But Austerity Perseveres

R&R did not create austerity – discrediting them will not kill it.

If you’ve been reading about the Rogoff and Reinhart incident this week, most everyone outside of the right wing press is claiming that the austerity argument has now been proven false. If only it were that simple. When Paul Krugman (probably the fiercest critic of austerity on this side of the Atlantic) wrote about R&R last week, he closed his column by saying the following:

“So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.”

Essentially, if it wasn’t R&R, proponents of austerity would have found some other paper by some other economist to back their claims. And most folks on the right are admitting that Excel error or not, debt kills economic growth (just a lot less than we thought it would).

Bob Samuelson committed probably one of the most egregious false equivalences in recent years in his column by referring to the fall-out over the paper a “dispute”, in which one side says X and the other says Y – as though X had not already been proven to be factually inaccurate and misleading.

So what now? For once, we seem to have a good set of economic data that millions of people around the world are familiar with. When debt approaches GDP, growth slows down to about 2%. That’s not great, but borrowing money is always painful. Taking a mortgage prevents you from accessing liquid capital in the short-run, but it is often a sound long-term investment.

Peggy Noonan made the mistake in the Wall Street Journal this week of basically making Obama’ argument for him, by claiming that the jobs crisis is much worse than the debt crisis. The Republican Party will likely pivot soon and start blaming the President for not doing enough for jobs, months and years after they blocked any and all legislative efforts to do something about jobs.

This is the Republican game – don’t let facts get in the way of your agenda. Excel errors do not matter. There are scores of other economists who are willing to stand in for R&R and defend the merits of austerity. While it’s true that Herndon’s work at UMass has exposed bad research and briefly given progressives, and Keynesians, and basically everyone other than right wing fiscal conservatives something to cheer about, I’d be surprised if politicians remember this a month from now. I’m a bit surprised that the coverage over an Excel error in an academic paper has lasted a week already.

Austerity Stumbles

It’s not often that an academic paper makes the headlines. Researchers and professors typically write on obscure topics that are read, if they’re lucky, years later, by a handful of graduate students who are working on their own obscure and imminent-to-be-ignored academic works. Ken Rogoff and Carmen Reinhart were superstars in this respect.

The Rogoff-Reinhart paper, entitled “Growth in a Time of Debt”, was the stuff of legend. Policymakers around the world referenced it when making the case for budget cuts and austerity measures, arguing that running budget deficits would cripple economic growth. In particular, they claimed that when debt crosses the threshold of 90% of GDP, national economies would begin to shrink.

The United States has already crossed that threshold (we’re beyond 100% actually), but our economy continues to grow. It’s growing at a flimsy rate and in a way that does not benefit the country as a whole, but grow it does.

Enter UMass Amhert economics grad student, Thomas Herndon, who did what nobody else did (yeah – the paper was not peer reviewed) and looked over the numbers used by Rogoff and Reinhart (check out the interview between Herndon and Stephen Colbert). It seems R&R forgot to include 5 countries (Australia, Austria, Belgium, Canada, and Denmark) in their final analysis. If you include these countries, economic growth crawls along at about 2%, which is to say that they somehow omitted the countries that maintained high growth in spite of high debt. It turns out the R&R committed a simple Excel spreadsheet error (visual approximation below). Unfortunately, this error led to the false conclusions that were used as ammunition to sell austerity measures all over the world! RandR Excel error

This is all very embarrassing for R&R and those who cited their paper, but if you think this means much in term of policy, think again. John Maynard Keynes once wrote:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Although I respect Keynes, I think we’d disagree on the extent to which economists and their ideas are pawns of politicians. I’ll tell you why tomorrow.

Mexico – Wealthier Than You Think

MexicoAs an American, it’s easy to think of Mexico as our poor and violent neighbor. And while there may be significant poverty and violence south of the border, it pays to take a step back and think of Mexico in a global context rather than a local one.

Mexico is always in the shadow of its wealthier and more powerful neighbor, in a way that hides how wealthy and powerful it really is. If Mexico were located anywhere else in the world, it would be perceived as a major international power. Adjusted for purchasing power, Mexico has the 11th largest economy in the world. Fareed Zakaria’s blog recently pointed out that although Mexico has a higher adjusted per capita income ($15,300) than Brazil ($11,700), China ($8,500) and India ($3,700), these other countries are always in the international economic limelight. Apparently the bad press has affected domestic sentiments as well – Mexicans see themselves as worse off than residents in these other countries even though Mexicans are significantly wealthier. Also, the Mexican economy continues to grow even as most of the advanced economies of the world has slowed to a standstill.

Mexico is the Scottie Pippen of international geopolitics – not a superpower but definitely a power to be reckoned with, and constantly in the shadow of the superstar teammate. There are of course those who say Pippen was as good as he was because he played with Jordan. The same can be said of Mexico’s wealth and power being aided by a close economic relationship with the US – but that’s a whole other blog post.

Hyundai – from Ashy to Classy

American manufacturing has been in decline for decades. The rise of Hyundai is indicative of who has been succeeding.

For those of you who lived in the US during the 80s and 90s, you may recall the embarrassment that went along with driving the a Hyundai. If not, allow me to refresh your memory.

  1. How do you make a Hyundai go faster? A towtruck.
  2. What’s on pages 4-5 of the Hyundai owner’s manual? A bus schedule.

Even praise of the vehicle highlighted its affordability rather than quality. $5,000 was cheap, even in 1986.

