Power & Market

It Is Time to Rethink the Policies of Invoking Government Nudges

05/19/2022Vijay Victor

There has been a lot of buzz going on about nudges ever since Thaler and Sunstein popularized the concept in their book “Nudge: Improving Decisions About Health, Wealth, and Happiness” published in 2008. Nudges are basically subtle suggestions or motivations devised to change people’s behavior without denying them the freedom to make own decisions. Thaler and Sunstein define nudges as:

Any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.

In the absence of evidence-based treatments and vaccines, behavioral nudges were expected to help in encouraging people to maintain social distance, wearing masks, debunking conspiracy theories at the start of the pandemic. Many governments and independent organizations funded projects to devise and study nudges that could bring in a desirable behavior.

Several studies have been conducted across the world to assess the effectiveness of nudges in a pandemic situation. Many of them reported that nudges were not as effective as expected in bringing out a desirable behavior. Informational nudges like pamphlets, text messages etc. seemed to have increased the hand washing habits of people by two percent and the willingness to wear masks by three percent in countries like Columbia and Brazil. Framing messages in loss or gain frame did not seem to have a major impact on deciding the need for and the length of lockdowns in the UK. Similar results were found in a study conducted in the Netherlands to motivate people to maintain hand hygiene in shopping streets. The study concluded as follows:

Our results suggest that stores, and governments, should look for other measures than the tested nudges to improve hand hygiene in the shopping street during the COVID-19 pandemic, either combining different nudges and/or using less subtle methods. 

Keeping aside the ‘replication crisis’ in the fields of psychology and economics, there are several reasons why nudges don’t work. One major reason could be attributed to the psychological barriers created by the cultural and contextual features of different countries, locations, and groups. Generalizing the results of studies without ‘context reconnaissance’1 would yield bad results.

It is almost impossible to devise umbrella nudges or interventions that would fit everywhere. To put this into perspective, consider the reasons for vaccine hesitancy in Africa. Years of war and Ebola outbreaks increased the distrust in the products from the west. Along with this, local health beliefs that differ from region to region play a major role in increasing vaccine hesitancy. A single nudge would not be of much help here. This necessitates the need for customized or rather tailor-made interventions that are region specific; homogeneous groups or at least groups with similar traits must be identified. Generalizing the application of nudges or interventions for regions with similar characteristics may also not work. It is quite possible that we overlook the underlying heterogeneity in the groups considered. After all, many social phenomena are inseparably intertwined.

Having said this, one should not exaggerate the effectiveness of nudges in a precarious pandemic situation like this. The effect sizes of the studies cited above indicate that nudges alone are not enough as in the case of organ donation or retirement plans where we observed significant changes. Many governments believe that instead of forcing people to exhibit a desirable behavior, they could just ‘nudge’ them. ‘What is considered as desirable behavior and who decides it’ will take us to the classic debate of libertarian paternalism and its oxymoronic nature.

Thaler himself suggested that the governments should opt for sterner measures like vaccine passports instead of solely relying upon nudges to get people vaccinated. We need the right mix of soft and hard interventions which Thaler calls ‘pushes and shoves’ to motivate people to take vaccines. The sheer simplicity and subtle nature of nudges may make them appear like magic potion to the politicians. It is high time that we realize the actual effectiveness of these interventions and use our limited resources judiciously. As a closing note, here is the conclusion of a paper published in Nature by a group of prominent behavioral scientists written in response to the overuse of half cooked behavioral interventions.

On balance, we hold the view that the social and behavioral sciences have the potential to help us better understand our world. However, we are less sanguine about whether many areas of social and behavioral sciences are mature enough to provide such understanding, particularly when considering life-and-death issues like a pandemic.

References

1https://behavioralscientist.org/ask-behavioral-scientist-piyush-tantia-ideas42-importance-context/

Positive results – framing: Nudges for COVID-19 voluntary vaccination: How to explain peer information?

Weijers, R. J., & de Koning, B. B. (2021). Nudging to increase hand hygiene during the COVID-19 pandemic: A field experiment. Canadian Journal of Behavioural Science / Revue canadienne des sciences du comportement, 53(3), 353-357. http://dx.doi.org/10.1037/cbs0000245

A megastudy of text-based nudges encouraging patients to get vaccinated at an upcoming doctor's appointment, https://www.pnas.org/doi/10.1073/pnas.2101165118

Use caution when applying behavioural science to policy - https://www.nature.com/articles/s41562-020-00990-w

How effective is nudging? A quantitative review on the effect sizes and limits of empirical nudging studies, https://www.sciencedirect.com/science/article/abs/pii/S2214804318303999

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It’s Only a Day Away

05/03/2022Robert Aro

Tomorrow the Federal Reserve's two-week blackout period will be lifted and Chair Jerome Powell is set to address the world. Strangely enough, yet not surprisingly, some mainstream economists and Wall Street analysts agree with the Fed that everything will be fine and a recession in the near future will be avoided.

To recap, CNBC notes that:

Expectations for a 50 basis point move in May rose to 97.6%, according to the CME Group’s FedWatch Tool.

Noting the long road ahead should take the Fed Funds Rate to 2.75%, which is a rate that hasn’t been seen since 2008, during the time of the Great Recession and national housing crisis.

