently, both Bush and Clinton were much better at keeping in touch with their benefactors, and regularly spent time socializing with them at a.o. the White House and Camp David. Big contributors are also complaining that it is more difficult for them to get appointed to prestigious positions in the administration than they expected.

Obama has come under a lot more scrutiny than presidents in recent years for alleged links to special interest groups and worse. Hopefully, he deserves it far less than his predecessors. Major donors are not so happy though; according to million-dollar contributor Chris Korge, “If they do have any connection … it is very limited as far as the fun stuff is concerned.”

Aftenposten reports, that Nortura, the farmer-controlled cooperative that has a de facto monopoly on meat and egg distribution in Norway, is in trouble; prices are regulated and have to be adjusted in such a manner that everything produced is sold, but at the highest possible price. This has led to 2.3 million metric tons of beef being stored in warehouses around Norway, which is close to the government regulated maximum of 2.5 million.

Action is needed, and the econometric modellers at Nortura expect that a price decrease of 2 Norwegian kroner combined with decreased production next year, will ensure that storages don’t exceed government limits. FrP, the populist party that wants do deregulate the agricultural market, is not impressed, and points out that one can buy beef across the border to Sweden for half the price. Today, in parliament, the agriculture minister has to explain why a price reduction of 2 kroner will be sufficient. Good times.

The Wall Street Journal reports today that the United States Federal Government is dwarfing private investors in providing venture capital for new high-tech startups – in particular in “clean technology”. Predictably, many (Americans) are worried that this is another step in the direction of a socialist United States. This is worrying too much.  There are abundant examples of governments successfully investing in industry – especially “infant industry” – in non-socialist countries with weaker constitutional safeguards than the U.S. If anything, it is a much more sensible way to do stimulate the economy during a recession than having people paint lamp-posts or pick leaves.

More importantly, the surge of public investments into high-tech business is probably very good for the private sector, both in the long and short run. Already, private venture capitalists are eager to invest in companies that receive loans or equity investments from the government. This, of course, can simply be attributed to the fact that more access to capital and concessionary interest rates should make lower risks and higher returns more likely. However, the much more significant effect – especially over time – is the establishment of strong intrasectoral networks that are necessary for any advanced industry to flourish. Such networks – prominent examples are Silicon Valley and (until recently) the car manufacturing clusters around Detroit – allow for specialized production knowledge to be developed and disseminated, specialized suppliers and consumers to gain sufficient economies of scale, and for consumers to “learn” new products; all necessary ingredients for dynamic economic growth. Notably, a high degree of geographic concentration is not always necessary, but a fairly large number of firms and a significant industry size is.

The network dynamic also highlights a particular reason why it may be appropriate for taxpayers to be venture capitalists. Because many of the benefits of venture capital investments – such as new innovations or other “network benefits” as outlined above – are external to individual firms and investors, but still benefit the economy as a whole, VC investment incentives are in some ways more symmetrical with those of taxpayers than private VC firms.

Of course, the establishment of strong dynamic intrasectoral networks can and has many a time been achieved without government intervention. However, it has not been achieved without plentiful financing – plentiful financing clearly not available in the wake of a financial crisis, especially for small firms. When the Federal Government is able and willing to make the necessary investments, why not be pragmatic rather than paranoid and let it? If anything, in five or ten years the U.S. might just find that they paid off.

Perhaps not, but this article by The Guardian is interesting even if the claims made by UN Office on Drugs and Crime are only half-true.

According to Reuters, a new stock exchange is at the center of booming economic growth in the Somalian coastal town of Haradheere. Lack of government interference in the region has allowed a highly profitable piracy sector to appear as an engine of economic development, turning the former fishing village into a bustling boomtown. A local ex-pirate named Mohammed, tells Reuters that “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.”The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

The mention of weapons is of particular interest. Although Somalia is a one of the poorest countries in the world, it is awash with weapons – and these weapons are often the by far most valuable assets many Somalians possess. Through the piracy exchange, poor Somalians can make a return on these assets – without raiding their own countryside. For example, the Reuters article mentions a young woman who invested a rocket-propelled grenade launcher she received in alimony when she divorced her ex-husband – and made a $75 000 return on that investment in a little over a month. In a strange way, piracy is contributing to capital flows from rich to poor countries, as well as increased internal stability in Somalia.

The exchange also claims to be attracting foreign investments – FDI, if you will – in particular from the Somalian diaspora community. This is ironic. If true, it is not unlikely that western governments such as that of my native Norway indirectly are contributing to piracy financing through a.o. welfare payments – while at the same time paying for naval forces to fight the same very same pirates that are attracting investments.

The economic growth surrounding the Somalian piracy sector is extremely interesting for several reasons. Firstly, it is an example of how self-organizing economic systems coupled with rapid economic growth can appear under conditions of extreme laissez-faire in a basically ungoverned area. With little “external” interference, quasi-free markets allow productive resources to efficiently flow to sectors where returns are highest, and institutional mechanisms – such as the Haradheere stock exchange – “spontaneously” develop to grease the wheels of economic growth.

The Somalian Piracy sector is also interesting because it shows so clearly that the kind of growth described above can be – qualitatively speaking – utterly perverted and hollow. In particular, it can be totally unrelated to production. In the case of the pirates mentioned here, the high returns on investment and the resulting economic growth is actually a result of sabotage of production.

These qualitative features are obvious in the Somalian case because they are so extreme. However, there is little reason to believe that economic growth fueled by piracy is the only type which may be qualitatively undesirable. Speculative housing bubbles, for instance, come to mind. Perhaps qualitative aspects of economic growth should be paid more attention to in general, both in rich and poor countries.