My latest article is up at 4liberty.eu on the middle income trap and how crucial it is how we measure growth; basically, if you don't know what you're looking for, how will you know that you've found it?
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Quite an interesting "human interest" piece today that the AP has put out, looking at what sounds like a "paradox of thrift" moment, but from the point of view of individuals. Basically, the article, entitled "Families Hoard Cash 5 yrs After Crisis," shows how specific individuals across the world are holding onto their money and avoiding debt and consumption. It does indeed take a quasi-Keynesian look at the problems that come about when all these thrifty people start not spending their money:
The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy. The whole article may have misguided analysis, but it's a good read. Indeed, it's a fascinating look at the effects of policy uncertainty (an issue that I have written about before), but without ever calling it by its name. While the authors try to pin everything down to Lehman Brothers (hey, isn't there an anniversary of sorts about that coming up?) and the epoch-changing event it heralded, it would be better if they examined what has happened since then: gigantic fiscal stimulus plans, loose monetary policy, aggressive interventions by central banks, attempted increased taxation in all walks of life, and crackdowns on any sort of entrepreneurship. This policy uncertainty has made people less sanguine about any form of investment (because of increase volatility), it's reinflated the stock market bubble (which people are understandably wary of jumping back into), and it has kept unemployment at high levels. This is less a misguided analysis of "damn those hoarders" than it is concrete evidence at the individual level of how policy uncertainty filters through the economy. In a world where fiscal "austerity" means the growth of government is slowed from 6% annually to 5%, it was perhaps inevitable that governments would still be in dire straits fiscally... and, of course, this means that there need to be new ways to fund Leviathan. The latest approach, pioneered by Central and now Eastern European governments, is a pension grab - either changing the laws to channel private pension fund money into government coffers (as in Poland) or... this. Prime Minister Dmitry Medvedev told ministers Thursday that the government needs to check that the money Russians channel to private pension funds is safe. To do this, it will seize 244 billion rubles ($7.6 billion) from non-state pension funds and put them into the state pension fund. So to recap, the Russian government is going to "inspect" the money by taking it away, booking it as part of their money for a year, and then possibly giving it back. Does this remind anyone of a Simpsons episode? Also remember, New England Patriots' owner Bob Kraft already claims that Vladimir Putin took his Superbowl ring to "look at" and never gave it back. What is the chance that this money will ever be returned? Even beyond that basic question is a more fundamental one - in what universe this is even considered a half-way decent idea? This shows that the institution of the government only ever operates for one institution, and that is government. In the middle of an economic slow-down such as the one Russia is facing now, the government has decided that keeping the government going is more important than investor confidence, contracts, or any of those either issues that come with a market economy. Here, let me just take that for you! The ramifications of a naked money grab such as this are myriad: decline in the stock market, further deterioration of (admittedly already fragile) property rights in Russia, financial volatility, and a further pallor of economic policy uncertainty. The upside? The government's budget numbers look good for one year. The shortsightedness of government never seems to amaze me.
The suspension of work in Washington DC, aka the "government shutdown," hasn't really affected people here in Russia. Or most of the world, actually. This could be perhaps that the US government has done this many times in the past, mainly under a Democratic Congress... even, as the link shows, when Democrats had control of the entire Congressional apparatus! An institution that doesn't fulfill its basic responsibilities (passing a budget) and thus relies on "continuing resolutions" to, um, continue its work, which then are fraught will sorts of brinksmanship... well, this cannot be called a functioning institution, I don't think. I'll have more ruminations on legislative institutions later, but here is one interesting result of prior empirical analysis that I have done: in transition economies, legislative effectiveness (or rather, the building of an effective legislature in a shorter period of time) tended to correlate quite negatively with economic success. I conjecture in my book that this is most likely because legislative organs tend to be more concerned with redistribution, and in an environment where the economic institutions haven't arisen or been put in place (i.e. property rights are still weak), opening up the treasury to a group of money-grubbing politicians might not be the best idea. This is true a thousandfold for Elizabeth Warren, the senator from the US state of Massachusetts and she of faux Native American ancestry, who is undoubtedly the least-qualified person to speak on economics possibly in the history of the chamber. Again, when thinking about the quality of an institution, perhaps it is best to remember Groucho's maxim about never belonging to a club that would have him as a member. I think if you can have a legislative body that welcomes Elizabeth Warren, maybe there are some flaws with your institution. Living in the former Soviet Union gives you a good sense of how institutions can be dismantled (or, more accurately, destroyed) by the powers that be, and how, when we talk about institutions, we mention them as semi-permanent. The Russian/Bolshevik revolution of 1917 swept all that had come before it off the table in an orgy of bloodletting, systematically breaking down the human spirit in order to fashion new institutions. This effect occurred in Armenia, Azerbaijan, Kazakhstan, and other places I've worked, but it appears to have had its biggest effect (intuitive, given that it originated here) right here in Russia, where I currently call home. With the loss of communist institutions following 1991-92, however, there is another interesting effect that is happening in Russia and the