In addition to discussing rates, the Fed’s March meeting indicated:

…the Fed eventually will allow $95 billion of proceeds from maturing bonds to roll off each month.

By listening to the meeting minutes and general comments, our central planner's outlook becomes clear. CNBC reports several telling quotes by the Fed Chair:

Powell noted that the other than pernicious inflation, the U.S. economy is “very strong” otherwise. He characterized the labor market as “extremely tight, historically so.”

He also addressed the possibility of a recession:

“Our goal is to use our tools to get demand and supply back in synch, so that inflation moves down and does so without a slowdown that amounts to a recession,” Powell said.

Between 50 bps rate hikes and increasing rates in the bond market, coupled with the potential to reduce the balance sheet by $95 billion a month, the Fed should be worried. The “very strong” U.S. economy that Powell cites could just be a mirage, and a Malicious Monetary Turnaround lays waiting on the horizon. This could inflict unfathomable capital destruction and market havoc; exacerbated when the Central Bank decides to first halt, then reverse its easy money stance.

In the future, some may call it a policy error, an oversight, or blame a Black Swan. Undoubtedly there will be much talk about how no one saw this coming, especially when mainstream outlets like CNBC start announcing unfavorable stats, such as negative growth:

Gross domestic product unexpectedly declined at a 1.4% annualized pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984…

Then follow up with expert assurances in the same article, like this:

“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. 

Then again with this:

…recession expectations on Wall Street remain low…

And again with:

While economists still largely expect the U.S. to skirt an outright recession…

And just in case anyone had their doubts that 2022 would be a difficult year:

Deutsche Bank sees the chance of a “significant recession” hitting the economy in late 2023 and early 2024, the result of a Fed that will have to tighten much more to tamp down inflation than forecasters currently anticipate.

What should be clear, is that when one of the largest media networks in the world, a chief economist, Wall Street, mainstream economists and even Deutsche Bank don’t seem too concerned, then this is not noise, it’s a signal. The boom-bust cycle is nothing new, and Fed induced market crashes, bursting of bubbles, and recessions come part and parcel with central banking.

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Inflation Is Just the Beginning. А Few Words about how the State Multiplies Risks.

04/29/2022Paul Tolmachev

The current extraordinary inflation and actually started stagflation is the result of a tremendous macroeconomic mistake of the state economic policy of developed countries and, first of all, the USA. A huge part of the respected academic and expert economic community has kept the U.S. and European governments from making such a mistake - but, as we see, in vain.

The government's mistake is not new: the attempt to moderate multifactorial market processes and form "conditional behavior" of agents for the illusory purpose of leveling the negative phases of economic cycles. This is the cornerstone of every leftist doctrine, from Keynes and Marx to pseudoscientific concepts like modern monetary theory (MMT).

The deep motives of such actions are determined by the electoral interests of the electoral elite and are described quite adequately by the Theory of Electoral Cycles. The essence of the error - in the expansion of state paternalism and hypertrophied macroeconomic stimulation of processes in an open market economy.

Against the backdrop of obvious supply-side disruptions associated with covid constraints - cascading supply chain breakdowns and declining labor, the state has decided to stimulate directive-blocked demand in unprecedented amounts. Such actions, even without taking into account other extraordinary exogenous and endogenous factors, look like absolute absurdity and a road to collapse.

Stimulation of demand by the state was implemented through a combination of fiscal and monetary interventionism. Direct payments to the population led to inflation of exchange-traded assets. Support for loss-making and inefficient enterprises to save jobs and the adoption of huge infrastructure programs were combined with maximum monetary easing through zero-funding rates and large-scale programs of direct injections of liquidity into the banking system through the redemption of public debt.

The result of such pumping demand on the background of obviously problematic supply was a cascading deterioration of the situation. The consumer intension, limited by covid lock-ups and a lack of output, was disintegrated by extra-injections of actually free and unsecured liquidity that is, by another state monetary leverage. This led to a sharp imbalance in the price relationship between supply and demand, with the growth of final consumer prices on the background of explosive post-consumer demand and supply unable to meet it.

The deplorable state of production, in addition to negative covidual logistical externalities, was intensified by a sharp decline in labor force and inability to fill vacancies - labor employment declined sharply due to imbalances in households' disposable incomes, liabilities and savings. This naturally increased wage inflation, which, together with other factors of production inflation, such as logistical gaps and shortages of components, contributed to a sharp rise in producer prices.

The final and extremely significant factor in production inflation has been the rise in commodity prices, primarily energy prices. This process has three main causes: a) asset inflation, partly artificial and created by the government, b) geopolitical tensions in Eastern Europe, d) the forcing of the green agenda and the compression of traditional energy sources without sufficient development of alternative sources.

The growth of exchange-traded assets, particularly commodities, is a consequence of excess liquidity in a troubled economy, with financial agents and investors absorbing liquidity in exchange-traded assets as a more reliable and promising investment segment than the real sector. Geopolitical tensions, or rather problems in countries that are key exporters of energy and agricultural commodities, are also a consequence of the Western economies' conciliatory and irresponsible policy towards resource autocracies, consisting in an increased dependence on their raw material exports.

