Recommended reading
David Glasner has done some excellent posts on the relationship between Keynes and Hawtrey during the 1920s and 1930s. Like David, I’m a big fan of Hawtrey.
Tyler Cowen has a post showing that it can be done—New Zealand has abolished deposit insurance. They were also the first to do inflation targeting. Let’s hope their “open bank resolution” regime also catches on.
Matt Yglesias gets the entire Cyprus–Germany thing exactly right.
Ed Dolan provides a good survey of everything you need to know to understand the Cyprus crisis. I especially liked this comment:
Although some kinds of financial losses may net out against one another, when the dust settles, we find that there are real losses behind all the paper. For example, behind the 2008 financial crisis in the United States, Ireland, Spain and several other countries there were wild overinvestments in real estate. Houses and condos were built that no one wanted to buy, at least not for enough to pay for the bricks and the wages of the bricklayers. In Cyprus, funds supplied by bank depositors were used to buy Greek government bonds, which, in turn, were used to pay the salaries of Greek bureaucrats to do work that critics claim was unproductive and overpaid. There is no way to recapture that wasted labor now..
I’d guess the Department of War Defense wastes more resources each year than the US wasted during the entire housing bubble. I’ve always found it implausible that allocating a few hundred thousand excess workers to home building in the mid-2000s, and a few hundred thousand too few workers to services and manufacturing, has any bearing on why the US economy has performed poorly in the 4 years since 2009. Adam Smith said something to the effect that “there is a great deal of ruin in a nation.” He should have added; “as long as the central bank keeps NGDP gradually increasing.”
David Brooks on prediction:
Suppose you’re asked to predict whether the government of Egypt will fall. You can try to learn everything you can about Egypt. That’s the inside view. Or you can ask about the category. Of all Middle Eastern authoritarian governments, what percentage fall in a given year? That outside view is essential.
Most important, participants were taught to turn hunches into probabilities. Then they had online discussions with members of their team adjusting the probabilities, as often as every day. People in the discussions wanted to avoid the embarrassment of being proved wrong.
In these discussions, hedgehogs disappeared and foxes prospered. That is, having grand theories about, say, the nature of modern China was not useful.
If you asked me why I believe China will become a developed country, these would be my top 5 arguments:
1. Taiwan
2. Hong Kong
3. Singapore
4. South Korea
5. Japan
Strongest argument against:
1. North Korea
PS. I use to be very skeptical when I read reports that China wouldn’t overtake the US in total GDP until 2029, or 2040, or whatever. It always seemed to me like it would be much sooner. Now the OECD seems to agree—putting the date at 2016. Earlier this year I did a post claiming it had already happened. Glad to see the conventional wisdom moving in my direction. Of course it will still be far from developed.
PPS. Want to see my top six arguments for why North Korea will eventually become developed?
PPPS. Non-economic, but recommended—Roland Kelts compares Japan, Britain, China and America. Also, I just finished “Cezanne: A Life” by Alex Danchev. I’m not a big fan of biographies, but the second half of the book is recommended if you have an interest in Cezanne, or in the art of painting. And doesn’t one imply the other? There are painters that are towering talents (Titian, Rubens, Rembrandt, Van Gogh, Picasso) and those whose best work seems inexplicable, a sort of minor miracle (Piero della Francesca, Velasquez, Vermeer). I put Cezanne in the second group. How did he do THAT?
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24. March 2013 at 07:48
Strongest argument against while NK in a very literal and short-term sense, yes.
But really, in a structural and powerful sense, Russia is the strongest argument against China. Culture matters and Russian immigrants remind me a lot of Chinese immigrants in work ethic/intellect. Both have troubled histories.
Is Russia developed? Against China, yes. But preponderance of state capitalism leads to intractable corruption and stagnation, it’s not a rich or developed country and I doubt it ever will be.
Both are resource-rich. Russia has gold and oil, China has rare earths (and the value of both gold and oil will depreciate against rare earths soon).
Why should we believe that China will somehow be “better” than Russia? Perhaps because its economic books are in better shape than Russia’s were during liberalization? Maybe…
24. March 2013 at 07:51
Robert Shiller is pimping the balanced budget multiplier: http://www.slate.com/articles/business/project_syndicate/2013/03/great_recession_you_have_to_raise_taxes_to_get_stimulus_done_right.html
24. March 2013 at 08:07
Thanks for the steer to the Cezanne biography. “How did he do THAT?”, exactly! I’m amazed how many good things I get from your blog, way beyond a persuasive voice on monetary policy. And how do you find the time? So prolific, so consistently good. Thanks!
24. March 2013 at 11:28
What worries me about the China case is that, unlike other examples of Chinese Developed Democracy (Taiwan and Hong Kong), the Chinese economy is heavily dominated by corrupt arrangements between State Owned Enterprises, State Owned Banks, and Local Officialdom to a degree that Taiwan and Hong Kong never even came close to. It’s going to make economic reforms liberalizing more of the economy very difficult.
In fact, it’s proven difficult already. Chinese leaders have been talking about liberalizing the SOEs and moving towards a domestically driven economy for years, but it hasn’t happened.