A lot has changed since then. Hyundai was able to replicate the success of Japanese car makers decades earlier. When Toyota, Honda and Nissan began exporting cars to the US in large number in the post WW2 period, they too were ridiculed for being small, weak and cheap. Now, there is more or less a consensus that the Japanese make better cars than Americans. This is not to say that American consumers suddenly decided to change their minds and prefer foreign cars. Rather, the foreign cars got better, and foreign manufacturers learned a lot more about American consumer mentality.

This is the dream of most manufacturers in emerging markets – gain a foothold in rich countries with cheap alternatives and gradually improve quality and marketing until you can offer a better product than the domestic competition. It took the Japanese a couple of generations to overcome the initial stigma. It took Hyundai less than two decades. Hyundai (along with its partner Kia) is currently the 4th largest automobile manufacturer in the world, and the fastest growing.

20 years ago, nobody would have guessed that a Hyundai would soon look like this.
The question for me now is, which improved first, vehicle quality or marketing? If better marketing leads to better sales, then that profit can be invested in better quality. But then again, can you sell lemons with good commercials? The truth probably lies somewhere in the middle.  Either way, Hyundai has enough money to regularly invest in Superbowl ads (which now cost about $3 million for 30 seconds) that focus on performance rather than affordability.

At first glance, this might not seem significant – there was a company that wasn’t that good, and then it became good. So what? Does the Hyundai experience signify a larger trend? Yes – especially among Korean companies.

Samsung is now the largest IT company in the world in terms of revenue – not bad for a company that worked mostly in ship-building and construction a few decades ago. LG is even more similar to Hyundai in that it entered the US markets with cheap consumer electronics (remember Goldstar?) and invested heavily in R&D and marketing. On the list of largest IT companies by revenue, LG is currently just behind Intel.

This does not spell doom for the American economy. The rise of knowledge industries is real, and even Detroit has witnessed a remarkable turnaround in the past couple of years. But companies like Hyundai, as indicative of the Korean economy, will continue to emerge. Fareed Zakaria said it best when describing his book, The Post-American World, as being “not about the decline of America but rather about the rise of everyone else”.

In 2009, the Hyundai Genesis was named the North American Car of the Year at the North American International Auto Show in Detroit. Earlier this year, the Hyundai Elantra was given the same honor for 2012. It won’t be long before Hyundai joins in on the chorus of mockery directed at Chinese and Indian cars when they start entering the US market.

Kill the Penny!

It costs 2.4 cents to make a penny. Let the one-cent coin die with some dignity.

Canada recently announced that it will no longer be making one-cent coins. Perhaps it’s time for some inward national reflection. The penny seems worthless now, but until 1857 it made sense for the US mint to issue even half-cent coins. Prior to 1982, the one-cent coin was made primarily of copper – they are now mostly zinc. This is why old coins are green; it’s the same process (oxidization) that has given the once shiny copper Statue of Liberty it’s current green color. Over the past ten years, the price of raw materials and minting has gone up significantly as have the calls to cease production.

If it were so simple, we would have already gotten rid of the one cent coin by now. So what are the reasons for maintaining it?

  1. prices will rise as a result of everything being rounded up to the nearest 5¢
  2. poor folks will be disproportionately affected by this price rise
  3. many charities rely on pennies precisely because people are more willing to part with smaller denominations
  4. we would have to mint more nickels, which are even more expensive
  5. sentimentality/tradition/respect for Abraham Lincoln

And now the reasons for getting rid of it:

  1. it wastes taxpayer money
  2. it wastes time at the checkout counter
  3. any price increase would be effectively meaningless because most pennies are lost/discarded/hoarded anyway
  4. maintaining the penny is a disgrace to the memory of Lincoln in that his face is on a worthless coin that nobody wants
  5. c’mon!!!!!!!!!!

The world is moving on. It’s time to kill the penny.

Blame Germany Too!

Everyone is blaming Greece and the rest of the PIGS but let’s take a look at who benefited the most from the formation of a currency club that was supposedly too large to begin with.

The Euro has depreciated against the US Dollar by about 15% since it’s 2011 peak of almost 1.5 Dollars for every Euro. Many have argued that the Euro was overvalued for years and that currency markets are merely correcting for past discrepancies. Even during the Euro’s heyday, the imbalances between Europe’s rich north and “poor” south benefited the likes of Germany who were effectively working with an undervalued currency, whereas Greece had to deal with an overvalued currency. This was a boon for German exports in that they artificially deflated the price of German goods on the international market.

Now, as the Euro has lost some of its value, and the rest of the Eurozone considers kicking Greece out of the club, Germany stands to gain the most once again. As long as Germany is entwined to its poorer neighbors, its currency will be valued lower than it otherwise would have been – the more poor the country, the more likely that the Euro would be undervalued. Any depreciation in the exchange rate benefits the Deutsche economy. Germany is already the second largest exporter in the world and has recently held the top spot if only for a few months.

Furthermore, the capital rich countries of Europe’s economic core were more than eager to lend money to the peripheral countries at high interest rates – fuel to the fire! For years, Germany has been riding the wave of an undervalued currency and cheap markets for their surplus capital; and when the problems began to emerge, all fingers started to point towards the south. It seems like another case of a drug dealer blaming the user.

Germany, more than any other country, has benefited from the Eurozone’s premature expansion and subsequent fall. They should be the last to complain.