Poor Economics

I hate reviewing my readings with too much delay and not enough time on my hands, in the process not doing either these books nor my blog due justice. And this especially when it comes to a gem such as Poor Economics by Abhijit V. Banerjee and Esther Duflo. The authors navigating between Scylla (William Easterly) and Charybdis (Jeffrey Sachs) introduce randomized controlled testing into development economics trying to determine what really matters for life choices of the poor.

There is no clear storyline to their book, which makes reading it a bit chopped at times, but that's also simply the point I think. There is no clear theoretical explanatory narrative to life and those who pretend that they know one are deceiving themselves. Duflo & Banerjee concentrate on simple, individual decisions such as why the poor do not vaccinate their children sufficiently, or only send their gifted kid to school. Really an extremely interesting insight in the reality that development programs collide with in the field.

Black Swan

I had picked up Nassim Nicholas Taleb's book The Black Swan when I was in New York in the spring. It had been on my list of current social sciences literature classics to read for quite some time. Taleb quite obviously is an impressive erudite, scholar and practitioner. He is fluent in multiple languages and can (according to Wikipedia) read a number of classical ones in addition. His literary and scholarly references abound in The Black Swan.

And yet, he is not a great writer. His style felt too much like someone highly intelligent trying to write popularly in order to scale the heights of the New York Times Bestseller List, which in deed he did. It made reading the book a bit annoying at times though I found, repetitive, and almost simplistic in some of his examples and anecdotes that stand in stark contrast to the more analytical or rare numerical parts.

Most important though is the theory of the Black Swan he proposes. I will not go into much detail on this, there is a whole Wikipedia article on it and I am not sure I'd even be capable of properly explaining his argument. Quickly put, Taleb argues that most - especially financial - statistical analysis is based on a no-outlier model of the world reflected say in body sizes where frequency groups around an average and there are fewer and fewer people at very high and low heights. Yet, this kind of model fails in the world of social sciences where a single event (a systemic crisis in the markets let's say, or the First World War) can make irrelevant any heretofore dominant average. Any model that does not take these black swans into account is doomed to fail especially as these kind of events happen much more frequently and are much more important in determining stock market moves (or world history if you may) than we presume.

A super interesting argument that came out right before the financial crisis in 2008 and that I cannot say I have read a good argument against so far. Note that especially his (semi-)technical chapters at the end make for a very good read as they are far less anecdotal and thus (ironically and at least for me) far more interesting and easy to read.

Die Inflationslüge

Mark Schieritz ist als Wirtschafskorrespondent bei der Zeit tätig und schreibt unter anderem am Blog Herdentrieb mit. Er ist einer der wenigen (relativ) prominenten öffentlichen Stimmen in Deutschland, der sich gegen die anti-Keynesianistische Mehrheitsmeinung richtet. Sein - kurzes - Buch, Die Inflationslüge - Wie uns die Angst ums Geld ruiniert und wer daran verdient, ist denn auch ein Pladöyer gegen die vollkommen überzogene Inflationsangst von den Springermedien und der FAZ (und einigen anderen) kontinuierlich hervorgeholt. Für mich, der ich mich an der Eurokrise schon viel abgearbeitet hatte, war leider relativ wenig neues in seinem Büchlein enthalten, aber es bleibt eine gute Übersicht über das Thema und die missgeleitete deutsche Politik in Bezug auf den Euro.

Lords of Finance

For many years people believed [...] that an economic cataclysm of the magnitude of the Great Depression could only have been the result of mysterious and inexorable tectonic forces that governments were somehow powerless to resist. Contemporaries frequently described the Depression as an economic earthquake, blizzard, maelstrom, deluge. All these metaphors suggested a world confronting a natural disaster for which no single individual or group could be blamed. To the contrary, in this book I maintain that the Great Depression was not some act of God or the result of some deep-rooted contradictions of capitalism but the direct result of a series of misjudgments by economic policy makers, some made back in the 1920s, others after the first crises set in - by any measure the most dramatic sequence of collective blunders ever made by financial officials.

Liaquat Ahamed tells the story of 1929, the Great Depression, and the bankers who broke the world in his Lords of Finance. He focuses extensively on the main financial protagonists of the time (most importantly: Hjalmar Schacht, Benjamin Strong, Montagu Norman, Émile Moreau) as well as their antagonists (mainly: Keynes) in order to recount the policy failures that led from the Paris peace conference in 1919 to German hyperinflation in the 1920s and ultimately to the bust of 1929 and the ensuing global depression. His book is a gripping piece of personalized historical writing.

