Don’t Panic

5 January 2009

Rethinking the Financial Crisis

Keep of the Grass, by Thomas Hawk, with Creative Commons licence (Attribution-Noncommercial 2.0 Generic)Writing in his very aptly named Unwritten Laws of Business, W.J. King implored his readers to “distinguish between isolated cases and real epidemics”, which is always a handy knack to master. “Most crises”, he explained, “aren’t half as bad as they appear at first”. That’s certainly food for thought these days, and it brings the psychology of market downturns to the fore. I’ve previously written about the extent of the world’s financial travails, and it’s easy to imagine that the worst is yet to come. But even if that is the case, and I have little reason to suggest it isn’t, just what will that worst case be?

Andy Singh has thought a bit about this, and over at Seeking Alpha he lays out a clear argument for thinking that the Great Depression should not be the model disaster at which we glance nervously. The size of the US economy has been shrinking for around 12 months, but the Depression lasted for 43 months. This, in itself, proves nothing, but given that the deep recessions of the past, including those covering the entire world economy, have ended with boosts in US consumer spending, there is less to worry about now. The European Union and the so-called BRIC countries – Brazil, Russia, India and China – offer much larger consumer spending blocks now.

The world doesn’t rely on just one economic hero any more.

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Crisis, Which Crisis?

7 October 2008

Choose Your Own Explanation

Crises are caricatures of the everyday, erratic farce pushed against the dull certainty of life. They mock the knowledge we thought we had, leaping around, squirting water in the face of experts, who ironically look a little too much like clowns. But no-one likes being played for a fool, so we rally, seeking various explanations for the way things are now, forgetting that we really know very little at the best of times. We are all too often ignorant of our own ignorance.

Take the current financial crisis, for instance. What is it? How will it affect you? What will the world economy look like in a year’s time? Three questions that could be answered in three lines, if we really knew what was going on. The problem begins with a euphemism – ‘sub-prime lending’ – which means mortgages for those who, on the balance of possibilities, were never likely to pay them off. Not a good start.

But then the situation deteriorates because various banks insure against those dodgy loans by selling the risk of non-payment, now labelled ‘mortgage-backed securities’, as bonds to largely unsuspecting superannuation funds. Naughty banks? Well, maybe, but any business is about reducing risk and increasing profits. Insurance companies issue policies against the risk, which seems a good back up. But when housing prices start to drop the actual value of mortgaged homes falls below the amount of money still owed and the chance to refinance favourably evaporates. Failures to make mortgage payments rise, dramatically.

In other words, the banks – and the two federal mortgage agencies – took a huge risk, thought they could get away with it in a buoyant US housing market, and had their pants pulled down by circumstance. When the insurance companies started paying out for bonds that no longer had any backing they started to lose money, with their credit ratings tanking. Bankruptcies ensued, banks started to fall over, trouble spread throughout the financial world.

Do I really understand this? No, it’s just information hurtling by. You might have noticed that the initial explanation was more substantial than the description of how the problem in America has spread elsewhere. After a point I really have to trust the explanations of others, because like most other people I’m a generalist and understanding the minutiae of world finance would involve time, effort and interest that I don’t really have.

So I ask – I speak to people, seek opinions, read what I can. Interestingly enough, the answers are not often the same. Allow me to offer three brief examples.

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Tread Warily, Fair Traveller

23 July 2008

A Socioeconomic Journey into Vengeance

The world of economics is a curious domain, beset by mathematics, often at odds with the reason of everyday life, but enormously informative should you traverse its difficult terrain. I’m reminded, each time I enter, of J.R.R. Tolkien’s perilous land, the enchanting realm of Faerie wherein lie “pitfalls for the unwary and dungeons for the overbold”. But I doubt another place could offer the governance of pirate crews and longevity of nuclear deterrence both to illuminate the human condition, still speaking of interest rates and supply matched mostly to demand.

Economics has taught me that much of what we assume is in no way actual, and that logic other people can’t understand is no less logical for it. So now I venture there again, to look around, to shout BEWARE! and to marvel at the concepts that lie in wait within.

