Italy’s Supply Constraint

The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
Continue reading

Greg Mankiw Wakes Up: Demography Does Matter

I recently berated Greg Mankiw (and the top ten world economists he pretends top cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.

Now since dependency ratios are really a function of three factors – fertility, life expectancy and net migration – it is hard to deny the obvious: that fertility is important.

Mankiw also cites approvingly the opinion of US economist Jeremy Siegel to the effect that the “way to finance the baby boomers’ retirement is persistent capital inflows and trade deficits with developing countries”. Now Siegel doesn’t quite have this right here. The way to finance a high old-age dependency ratio, is through a high level of saving, and running persistent capital *outflows* and trade *surpluses*. This, of course, is precisely what Germany and Japan are now doing, (and also, incidentally, steering the currency down to reduce deflationary pressure, which is again what has been happening in Japan) and this is one of the reasons I give so much importance to this phenomenon. It is also one of the reasons why I discount the likelihood of domestic-demand-driven growth in these countries.

So all I can say is, well, well, well, welcome onboard Greg. As is well known both time consistency and cognitive dissonance are phenomena which constitute important problems for economic theory, but normally not in the sense that we can see them at work here.

A topic whose time has finally come? We will see. To quote the evolutionary biologist Linda Partridge (in another context) “there is much to do”. Would that economists were as aware of this as theoretical biologists seem to be.

Update: the problem is more perplexing than I initially imagined, since I now discover that on July 20th Greg approvingly cites a paper by Nir Jaimovich and Henry Siu. The title of the paper is The Young, the Old, and the Restless: Demographics and Business Cycle Volatility , and the extract he cites is this one:

changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies“.

Greg says that this was the most intriguing hypothesis he had heard all day (he was at the NBER Summer Institute), which is fair enough, and I don’t expect him to agree with the hypothesis simply because he finds it intriguing, but I *am* stumped to understand how he can then go on on August 26 to describe the idea that low fertility posed a serious economic problem as one of the most wrong headed ideas he had heard recently, since, obviously, it is fertility levels which in part determine age structures which in part influence volatility in business cycles (according to the intriguing hypothesis). So come on Greg, which is it, wrong-headed or intriguing?

Seriously though, my point here is not to have a go at Greg Mankiw (although I have rather done that haven’t I?). My point is to draw attention to all the confusion which is knocking about on this topic. Material not unrelated to all of this is to be found in a recent article in the FT by John Kay. Kay asks hijmself why it is that Eureka moments seldom happen to economists. Basically he suggests that the reason is down to the difference between the natural and the social sciences. I don’t buy that, and I think that we social scientists sell ourselves too cheap if we succumb to it. But by the by Kay touches on another point, and it is one which brings us back to the struggle Greg Mankiw is having with the recalcitrant phenomena, since:

“It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat.”

Well sorry John, but we have just found one that is: the neo classical account of steady state growth, there is no real factual basis for this theory, and theoretically it isn’t hard to see that it must be flawed, if, that is, the ‘intriguing hypothesis’ which Greg was scratching his head about is a valid one, and thus, since age structures constantly change, so must rates of economic growth. In which case both steady state growth and convergence theory go quietly west, off into the sunset. The intriguing question is then of course what exactly it is which modulates the changes in age structure. This is, of course, just the kind of problem that Archimedes was toiling away with in the relatively unturbulent waters of his bathtub. Aha, now I know why it is economists seldom have Eureka moments: they all take showers.

Now just let me step outside a moment, what is going on out there, is that the sun going round the earth, or could it just be that somehow or another the earth – unbeknownst to me – is actually turning round the sun.

Noted With Pleasure: Reindeer People

One of the other books that I picked up while in Helsinki was Reindeer People: Living with Animals and Spirits in Siberia, by Piers Vitebsky. (US paperback coming in December.) He’s an anthropologist at the University of Cambridge, and the reindeer people are his research specialty. The book, however, is an engrossing synthesis aimed at a general audience. More than that, though, it’s a personal account of living with nomads, clashes of cultures (ancient, Soviet and post-Soviet) and vivid personalities, all played out in a beautiful and harsh land. I picked up the book in part because I had just missed meeting some reindeer people when I was in northern Mongolia a few years back, and I wanted to learn what their way of life was all about.

I got much more: how reindeer are partially domesticated, what the coming of Soviet power meant to the far North, how people are surviving its ebb, how reindeer migrate, what Arctic cold means in practical terms, to name just a few. Vitebsky writes well, he’s chosen interesting ground to cover, he can sketch people, relate key anecdotes and sustain narratives about their conflicts. Layer upon layer, like the clothing the Eveny wear in winter, Reindeer People envelops the reader, imparting something of those distant lands.

