Wednesday, August 31, 2016

Policy limitations and the self adjustment path

A current issue which concern the economists, is about the ability of economic policy, to have control of the recovery path in case of a recession, such that the one the global econokmy had in 2008. On both side of the Atlantic, there has been a huge effort coming along from Central Banks about monetary policy, at the risk of its own credibility, as the key tool to get the economy out of recession first ,and stagnation later on. However. after years of such approach in both the USA and the Euro Zone, the outcome seems far from the expected,although more so in the euro zone ( ).- Both economies, seem reluctant to get traction based on monetary stimulus alone based upon either very low or negative interest rate, asset purchasing and forward guidance. Having said the above some questions arises: a.- Is monetary policy alone, capable of pushing a strong economic recovery? b.- Does the economy always have to react the same way to economic policies? c.- Is there the chance that beyond a certain point , the economy gets to a self adjustment path which make useless any policy intervention? The first two questions deals with the fact that reaction policy parameters, change as time moves on. So, the setting change but as the policy is slower to adjust itself to it , so its impact is lower, if there is still a chance of any impact at all ,in the following stage . It follows that any policy alone, is not enough to improve the impact of policy actions.In this case , it requires a complementary policy .But when fiscal policy is constrained by a maximum deficit rule, its ability to go along with monetary policy weaken.Besides, usually fiscal policy deals with improving output performance, while monetary policy deals with private expenditures path through financial and real channels.As MUndell Fleming models says , both policies may be more effective together than apart from one another. Thus, perhaps it is not that much about monetary policy uneffectiveness, but more about fiscal policy restrictions.In fact, Gordon (Macroeocnomics ,1983) has said that fiscal policy has higher transaction cost because of its lagged reaction due to the link with legislative discussion,such that when it is ready to be implemented , time has gone. There is a missmacht betwen both policies, unless there are some coordinated actions.But this assume that every one knows exactly when a recession may arise!.- The third question, show a more complex approach. The one which deals with the chance that the economy has some self correction ability hide all the way up to the prices level get down. In fact in a low inflationary scenario, real asset value increases, in such way that it may sustain increase in expenditures levels ,fostering income by the multiplier impact , having effect on both the real and the monetary side.It is call the "Pigou effect". Somehow, Euro zone economic performance so far is an indication of such effect. Current available data indicates that Banks are lending more,(1,4% increase in lending rates this year), no necessarily because they want to do so, with both negative interest and deposit rate , but because both consumers and investors have a greater endowment of asset in real value, which allow them to take advantage of the monetary easing, because of a better position to guarantee any loans.Therefore ,it looks like the real Private expenditures can makes its way through to get the economy out of stagnation!.- However, it is obvious that it take a long time for the economy to reach such a inflexion point stretching the social imbalances.Prices rigidity play its role in the time span to get the self adjustement path.In this case, it seems relevant to take into account to improve price flexibility, such that to get that path quickier. Finally, the issue seems to be not only about policies ,but also about prices reactions.The faster they react, which means the more flexible they adjust to the new market status, the faster the economy get its self adjustment path (PIgou effect), and the less it depends upon the policy limitations.As a matter of fact, it is not a trivial situation that while the USA economy has a more flexible prices than the Eurozone does, the later still struggle some steps behind its counterpart, to get the new "normal" stage of its economy.