The forcing of the energy transition against the background of a tougher ideological conflict between the two socio-political poles, with insufficient funding and development of alternative energy sources has led to vulnerabilities in the energy supply of some Western economies, primarily members of the European Union.

As a result of the complex of all the factors and sequences mentioned above, globalization is torn in different parts of the cycle, and this is not a short-term process. This also means that the agenda of economic security and economic sovereignty will supersede the agenda of efficiency growth. The disruption of global production and logistics interactions and the clustering of production and logistics exchanges will inevitably lead to significant shifts in economies and growth rates. That means inflationary pressures and lower effective growth rates, i.e. stagflation.

Monetary tightening in such an environment is incapable of sanitizing the economy for a new growth cycle. This is a systemic shift where previous measures do not work in their usual mode: monetary tightening will certainly deflate consumer activity, but the structural problems on the supply side will only be exacerbated by this monetary tightening.

At the same time a decrease in efficiency is inevitable, as fiscal stimulus in the form of social and infrastructure programs have already been adopted and the effect of squeezing business by the state - both through fiscal tightening and through direct expansion of state business - will reduce opportunities for private business, especially against the background of rising costs of funding, which will affect the quality of economic development and the rate of long-term growth.

The political electoral interests of the power elites under conditions of geopolitical aggravation, growth of risks and uncertainties, dictate to them the obvious but vicious goals - short-term efficiency in exchange for long-term development. As we know, short-term efficiency is possible only through a simplified and somewhat complicated action, which is directive state expansion.

The problem of this policy is very clear: the free market and its self-regulating mechanisms are not compatible with crude exogenous regulatory political interference. It is state intervention that multiplies the risks and negative effects of market cycles, it is state intervention that expands their volatility, it is state intervention that generates the effect of spiral reproduction of economic inefficiencies: the previous mistake can only be corrected by the next, even bigger mistake.

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Inflation, Quick and Dirty

04/22/2022Jeff Deist
Listen to the Audio Mises Wire version of this article.

All of a sudden everyone is an expert on inflation. Your brother-in-law, your local paper, and even dilettantes at dubious outlets like the Washington Post or The Atlantic feel compelled to explain our current predicament. With the admitted rate of consumer inflation running somewhere around 8 percent, and the real rate much higher, even central bankers can’t hide the reality from us. So the commentariat has to explain to us why this is happening and make sure we blame the mysterious workings of capitalism for our troubles.

In other words, economics is back. Covid was a nice diversion, and Ukraine took up all the media’s oxygen for a few months. But now we must deal with the economic devastation caused both by lockdowns and two years of crazed fiscal and monetary policy. Everyday Americans, stubborn as they are, care more about rising gas and food prices than the political class would like. So they trot out Nancy Pelosi to explain how government spending actually reduces inflation and push pseudoeconomic ideas like modern monetary theory to explain why more federal spending is always the cure.

But what is really happening?

First, consider the two covid stimulus bills passed by Congress in 2020 and 2021. These pumped more than $5 trillion directly into the economy in the form of payments to government, payments to households, unemployment benefits, employer payroll loans, cash subsides to airlines and countless other industries, and a host of grab-bag earmarks which had nothing to do with covid. This new money injected itself straight into the veins of the daily economy.

Second, supply chains remain degraded because politicians around the world didn’t think through their lockdown policies. The deeply interconnected global economy does not have an ON/OFF switch. Idle resources and idle workers don’t simply spring to life and produce goods and services on command. But our policy makers have no conception of a structure of production, its temporal elements, or the ravages of malinvestment created by their political decision to shutter businesses.

Third, covid allowed the Fed to justify yet another spasm of “extraordinary” monetary policies beginning in March 2020. This gave central bankers an easy out, in a sense, because real trouble was already on the horizon back in September 2019. The repo market, which commercial banks use for short-term (overnight) financing of their operations, suddenly seized up and sent rates spiking. These paroxysms embarrassingly forced the Fed to inject billions of dollars into its “standing” (i.e., permanent) repurchase facility and to consider yet another round of QE (asset buying) even after it had promised to shrink its balance sheet, still bloated with the detritus of the 2007 crisis. 

All of this happened before any of us had heard of covid. But the obvious question last fall, screaming to be asked, was this: How on earth, after more than a decade of aggressive asset purchases by the Fed (swelling the central bank’s balance sheet from less than $1 trillion in 2007 to more than $4 trillion by 2019), did commercial banks still experience a liquidity crunch? What the hell was the point of all that money?

But covid washed away any question about repo and silenced any critics of the Fed’s largesse. Covid had to be defeated, by God, and monetary policy would lead the way. So the Fed went into hyperdrive, buying trillions in additional assets to send its balance sheet soaring to nearly $9 trillion today—adding nearly 20 percent of all dollars ever created to the M2 money supply measure in 2020 alone.

That same year, with lockdowns firmly in place and a crisis mindset whipped up by both parties, Congress managed to spend almost twice what the Treasury collected in taxes ($3.4 trillion in revenue versus $6.5 trillion in outlays). How is such an arrangement possible? Given historically low rates of return on Treasury debt—well below real inflation—and given the almost unbelievable and irreversible profligacy of the spendthrift US government, why would any sentient being continue to loan money to Uncle Sam? Why would anyone help Congress continue its debt-financed orgy? Why lend America money?