24. March 2013 at 11:35
heh, as long as the Kim Dynasty still stands NK will never develop.
24. March 2013 at 12:17
Ashok, China is certainly not “resource rich,” and Chinese culture is quite different from Russian culture. Their economic systems are quite different. Where is the Shenzhen of Russia? The Wenzhou?
Thanks for the link Saturos.
Thanks Riccardo.
Brett, Actually China has liberalized a great deal–It’s a totally different economy from when I first visited in 1994.
ChargerCarl, But how long will it stand?
24. March 2013 at 12:38
They’ve opened up more for privately-held firms to do business and export, but as I said, promised reform of the SOEs has been stalled for years. It’s not the same thing.
As long as the Kim Dynasty can ensure the loyalty and sustenance of the army, and as long as no one intervenes from the outside (which is unlikely).
24. March 2013 at 12:41
You’re right – I think I may have overestimated the rare earths export, but in general both China and Russia export valuable goods (IT and natural resources come to mind). The former is particularly important for economies to become skilled centers of innovation rather than factories of the world.
The economic systems might be different but since maybe 1980 or actually late ’70s both followed versions of Deng’s “Reform is China’s second revolution” with practical realities outpacing ideological history.
Culture seems different, but similar in terms of economic values and general intelligence (again this is just stereotyping and immigrants are, of course, a selected group).
Both have quite a bit of state driven innovation whether it comes to weapons or space or cyber technology.
I see China and Russia as part of a broader trend and, perhaps, I’m mistaken. But if anything were to be China’s greatest “enemy” in terms of future development even if NK is the literal answer, I think Russia is the more “holistic”, if you let me use a fluffy word, answer.
Which really rich country today (Northern/Central Europe, USA, Scandinavia, Singapore, parts of Western Europe) have gone through real, damaging strife (gulags, years of repression, GLF/cultural revo etc.)
However, I am optimistic about you in the short-run in terms of housing busts. When (not if) the expensive houses they’ve built up come crashing, it will basically be a mass redistribution of welfare from state capitalists to lower middle class urbanists.
24. March 2013 at 12:42
Scott, you might find this interesting:
http://www.c-spanvideo.org/program/292562-1
24. March 2013 at 16:32
My recommended reading;
http://www.amazon.com/The-AIG-Story-Maurice-Greenberg/dp/1118345878
I only read the second half. Where Eliot Spitzer enters to destroy a good, solid international financial services company, just because he could (and use that to get elected governor).
After Spitzer does his worst–and essentially has to concede that he had no case against AIG–the new, weakened management put in place at Spitzer’s behest (hard to believe, but true) looks the other way as FP goes hog wild insuring MBS they seemed not to have understood. That’s the source of AIG’s illiquidity problems in 2008.
Then Hank Paulson and Tim Geithner use those issues to maneuver the weakened AIG into a conduit for a bailout of several Wall Street firms and big banks (yes, including Goldman Sachs). All the founder of the company, Hank Greenberg, can do is watch the horror show unfold.
If it’s true that revenge is a dish best served cold, Greenberg must have enjoyed this meal. However, anyone who believes in the rule of law will be appalled at what is in this book.
24. March 2013 at 18:40
If you asked me why I believe China will become a developed country
I’m curious, do you think this will happen absent real political reforms, or do you expect open national elections within, say, 20 years? (I certainly hope you’re right!)
24. March 2013 at 18:45
(to clarify, China has of course seen considerable reform already, I mean reforms relative to where they are now, the kind that would take Zhonghua into something approximating liberal democracy)
24. March 2013 at 20:41
Japan is a unique country and no more comparable to other Asian countries than those countries are to the West.
Hong Kong and Singapore are entrepot city-states whose development strategies are of dubious relevance to China.
That leaves South Korea and Taiwan. These are larger countries that developed in large part under authoritarian regimes. So they do offer lessons for China and China has undoubtedly learned these lessons well.
But there are important differences. The test for China going forward is whether its leadership can restrain their own corruption and self-dealing such that the overall economy is not suffocated. In other words, I agree with Ashok: the question is whether China will turn into Russia with Chinese characteristics.
There are good reasons the leaderships of South Korea and Taiwan exercised restraint: both nations were utterly dependent on foreign (American) support to ensure their existence. It was never an option for the Park or Chiang regimes to kick back and live large off of rents extracted from their underdeveloped economies. Building up national productive capacity, and maintaining American support, were crucial to their survivial. And when the military dictatorships outlived their usefulness, they handed over the reigns (under foreign pressure) to democratic leaders with minimal bloodshed.
China doesn’t have many allies, but it does not face any existential threat like Korea or Taiwan did. If China gets to a point where corruption and state monopolies are suffocating the economy, will the leadership be willing to put in place reforms that undermine their own authority and economic self interest? I see absolutely no evidence that this will be the case.
24. March 2013 at 20:48
Brett,
I think one considerable counterpoint to your argument is Singapore (SOEs run rampant there shoulder to shoulder with private enterprise). Arguably one could bring in the chaebols of South Korea or similar large behemoths of Japan — the latter two may not be nominally state-linked but in many ways function (or used to function) similarly to SOEs in other Asian countries.