Sunday, July 24, 2016

Beyond free Trade

Last April, according the World Trade Organization (WTO)in its Press release 768, free trade growth indicators for the years 2011-2015, had a path very close to the GDP global growth. It grew less than a 3% annual rate (Y/Y).For the year 2016, the WTO is expecting that Free trade will grow at 2,8%.Before the financial crisis (2008),Trade was growing at a rate twice higher . This outcome is not somehow unexpected , and in fact it is probably the new trend:Trade growth growing a slower pace. From the above arise some hard questions, and no less both complicated and worrisome answer: a.- Does free trade by itself able to get higher welfare level for a community?. If it does , trade would be always expanding higher .The fact suggest the contrary.Free trade seem to be a necessary, but not a suficcient condition to improve welfare at a steady rate.- b.- What about the answer the mainstream models supporting free trade does provide?.The Heckscher-Olhin model, states that following key assumptions, free trade improve the welfare of a community as a whole, but not necessarily to each of its members individually considered.In other wordss, Free trade does not solve income distribution, and it may allow some people, get higher benefit than others. Thus,it follows that to improve the social value of trade, it is required an effective complementary public policy. Doing so, it allows to get the highest impact of trade upon welfare.- Moreover, free trade means that all resources are fully mobile. This means that as long as resources move everywhere any time ,coupled with trade expansion, theres is a "job creation" and a "job destruction" outcomes, which do not match each other up,such the outcome is a relocation of jobs to keep employment level at the same level.It rather means that in somes places "job destruction" may be higher than "job creation".The underlaying assumption is that because its higher prices and value added, capital intensive goods, becomes more profitable than labor intensive goods one, to be part of trade flows.Besides, two homogeneous countries in terms of technology development , capital intensive goods,complementary chain value, and high human capital and income level, may get higher benefit from trade taking place among them.- On the other side (heterogeneous contries), capital subtitute labor, at a faster rate than the arising new opportunity jobs for those left behind.No doubts, in this case, both an effective and efficient public policy, is needed to cope with this implications.- But , the following implications are even more troubling: As the world becomes interconnected and smaller, at an increasing rate ,the current approach to negotiate trade based upon regional blocs, makes geography a negotiation tool,aside from market size. Because of Geography ,there are countries , that are in a better position to get more from free trade today, than they were before. The European Union for instance, may get a better trade agreement as such, now than in the beggining of such experience (1999).Latin america pacific ocean boundaries countries, can get a better trade agreement now, than the were able in the nineties. So, geography matter for better trade deals and outcomes , which it is not just about markets. Finally, taking into account the above, some conclusions becomes clear to explain trade flows trend.Two issues becomes the most relevant: a.- Trade by itself do not seem to replace effective public policy for improving its impact on social welfare. b.- Geography is as much important as markets as input for better trade. c.- A Sucessful Globalization depend upon an evolution from free trade to better trade, which at the end imply that politics have also something to say when it comes to better trade.-

Monday, June 27, 2016

Brexit: What comes next?

For the world ,It is still hard to believe the outcome of the referendum about the Brexit,which was based on the option of leaving or remaining within the EU. Those option by themselves, stated as either "like" or "dislike", did not set clearly the whole complexity behind them both other than the economic cost, which in the balance for a country like Briatin it is posibble to recover. What if the "remain" option, would has been about "remain in a different EU", and the Brexit option, would has been about "Exit no matter a reform in the current EU project". I can bet the remain alternative would have been with more than the 48% it got.- Most of the analysis, was based upon the perception that Britih Remain option were both all that positive and desirable, which it was true but with some costs , which British citizens thought they were not ready to afford. The UK has not been too much entusiastic about the European Union, as long as they believe it is mostly a bureaucracy, with no other goal than to reinforce the welfare state, and the power of those who are in charge of regulations and european laws. It follows that, It would be hard to believe , the all mighty British would become the "yes country", for such a purpose.- Thus, no matter the economic advantage, there was a political barrier for Britain hard to avoid sooner or later, as long as the EU moved along into a deeper integration stage.- Therefore what is the meaning of Brexit?.It means that British citizens do not care about deeper ties on trade, financial and business links with Europe?.My own guess goes in another direction.I do believe they do care, but they do not in the current status of the EU project. So, what it is at stake?.They are beting for a different European Union, one in which they can participate on trade and finance links ,but at the same time to stay politically independent from Brusssel.Perhaps that would not be the European Union anymore,as much as the treaty already signed say clearly. Well,not necessarily ,except that with different boundaries and limitations.- The narrow margin of the outcome (48% to remain, 51% to leave),suggest that a midlle ground based solution upon this lines, might be possible some time in the future, taking into account the expected period of time (between 5 to 10 years),needed to close the Brexit deal, and the burden of the economic cost to become not aparent but a costly reality ,specially for those who do not expect other than benefits form such a move. Following the analysis of democratic rules, with such a narrow margin, it is hard to think there will not be a path to seek for an intermediate solution. However, such scenario actually looks far away from the negotiaton table.But what if other countries want to follow the exit path to join the British for such a different approach to the EU project?. When markets are unpredictable, Good management policies are based on the premise of "Think the unthinkable". Besides, after the Brexit, the EU is not longer the strong and forseable project it looked before june 23rd. To be blind about it, would be more complicated than the brexit itself.In the years to come ,Politics rather than economics, have much more to say , for the EU to sustain the unpredicatble.-