Most eerily and pertinent for today are undoubtedly the many similarities of the situation in Europe at the moment with what happened at the time. While policy makers clearly have drawn some lessons from the past and the kind of complete societal and economic breakdown of the 1930s has not repeated itself, there are enough worrisome comparisons that still apply. Whereas today the PIIGS owe more than they will be able to pay, at the time it was Germany stuck in the same situation. And while back then it was the strict adherence to the gold standard that worsened the economic situation in the UK, US, and Germany, it is today the Euro, which forces Spain and others through a deflationary, low growth (even recessionary), high unemployment period.

Of course superficially comparable situations will not necessarily result in the same horrifying course of events, but a study of the past makes one also painfully aware of how much of déjà vû the structural monetary and financial problems of the European debt crisis really is.

Why Nations Fail

One of the most recently hyped books on the political economy, Why Nations Fail - The Origins of Power, Prosperity, and Poverty by Daron Acemoğlu and James Robinson tries to explain why some nations grow rich while others fail their citizens. Reviews abound (Dan Drezner, William Easterly, Martin Wolf), my addition to these luminaries weighing in would hardly seem to matter at the margins even.

I will try but little then. Robinson and Acemoglu put forward a very interesting argument showcasing how institutions - political and economic ones - determine long-term growth and in that sense are to belie the performance of nations/states. Neither culture, nor religion, nor even geography matter to the same extent and with the same durability and importance as to the authors. It's a very convincing argument devoid of the old cultural, xenophobic, racist, or even geopolitical prejudices. In order to generate and most importantly sustain long-term economic growth countries were in need of inclusive institutions, which the authors juxtapose with the extractive institutions present in far too many African or even Asian or South American states.

In more detail:

Extractive institutions ... have a powerful logic: they can generate some limited prosperity ... while distributing it into the hands of a small elite. For this growth to happen, there must be political centralization. ... The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions ...most important, it is not sustainable. By their very nature extractive institutions do not foster creative destruction and generate at est only a limited amount of technological progress ... [also] strong incentives for others to fight to replace the current elite. Infighting and instability are thus inherent features of extractive institutions. The fear of creative destruction is the main reason why there was no sustained increase in living standards.

Fault Lines

As futile as trying to read up on political, literary and historical issues already is, I also like to read the occasional economic book. In fact I wish I had more time to simply read all the books that I've already bought or plan on acquiring in the future, but that's a different story for another day. Raghuram Rajan's Fault Lines - How Hidden Fractures Still Threaten The World Economy was possibly the economic analysis that received the most public attention in 2010. As the title states, Rajan offers up a number of economic and political fault lines that brought about the financial crisis. These fault lines are far from being resolved today and thus hold the potential of contributing to another bubble and the ensuing crash.

Rajan as an (Indian-)American economist is a believer in the ultimate superiority of the market economy of course, yet this just lends further credence to his observations of the defaults of the American system. Thus he exposes the extreme rise of income inequality coupled with the lack of a social safety net in the United States as a fault line for the economy there - and in extension the world - because of resultant the political need to push for easy credit in order to sustain consumption of poorer households. Similarly, the urgent need for the quick creation of jobs in the United States versus Europe -where social assistance makes higher unemployment rates much more politically sustainable - in combination with the kind of job-less recoveries that emerged in the 1980s creates political incentives for expansionary monetary policy. Both of these political forces arising out of the peculiar situation of the - almost pre-modern - American social system hold the potential of creating future bubbles that then will inevitably burst. Rajan sees these - in combination with a few others of course - as the underlying basis of the sub-prime crisis.

Politicians favor access to easy credit as a means to overcome rising inequality. [...] The weak safety net and the emergence of jobless recoveries imply that the American electorate has far less tolerance for downturns than voters in other industrial countries [...] In an attempt to induce recalcitrant firms into creatin jobs, both the government and the Federal Reserve, especially the latter, ended up aiding and abetting a house price bubble and the financial crisis.

Rajan also finds an international component of this fault line of easily available credit.

Somewhat ironically, the developing country central banks did to the United States what foreign investors had done to them in their own crisis.