Central Asian post-Soviet republics (and to a lesser extent in Ukraine and Moldova). As institutions seem to be most effective when they are organic, as the result of spontaneous order rather than central planning, the collapse of centrally-constructed institutions left a large institutional vacuum. With foreign aid coming in by the boatload from the US and then later the EU, there was a rush to "build" the institutions that everyone knew were important for a market-economy. Of course, this was also somewhat central planning, as institutional structures were imported, as was legislation and guiding regulations. And also of course, the fact that the aid that was coming in was government-to-government meant that one of the largest institutions, government itself, was unquestionably accepted as necessary. This led to much crowding out of private institutions, private approaches to economic problems, and adoption of many of the private ways that survived communism (albeit at a small scale). Indeed, this swap of communist institutions for market-oriented ones, being done in a planned manner, meant that the bonds that make an institution function (beyond mere legality) were somewhat glossed over. Only in countries that vitiated the power of the state did informal institutions have a chance of becoming formal, while in the post-Soviet republics, where the power of the state never waned, we have swapped out one set of institutions for another. And this replacement of institutions has created, as Baudrillard might say, a "simulation" of institutions - that is, there are shells of institutions in place, even given legal status or operational with a staff and everything (see: judiciary, competition agencies, etc.) but they don't REALLY exist. That is, again to call on Baudrillard, there was no original here in Russia, so what we have is just the simulation of an institution. And the simulation of an institution doesn't fulfill the same economic role that a real institution would... at least in terms of facilitation. It sure can hinder an economy. In one sense, Russia has been here before - after all, this is where the Potemkin village was born! A false facade that hides the fact that there is nothing behind it. In some sense, this is where Russia's institutional problems arise from (for more on Russia's institutional development, see my piece here). But in another sense, and what I hinted at before, is the fact that the state never left - there always was an omnipotent government to stand over you (or push you down). The conception of the state went from being the punisher of kulaks and capitalist exploiters to a referee overseeing the market (often with the same people in charge), but the idea of the state was never questioned. This leads me to the title of my (long) blog post today - Russia is in fact a nation of laws, but not rules. That is, the institutions and their simulations have a very well-developed body of laws, implementing regulations, administrative fiats, etc., covering every situation. In short, the state has tried to think of everything and has a law handy for each situation. However, it is in the cracks that the state doesn't fill that the economy and, indeed, real-life occurs. Thus, Russia has a fantastic set of laws, but there are little informal rules to cover or give guidance. Informal institutions have been almost entirely crowded out by the official simulations. A great example of this is in handling traffic accidents. When a traffic accident occurs, it often paralyzes the street and creates traffic for miles. This is simply because no one moves their car - even just a minor fender-bender means the cars must be frozen in place until the police arrive. Because, you see, a traffic accident is somehow a criminal act that requires the hand of the state to intervene. Heaven forbid that it can be seen as a private issue between two cars, two drivers, and (possibly) two insurance companies. While one waits for the hands of the state to arrive, nothing can be done, and so drivers literally block three lanes of traffic for hours because, well, there's no guidance on how to settle it otherwise. In the talk I gave to RANEPA last week, I noted that this was precisely the problem with the biggest and most important institution, property rights, in Russia. Property right infringement is not a question of civil or tort law in Russia, it's a CRIME (the definition of "economic crime" changes frequently here, but still, it falls under criminal law). This means that even property rights are in some sense dependent upon the state and any infringement automatically involves the state as an arbiter. Now, many economists (including myself) believe that the only role of the state is to protect private property, but as years of public choice economic theory shows us, involving the state in private disputes generally leads to the state being richer and the other parties being poorer.
Where does this leave us? Well, it appears to me that there is a definite argument to be made that the state's formal institutions crowd out informal ones, with simulations of institutions taking over. More importantly, this crowding out effect means that people are unable to form the guidance that they normally would be able to, and instead remain helpless wards of the state. Which, come to think of it, might be why they are so popular with politicians. Remember this the next time someone tells you "institutions were neglected" in transition economies - when someone like Stiglitz says that the reason reforms failed was that tax administration wasn't built up fast enough!! - and ponder, how could they have been built differently? As I've tried to show here, it could have been a more rapid diminution of the state and filling the vacuum with informal and private alternatives. But for those who claim that institutions were neglected, this is rarely what they mean. Blogging's been light this week due to a few events, including speaking at the President's Academy for Public Administration and Economy (RANEPA) on institutional challenges to Russia. But wanted to let you know I appeared on Swiss financial TV today talking about more short-term challenges to the Russian economy and a response to the IMF/World Bank forecast
Greece's favorite Kanzlerin, Angela Merkel, absolutely crushed the opposition SPD yesterday in German elections to win an outright majority. However, it's not all rosy, as the FDP, the actual free-marketeers, failed to clear the 5% threshold and won't be in the Bundestag anymore. Meaning that there still might be a black-red coalition in the offing. Stay tuned.