Sunday, May 22, 2016

The moral limits of power

What is the moral foundation of power?.It depends on the kind of power . However, whether it is economic, politic,cultural or religous power it all come down to the way it gets through to both what it is focused on or , to what it stands for. Political power is based upon voters preference, as much as economic power it is based upon the economic value added to the economic activity by business groups .Thus, those who have voters preferences have the moral sustain to hold power positions on their behalf. By the same token, those who have both the higher proportion or contribution of economic value added, have the moral sustain for its influence on public affairs. From this point of view ,Business man in politics it is not unusual,as much as they create wealth, jobs opportunities, and increase value added, because of their business.While politicians get their legitimacy by their link with voters´s preferences and their expectations,business man get their legitimacy , by their abilities to create wealth also for the benefit of the comunnity .- It follow that democracy whether either political or economic one, it is the main source of moral sustain for power, as much as it does provide opportunities for everyone to get so. Quite on the contrary is the case for cultural power.The Beatles have cultural power on its own , as much as the Rolling Stones also do, or for this matter, some time ago Frank Sinatra or actually any singer of global coverage, aside from all the variety sources of cultural activities. Religious power is even a more complex issue, as long as it comes from divinity.It is not but for e few selected people, to be able to act on behalf of God. What about force as a source of power?.Very popular in then XX century in Latin America, but there are a lot of problems with this approach to power. a.- It does not have a natural link with those who are supossed to be, the main focus of the one who held the power. Besides, Force as a source of power get rid of expectations and hope, because it applies a deterministic rule of decisions, missing the feedback to reinforce itself as long as it is based on fear. So, sooner or later this kind of power gets the entropy status.- b.- Whether voters would have the chance of answering , the question about how they would prefer to be ruled by their authorities , it is highly feasible they would reject force as the key source of the social contract with Government. c.- The monopoly of force is part of a social contract, based on the need of effectiveness only in case of external .- d.- The dicentralized nature of comunications and information in this century, make force less effective than before to hold political power. Conectivity become a powerful grid, capable to overthrown those who depend on force to stay in power. Latin America has a long tradition of political power based on the use of force. Democracy, is a rather new experience in the majority of Latin American countries. The political instability of many of these countries in the XX century ,was the main reason for solutions based on force.In all cases, the outcome was not the expected one.Instead , it arose new and more complex problems, such as human rights abuses,nationalims as a threath of peace, and econoic stagnation which boosted poverty and inequality. It looked like one step forward, were matched by two step backs.- So, power has a moral sustain, when it deals with the ones who can not work solutions by themselves out (voters).Instead, politicians take the responsibility to act on their behalf up to the limit of their ability to really provide solutions, otherwise it is better to try new approaches. such as to check voters preferences out throughout new elections. Probably the founding fathers of Latin America independent countries, thought about force as the last resource in case of external threath, but not as tool against their own free citizens.- Besides, Latin America is actually moving toward democracy models based on the complementary role of institutions, the rule of law, transparency and efficiency of public policy, such that one step of progress it is followed by two step forward the well being of the community.