The answer is complex, ranging from the dollar’s status as the world’s reserve currency to pension and sovereign wealth funds around the globe that hold US Treasurys by charter and even the relative strength of America’s military forces. The question is thus as much geopolitical as economic. But in short, the world knows the Fed will always be there as a ready backstop, to buy US debt when appetites for such debt waver. Propping up congressional deficit spending, juicing equity markets, and constantly recapitalizing commercial banks are the Fed’s true mandates.

How does inflation end? Only with pain in the form of a necessary corrective recession or depression. Congress must slash spending, the Fed must stop buying assets and stop tampering with interest rates, and existing US debt must be allowed to mature and roll off the Fed’s balance sheet. We should force the US federal government to sell assets, especially land, to pay off Treasury obligations and fund future Social Security and Medicare entitlements. And if necessary, the federal government should be forced to default or apply a haircut to Treasury investors, who, after all, took a risk like any investor.

If all of this sounds politically impossible, you understand the deep unseriousness of today’s politics.

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If Genghis Khan Can Get Fair Treatment from Historians, Why Can't Thomas Jefferson?

03/17/2022Lipton Matthews

By now it should become obvious to observers that the decision to cancel historical figures in the West is driven by anti-white animus. The legacies of historical figures like Christopher Columbus and Thomas Jefferson can’t be discussed without activists arguing that they were problematic characters. Such figures are not judged as products of their time but rather as villains who are unworthy of forgiveness. Neither are we allowed to appreciate the achievements of personalities tainted as villains by woke activists.

However, whenever we are talking about non-white personalities nuance becomes important. Books authored by Marie Favereau and Jack Weatherford offering a balanced appraisal of the Mongol Empire have received glowing reviews from respected outlets. History reveals that Genghis Khan was a tyrant who often killed subordinates for flippant reasons, but notwithstanding his psychopathic tendencies, he demonstrated impressive leadership abilities, and celebrating his capabilities must never be seen as endorsing atrocities committed by his regime.

Distinguished Professor Jeffrey Garten can outline Khan’s contribution to globalization without people thinking that he is an apologist for tyranny: “The international networks of free trade pioneered by Khan and his successors, changed the world in underappreciated ways: The printing press, gunpowder, and the compass were all brought to Europe on Mongol trade networks.”

In another insightful review, Nathaniel Scharping comments on his complex legacy: “From early in his military career, the Khan promoted a meritocracy, upending the traditional aristocracy of the Mongolian steppes. It was a policy that would continue throughout his rule and after his death. Genghis Khan also promoted religious freedom and banned the use of torture throughout his kingdom. After his death, the Mongol Empire would nurture trade routes and diplomatic relations that helped sustain its strength and brought news and knowledge from the outside world to Asia.”

The reputation of Genghis Khan has become so refined that Carl Hartmann thinks that if we should call anyone in central Asia over 800 years ago a feminist, Genghis Khan would be the prime candidate for not relegating women to an inferior status. Presenting a dispassionate assessment of Khan’s legacy is indeed noteworthy, so why can’t white people defend the legacies of men like Columbus and Jefferson without inviting venom?

Like the British and the French, the Mongols presided over a vast empire entailing the subjugation of conquered peoples and the evidence suggests that the Mongol invasion had an adverse impact on Iran, but for some strange reason contemporary historians are uninterested in shaming the Mongols for past ills. Although writers like Abbas Edalat and Ira Lapidus are rather specific in explaining how the Mongol invasions retarded conquered regions and economists are obsessed with studying the effects of European imperialism they are unwilling to explore the implications of the Mongol invasions with equal fervor.

But the mindset of activists and disingenuous academics is quite simple once we appreciate the uniqueness of Western civilization. The Western world was the first region to modernize and it is also the progenitor of many innovations. As a result, Westerners unlike racial minorities in the West do not occupy the position of the underdog. For the past 500 years, the West has been the most tremendous force in the world some think that it is only appropriate for white people to atone for the sins of their ancestors by continuously genuflecting to demands that their culture be erased.

Quite disappointing is that few on the right are challenging this swindle. When conservatives refuse to push back against calls to remove statues of Robert E Lee and other figures associated with the confederacy, they are doing the bidding of illiberal and misinformed activists. Because the culture of the pre-civil war South is deeper than reverence for slavery and racial hierarchy understanding the rationale for embracing confederate symbols shouldn’t be difficult for mainstream conservatives and libertarians.

If people have a right to self-expression and whites are people, then we should afford them the right to celebrate their heritage without harassment. Some supporters of confederate symbols could be racist, but even so, many are decent people and must never be deprived of their right to self-expression. Libertarians and conservatives only cede the moral high ground to unreasonable activists when they compromise history for social prestige.

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Is Putin the New Coronavirus?

03/10/2022Ron Paul

President Biden’s “maskless” State of the Union signifies the near-end of the COVID tyranny we have lived under for the past two years. Fortunately for Congress, the President, and the Federal Reserve, the Ukraine-Russia conflict is replacing COVID as a ready-made excuse for their failures and a justification for expanding their power.