They pushed easy credit into the US due to their desire to build up reserves following their experiences in the Asian financial crisis of the 1990s and in that way helped construe the bubble that just blew up in all of our faces.

I am far from giving this book and its overview of the American and global politico-financial interactions justice of course. Let it suffice to say that the above-described mechanism is still in place today and to some extent has even been reinforced with the Fed as expansionary as ever - and far more so in relative terms than say the ECB - and income inequality - I assume - only having risen even more due to the crisis. Rajan is an astute, optimistic Cassandra - as little sense as that makes - and his book gave me a much better understanding of the forces behind the crisis we just experienced and the ones we will be facing in the future.

Aus dem Ahlener Programm der CDU (1947)

Das ist es also, was die Konservativen meinen, wenn sie immer von der Sozialen Marktwirtschaft schwärmen. Oder etwa nicht?

"Das kapitalistische Wirtschaftssystem ist den staatlichen und sozialen Lebensinteressen des deutschen Volkes nicht gerecht geworden. Inhalt und Ziel dieser sozialen und wirtschaftlichen Neuordnung kann nicht mehr das kapitalistische Gewinn- und Machtstreben, sondern nur das Wohlergehen unseres Volkes sein. Durch eine gemeinwirtschaftliche Ordnung soll das deutsche Volk eine Wirtschafts- und Sozialverfassung erhalten, die dem Recht und der Würde des Menschen entspricht, den geistigen und materiellen Aufbau unseres Volkes dient und den inneren und äußeren Frieden sichert."

Gold and the Dollar Crisis

I have to admit that I get some kind of a bizarre (sadomasochistic?) joy out of these intellectually challenging economics books. But then I like to read for Faulkner for fun and devote a significant chunk of time to the upkeep of a blog whose number of hits (aka readers) is, well, not overly impressive, maybe I simply am bizarre when it comes down to it. In any case, Robert Triffin's Gold and the Dollar Crisis - The Future of Convertibility was fun, even if I only read the first half (the second half deals with his proposed changes to the Bretton Woods system finally truly in place in 1958 - analyzing never enacted reforms to a system not in place anymore felt a little bit too hardcore).

Triffin of course is the source of the famous (maybe my perception has become a little bit skewed here) Triffin dilemma, which states that a continued American capital deficit is necessary in order to provide the liquidity needed in an economically expanding world, while it will at the same time undermine the dollar's credibility as the global reserve currency because of the increasing gap between American gold reserves and greenbacks circulating (metaphorically speaking).

In his own words:
'The gold exchange standard may but does not necessarily, help in relieving a shortage of world monetary reserves. It does so only to the extent that the key currency countries are willing to let their net reserve position decline through increases in their short-term monetary liabilities unmatched by corresponding increases in their own gross reserves. If they allow this to happen, however, and to continue indefinitely they tend to bring about a collapse of the system itself through the gradual weakening of foreigners’ confidence in the key currencies.'

Very similar to Eichengreen's analysis at times, he argues that up to 1914 the gold standard worked and provided stability (to major Western countries in any case) because of cushioning, private financial flows (because of the expectancy that problems would be solved and currencies not depreciated) as well as 'higher endurance of macroeconomic suffering' (unemployment namely) feasible due to very restrictive voting rights (and in turn a lack of democratic accountability). He differs from Eichengreen in the sense that these explanations do not suffice in his opinion. He thus adds the 'widespread acceptance of long-term deficits' and the fact that major imbalances were prevented ex ante before its impacts on employment or growth could be felt. Finally, 'financing of expenditures over production did not exist in any dangerous manner.'

All of this changed after WWI. Especially private financial flows became accentuating rather than cushioning of the impact of current account imbalances simply because the belief that currencies would not depreciate had evaporated (here his and Eichengreen's analyses are congruent again). Basically the same situation developed around the Dollar (not the Pound Sterling of the interwar years) after WWII.

Triffin's dilemma of course perfectly summed up the situation and his definition quoted above describes perfectly what 'happened to the UK in 1931' and (unbeknownst to him in 1960 of course) to the USA in 1971 and 1973. Ironic in retrospective is that Triffin shows himself convinced that this situation would not arise again. 'Only an incredible complacency on our part could [...] force us to suspend or modify the legal gold cover requirements of the Federal Reserve System.' His main concern lies with the deflationary consequences of an adjustment to the American balance of payments deficit instead.