The National Bureau of Economic Research in the US recently uploaded Naci Mocan’s working paper on vengeance. Yes, you read that correctly – vengeance. Those of you who, like me, have spent a while in and around academia might be tempted to think first of departmental politics, but not this time.

Mocan’s paper is a very carefully argued study of statistics drawn from the International Crime Victim Survey conducted by the United Nations, covering the responses of 89,000 interviewees from 53 countries. To cut a very long story short, it’s about what is likely to happen if your colour television is stolen that the perpetrator caught. How are you likely to feel?

That doesn’t seem entirely within the realm of economics, but it is given that Mocan finds different attitudes prevalent in different places, and according to different income levels, including per capita levels for the whole country. People from lower socioeconomic groups, and in poorer countries, will want to send that TV-stealing thief to jail for longer, and sometimes even for life.

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A Question of Money

5 July 2008

Is the Allure of Remittances Fading?

? by Stéfan, with Creative Commons licence

Questioning orthodoxy is often the hardest, least rewarded task. Everyone hates a whiner, and even the most artful of dissenters rarely appreciate the value of their own kind. But only by pushing and prodding can we expand our understanding of the way things are, always with the aim of shifting them towards the way things should be. When J.K. Galbraith coined the term ‘conventional wisdom’ in the 1950s he did so in the belief that there was “a persistent and never-ending competition between what is right and what is merely acceptable”. He wanted to root out and analyse ideas that were popular only because they could be understood within a broad social consensus, regardless of their content. They were persistent because people built on them, using the same or similar methods to produce slightly different explanations.

I’ve written about money sent home by overseas workers to the Philippines before, but allow me now to consider recent comments by others to put the issue in perspective. When I attended the opening forum of the International Migrant Alliance in Hong Kong not long ago, the most credible of the speakers had an interesting tale to tell. Sonny Africa is an economist with the IBON foundation, a left-leaning think tank in the Philippines. He argued, very much against the conventional wisdom, that remittances might well be propping up individual households in the country, but there was no hard evidence that they were encouraging anything but low-level investment. Most importantly, he said that remittances were not beneficial to long-term economic growth.

Africa’s position sounds like sour grapes in a country that received a staggering US$17 billion in remittances last year, second only to vastly more populous China at $US25.7 billion. But other economists have been questioning remittances recently – not dismissing them, but asking whether their beauty is in the eye of the beholder.

YouNotSneaky, an economist blogger far more perceptive that the name suggests, has argued in much the same way as Africa that the benefits people think come from remittances are actually from the transfer of money within households. The overall economic benefit, he argues, comes not from the remittances themselves but from the entire process of labour migration. Reviewing the post at Marginal Revolution, Tyler Cowen agrees that “the gains are to be found in the immigration itself, not the subsequent transfer. Beware double counting.”

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Knowledge is Never Finished

14 April 2008

The ‘Freeconomics’ of Spreading Ideas

The Sinister Idea, by Felipe Morin, with Creative Commons licenceHow do ideas shift across society, through time? Brian Aldiss once wrote that we really have no firm understanding of how an intellectual elite passes on difficult concepts to the general public. Sure, education’s a part of it, as are what Antonio Gramsci called organic intellectuals – those who engage their communities, offer what they know and learn from the experience. Social networking and blogs have diminished geographical boundaries in that sense, but if we stay focused on the Internet there’s another vital aspect of the process that not everyone considers: commerce.

You might be thinking of e-learning services or pay-per-visit news sites, but I want to suggest a more traditional medium that’s making itself over. I’ve mentioned before that academic papers are easy to dredge up online, and they’re particularly helpful if you’re interested in what I recently called casual learning with a nod to Ivan Illich. Most of those papers are available on pages maintained by their authors, although some are orphaned on project sites long after the researcher has moved on. It’s not very often that you can drag out full journal issues free of charge, but it’s becoming a little more common.