Dear Dmitri…

Terrific appreciation of Dmitri Shostakovich in the weekend FT (not this last weekend, of course, I’m a little behind on my reading) on the centenary of his birth:

The Fifth Symphony was a compromise that didn’t compromise. It was a squared circle. It was genius with a welcome mat. It made the Soviet state pigs feel they could wipe their trotters at the entrance and hand you their hats. Yet it was still a work of genius. Today the symphony is just as interpretable as a cry of grief and wrath over Soviet Russia as an endorsement of Stalin.

You carried on, avoiding the gulags, smuggling impertinences into your music (the Sixth Symphony) and writing string quartets as private therapy. Meanwhile friends and fellow artists were being dragged to Siberia, shoved in the Ljubjanka, or otherwise stiffed or silenced. You dreaded the knock on the door.

Read the proverbial whole thing.

Baltic Framework

Our recent posts on governments in Stockholm and Schwerin are as good a reason as any to highlight Northern Shores, by Alan Palmer. (It’s published in the US as The Baltic.) I had intended to write a premature evaluation, but then I finished the book, which I picked up during a business trip to Helsinki, so this is slightly more considered.
Continue reading

A squabble

The next anniiverssary guest post is by the funny and clever Michael Manske.

Border disputes between Slovenia and Croatia flare up with the regularity of teenage zits, and they’re about as equally exciting. The latest one to pop was in the swampy little Slovenian hamlet of Hotiza last week, when Croatian police arrested some Slovenian journalists and the tired cycle of outrage and mutual recrimination began again. Slovenia’s foreign minister promptly tattled to the EU, and Slovenian special forces were sent to the area where they and their Croatian counterparts engaged in a brief, but intense, staring match.

The EU has never shown much of an interest in the dispute, and this time was no exception. Commissioner Ollie Rehn, like a teacher in an unruly classroom, admonished the two neighbors to behave as befits an EU member and an EU candidate country. But otherwise the EU’s tried and true doctrine of telling everybody to just get along had very little effect on the Slovenian-Croatian dispute.

So what is the problem exactly? I don’t want to get too much into it (like I said, it’s not the most exciting topic — there’s an overview of it over here at wikipedia if you’re interested) but it goes beyond the ill-defined border to a chronic inability, or perhaps cynical desire, to let the issue fester on indefinitely.

Slovenia and Croatia have been independent now for 15 years, the wars of Yugoslav secession have been finished for more than a decade, and still the border isn’t clear. The closest the two sides came was in 2001 when they almost accepted the so-called Drnov¹ek-Raèan agreement. In the end, the Croats failed to ratify it — a mistake that may come to haunt them in any future negotiations, since next time around Slovenia will bring a nuclear weapon to the table: the EU membership veto. It’s been dangled threateningly in front of Croatia before. Back in 2004, the previous center-left government (during another border incident) explicitly said as much. Now the government is comprised of center-right parties and even includes Janez Podobnik, a man who personally got roughed up at the border a few years ago. (He’s now serving as environment minister.)

Slovenia knows what it’s like to be on the receiving end of a threatened veto. During Berlusconi’s mid-90s reign, Italy strong-armed concessions out of Slovenia with regard to property rights and the Italian minority. This culminated in the so-called Madrid (or Spanish) Compromise of 1995. The question is whether Slovenia will decide to pay it forward, this time with Croatia. And what effect that may have on already soured relations.

Google news without Belgian news

The Belgian court of Justice has ordered Google News to remove all feeds of Belgian newspapers and journalists. This news was broken by Chilling Effects:

…to withdraw the articles, photographs and graphic representations of Belgian publishers of the French – and German-speaking daily press, represented by the plaintiff, from all their sites (Google News and “cache” Google or any other name within 10 days of the notification of the intervening order, under penalty of a daily fine of 1,000,000.- € per day of delay;

The original court order, in French and dating from September 5th, can be found here (pdf). Google News seems to be charged with violating laws concerning copyright (publishing of headlines and first paragraphs) and databases (publishing cached articles after they have been retired by editors). If I understand the Belgian and Dutch press correctly, the court order concerns only publications in French and German as Dutch-language publishers have already had their headlines removed from Google News. It is possible that publishers will use this court order to negotiate, in which case Google News could eventually be forced to share its advertising revenues with the respective publishers.