His suggestion to solve this problem lies with an international lender of last resort, more powerful and better financed than the current (or historic) IMF since 'the basic absurdity of the gold exchange standard is that it makes the international monetary system highly dependent on individual countries’ decisions about the continued use of one or a few national currencies as monetary reserves.'

Restoring Japan's Economic Growth

The wonders of inter-library loans. I am not sure why I did not discover them early on in my academic career. Anyway, Adam Posen disects Japan's lack of growth through-out most of the 1990s after having given a scarce to the American right with its rapid qnd constant growth only a decade earlier. Basically, he applies Keynes to Japan and thoroughly analyzes why a fiscal push would help jump-start the country's economy. I don't want to go into too much detail on this, but he shows in a very convincing manner how what has been called fiscal expansions in Japan have in fact been mere collections of spendings already planned leading to a budget deficit lower than the Maastricht Criteria, lower than most Western European econolies at the time (none of whom had to deal with a major recession).

The General Theory of Employment, Interest and Money

I spent a decent amount of time plowing through Keynes and I got surprisingly little out of it. His theory of course is fascinating, but his language just a tad too antiquated and complicated to make his book anything even close to a pleasure. Considering how relevant he seems to have become again it seemed like a good idea to have a look at him though.

Keynes basically wrote a criticism of classical econolic theory. He argued that Smith's invisible hand would not in fact provide market-clearing mechanisms for the employment market. In certain situations, an economy could get stuck at sub-equilibrium outpout and thus employment and welfare. Notably this were the case if future expectations lead to a slide in investment and consumtpion. In this case actions by individually rational actors lead to a sub-optimal aggregate outcome. In order to jump-start the economy the government needs to intervene either through monetary expansion or (if the former proves impossible) through fiscal deficit spending. It does not matter whether this budgetary deficit is sensibly spent ('digging for gold, building pyramides) pointless activities help create employment and in extension wealth.'

Fairly simple it seems (even though it isn't and I hope no one who reads this manages to call me out on any grave mistakes) and applicable only in the rare circumstances where output (employment) clearly lies above its potential (natural equilibrium).

In Defense of Globalization

A bit of an overload today I realize that but I had to play catch-up. Just a really short critique of this book. Jagdish Bhagwati's In Defense of Globalization was something I had really looked forward to. He used to teach Krugman, is one of the elder statesmen of trade theory and I was really exciting to read a book by him, especially one with a title as aggressive as this one. Well, Mr Bhagwati let me down. Big time. Basically his book consists of a number of essays that are put together without much thought nor inherent logic. He mainly attacks globalization opponents, calls the demonstrators in the street out as being uninformed (really, the couldn't argue economics with someone with a PhD, that is surprising) and while he refutes some of the usual anti-globalization arguments he does so on a very basic level. Maybe he tried to educate the completely uninformed with this, I didn't really get anything out of his book.

The Great Crash 1929

Another one of the countless books in preparation for my economics exam next week (wish I could spend as much time simply reading literature/history, topics that I choose, no such luck though), John Kenneth Galbraith's The Great Crash 1929 is considered the classic study of this stock market failure. Considering the renewed interest in these subjects and the fact that financial aspects will definitely (possibly? I have no idea really) be part of my exam, I decided it would be a good idea to have read it.

The big surprise of this book basically was how much I enjoyed reading it, I finished it in less than 10 hours (in more or less one straight sitting) and never got tired of it. Galbraith provides a very detailed study, he does not try to overanalyze, but instead intends of providing his readers with enough information to pass judgment themselves. He shows the failure of market participants as well as regulators while also pointing out that the crash was inevitable and a market failure. Its size or impact could have been impacted by the Fed, the Treasury and a number of other actors, but they could have not prevented the bubble from bursting.

I find these economic subjects highly frustrating at times, simply because they are so inconclusive, everything is based on assumptions that might (or might not) be logically coherent but not necessarily true. Even if after reading this book I feel like I understand the nature of these bubbles, these crashes, better, it still seems to be such a superficial understanding, such a shallow knowledge. I guess there ain't nothing but to keep on reading.

Late add-on:
I just found my notes for this book again and just wanted to add a few comments:

• Galbraith argues that 'cheap credit [is] not sufficient as an explanation for a speculative bubble' which I found highly interesting considering that's what Europeans claim the Americans did wrong these last few years (also I think this is what Greenspan usually is criticized for).
  