Even before politicians began declaring the end of the pandemic, polls showed that rising prices were the people’s top concern - particularly the increase in gas prices. Since Russia is one of the world’s leading energy producers, sanctions imposed on Russia, as well as Germany’s decision (made under pressure from the US) to shut down the Nord Stream 2 pipeline, provide a convenient excuse for rising gas prices. This is the case even though the US, citing the “instability” in world energy markets created by the Russian-Ukraine conflict, has yet to officially ban imports of Russian oil.

The Federal Reserve has been planning several interest rate increases this year, even though some fear that rate increases could decrease growth and increase unemployment. The Russian crisis allows the Fed to either postpone rate increases or blame Russia for any unemployment that accompanies the rate increases. Either way, the Fed can use the crisis to deflect attention away from its responsibility for our economic problems. As of now, it appears the Fed will go through with at least a modest rate increase this month, but because of the Ukraine crisis, the increase will be smaller than previously expected.

The Ukraine crisis also provides an excuse for Congress to do what Congress does best: increase federal spending. President Biden has requested Congress provide an additional $10 billion in emergency military aid to Ukraine. Congress will likely quickly approve the President’s request. This will not likely be the last time Congress rushes billions of “emergency” money to Ukraine.

It is also certain that lobbyists for the military-industrial-complex are already “explaining” to a very receptive Capitol Hill audience why the Ukraine crisis justifies increasing the military budget to “counter the threats” from Russia, China, and whoever else can serve as a convenient boogeyman. It is unlikely there will be much resistance in Congress to a further increase, even though the US already spends more than the combined defense budgets of the next nine biggest spending countries.

Over the past two years, many leading Internet companies did the government’s bidding by “de-platforming” anyone who expressed skepticism of vaccines or promoted alternative treatments — even when they presented evidence to support their claims. These companies are once again helping the government by de-platforming those who question, or are suspected of questioning, the official narrative regarding Ukraine. Yet these companies’ concerns with “fake news” have not led them to stop people from sharing widely debunked stories supporting the US-backed Ukrainian government.

The lockdown and mandates did more harm than the coronavirus itself. They were based on lies promoted by the government and its allies in the “private” sector. Yet too many Americans refuse to even question the US government’s claims regarding the Ukraine crisis or question whether Russia is really responsible for our economic problems as opposed to a spendthrift Congress, successive spendthrift Presidents, and an out-of-control Federal Reserve. The only way to stop authoritarians from using crises like these to grow their power is to make enough people understand a simple truth: authoritarian politicians will always lie to the people to protect and increase their own power.

Reprinted with permission.

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Invisible Data

02/21/2022Robert Aro

Federal Reserve Bank of New York President and CEO John C. Williams gave a speech Friday outlining the Fed’s monetary tightening plan, Restoring Balance. He provided succinct details over the central bank’s intended course of action, yet failed to show an understanding of the Fed and Government’s role in causing our economic woes. Thus, there is no reason to believe America’s boom and bust cycle will stop anytime soon.

One problem is the long-standing notion that the Fed is data dependent. In his own words:

We make our decisions after studying the data—lots of data.

As the story goes, the Fed uses data to make various calculations to achieve its dual mandate of maximum employment and price stability. Per the CEO:

We look at everything from food and gas prices to retail sales and inventories, from labor costs and employment figures to semiconductor inventories and shipping expenses, and from the demand for goods and services to readings on public health.

The way in which the data is utilized remains unknown. Beyond the data:

We also regularly hear from business and community leaders who tell us firsthand what is happening in the economy. 

How the Fed compiles data from these so-called leaders, who these leaders are, and just how much influence they have in dictating policy is another unknown. But if the Fed is data dependent, then a great deal of harm could occur by not making the data sets or statistical models available, since there can be no public scrutiny or review done by the economic field at large.

The Fed’s process could encompass flipping a coin, or polling global elites such as the CEOs of JP Morgan and Goldman Sachs. We’d never know. The data could simply be tabulated incorrectly or utilize statistical methods which could come under sharp criticism from academia. The ability to examine data used to make monetary policy decisions for over 300 million people should never be regarded as a bad thing. It would allow for more transparency, unless of course, the point is to keep the masses in the dark over such matters?

While unseen data is difficult to disprove, the limitations on data and statistics that can be seen should also be understood. Consider:

The economy, measured by real gross domestic product, or GDP, grew about 5-1/2 percent over the course of last year, the fastest pace of growth since 1984.

And:

The unemployment rate has fallen from the pandemic peak of 14.7 percent to just 4 percent today.

In the case of GDP, if the government borrows $1 trillion and then decides to distribute stimulus checks amongst the population, GDP would increase. Yet, dollar purchasing power would certainly suffer. The unemployment rate can decrease from people exiting the workforce or by increasing incarceration rates. Though, a rising GDP and falling unemployment make for great headlines, this is not the type of country anyone would want to live in.

Data can be easily manipulated. And it’s easy to claim data dependency when no one is allowed to challenge said data. When the CEO of the New York Fed says, “our actions will always be driven by the data,” while knowing no one outside his circle is privy to such access, it’s a disservice to society at best, but may be indicative of something much more nefarious.

