Debt, no brainers and no-nos

Yesterday I attended the launch of a new CEPR (free) e-book, A New Start for the Eurozone: Dealing with Debt. Written by some of Europe’s most distinguished macroeconomists, it notes that a return to sustainability requires a reduction in the legacy debt burden. It proposes using the seigniorage revenues from the Euro to finance a one-time debt buyback for the most indebted Eurozone countries, reducing their debt-GDP ratios to a sustainable level. This would be combined with a stronger regulatory structure to prevent future debt build-ups (and mitigate the unavoidable moral hazard involved in the first step), and the creation of a safe asset, a synthetic European bond.

A New Start for the EurozoneThis is very far from my area of expertise, so it sounds a promising package of measures but I’m not in a good position to evaluate its details. Among the audience at the launch, the questions centred almost entirely on political economy questions: how could European governments be persuaded to do anything now the markets are calm? how would the new measures sit within the existing institutional framework? could northern Europe (Germany) be persuaded to allow the seigniorage revenues to be used in this way?

In short, an economic no-brainer – that the debt legacy has to be tackled – is a political no-no. The fact that the economic hurdles are huge but the barriers to reform are political was brought home by Gillian Tett’s Financial Times column this morning. She writes: “On the eastern side of the Atlantic, policy makers are now at pains to suggest that a Greek default, or even a eurozone exit, would not be disastrous; at last week’s International Monetary Fund meetings German officials argued that the chance of a Greek exit had already been priced into the markets, and that shocks could be contained.”

She argues – and I agree – that the Eurozone could yet go very pear shaped, and the dangers of renewed systemic financial crisis are non-zero. At least if the pessimistic view is correct, the political economy of reform along the CEPR or other lines will become more favourable.


Non-anachronistic inflation

An interesting-looking book has arrived – I’ve not yet had chance to read it but have paged through. It’s The Truth About Inflation by Paul Donovan. It looks like a very nice overview – historical trends, why it happens, why it matters, the issues with index numbers and when to use different price indices, inflation and debt, and inflation for different social groups. The author is an eminent City economist (UBS) and the book is aimed at investors, but would therefore work as well for students – it’s non-technical but intelligent.

The conclusion touches on the deflation question but says: “This does not mean inflation can now be pushed to one side by an investor as some kind of quaint anachronism of times past.” For one thing, in a low inflation world, small differences in inflation rates make for big differences in outcomes and returns. For another, not all groups of people in society are experiencing any deflation – it depends on your consumption pattern.

Like me, Donovan was marked by the British high inflation experience of the 1970s. He says, “I have long wanted to write a book on inflation.” Economists are indeed strange, he adds. Maybe I’m strange too, but I’m looking forward to reading this.

The joy of GDP – and beyond

Late last week I attended a special IARIW-OECD conference on the future of the national accounts, and don’t tune out – it was fascinating. I’ll write up my own talk soon: one of my two main themes was that whatever approach one takes to measuring economic and social progress, there needs to be a more explicit social welfare framework informing the measurements. It’s often said that GDP is not a measure of welfare but of activity, and yet we freight it with value judgements and use it as an indicator of living standards.

All the alternatives have the explicit aim of measuring welfare but end up usually as ad hoc lists because the analytic framework is only implicit. A recent example is the Social Progress Index published recently (and Michael Porter explains its rationale here), which has 54 indicators in 12 categories and makes a point of excluding economic measures such as employment and income, which seems odd to me given that surely we want to understand the trade-offs. Anyway, the indicators included are all Good Things, but then so are the categories in the OECD’s Better Life Index and the Human Development Index. How should we choose?

Anyway, clarity about the relationship between the economy and nature on the one hand, and the economy and non-efficiency, social indicators on the other, was on the mind of many participants at the conference. The conference papers are well worth a browse.

GDP is certainly a surprisingly popular subject at the moment. Apart from my own GDP: A Brief but Affectionate History, there was Zachary Karabell’s The Leading Indicators (which I reviewed for the New York Times) and Lorenzo Fioramonti’s Gross Domestic Problem. These were all published around the same time. In June there will be Dirk Philipsen’s Little Big Number: How GDP Came to Rule the World and What to Do About It, which I’m half way through and is in the Fioramonti vein. At the conference Quentin Dufour pointed me to a French book (published in English in 2002) by Alain Desrosières, The politics of large numbers: a history of statistical reasoning.