• The high income gap in the United States before 1929 (low Gini-efficient) contributed to a dependency on luxury goods for continued economic growth. When the stock markets crashed a relatively low percentage of people were directly affected by this, but these were the guys that were needed to keep consumption at high levels. Basically (and this is me, not Galbraith), if the United States had been a more just (in terms of income) society the Great Crash wouldn't have had such an astounding (and long-term) effect. I wonder what that means for today's society, considering that thanks (to some extent) to Bush's economic policies the rich have gotten richer while everyone else stagnated.
  
• 'The bipartisan emphasis on balancing the budget in 1932 worsened the developing depression.' Let's just say I hope that Frau Merkel is reading some economics texts too, I'd like to find a job next summer after all.
  
• Highly amusing:
  'Persons high in Republican circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the Administration. Every time an Administration official gives out an optimistic statement about business conditions, the market immediately drops.'

Pop Internationalism

The second book by Paul Krugman in the last few weeks (days really) I've gone through. I found the French title to be more explanatory if less catchy: Le mondialisation n'est pas capable. In any case, the book is simply a collection of essays and speeches that Krugman had written/given trying to dispel certain notions on trade policy in the (American) public and political arena. Even if some of content becomes slightly repetitive after the second or third essay (it a collection after all not a coherent body of work), I found the whole thing a very insightful and helpful read. It has already helped me twice these last days in arguments on trade policy with non-economists (even non-political scientists and it is not like I could even call myself an economist with producing inadvertent laughter within myself).

Krugman fears that public discourse has been decoupled from the scientific economic discourse and would like to try to refute some of the (economic) arguments put forth going against every economic theory or against empirical proof. I am not going to go into detail here, repeating his main arguments, but I most definitely can recommend at least one or two (or all) essays of this volume to most (non-economists) readers.

The Return of Depression Economics

Paul Krugman during the past week referenced to a book that wrote in the late 90s on financial crises and which he now apparently is republishing with some added data and another chapter. Considering I'll be taking an economics exam in Berlin relatively soon I figured I should read that book in order to try to find out more about this current crisis and its implications for a Bretton Woods II (whatever that may mean in the end and not matter whether that might be a good analogy or not, it drives across a point).

what does this year's Nobel price winner have to say then? Basically, this obviously being a very much condensed version, a stylistic recounting of a stylistic argument if you want, Krugman shows that financial market crises need not be logical or rational. There is an inherent logic to market behaviour that leads to self-fulfilling speculative attacks (if everyone knows everyone else will sell dollars/euros/whatever else, it is rational for you to join the fray as you will lose money otherwise, even if the good/share/currency concerned might actually have a sound economical value). For him this was especially noticeable in the case of the Asian crisis (crises?) in the 90s, when fundamentally sound markets (like South Korea) were abandoned because of a double standard of markets, an irrational (racist? one could totally do a reading from this point of view, not getting into that here though) benefit of doubt for first world countries (leaving Australia with far less problems than say Malaysia). Obviously, this latter argument would have to be updated some in his new version of this book, simply because we now had (have) a first world financial crisis.

Interesting is the fact that Western governments (mainly the US) forced anti-Keynesian policies on Asian as well as South American countries leading to possibly worse results in regard to their currencies (because their one-time devaluation was not deemed sufficient) at the same time that the following recession was deepened (do recession's deepen?) through the implementation of high interest rates and 'fiscal responsibility'. Why is that interesting? Well, considering the US and Britain the stalwarts of the Western liberal system just (semi-)nationalized their banking sector and are now discussing programs intended to assuage economic problems, there seems to have been a certain amount of hypocrisy in this policy.

Summing up then, Krugman basically claims that a feedback loop, a gigantic financial market failure if you want, can lead to financial crises even if economic data is sound, which leaves us with what? Looking to the government for help? Obviously a solution to this (current) crisis requires some kind of government involvement, but how far and in what way seems very much to be open to debate. After all, it is not like governments have been known to run profitable effective operations in the past.

Super interesting book, read it. I am not sure I can claim I really understand everything and I most definitely have a hard time recounting all the arguments concerning the feedback loop or the liquidity trap that Japan was facing, but I find it shocking how many policies Krugman criticizes are being employed again today, notably by the ECB and its Bundesbank-philosophy of regarding low inflation as the most important aspect of monetary policy. As always, one's lack of knowledge, of a deeper understanding in virtually every subject is quite stunning (and depressing at times), but I guess one just has to continue chugging along (keep on reading that is).