Last week, Jeff Deist opened the article: The New Antieconomics with a quote from Per Bylund. It seems Dr. Bylund has ample quotes to draw upon, here’s another below:

To Austrian economists, the use of data is most certainly welcomed, but the difference is that Austrians will not use data as a tool to ignore economic theory. It’s not much to ask, but if the Fed really is using data, the solution is simple: show us the data!

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Is Slavery a Factor in Africa's Financial Development?

02/14/2022Lipton Matthews

There is a sizeable body of research linking financial development to economic growth. A competitive financial sector is crucial for the strategic mobilization of resources in an economy. Investigations, however, have uncovered that Africa is suffering from a “financial development gap.’ This is because banking platforms in Africa operate below capacity – relative to other developing regions. A common metric to judge the efficacy of banking systems is the degree of financial depth.

Banking depth is measured by the supply of domestic credit to the private sector as a percentage of GDP and the ratio of liquid liabilities. The depth of a country’s banking system captures the extent to which economic players can utilize financial tools to shape savings and investment portfolios. One study commented that loans to the private sector as a percentage of GDP ratio is on average, just 21 percent in African countries – this paltry figure is half the ratio in non-African developing countries.

Even more startling is the reality that 65 percent of adults in sub-Saharan Africa are unbanked. But what could account for such an abysmal level of development? Researchers have examined multiple culprits – from the legacy of colonialism to institutional quality. However, some scholars are advancing the bold thesis that deficiencies in Africa’s banking sector are attributable to the legacies of the slave trade.

Combing through the data from the 2005 Afrobarometer survey to ascertain whether individuals associated with ethnic groups that were greatly exposed to historical slave trades exhibit lower trust in the future, Nunn and Wantchekon (2011) conclude that this is indeed the case. Ethnic groups with considerable exposure to past slave trades display lower levels of trust in family, neighbors, co-ethnics, and local government today.

Both the transatlantic and Indian Ocean slave trades offered opportunities for African polities and traders to profit by selling victims into slavery. In response to the demand for black slaves, kidnapping intensified and laws were modified to justify the sale of offenders. Due to the rise of unscrupulous activities enabled by the slave trade, Africans became skeptical of their peers thereby fomenting an environment of mistrust.

The findings of Nunn and Wantchekon are relevant since trust has implications for financial development. Harnessing trust is the gateway to business collaborations; therefore, if slave trades eroded trust in individuals and institutions – the result will be fewer businesses partnerships and hesitancy to engage institutions. Ross Levine and colleagues arrived at this conclusion in a 2020 study, titled “The African Slave Trade and Modern Household Finance,” published in The Economic Journal. Levine and co-authors point out that distrust limits the enthusiasm of potential lenders to avail credit to prospective clients and inhibits the propensity of households to save and invest in financial institutions.

The study revealed stark disparities in financial involvement as a result of intense exposure to historical slave trades:

  • In Mauritius and South Africa, the use of credit cards was over 16%, but lower than 0.5% in Madagascar, Sudan, and Ethiopia, where there was greater exposure to slave trades
  • People in countries that were less affected by slaves are also less likely to express trust in financial institutions. Only 0.3% of respondents in Mauritius indicated a lack of trust in banks, however in Niger 22% of respondents noted an unwillingness to trust banks or other financial institutions

Moreover, the legacy of low-trust has compounded the perils of conducting business in a diverse region like Africa. Ali Recayi Ogcem and co-writers in a 2021 paper on the association between trust and financial development observed that generalized trust lowers risk in diverse regions: “Our findings show that generalized trust play an important role in mitigating the adverse effects that ethnic fractionalization has on the availability of deposits or stable sources to fund loans.”

Further, other than stymying the growth of an innovative financial sector historic exposure to slave trades has impeded the potential of firms to access finance as revealed by Lamar Pierce and Jason Snyder in a 2017 article. The authors write: “Firms in high-slave-extraction countries also rely less on formal means of credit such as bank loans, lines of credit, checking accounts, and overdraft facilities. Slave extraction at the country level also correlates with a lower level of access to credit from suppliers. Although informal financial channels often act as substitutes for inaccessible formal financial channels…we find no evidence that firms in countries impacted by the slave trade are able to compensate for insufficient formal finance channels with credit from suppliers and customers.”

Notwithstanding, the evidence presented one criticism of this line of research is that low-trust countries in the Caribbean and Latin America possess superior financial institutions, so there is a possibility that the underdeveloped nature of Africa’s banking system is a consequence of weak institutional capacity, low levels of human capital, and inadequate governance. However, if we acknowledge that the performance of the banking system is a legacy of slave trades, then the only option is for African leaders to devise strategies to nurture trust and civic capital. Using the history of slave trades to create excuses for failure will not redound to the benefit of Africans.

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Is the "Resource" Curse Keeping Many Developing Nations Poor?

01/21/2022Lipton Matthews

The impact of resources on national development has puzzled economists and political scientists for decades. Economic literature has noted that resource-rich countries conventionally fail to transform natural advantages into material prosperity. In the field of economics, this development is known as the resource curse. It has been asserted that resource abundance degrades the quality of institutions by emboldening elites to devote resources to capturing rents. Others argue that by reducing the state’s dependence on taxes, resource windfalls erode political accountability. 