It also helps to understand one of the institutions that shapes not only our worldview of economics, but that shapes the economists - I'm of course talking about the educational system of a specific country. In a real sense, the university system has somewhat converged internationally, especially in relation to higher degrees - while there may be specific differences (such as the habilitation system in Germanic countries and Poland, or the somewhat screwy Russian system of nauk and doktor and who knows what else), for the most part the tenets of academia are fairly similar.
And, according to this intrepid Swiss soul, it's a) a load of bunk, b) worthless at best and damaging at worst, and c) a cartel made for those on the inside to jealously guard against those on the outside. It's fascinating reading and, really, anyone who has spent any time with academics will agree with the bulk of what he has to say. The discouraging thing is that, while he is a hard-core scientist, his words have applicability for all PhDs/academics: “Professors with papers are like children,” a professor once told me. And, indeed, there seems to exist an unhealthy obsession among academics regarding their numbers of citations, impact factors, and numbers of publications. This leads to all sorts of nonsense, such as academics making “strategic citations”, writing “anonymous” peer reviews where they encourage the authors of the reviewed paper to cite their work, and gently trying to tell their colleagues about their recent work at conferences or other networking events or sometimes even trying to slip each other their papers with a “I’ll-read-yours-if-you-read-mine” wink and nod. No one, when asked if they care about their citations, will ever admit to it, and yet these same people will still know the numbers by heart. I admit that I’ve been there before, and hate myself for it. Having only recently gone into the publishing game (remember, I came to my PhD much later in my career because, you know, I thought I would be doing my own research and not just kowtowing to 24-year-olds who had never done a days' work in their life), I agree with this entirely. Some of the other things he mentions are also true, given my short time dealing with reviewers who seem to make the point they want, even if it's already in the paper: I often wonder if many people in academia come from insecure childhoods where they were never the strongest or the most popular among their peers, and, having studied more than their peers, are now out for revenge. I suspect that yes, since it is the only explanation I can give to explain why certain researchers attack, in the bad way, other researchers’ work. Perhaps the most common manifestation of this is via peer reviews, where these people abuse their anonymity to tell you, in no ambiguous terms, that you are an idiot and that your work isn’t worth a pile of dung. Occasionally, some have the gall to do the same during conferences, though I’ve yet to witness this latter manifestation personally. Agree agree agree. The best manifestation of this was a paper I had rejected lately - I had extensively re-written it to comport with the first referee's three pages of notes (which, for the most part were excellent and helped the research become much better). The second referee wrote, in very poor English, about two paragraphs which were off-topic and dismissed the paper entirely. However, on the basis of the first referee, I went forward... after three months, it came back that the first referee was not satisfied, mainly on (oh the irony) the basis that the English wasn't up to snuff. But this wasn't the real dinger, the real humdinger was that, as an example of poor English, he cited a footnote that actually contained the words of Shakespeare. To recap, this referee believed that Shakespeare was poor English. And THAT is everything you need to know about the ivory tower of Babel that academics have locked themselves into I appeared yesterday on Russian News Service (Russian Radio, 107.0) at 2PM local time to talk about Armenia's actually surprising announcement that it's backing away from the EU and moving swiftly towards joining the Russian-led Customs Union. My gut feeling is that the Russians have promised Armenia favorable support regarding Nagorno-Karabakh, something that the EU was not likely to do. On the whole, though, probably a bad move for Armenia and a move that won't affect Russia, the EU, the US, or anyone else.
Listen to the show in its entirety here. One other note: the host, Olga Baikalova, was fantastic, really asked some great questions and great follow-ups. And my translator, Margarita, was, as usual, fabulous. Thanks to both of them. Disregard what I said earlier about the ruble - Putin's masterstroke in Syria, combined with the Fed's continued running of the presses, means the ruble is back down under 32 today.
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AuthorDr. Christopher Hartwell is an institutional economist and President of CASE Warsaw. All commentary on this page is exclusively his own and in no way represents the views of CASE, his wife, his dog, or anyone else. Especially not his wife or his dog. Archives
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