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Monkey See, Monkey Do

7 April 2008

Throwing Poo at Andrew Keen’s Cult of the Amateur

Three Wise Monkeys, by Leo Reynolds, with Creative Commons licenceThe world needs a stirrer, someone willing to dislodge existing patterns of thought. Think Charles Darwin, Albert Einstein or Marie Curie. They all worked carefully against the orthodoxies of their times. Andrew Keen tries to ape that sort of iconoclasm in his Cult of the Amateur, but just makes a monkey of himself.

Or does he? Monkeys are far more clever than he seems to think.

First, let’s consider what Keen has to say. He takes issue with Web 2.0, the participatory culture of social networking sites like Facebook, the carnivale of YouTube, the black economy of file sharing and the gabble of blogs. He argues that amateurs are ruining the Internet by dumbing it down, like the infinite monkeys who might – given enough time and typewriters – tap out a masterpiece. In the meantime they’ll just type rubbish and abuse copyright, encouraged by a cabal of Silicon Valley entrepreneurs, particularly Tim O’Reilly.

Guard Statue, by Jennoit, with Creative Commons licenceThe result, Keen claims, is hard times for the newspaper and music industries, clearly without any understanding of the creative destruction that helps industries grow through innovation. He also frets at the loss of control by “gatekeepers” – editors, journalists, authors and the like, those traditional arbiters of information content. Or you might think of them as bereft zoo keepers now that the monkeys have escaped the enclosure.

Keen initially reserves his monkey comment for bloggers, who he thinks never read – at least books like his to go by comments reported in the Guardian. So I imagine empty shelves around me and – behold! – I feel a tail growing. I want to take Keen on his word, and see how a monkey could suggest that today’s Internet is actually improving the world.

Now where’s my banana.

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Market Malady

27 March 2008

Ethnic Segregation, Maids and Shopping in Hong Kong

Hong Kong at night, by wok, with Creative Commons licenceHong Kong is renowned for two things: its libertarian economy and its cosmopolitan outlook. Here the dollar is king, and people from around the world can meet, exchange and learn in the market. It’s the economics of the human condition. Or it would be, if the city weren’t ethnically segregated.

No, you say, surely not! But consider this first up: in presenting the 2006 by-census data, the Race Relations Unit of the local government describes the 95% majority in ethnic terms as “Han Chinese”. Then it labels all fair-skinned non-Chinese residents as “self-identified” (because that’s the only choice they’re given on the census) “white”, and lists other minority groups under national designations such as “Indonesians”, “Filipinos” and “Nepalese”.

Raceposter1, by tamarabianca11, with Creative Commons licence So, despite a Race Relations Unit committee that is supposed to promote ‘racial harmony’, for minorities we have one term that coheres a range of dissimilar ethnic groups under a skin colour that is no more white, and often less so, than the appearance of many ‘authentic’ locals, and designations that deliberately separate ethically similar people (Indonesians and Filipinos are both ethnic Malays). Framing this wayward categorisation we have the curious use of “Han Chinese”, when almost everyone here identifies with the Cantonese ethnic subgroup.

But, of course, we’re part of China now, and all Chinese should be the patriotic same.

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Another Thing About Taxation

10 March 2008

What Place a Morality Tax?

Tax Day, New York City, by Amit GuptaWhen you start thinking about tax it’s hard to stop. Having written my weekend post on tax and governance in Hong Kong I began to think about the extent to which taxes are warranted beyond the fair maintenance of society and its institutions. In a place like Hong Kong taxation isn’t the main form of government revenue, so it’s hard to argue for more progressive tax rates. But what about as a general principle? How do we determine the scope of taxation that best suits a given society?

Daniel Hamermesh and Joel Slemrod have been working on one answer for a while: a tax on workaholism.

The pair recently published a paper entitled “The Economics of Workaholism: We Should Not Have Worked on this Paper” in the B.E. Journal of Economic Policy & Analysis. But the effort, provocative as it might seem, didn’t cause much of a stir. The paper had already been issued in 2005 as a NBER working paper, and even then made only a passing fuss (amongst others, the Ayn Rand fan club, the Atlas Society, was predictably unimpressed).

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Mo’ Money

8 March 2008

Tax Breaks and Populist Governance in Hong Kong

Tax 稅, by hochitThe greatest delights are sometimes more food for thought that you might imagine. Next year I’ll pay almost no income tax, for the second year in a row. I don’t dodge tax – I’ve just been given a break. Thank you, Hong Kong. But multiply my windfall a few thousand times and what does it mean?

