This just in: Yellen and Fischer fight over the controls of a disconnected thermostat!

People!  Check out this quote,

“Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.”

After the events of the great recession, it’s just amazing to me that people think the economy is a steak, the Fed is a precision sous-vide machine, and all we have to decide is medium-rare or well-done.

For the millionth or so time, the models implying the Fed can do this, completely and utterly failed during the great recession. There is also evidence that a large part of the good outcomes credited to the Fed during the great moderation were actually due to exogenous forces (i.e. good luck).

Neither the Fed nor the President “runs” the economy. There is no stable, exploitable Phillips Curve / sous vide machine that lets us cook at a certain temperature.

This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that  the Fed’s power over the economy is quite limited and tenuous.

But I guess it’s comforting to think that the little old lady behind the curtain can fix things for us.

She can’t, Stan Fischer can’t, Bernanke couldn’t. Maybe the sous vide machine is unplugged?




Centralization, state-building, and literature

When I first started learning about differential development patterns in the Americas, I believed that former Spanish colonies lagged behind the US because of the overly bureaucratic, centralized government they had inherited from the mother country. This was the original view of Spain that Douglass North put forth in his early work.  Alejandra Irigoin and Regina Grafe describe this interpretation: “Spain was absolutist, interventionist, centralist, statist, bureaucratic and constitutionally disinclined to grant its subject much local government.” [Irigoin & Grafe, HAHR, 2008].

Later I learned that economic historians had rejected this viewpoint as having little basis in reality.  In the book I co-authored, The Long Process of Development: Building Markets and States in Pre-industrial England, Spain and their Colonies, we show that Spain was hardly a centralized, bureaucratic state:

“Until the 1580s Philip’s ‘defense department’ had only one secretary assisted by a handful of clerks, none with military experience. As he prepared to launch the Spanish Armada to try to conquer England, he doubled the number of responsible defense officials to two–one for the army and one for navy! The ships were largely rented from Genoa.”

This lack of centralization was replicated in the colonies:

“The New Spain viceroyalty contained modern Mexico, much of North America, Venezuela, the Caribbean Islands, the Philippines, and all of Central America except modern Panama. Even in the 1600s it nominally included most of the future United States except the Atlantic coastline and the French areas north of the Ohio River. The Viceroyalty of Peru contained all the rest of Spanish South America plus modern Panama.”

Here is a map of New Spain in 1810:


Here’s how we summarize governance in the colonies:

“Spain established two viceroys in ruling the New World, one essentially for North America and one essentially for South America. Neither viceroy had significant staff, and neither had a centralized bureaucracy.   Until the 1770s Madrid did not even create an orderly set of provincial governments at the level of the future American states.

With the possible exception of the Church, the administrative organs were grossly understaffed. Even in the late 1700s, David Brading notes that ‘the Spanish Crown depended on a mere handful of officials to govern its American empire.’ He reports that ‘in New Spain the entire judicial bureaucracy, for example, the salaried members of the Audiencia of Mexico and Guadalajara, numbered about 30 persons [in the late 1700s].'”

So while over centralization and bureaucratization used to be blamed for slow growth in post-colonial Latin America, we argue instead that it is the opposite:  the countries were insufficiently governed and that left a power vacuum in the chaos of independence.

I was reminded of these issues when I recently finished Willa Cather’s “Death Comes for the Archbishop” (a beautiful book about late 19th century New Mexico).  The novel gives the reader a great sense of how long the distances were in those times and how little that area was actually governed.  Here are some of my favorite quotes:

The Bishop (originally from France) arrives in New Mexico and immediately faces resistance from the locals, who dispute the idea that the territory is no longer controlled by Mexico.

The Bishop laments “I wish I knew how far this is! Does anyone know the extent of this diocese, or of this territory? The Commandant at the Fort seems as much in the dark as I. He says I can get some information from the scout, Kit Carson, who lives at Taos.”  

Because of the resistance, the bishop must travel to the Bishop of Durango to get official papers showing that he is now in charge of Catholic affairs in the area.  That was easier said than done in that period:

“Your Eminence, the Bishop of Durango is an old man; and from his seat to Santa Fé is a distance of fifteen hundred English miles. There are no wagon roads, no canals, no navigable rivers. Trade is carried on by means of pack-mules, over treacherous trails. The desert down there has a peculiar horror; I do not mean thirst, nor Indian massacres, which are frequent. The very floor of the world is cracked open into countless canyons and arroyos, fissures in the earth which are sometimes ten feet deep, sometimes a thousand. Up and down these stony chasms the traveller and his mules clamber as best they can. It is impossible to go far in any direction without crossing them.  If the Bishop of Durango should summon a disobedient priest by letter, who shall bring the Padre to him? Who can prove that he ever received the summons? The post is carried by hunters, fur trappers, gold seekers, whoever happens to be moving on the trails.”

and lastly, the vicar notes that “at Rome they did not seem to realize that it was no easy matter for two missionaries on horseback to keep up with the march of history.”  

I might assign section of the book next time I lecture on centralization and nation-building.  There is something more “real” perhaps about reading it in a novel with characters you care about than just as a passing note in a textbook.

Is Britain poorer/doomed?