Friday, April 15, 2016

Politics and oligopoly: Costly Entry barriers

Free markets work as long as competiton also work,otherwsie special interest groups can colude themselves to transform markets functioning in their own advantage ,This outcome is known as Competition among a few (oligopoly) which imply that the benefits of competiton goes to those who contol the market, leaving aside consumer´s interest , and comunity welfare as a whole. Imperfect competition, in particular Oligopoly just as it is with monopoly, affect negatively the welfare level of the community, because prices are higher, product is lower, so employment is also lower, but rents of those in charge of oligopoly are higher.It follows that an economy which become organized as an oligopoly , induce income inequality and welfare losses.- Someone may wonder about regulators and regulations.Either one, the law or the regulator can only reduce the burden upon the welfare of the community, but no necessarily avoid the rent arising from lack of effective competition. Moreover , consumers who are key to enforce the law ,are disperse and ill organizaed , lacking coordination capabilities.- What about oligopoly in politics?.It would be like a competition among a few, but in this case the market are voters ,and the losses of welfare do not affect only to those who buy the products under the oligopoly scheme, but to the community as a whole, as long as it becomes hostage of those who have the control of politic frameworks for their own advantage away from community needs.- So, with Oligopoly in the economy and oligopoly in the politics field, what may be the final outcome?.It is not surprising to realize that in such scenario , both democracy and free market not longer exist at the same time. A new dictatorship arise, not the one plainly totalitarian like the XX century style .This one, is more sophisticated , it goes through the rules of democracy and competition hiding its real purpose, such that it is harder to detect and difficult to confront. Besides , as the decisions parameters do not fit with community interest, there is not control mechanism other than its own perspective of surviving time and events.- Many latin american economies ,are organized on the basis of lack of competiton and political oligopoly.The outcome is corruption, poverty, inequality, and losses because of recources are wrongly allocated to those uses which do not represent the majority welfare expectations, neither theirs best interest, but only the ones of those who have become the controllers of markets and democracy. Current crisis on key economies of South America, deal with this problem and its implications. Sooner or later , voters have something to say.Voters have better coordination capabilities than consumer ,because they identify themselves with someone in a stronger way they do with a product .- Friedman was right when he stressed that free markets economy, goes along with politics freedom , which mean no entry barriers for those who have new ideasconcerning how to improve economics perfomance ,or how to improve politcs frameweork for the benefits of the majority which add up to become real free markets and effective democracy.- The source of innovation and prosperity ,is precisely to keep freedom to shape the design of new politics approach to key issues , as much as to design new product for the benefit of consumer. However, this argument works with a the proper instituional framework with a clear set of rules,and transparency mechanisms, to sustain competition above special interests threats to get control of it for their own purposes. Friedman did not foresee that politics may be capture by special interests.

Thursday, March 24, 2016

Smaller world higher interdependence

The world has witnessed two political events, one of which unthinkable a few years ago. President Obama making an historical visit to Cuba , and President Gauck visit to China.Does anyone may doubt about the common values both USA and Germany respectively, share about what they stand for in the world?.At the same time, does anyone may be confused about the restrictive legal systrem and law implementation(Human right included), both Cuba and Chine share, concerning their domestic policies?.The answer to these question get to an unexpected explanation.The political stand of appliyng a more inclusive approach to those who were left out for most of the XX century, is possible because the world has become not only flat , but also smaller.- So , when the space anyone share with their neighbours become smaller, then it is the time to care about how to get along with them.Otherwise peace and new opportunities, will be difficult to achieve. This does not imply to quit the individual values or its relevance , for the whole purpose of being able to work thing out within diversity.But it means that pragmatism becomes more relevant than ideology. Techology has made possible to reshape the world into a smaller place, without changing the fact that year by year there are more people getting on board, and each of them with their own beliefs and values.However business opportunities, make its case to reshape the strategic perspective of a more interconected world as well.Some authors called the "Buttefly effect", but it is more relevant to consider it, like the strenght of world citizens , who throughout news technology means , increase the velocity of their interaction at such a pace that their abilities to broaden up opportunities , improves exponentially. Should politics be left behind this trend?. Should democratic values become irrelevant?. Because of politics and key democratic values, this new approach becomes possible. Otherwise the world would be like a close system with no means to make reinforcement a crutail requirement to improve both its fundament and outcomes. It get into the path of entropy or self destruction.- Latin America economies in particular, feel more confortable with this approach, which make it a more active partner for business opportunities arising from a global economy in its way to the path of prosperity for all, specially the chance of better expectations for those who needed it the most.- The world is moving toward a single global community, where it becomes necessary to foster what make it better and a more reliable place for peace, rather than what make it weaker. There are a lot of pressing challenges, hard to cope without a inclusive approach.