The erosion of accountability is likely because windfalls minimize the need for tax revenues thereby diminishing the impetus to be accountable to citizens and implement reforms. Reliance on resources can also preclude economic diversification by crowding out manufacturing and the service sector. Another burden of the resource curse is that incentives are engendered for politicians to distribute privileges to major players in the economy at the expense of the broader economy.

A related problem is that resource windfalls cultivate a breeding ground for autocracies by bolstering the power of political elites. Several observers have concluded that oil wealth increases the durability of autocracies and impedes the transition to democracy. Furthermore, when autocrats exert control over economic resources, they also inherit the ability to use these resources to purchase support and consolidate their rule.

Michael L Ross in a detailed 2015 review of the resource curse published in the Annual Review of Political Science shows that during 1960-2008, there was an inverse association between democratic transitions and the level of a country’s oil income. Moreover, countries that transitioned early and retained democratic institutions like the Dominican Republic, Turkey, Portugal, and Spain had marginal or no oil. Though some countries with modest oil and gas managed to transition, no country with more reliance on oil and gas income than Mexico became democratic.

However, the best case studies of the resource curse have been provided by data-sets examining African countries. South Africa is featured prominently in the literature. In the 2013 article, “The forgotten Resource Curse: South Africa’s poor experience with mineral extraction,” Ainsley D Elbra opines that South Africa’s experience not only aligns with the resource curse literature but is amplified since the country is plagued by entrenched poverty and inequalities linked to a rentier state.

Indeed, the scenario identified in South Africa is typical for African countries. In Sub-Saharan Africa resource abundance is related to rampant corruption, low economic growth, and inefficient bureaucracies, according to research. Due to avenues for pilfering, politicians have a reduced incentive to inhibit corruption by enhancing the efficiency of government.

But there is no reason to believe that resources will forestall economic growth. Addisu Lashitew and Erik Werker in a 2020 paper using the examples of Canada and the Republic of Congo illustrate that equally endowed countries can pursue divergent paths. Despite similar levels of resource endowment, the contribution of resources to GDP is substantially larger in Congo (42.3 percent), in comparison to Canada (2.3 percent). The adverse effects of resources are more pervasive in the Congo considering that its economy is dependent on resources, whereas Canada’s economy is diverse, notwithstanding resource abundance. The authors contend that the channels through which resources hinder institutional change are likely to be weaker in diverse economies. When economies are diverse there is less scope for players in resource sectors to lobby for initiatives that block institutional innovations thus diminishing opportunities for rent-seeking.

The contrasting fortunes of Canada and Congo suggest that institutions are crucial in explaining income disparities across countries. Although the evidence indicates that resources induce perverse incentives - high quality institutions can tame the resource curse. One study finds that in Africa when countries are besotted by corruption, and limited institutional capacity, resources appear to be a curse, instead of a blessing. Yet as institutions upgrade, resources transition from a curse into a blessing. Essentially, increased accountability and constraints on the political class depress conditions for the emergence of a rentier state.

For example, Naazneen H Barma in a comparative study of countries affected by the resource-curse recounts how Timor-Leste adopted new practices to combat the resource curse: “Partly due to the extensive international state-building effort there, the Timorese government decided upon petroleum sector institutions and policies explicitly intended to mitigate the resource curse…The centrepiece of Timor-Leste's institutional architecture in the petroleum sector is its Petroleum Fund, to which all petroleum revenues are directed, without exception. The Petroleum Fund Law establishes the concept of Estimated Sustainable Income (ESI), a principle intended to ensure intergenerational saving of the country's windfall income stream.”

Additionally, relating the issue to an American context Justin Callais declares that unlike Texas, Louisiana is languishing from a regional resource curse as a result of differences in institutional quality. Texas has a high EFNA score, ranks ninth on the net entrepreneurial productivity index, and demands licenses for just 34 of 102 lower-income occupations. Callais similarly avers that Louisiana’s economy is inferior because “Texas provides its citizens with alternative opportunities, while Louisiana’s environment is such that it necessarily must be dependent on oil.”

He further attributes Louisiana’s subpar economic performance to the legacy of the civil law: “Civil law tends to concentrate power to a centralized government. In France, this was chosen as a tradeoff in favor of dictatorship as a means of lowering disorder… What this means for Louisiana, and other transplant areas more generally, is that centralized control lead to ineffective governance and corruption. Through corruption, more authoritarian regimes were able to take advantage of their resource abundance. This abundance was good for those in power, yet lowered opportunities for the economy as a whole to invest and produce in alternative industries.”

Based on the data explored, we conclude that resource abundance can either result in stagnation or prosperity. However, the pertinent fact is that the potential for resources to foster growth is contingent on the right interplay of institutions and policies. Lacking an appropriate institutional framework resource-abundance will lead to dismal economic outcomes

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Is the "Resource" Curse Keeping Many Developing Nations Poor?

