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Wednesday, June 25, 2003

Soirée in Paris

I have to confess that I was not wowed by Paris. Don't get me wrong., though. I enjoyed my visit, and the city really is quite beautiful. It was also fortunate that I was there for the Féte de la Musique, with lots of cool spontaneous jam sessions all over the city. Real French pastry is much better than the stuff they sell here. The Musée d'Orsay was a sight to behold--one of the best art museums I've ever been to (artwise, that is; architecturally it's different story). The boulevards and the cafés are a wonderful sight.

That's said, I did not feel the proverbial "magic". Maybe it's because I expected to. I try to treat places I've never been to as a process of discovery, trying to get a "feel" for it. The friend i went with was gushing about the place, which sort of affected my thoughts on it. The impression I got was of a city that seriously does not take itself that seriously. This is in contrast to the French state, with does things in a very determined fashion. Haussman's boulevards, the layout of the buildings and gardens and Mitterand's grand projets are all a testament to the power of the French government,.but does not say much for the citizens of Paris, who are a relatively laid-back lot. I saw no evidence of the strikes that have plagued the city recently, not the impression that this city at the "heart of Europe" (to use a British expression) was suffering from economic difficulties. Maybe it's because rthe city is a survivor--it's been there, it's seen that. Why worry?

I could be wrong. I was a tourist, after all, and I don't speak French; I also did not have much opportunity to interact with the Parisians who were not service staff, all of whom, it must be said, wee quite pleasant, in contrast to what I've heard. You do see signs of French exceptionalism, but also evidence to the contrary--most of the bands in the Féte de la Musique, for instance, played American rock music, which surprised me. The place is different, allright, but not that different.

This is why I agree with Alex Singleton of Samizdata that boycotting France is a mistake. Engagement can only work to break down the barriers--to maintain France's uniquness, while making the place less "exceptional". Maybe then they could be less intransigent on some things, like a real reform of the EU's Common Agricultural Policy. France is a great nation, but it, like Britain, probably needs to stop trying so hard to make sure everyone knows this. Like the residents of Paris, France needs to relax, and not take itself so seriously.

Saturday, June 21, 2003

On Vacation

I'm in Paris at the moment--my first time in the City of Lights. Nice. Regular blogging will resume on my return next week.

Sunday, June 15, 2003

All I Learnt about the World I Learnt from a Phase Diagram

Professor David Begg (formerly of Birkbeck, now principal of Imperial College Business School) once told us that in the 1970s phase diagrams were the rage in economics. While studying for my macroeconomics final two weeks ago it was hard to see why. You spend a while deriving a differential equation that tells you how to achieve the steady state (the long-run rate of economic growth, say, or the trend rate of inflation) and then you draw a phase diagram that tells you how you get there. The rest of the analysis is to show what happens when some externally-determined ("exogenous") variable changes, and how or whether you get back to the steady state in the long run.

So far, so good, those of you who are still reading might say. My point is that most of this analysis takes place through the diagram, not through the calculus. This is good, to a point; it does make the subject matter more interesting, I think. It is also a bit of a rejoinder to those who complain about too much formalism in neoclassical economics--the diagram does help you to understand what is going on, and how change works through the economy.

At the same time, though. it is a bit odd. I can't imagine anyone standing in front of a meeting of experts and saying "if we do this, it should take us on a smooth path to the steady state". (I could be wrong about this--after all, the term "equilibrium" does come up pretty often in stability analysis.) This matters more especially if, with the given data we have, we often don't know where the steady state actually is, though a lot of policy, it would seem, is driven to trying to get to this nirvana, or somtimes to escape from it (for example, the natural rate of unemployment).

I guess this post is about meaning. Two years ago, when I first learnt calculus (yes, i was that bad) My wonderul quantitative techniques lecturer, Tony Humm, explained why economists use calculus. It was wonderful--it all became clear. I understand and like differential equations and their resulting phase diagrams, but I can't help but feel something is missing.

Thursday, June 12, 2003

Shifting the Goalposts

I don't agree with a lot of what Anatole Kaletsky says in today's Times, but he makes an important point about Britain's "five economic tests" on joinng the European single currency:

In 1997, when the “five tests” were invented, the Government’s position was that joining the euro would be a politically unpopular and painful decision that might be necessary for Britain because of the overwhelming economic benefits of the single currency. Now the relationship between politics and economics has been reversed. We must now join because of the “overwhelming political benefits” (a phrase Mr Blair now habitually uses in his speeches), provided membership does not entail significant economic costs. The purpose of the Treasury assessment is no longer to prove that Britain will gain economically from the euro. It is to make sure that the British economy is not wrecked by joining on the wrong terms or at the wrong time.