American trade policy / la politique commerciale américaine

So, I just wrote my first paper and had my first oral presentation in France. I wrote the text in English and wanted to do the presentation in the same language but then I got pissed off at myself for chickening out and under consideration of the fact that I don't really care about my grades here decided to do everything in French. Thus, I rewrote the whole thing in French (with friendly assistance of this terroristy kid from some crappy, small town in the South of France somewhere). If you care to read a short summary of American trade policy, check it out. Lots more could be said about this and my footnotes show where one could take this I think. Interesting subject to say the least.

As a side note, Paul Krugman on his blog posted a really easy introduction into trade theory, you should read it if you don't know much about this topic.

Je viens de donner ma première exposé à Sciences Po et j'ai écrit une synthèse sur le même sujet (avec un peu d'aide d'un copain terroriste à moi). Je l'avais écrit en anglais au début, mais je veux apprendre quelque chose ici, alors je me dis que cela servirait à rien à la fin et je l'ai traduit en français. Si la politique commerciale des États-Unis vous intéressez, lisez-le. Je le trouve un sujet fascinant et je crois qu'on peut voir qu'il y a beaucoup des possibilités d'élargir cette synthèse.

Exorbitant Privilege

I wrote an economics paper on the side this semester, dealing with the United States' (or the dollar's) benefit accrueing through its position in the international monetary system. Very interesting subject I found out, check it out.

Money and Security

Hubert Zimmermann, a German author, wrote Money and Security. Troops, Monetary Policy, and West Germany's Relations with the United States and Britain, 1950-1971 in English, even while focusing on a part of German history I had been embarassingly unaware of. I will not focus too much on it, as I plan on using it in my master thesis and an economics paper that I have to write.

Let it suffice to say that Zimmermann, shows in a very conscise and convincing manner how Germany came under pressure from the United States (and to a lesser extent Britain) because of the foreign exchange surplus that foreign troops in Germany created for the mark. Because these troops had to be paid in German money, Germany ran a balance-of-payments surplus for years on end (not only because of that though, but this was responsible for a large part of it).

The United States continously during the 1960s tried the German government to offset this deficit (for the US), succeeding increasingly less over the course of that decade. Highly interesting stuff, the foreign troops in Germany thus directly contributed to the end of the Bretton Woods system. Economy and security as two sides of one and the same coin. Read it. (I am too tired for better posts tonight, sorry)

The Rise and Fall of the Great Powers

Paul Kennedy's monster work, The Rise and Fall of the Great Powers - Economic Change and Military Conflict from 1500 to 2000 had been referenced by a lot of the guys I had read before. It is a crazy book because of the detailed look it takes at power politics over a period of 500 years. I have to admit that I don't want to get into describing this book too much because any short blog entry would barely scratch the surface anyway and not give the amount of information provided by Kennedy justice. Thus, in only a few sentences:

Kenedy's main argument is that economic change and military prowess go hand in hand and that in the long run economic might determines military might and thus shapes the politics of the Great Powers. Disappointing, even if Kennedy surely cannot be blamed for that, was the fact that the book was written before the fall of the USSR, thus some of the analyses are completely irrelevant for today. Nonetheless I felt that his book helped me to develop a better understanding of the politics of power and war of the last 500 years (and especially and most relevantly of the 20th century).

Don't read this book just out of boredom, but if you do pick it up, it will provide with a wealth of information, the only downside of which might be that it proves once again how little we really know.

Inequality and Prosperity

Inequality and Prosperity: Social Europe Vs. Liberal America by Jonas Pontusson was a book for my second directed reading class (the first one being basically me working on my thesis). In basic terms I already knew a lot of the points that Pontusson made, having taken a class on the American welfare system in Germany right before I left. Still, the amount of data in this book was quite overwhelming (and made for dense and slow reading).

Pontusson's argument basically is that unlike what most Americans (and Europeans it seems for that matter) think there are some lessons to be learned for the USA from European systems (especially the Nordic ones). He firstly, and importantly, refutes the notion that European welfare states are restrictive of growth. This, because those two did go hand in hand during the 1960s and 70s after all, while there is no clear correlation between the two for the 80s and 90s (if the Nordic states are taking out of this equation there is a clear-cut correlation though even if Pontusson never mentions this). The main criticism of the European systems that he puts forward is related to the low employment rate (because of lower female participation rates and early-retirement plans enacted during the last two decades of the 20th century (and still today)).