01/21/2022Lipton Matthews

The impact of resources on national development has puzzled economists and political scientists for decades. Economic literature has noted that resource-rich countries conventionally fail to transform natural advantages into material prosperity. In the field of economics, this development is known as the resource curse. It has been asserted that resource abundance degrades the quality of institutions by emboldening elites to devote resources to capturing rents. Others argue that by reducing the state’s dependence on taxes, resource windfalls erode political accountability. 

The erosion of accountability is likely because windfalls minimize the need for tax revenues thereby diminishing the impetus to be accountable to citizens and implement reforms. Reliance on resources can also preclude economic diversification by crowding out manufacturing and the service sector. Another burden of the resource curse is that incentives are engendered for politicians to distribute privileges to major players in the economy at the expense of the broader economy.

A related problem is that resource windfalls cultivate a breeding ground for autocracies by bolstering the power of political elites. Several observers have concluded that oil wealth increases the durability of autocracies and impedes the transition to democracy. Furthermore, when autocrats exert control over economic resources, they also inherit the ability to use these resources to purchase support and consolidate their rule.

Michael L Ross in a detailed 2015 review of the resource curse published in the Annual Review of Political Science shows that during 1960-2008, there was an inverse association between democratic transitions and the level of a country’s oil income. Moreover, countries that transitioned early and retained democratic institutions like the Dominican Republic, Turkey, Portugal, and Spain had marginal or no oil. Though some countries with modest oil and gas managed to transition, no country with more reliance on oil and gas income than Mexico became democratic.

However, the best case studies of the resource curse have been provided by data-sets examining African countries. South Africa is featured prominently in the literature. In the 2013 article, “The forgotten Resource Curse: South Africa’s poor experience with mineral extraction,” Ainsley D Elbra opines that South Africa’s experience not only aligns with the resource curse literature but is amplified since the country is plagued by entrenched poverty and inequalities linked to a rentier state.

Indeed, the scenario identified in South Africa is typical for African countries. In Sub-Saharan Africa resource abundance is related to rampant corruption, low economic growth, and inefficient bureaucracies, according to research. Due to avenues for pilfering, politicians have a reduced incentive to inhibit corruption by enhancing the efficiency of government.

But there is no reason to believe that resources will forestall economic growth. Addisu Lashitew and Erik Werker in a 2020 paper using the examples of Canada and the Republic of Congo illustrate that equally endowed countries can pursue divergent paths. Despite similar levels of resource endowment, the contribution of resources to GDP is substantially larger in Congo (42.3 percent), in comparison to Canada (2.3 percent). The adverse effects of resources are more pervasive in the Congo considering that its economy is dependent on resources, whereas Canada’s economy is diverse, notwithstanding resource abundance. The authors contend that the channels through which resources hinder institutional change are likely to be weaker in diverse economies. When economies are diverse there is less scope for players in resource sectors to lobby for initiatives that block institutional innovations thus diminishing opportunities for rent-seeking.

The contrasting fortunes of Canada and Congo suggest that institutions are crucial in explaining income disparities across countries. Although the evidence indicates that resources induce perverse incentives - high quality institutions can tame the resource curse. One study finds that in Africa when countries are besotted by corruption, and limited institutional capacity, resources appear to be a curse, instead of a blessing. Yet as institutions upgrade, resources transition from a curse into a blessing. Essentially, increased accountability and constraints on the political class depress conditions for the emergence of a rentier state.

For example, Naazneen H Barma in a comparative study of countries affected by the resource-curse recounts how Timor-Leste adopted new practices to combat the resource curse: “Partly due to the extensive international state-building effort there, the Timorese government decided upon petroleum sector institutions and policies explicitly intended to mitigate the resource curse…The centrepiece of Timor-Leste's institutional architecture in the petroleum sector is its Petroleum Fund, to which all petroleum revenues are directed, without exception. The Petroleum Fund Law establishes the concept of Estimated Sustainable Income (ESI), a principle intended to ensure intergenerational saving of the country's windfall income stream.”

Additionally, relating the issue to an American context Justin Callais declares that unlike Texas, Louisiana is languishing from a regional resource curse as a result of differences in institutional quality. Texas has a high EFNA score, ranks ninth on the net entrepreneurial productivity index, and demands licenses for just 34 of 102 lower-income occupations. Callais similarly avers that Louisiana’s economy is inferior because “Texas provides its citizens with alternative opportunities, while Louisiana’s environment is such that it necessarily must be dependent on oil.”

He further attributes Louisiana’s subpar economic performance to the legacy of the civil law: “Civil law tends to concentrate power to a centralized government. In France, this was chosen as a tradeoff in favor of dictatorship as a means of lowering disorder… What this means for Louisiana, and other transplant areas more generally, is that centralized control lead to ineffective governance and corruption. Through corruption, more authoritarian regimes were able to take advantage of their resource abundance. This abundance was good for those in power, yet lowered opportunities for the economy as a whole to invest and produce in alternative industries.”

Based on the data explored, we conclude that resource abundance can either result in stagnation or prosperity. However, the pertinent fact is that the potential for resources to foster growth is contingent on the right interplay of institutions and policies. Lacking an appropriate institutional framework resource-abundance will lead to dismal economic outcomes

When commenting, please post a concise, civil, and informative comment. Full comment policy here
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