First, allow me to set the scene. On Wednesday last week, Hong Kong’s Financial Secretary delivered his first budget. Not such an interesting event you might think, but this version had already been subjected to a long stretch of public debate. John Tsang had a sizable budget surplus of HK$115 billion to fling around, and everyone was looking for a piece of the action.

What finally stuck when the details hit the wall was an extension of last year’s offering – 75% reductions of income, profit and property taxation subject to HK$25,000 ceilings, and various small, once-off gestures, including a few welfare give-backs.

The Standard newspaper, in its slightly scatterbrain style, pronounced the Financial Secretary “Santa Tsang”.

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We Shall Overcome

24 February 2008

In Praise of Knowledge Reworked

BrainIt’s impossible to discuss complex ideas without clarity, but don’t search for deeper meaning in Wikipedia or a dictionary. That was the message over at the Scatterplot blog last week. With a focus on academic submissions to a sociological journal it seems a valid point, but it also tells us something about hands-off commentary.

As passing quips, the posts on using Wikipedia for background information and appealing to dictionaries in defining complex ideas read very much like on-the-run, exasperated commentary. And they should be – journal editors have a responsibility to act as gatekeepers, screening out submissions not fully engaged in the world of ideas.

This isn’t as abstract as it might seem; a journal article is, or at least should be, a small contribution to how we understand the world, regardless of the discipline in which it was written. But look at the problem from a slightly different perspective. How can we ensure that cut-price sources become top-rate reference material?

definitionsLeaving dictionaries aside because they still involve a long process of submission, consideration and acceptance – not to mention the need for sometimes crippling brevity – what can we do about Wikipedia? From a blogger’s perspective, John Quiggin has provided a very simple answer.

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Where Does All the Money Go?

23 February 2008

Remittances, Consumption and Corruption in the Philippines

Remittances mainly arrive from the USOne of the cruel ironies of Philippine national life is the reliance on remittances as an economic crutch. There have long been suggestions that the staggering amount of money flowing into the country from emigrants abroad – the Bangko Sentral ng Pilipinas puts it at US$14.4 billion for 2007 alone, or around 10% of GDP – is beneficial for domestic savings and economic growth in the depressed rural regions. That’s what University of the Philippines economist Ernesto Pernia argues in a discussion paper released earlier this month. But why is almost all of the country still dirt poor?

Pernia has part of the answer – most of the money goes to the relatively better off, who can afford to send a family member overseas in the first place. Another indication that something is amiss came from the World Bank chief in the Philippines, Bert Hofman, when he commented last week that there were “too little investments [sic] in this country”. Leaving aside investment by foreign companies, you might presume that the remittance wealth is trickling down into a modest amount of domestic investment, but that doesn’t seem to be the case.

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Voodoo Journalism

20 February 2008

A Textbook Case of Hoodwinking

The Old World, according to Stefan Theil in the latest issue of Foreign Policy, is succumbing to a dangerous pro-left bias. In an article entitled ‘Europe’s Philosophy of Failure’ Theil surveys high school textbooks, finding them both hackneyed and representative of a larger economic malaise. His evidence seems so compelling that he has generated a vigorous online debate about the limits of European economic sensibilities. But beyond the headline, something is amiss.

Captial and Kapital

Blog posts on Theil’s thesis of despair are fairly easy to find, and troublesomely accommodating. Marshall Jevons’ link-and-comment post on Bayesian Heresy merely points to an “interesting article”. Eric Skilling’s post on Flashcube.Org at least cites a passage, but only offers a similar passing comment on a “great article”.

There is much to be said for traditional linking blogs and their ability to disseminate information. But in this case the minimalist posts obscure a crucial failing of Theil’s piece: it’s not about Europe at all. Skipping from the Europe of his title to specific accounts of French and German textbooks, Theil reveals a sweeping illogic. How can we possibly draw continent-wide conclusions from two states, even if their economies are the backbone of European development?

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