Yet, his main point I believe is a normative one, specifically, that the USA should try to implement some of the positive aspects of European welfare states. Namely, wage solidarity (possibly through Union negotiation powers) which limits unproductive agencies (due to a kind of convoluted argument that claims that lower wages for unskilled workers subsidize unproductive industries (this because compressed wages due to union activities put a higher premium on capital and thus lead to its more efficient usage)) and prevents social unrest and losses through constant strikes (see France :)). Furthermore, higher investment in public education as a public good (with the German trade school system to some extent being held up as an example) and more active labor market policy. As an extra argument, (I would have included this in the active labor market policies) 'family policies designed to facilitate female labor participation' and, finally, more universalism as opposed to means-tested assistance as a means of increasing public acceptance to welfare programs.

He does make a convincing case for the most part, offering up an incredible amount of data, even if some of his statistics seem doubtful (significance at 90%?). Yet, he stays very much on the ground analytically, meaning he mostly refrains from deeper analysis, which does not necessarily detract from his main argument (see above), but leaves the reader exasperated at times. Also, some of his theories make an impression of containing at least some wishful-thinking. Thus, he argues that the EU unemployment rate is artificially high, because the current account balance (as % of GDP) needs to be deducted from it. While in theory, the long-term current account balance needs to rest at an equilibrium, this does not mean that its effect would necessarily be lower unemployment, adjustments could also take place through wages.

Lastly, one fun fact on the USA: If the prison population is included American unemployment rises from 5.6% to 7.5%. For the EU the same change in people considered results in an increase from 8.3% to 8.5% only.

Globalizing Capital

Barry Eichengreen's Globalizing Capital - A History of the International Monetary System was part of the readings for a class I have. For various reasons I never had the book when we were supposed to have to do the readings. So I borrowed and read it over my Thanksgiving break even when I wasn't sure whether the whole book or only parts of it had been assigned. Some people might wonder why now, but in my last college days, for reasons I cannot quite fathom yet, I have become increasingly interested in macroeconomic developments and the international economic arena in general.

Eichengreen in his book gives an overview of the history of the international monetary system (admittedly relatively unsurprising considering the subtitle of the book) from the 1870s onwards. He sketches the path to the gold standard, its predominance until 1914, the futile interwar attempts of reestablishing it and the ensuing instability, the Bretton Woods System, the following floating exchange rates, and finally attempts at monetary unification. Published in 1996, the one glaring omission of this book is EMU. Also, one of today's most pressing financial issues, the build-up of dollar reserves in developing countries, specifically China, is not included. But even if the inclusion of these more recent developments would have been appreciated, Eichengreen obviously cannot be faulted for them as he had finished writing his book before these points really arose. Furthermore, the book is highly interesting in any case.

I don't want to write a lengthy review of this book because of two reasons. Firstly, to give the author justice one would have to be very detailed in a critique of his book, as his argument is very detailed and exhaustive in regard to the amount of information provided. Secondly, I simply am not sure whether I am truly capable of criticizing an economic author like him yet. I started getting into economical issues late in my studies, a year ago really, and I cannot say that I have developed enough of a grasp as of yet to really have strong personal opinions on topics as abstract as this one.

Yet, having said that, it seems to me that Eichengreen's main argument is that there are two reasons why the gold standard could not be successfully implemented again after the First World War. The strict adherence to the gold standard, which was necessary to prevent speculative attacks on currencies, resulted in countries sacrificing growth and employment figures (through deflation) for stable exchange rates. This was possible mainly because the segments of society mainly hit by unemployment and this decrease in growth were politically irrelevant, they could not vote. With universal suffrage becoming a reality in most of Western Europe it became impossible for governments and central banks to pursue this kind of policy. Thus, another measure was used to keep exchange rates in check, capital controls. This made speculative attacks more difficult even if it never eradicated them permanently. Furthermore, these controls became less and less efficient and an ever increasing global flow of capital made the adherence of fixed exchange rates more and more difficult leading to the current system of most major currencies floating freely against one another.

If Eichengreen uses stylized facts in his book, I just super-stylized those. I thought I should at least try to offer a concise (hopefully) and short (definitely) summary of his book though. I really enjoyed reading it and I will almost assuredly try to find out more about this subject.