Wednesday, June 11, 2003

Euro-Quiz

The Guardian posts a flippant quiz on Gordon Brown's Five Economic Tests here. I personally don't find it all that funny, but, then again, that could just be me.

Tuesday, June 10, 2003

Euro-Fudge

Yesterday Britain's Chancellor of the Exchequer Gordon Brown offered his verdict on the "five economic tests" to decide whether the United Kingdom should join the Euro. Result: failure in 4 out of 5. I don't have much to add to what Brad DeLong and Edward Hugh have said about it, and the idea that the fundamentals that prevent Euro entry will change enough to allow for a reassement in nine months is perposterous. To quote Dan Gelfand, "though I have little reason to directly argue against the merits of a rolling review, I do worry that it will give too much of an opportunity to die-hard Europhiles to ignore reality on a regular basis."

Ignoring reality? Consider two of British Spin's points:

The Depth Charges: Two of the major planks of reform to prepare the UK for joining the Euro will scupper our plans to join: Regional Pay Bargaining will enrage the unions and put them firmly in the No camp, while Mortgage Reform will send home owners insensate with rage. [The transition will also be expensive to the Exchequer, and will not be quick--DCS]

A Return to Keynes: Anatole Kaletsky spots this in the Times. If you don’t have interest rate control, then the easiest way to heat up or cool down the economy is through fiscal policy. Now this is explicitly against the Stability and Growth pact, but also politically, the cuts phrase can be very painful.


These are things that Brown has declared he wants to take care of before he decides to recommend that Britain join. They are overshadowed by the main point, though, which is what the Guardian's Larry Elliott gets to:

Meanwhile, Germany hovers on the brink of deflation and French workers strike against attempts to reduce pensions that are no longer affordable in a low-growth environment. Still, if you want Britain to join, Brown's approach makes sense. It has more to commend it than that taken by some members of the cabinet, who appear to be in complete denial about the state of the eurozone and insist on treating the UK public like wayward pupils who don't understand what's in their own best interests.

Monday, June 09, 2003

Policy Ineffectivness

Jane Galt posts about capital controls. This has been a topic discussed on a couple of blogs lately, and I have a few observations.

Regarding countries that use or have used capital controls, Chile comes to mind as a prime example with its previous implicit tax on on short-term capital inflows; the new free trade agreement with the US, unfortunately, prohibits their reintoduction. China also does not have a free capital account, which is probably a good thing for the moment as their financial system is in a fragile state and could collapse due to the bad history of state-directed lending.

There is also a false dichotomy between currency controls and free capital movement. As Daniel Davies himself noted on Brad DeLong's blog, free capital movement may require sequencing--a gradual liberalisation as the policy framework improves. There are a number of recent studies that indicate that financial liberalisation has limited benefits, especially portfilio flows. The IMF is revising its policy advice after recent empirical research concluded that there are limited benefits to free capital movement, at least in the short run.

Galt's notion about the government badly controlling the money supply is odd. The reason may not be "government" but simply that monetary authoritues did not have the "technology" to properly control inflation, or had other objectives. To take the latter first, before the Friedman-Phelps expectations-augmented Phillips Curve policymakers thought they could safely tradeoff inflation for lower unemployment. This was naive, but was not, of itself, an illegitimate objective.

Paul Volcker had the good fortune to have been appointed when he was. Kyland & Prescott's paper on time inconsistency dates from 1977, two year's prior to Volcker's appointment; this is followed by Barro and Gordon's paper on Rules vs Reputation in monetary policy (1983) and Kenneth Rogoff's paper on the "conservative central banker" (1985). All of these are the foundation for the successful (so far) transition to independent central banks in many countries.

The trouble with an argument against policy is what would happen in the absence of policy, especially politically. To take two examples, while the theories are vastly different, the practical effect of both real business cycle theory and the Austrian theory of business cycles is the same--the government should not intervene in the economy to ameliorate the cycle. In a recession, this is a tough sell, especially when the public demand that something be done about the economy.

Friday, June 06, 2003

Satiation

Exams are over. Joy. Microeconomics was horrible (I'll just say that there was a strong serial correlation in the topics covered in the previous five years of exam papers, with this one being very different stochastically) but macro was better. Now I have the summer off (well, I'll be working) and hopefully I can pursure the full-time MSc this coming September. In the meantime I'm going to Paris in two weeks, and I would like to visit my Greek economist friends soon. (For some strange reason, there are a large number of Greeks studying economics and finance. Wonderful people.) As a Trinidadian may say, Irie.