Sunday, February 28, 2016

Voters`mood in Latin America, and the impact on Government economic policies

Most of the atention of political analists in recent weeks in Latin America have been focused on the proper interpretation of election results in Argentina, Venezuela, and Bolivia.As a follow up it comes the expected outcome of Equator (2017), and Brazil Government survival of current investigation about corruption charges, against high ranking advisers of Brazilian Government. But focusing on these eletion results, what are the most likely hipothesis?: a.- Within the conventional wisdom ,there are two lines of approach:The first , deal with voters shifting away from soft government. which means government based upon people `s will, no matter the cost.In latin america it is called "Populist kind of government policies".The second one, comes out from the old left-right axis,which in this case means a supposed shift of voters to the right .There is a third line of approach, which goes on the old school of Government management policies, which split government performance on two groups: The left government comes along when public incomes are rising , so voters look for someone to spend them.The right government comes along when public incomes fall, and voters look for reponsible people to solve the situation. Although these hipothesis are both relevant and not self excluded explanations, they do not cope with some fact which represent a new trend for future elections.This line of approach, goes on the side of non conventional analisis, but get closer with the changing mood of voters in latin america.Let review some issues about it: a.- The economic boom of the beginning of the 2000 decade, and the moderate expansion afterwards(2006-2014),average of 3,3%,meant that average GDP per capita increased from USD 5500(2006) to USD 9100(2014).These economic outcomes changed the social landscape of latin america, as long as poverty and unemployment decreased, and at the same time middle class segment, became an important segment of the new voters.- b.- These new voters, demand different kind of policies from Government.They focus on the quality of health, education, and public service as a whole:They do not require the Governmenet to do what they can do by themselves.They realize how important is to count on their proper means to prosper as entrepreneurs,small business activities, complementary services and the like.These people cares more about inflation, social stability and a good environment for pursuing their goals, and so imporve their expectations about the future.So, they are in the stage , such that they no longer whant a paternalist government , but an efficient and effective one. c.-These days, people have better means to make clear what it is like to be uneasy about a government which do not fulfill their expectations, or to care more actively about corruption,and other social bads, such as nepotism,discrimination, and its implications.The access to new technology tools (cell phone, On line communication,Internet facilities , and the like),increase citizens involvement in public affairs. So, What is it really happening?.An alternative hipothesis would be that , Latin American voters mood,changed as a result of years of high economic growth, such that on this regard it was no a missed opportunity for them.It rather seems that it was a missed opportunity for Governments , specially those which did not bother to become closer to voter needs and expectation, and instead focused on their own interests and self benefits.Thus, The success of incoming government and policies will depend upon the identification with what new voters need and expect, more than what government ideology may suggest.

Saturday, February 06, 2016

Technology : the missing variable

What technology means for economic analysis?. It is surprising that very much of the unexplained exogenous source of growth,(aside from labor and capital rate of change) deals with total factor productivity, which may be affected by a variety of variables ,including technology change.Endogenous sources of growth instead, deal with human capital , innovation and business initiative, which have an impact on the quality conditions for economic growth. Usually the former than the later approach ,get the most when it comes to explain the economic growth trend against the potential output which allow the well known output gap. It is s, because it make easier to influence the design and implementation of economic policy.(Taylor´Rule). Technology impact growth throughout factors productivity. Thus, all the technology progress since the nineties aplied to production and management, has increased productivity of both capital and labor,changing both the quality of capital goods, and the profile of labor demand increases toward better and different complementary skills. Having said all the above, the main constraint for growth is still the resource scarcity.The premise is that technology, somehow it only change the way resources are mixed.Those which are freed in some sector, goes to other ones, given a total unchanged endowment. But What if the technology becomes more efficient?.Let say to download 18 movies in one second, or within supermarkets throughout the lighting system, the manager send information to consumers iphone about the new bargaing in some specific aisle?. Technology is about to surprise everyone of us changing from the wi-fi, to the light-fidelity (LI-Fi), which will increse the speed of data and information flow, to such an impressive level hard to cath up for human understanding abilities.- Leaving aside the implication for the development of robotic of higher generation (intelligent machine), the fact which concern to the economcy as the science focused on solving resources scarcity, is that these will no be scarce any more.We will be plenty of resources because technology will widen up the available supply. Actually 1% of labor force, is able to supply food in developed countries. However, whithin the framework of knowledge society, information is what count the most. With the new faster pace of technology ability to cope with data volumen, economic agents will have more information they are capable of dealing with. Thus ,the real problem will not be to maximize, because it will be out of reaching for humans, to be able to understand millions of data available at the light speed, in any monet in time (one second), before making a decision. Therefore, the challenge will be to minimize losses from missing information.To minimize losses from wasteful of higher endowment of resources, such as for instance ; time.Tehcnology will free time for aditional uses,aside from the trade off between leisure and work.- How well prepared is the economic sience for this new framework, away from resources scarcity as the key restriction, to be replaced by human understanding and emotions (feelings) as the new one?