25. March 2013 at 00:13
Off topic on Cyprus: the good news is that the ECB retains its credibility and will continue to meet its inflation target.
25. March 2013 at 00:18
James,
Stable prices now and forever!
25. March 2013 at 00:59
Ashok Rao,
“Which really rich country today (Northern/Central Europe, USA, Scandinavia, Singapore, parts of Western Europe) have gone through real, damaging strife (gulags, years of repression, GLF/cultural revo etc.)”
Japan and Germany spring to mind. However, all of Europe (and I imagine Scandinavia) suffered from times of severe famine, oppression, inquisition, and war, for just about every century until the 20th. The last natural famines in Europe took place in Ireland and Finland, both of which are well-developed and stable societies today. The depopulation in Ireland during The Famine was massive and crippled their society, and the history of the Republic alone was hardly an easy one, yet even the recent crisis hasn’t undone all the progress they’ve made since the 1980s.
Every society has to struggle with its history to become a stable capitalist democracy and even the maintenance of a stable capitalist democracy requires vigilance. However, the astonishing history of the last 500 years is that, for a huge variety of climates, geographies, cultures and races, it has been possible to achieve this goal.
25. March 2013 at 01:13
“I’d guess the Department of War Defense wastes more resources each year than the US wasted during the entire housing bubble. I’ve always found it implausible that allocating a few hundred thousand excess workers to home building in the mid-2000s, and a few hundred thousand too few workers to services and manufacturing, has any bearing on why the US economy has performed poorly in the 4 years since 2009.”
The key factor is leverage. People do not buy houses with their own money; people buy houses via the use of leverage. Once house prices collapsed, underwater household balance sheets triggered a debt deflation; the kind Irving Fisher wrote about. Fortunately, the Fed came in to stabilize the price level(although it came in way too late) to head off the debt deflation.
25. March 2013 at 05:38
If North Korea eventually becomes developed, it will probably be after what limited infrastructure the country had is flattened. The Kim regime has proven time and time again that regime security is the first, last, and only priority of the government. I doubt they’ll go down quietly.
25. March 2013 at 06:05
If you look at gdp growth over the next several decades I would guess N Korea will be number 1, you could maybe talk me into Myanmar but when N Korea rejoins the south the gdp of the former north will skyrocket.
25. March 2013 at 06:23
I think Myanmar is a much better bet than North Korea. Do you remember when Germany reunified? The relative disparity in per capita GDP between North and South Korea is far beyond the gap there was in East and West Germany, and Germany’s reunification was a very difficult scenario whose effects still exist today.
Even if the two Koreas reunified peacefully, the societal and economic pressure would be immense. This is a lot of interesting literature on the topic.
25. March 2013 at 06:36
Brett, Why didn’t your North Korea argument apply to Burma?
And many Chinese SOEs have been privatized–more will be in the future.
Ashok, You asked:
“Which really rich country today (Northern/Central Europe, USA, Scandinavia, Singapore, parts of Western Europe) have gone through real, damaging strife (gulags, years of repression, GLF/cultural revo etc.)”
Germany, Japan, South Korea all went through agonizing strife.
ChargerCarl and Patrick, Thanks for the links.
TallDave, There have already been enormous political reforms. China’s political system today is more similar to the US, than to the China of 40 years ago. I expect the political reforms to continue, and they’ll have democratic elections within 15 years. They’ll be democratic before they are rich (just as Taiwan and South Korea were.)
Richard, The Chinese believe the Singapore model is highly relevant to China, and I tend to agree. I expect the reform process to keep rolling along. I’d recommend Coase’s new book on China.
James, Yes, the “good news.”
Suvy, Yes, but then it’s all the Fed’s fault, which is exactly my point. Fisher also blamed the Fed.
errorr, I discussed the same point in an earlier post. People talk about the record setting levels of investment in China. I said investment as a share of GDP will set an all-time record in North Korea in the 2020s, never to be surpassed.
25. March 2013 at 15:01
The reason the N Korea has a better chance after reunification is that S Korea has a stable government with lots of FDI that would provide a stable framework to develop the North. It would cost the South a lot but most Koreans I’ve asked are still commited to reunification. Korea’s have too much shared history and are basically a single cultural people although their lives are vastly different.
25. March 2013 at 15:01
The reason the N Korea has a better chance after reunification is that S Korea has a stable government with lots of FDI that would provide a stable framework to develop the North. It would cost the South a lot but most Koreans I’ve asked are still commited to reunification. Korea’s have too much shared history and are basically a single cultural people although their lives are vastly different.
25. March 2013 at 18:39
Scott, thanks for the thoughtful reply, I agree they’ve come a long way. I’m a bit less optimistic of course — I do not think the Communist Party will be ready to give up power in free elections within 15 years; I think another Tiananmen-style massacre is much more likely, in fact I think they would rather fight a civil war rather than give up power.
But I agree they will be free before they are rich!
25. March 2013 at 18:40
errorr — For reunification to really happen, the North Koreans are going to have to play a loooooot of Starcraft.
26. March 2013 at 02:18
the father of us all!