I fear there’s been a bit of  goal-post moving by the anti-brexiteers.  From “this will wreck the economy” to “the depreciation of the pound will have devastating long-term effects

People, believe it or not, the depreciation of the pound is HELPING the British economy. Manufacturing is up, recession has been avoided.

Tyler acknowledges this, but writes about how the 10% depreciation of the pound make the UK poorer by some fraction of that decline. And indeed that can be true. If British wealth remains constant in pounds, and some of it goes to buying imported goods (and 30% of British consumption is on imports), then they are indeed poorer.

But things are more complicated than that. First off, if Brits own dollar or Euro denominated assets, they are actually getting richer in terms of wealth for pound-based future consumption.

Plus British wealth in pound terms is NOT staying constant.

Pre-Brexit, the FTSE was settled in around 6200. It fell to 5400 after the vote, but it is now trading at 71oo. That is a 14.5% rise in the value of British companies (from the base of 6200 not 5400).

And that my friends, is British wealth going up in pound terms by as much or more than the pound is depreciating.

Of course, to the extent that non-Brits own British shares, that dilutes how much British wealth rises when the valuation of British companies rise.

In fact it’s pretty hard (I think) to figure out the exact net international position of a country’s asset holders.

We do know however, that there is a large home bias to asset holding and common measurements of national wealth just roll in the full value of the stock market.

Sure, the stock market is not all of wealth and the stock market could fall on further news. But the pound depreciation doesn’t affect all wealth either and the pound could rise in medium term (I know it fell further last week).

To my eye, for now at least, I’d say it’s closer to the truth that post-brexit Britain is wealthier, not poorer. At the very least, please just consider that the economic consequences of Brexit may not be as bad as our pundits are telling us.



Priorities, Syria edition

As we noted in “When Assad Gives you Lemons,” Syria is bizarrely focusing on promoting tourism in the midst of its civil war.  Instead of focusing on the coastal areas, the Tourism Minister is now hyping Aleppo. Seriously.  And it’s doing so with the help of the Game of Thrones theme music.  You can’t make this stuff up.

CNN describes the unreal ads:

“Showcased in the video are aerial shots of wide green boulevards and swimming pools. It’s a far cry from the rebel-held eastern part of the city, where 250,000 people live with daily airstrikes, according to the UN, and where whole blocks of neighborhoods have been destroyed…Syria’s state-sponsored news agency last week mocked the perception of Aleppo as one of the ‘world’s most dangerous’ cities, tweeting a video of locals enjoying the city’s ‘thriving nightlife.’

Who exactly is the government trying to lure to Syria?  What tourists are so confused (phone call for Gary Johnson) that they don’t know that Aleppo is immersed in a civil war? And why use the theme music for a TV show filled with violence and war?

I guess the filming had to be carefully supervised so they didn’t accidentally get pictures of the other Aleppo:


Priorities, priorities


Mexico’s President has been battling corruption rumors for years.  I guess now instead of trying to actively combat corruption, he is instead spreading it around more!

Santiago Perez of the WSJ reports that the Mexican government “recently carried out one of the region’s biggest government giveaways: a $1.3 billion program to hand out close to 10.5 million flat-screen television sets to the country’s poor.” Looks like they have their priorities straight.

There are at least two major problems with this program:

First, and not surprisingly, “the process was riddled with corruption in its latter stages…Some contracts to purchase hundreds of thousands of TVs were awarded in no-bid procedures, and a high-ranking Mexican official asked for kickbacks during the process.” 

Second, “critics of the program say the government shunned less expensive alternatives, designed by the previous administration of President Felipe Calderón, for switching the country to digital television. Gustavo Rivera, executive director of Opciona, a Mexican anticorruption advocacy group [notes] ‘It was an overly expensive and flawed plan that showed either negligence or corruption.'” Or both!





The market speaks

Bloomberg just published an article arguing that Trump lost last night’s debate according to at least one important metric:  the Mexican peso market.  The peso/$ exchange rate has been hovering right at 20, an almost 50% depreciation since 2014.  But this what happened to the peso after the debate:


The peso increased in value by 1.5%, which is a relatively large jump in such a short period of time.  While many currencies increased in value after the debate, Bloomberg reports that the peso showed “the biggest gain across 24 emerging-market currencies.”

As for the Mexican government’s opinion about a Trump presidency, Mexican Economy Minister Ildefonso Guajardo said last week that “the country’s government is prepared to ‘talk to the devil’ to defend Mexicans in the United States if Donald Trump wins the presidency in November.”


Irony fail, Saudi Arabian version

I learned two funny facts this morning about Saudi Arabia.  First, the government is running for the UN Human Rights Council.  Oh the irony. It’s hard to know where to start with that one!

But it gets even better than that folks.  The second fact is that the brochure advocating their candidacy cites women’s rights in SA.  Seriously–you can’t make this stuff up.  And look at the photo that goes along with the supposed women’s rights:


Besides the photo, there are some really funny statements in the brochure, like “The Government allows women to achieve a number of accomplishments.” [my emphasis on the most insulting parts of the sentence]

Also, there is the ridiculous statement that “Saudi law does not differentiate between men and women. This ensures them freedom of action and the running of their own affairs independently and without any restriction.”  Even if that were true, which it is absolutely not, the statement is incredibly insulting and patronizing.  The government lets women run their own affairs.  Gee thanks.

h/t to Hillel Neuer (@HillelNeuer) for this morning’s irony fail.