The wave of publication is surely a sign that something is shifting? The last big wave of books about measuring the economy dates to the early years of national income accounting, including Richard Stone’s The Role of Measurement in Economics and J.R. Hicks’ The Social Framework.

A challenge to techno-euphoria

After plucking it off the shelf for yesterday’s post on the ebb and flow of economic power in the long sweep of history (or – what I did on my holidays), Angus Maddison’s The World Economy: A Millennial Perspective (read it online here) absorbed me. He identifies three forces driving long term growth: conquest and settlement; trade (specialisation and the division of labour); and technological innovation. On the last of these, he writes:

“It is clear that technological progress has slowed down. It was a good deal faster from 1913 to 1973 than it has been since. The slowdown in the last quarter century [ie. to 1999] is one of the reasons for the deceleration of world economic growth. ‘New economy’ pundits find the notion of decelerating technological progress unacceptable and cite anecdotal or microeconomic evidence to argue otherwise. However, the impact of their technological revolution has not been apparent in the macroeconomic statistics until very recently, and I do not share their euphoric expectations.”

I would really challenge the implication here that macroeconomic statistics are facts and microeconomic evidence just anecdote. SInce Maddison wrote this, we have had the early 2000s boom and then the financial crisis and its aftermath. It will be a while before the macro data can make sense of it all.

It’s quite clear though that there are some innovations that have not improved productivity or welfare – see Thomas Philippon’s marvellous paper Has the US Finance Industry Become Less Efficient? (Answ: Yes) The Maddison challenge is a good one to those of us who do think there is important technological innovation occurring – just as when Solow made his famous comment about computers, there is a question about why it doesn’t show in macro data. One answer might be that GDP data don’t capture the welfare gain due to new technologies (see my GDP for more). Another might be that the technologies are doing more for growth outside the OECD countries – think mobiles in Africa, South Asia or Latin America. But if Maddison is right, the interesting question then is why this wave of technology uniquely has not translated into faster growth and social welfare?

Venetian capitalism, 1515 and 2015

I’ve had a short break to celebrate my 25th wedding anniversary, and we went to Venice. One of my books was Peter Ackroyd’s Venice: Pure City, which has lots of interesting facts but is frankly a bit long and dull. I did enjoy, though, the sections about the Venetian economy. It was the engine of the world economy in the 16th century, a bustling, dynamic trading economy, built on a marsh with no natural resources apart from lots of fish.

Angus Maddison’s The World Economy: A Millennial Economy is excellent on this, and on the tides of economic history more generally; one of the fascinating things is how different places have had their moment. Italy’s was the during Renaissance, and look at it now. Maddison writes of the Venetian Republic: “It created political and legal institutions which guaranteed property rights and the enforceability of contracts. It was a pioneer in developing foreign exchange and credit markets, banking and accountancy. It created what was effectively a government bod market. … Its fiscal system was efficient and favorable to merchant profits and the accumulation of capital.” On the accountancy, Jane Gleeson-White’s Double Entry: How the Merchants of Venice Created Modern Finance is a great read.


Venice was also the first centre of commercial publishing thanks to Aldus Manutius (there’s an exhibition on him now at the John Rylands library in Manchester). Ackroyd writes: “Printing was the first form of mass production technology, creating identical objects at identical cost.” Venice pioneered commercial printing and publishing, although the activity led to complaints that the technologically-driven abundance of books was making people less studious, a vulgarising influence. Sounds familiar!

One thing that intrigued me in Venice (the city, not the book) was the fact that the identity of the sellers of cheap handbags and selfie sticks in the streets has shifted. Last time I was there, five years ago, these men were mainly Senegalese. This time they were mainly South Asian. I wonder how these shifts happen? Of course, the city’s main trade these days is tourism, and all the services and goods that requires – like so many other beautiful places whose earlier economic function has vanished into the mists of time.

Beautiful - and redundant?

Beautiful – and redundant?