Stephine Flanders writes that

“Like other governments that are borrowing a lot, ours would be vulnerable if international investors decide, overnight, that sovereign debt isn’t a safe bet after all. We recently won the chance to host the Olympics. But there the similarity ends…

That may change. We may, after all, have some serious political uncertainty coming down the track. But market movements today are a good reflection of the distance between London and Athens.

Investors may worry a lot more about Britain’s public finances than they did a few years ago. But they worry half as much about it as they worry about Greece.”

Its worth a read you can find it here.

Why does this matter? Well think back to the banking crisis two years ago and the knock on effect that one shake can have on a nation. Imagine rather than banks whole nations collapsing.  Economist Jonathan Loynes, of Capital Economics, said that Greece could be a “sovereign equivalent” of Lehman Brothers; the bank which started the collapse.

Will we have to bail out a whole country? Several countries? Time will tell.

We’re not out of the woods yet.

Econstories.tv is a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts.

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis.

Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies (as you do) and good reason to fear it.

Get the full lyrics, story and free download of the song in high quality MP3 and AAC files at www.econstories.tv

Discuss and enjoy guys!

In English, Incentives make you want to do something you otherwise wouldn’t want to do. Today let’s talk about an incentive which is in the media at the moment, the oft criticised, proposed marriage tax break.

The plan is essentially an easy one. Cut the costs for people who want to get married via a tax rebate, and it makes sense. There is a lot of evidence to support the claim that marriage is good for society.

As the Telegraph reports

The statistical evidence is overwhelming: children brought up by two parents do much better, on average, than children brought up by just one. They are less likely to drop out of school or end up in prison, and more likely to pay taxes and remain in employment. This is not to deny that single parents do an excellent job and raise children who grow up to contribute much to society. It is simply to point out that across the population as a whole, two-parent families are more likely to achieve that result – and couples who marry are five times more likely to stay together, and provide that positive environment, than those who cohabit without any public commitment.

We all benefit from well-adjusted children, who are ‘polite, well educated and contribute to society’ this is what economics calls an ‘externality’ a benefit by a party that is not directly involved in the transaction. Parents are paying an extra  cost which we all benefit from.

Well the first is the claim by Ed Balls that the tax is “trying to socially engineer family life through a tax policy… [it] is hugely expensive and unfair.”. An economist would claim however that “Ahhhh! All taxes change peoples behaviour”  and The Working Families Tax Credit increased the benefits available to single mothers who sought employment thus penalising women who stayed home to look after their children or who remained with their husbands.(the latter claim being VERY  VERY contentious)

The second claim is that the credits “could stigmatise children” whose parents are not married. Again many feel that this is false by providing tax incentives for marriage it is difficult to see how it would  “stigmatise” the children of the unmarried, any more than providing incentives for single parenthood would “stigmatise” those whose parents live together.

There is of course one issue with the above arguments, they all involve children,  supporting and subsidising ALL married couples regardless of their parental status, in effect , penalises everyone else. So should the ‘tax break’ be administered to just  married couples with children? I don’t know?  Of course, nothing will replace a loving, stable, family; interested in their child’s upbringing and this is something that no taxbreak can fix.

A leaflet called the ‘Communist Manifesto’, which was distributed to the masses in London contains several passages which to this day remain a part of the canon of political economy.

“A spectre is haunting Europe — the spectre of communism”

“ The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.”

Despite the attractions of Marxism, it never really took hold in the US and Western Europe. Economists were just too enamored with the free market orthodoxy of classical economics. Just to remind you, these economists differed little from the original ideas postulated by Adam Smith.

However in the 1930s free market economics was to face an impossible challenge – The Great Depression. With it came mass unemployment, bankruptcies and falling output. Western democracy itself was threatened. The result of this was a new way of thinking about economic problems and the end of blind optimism that economists held that in the Long Run everything would be OK.

Thus it was in the middle of the great depression that J.M.Keynes rose to prominence retorting to orthodox economists that “In the Long Run we are all dead” Keynes saw no point in waiting a couple of decades for the depression to come to an end. Keynes argued for immediate intervention and by that he meant that in particular the government should spend, spend, spend.

We will look more at Keynes next week.

Image copyright of roland (flickr)

One of the first scholars to grace our lovely discipline was Thomas Malthus. An early proponent of “The end is nigh” syndrome he is mainly remembered for his essay on Population- where he argued the human race was doomed because the population was increasing at a faster rate than our capacity to grow food. Unsurprisingly it was Malthus who claimed for economics the label “The Dismal Science”.

The communist Lenin sharply criticized Malthus theory calling it a “reactionary doctrine” and “an attempt on the part of bourgeois ideologists to exonerate capitalism and to prove the inevitability of privation and misery for the working class under any social system”- and if you don’t understand what that means, don’t worry neither do we.

Fortunately Malthus displayed a trait that many economists would later share – he was wrong. The population didn’t starve and in fact during the nineteenth century the forces of capitalism flourished creating unprecedented wealth for those who owned the means of production. To find why we will need to look at our next great economist Adam Smith.

Economist Peter T. Leeson of West Virginia University has released a working paper arguing that 17th Century pirates actually used constitutional democracy, achieving this before either the USA or England. This is is an important recurring theme in economics: how self-interested individuals can work together to achieve a common good.

Read More: An-arrgh-chy: The Law and Economics of Pirate Organization (Abstract of the paper on Social Science Research Network)

Peter T. Leeson (2007) An-arrgh-chy: The Law and Economics of Pirate Organization (full paper in PDF format)

In fact, Bangladesh turned not once, but twice, to an economist to resolve its political deadlock. Dr Ahmed, who worked at the World Bank after his economics PhD from Princeton, took the job after it was turned down by Professor Muhammad Yunus, awarded this year’s Nobel Peace Prize for pioneering micro-credit at the Grameen Bank.

But why would you look to a professional economist turned central banker, with no past political experience, to take over the reins and sort out the warring party leaders? That word ‘volatile’ has a lot to do with it. Financial markets worst enemy is ‘excess volatility’ the movement of share and debt prices by more than seems warranted by latest news. To calm expectations, and stabilise prices, central bankers don’t only need to align monetary policy with inflation or credit growth targets, and pressure governments to do the same with its fiscal policy. They also need to look credible, appearing to know what’s happening and how to handle it. The avoidance of financial panic at the onset of political chaos did much to propel the new acting leader into his post.

Also useful for Dr Ahmed electorates tendency, when faced with raucous and rule-bending politicians, to welcome a temporary takeover by technocrats. Especially those with central bank experience, are unusually comfortable in that role. They focus on incentives and constraints that shape people’s behavior, whatever their preferences and political beliefs. They point out aggregate trends and forces that push business and government in particular directions, regardless of the preferences of those leading them. Several Eastern European countries were steered through recent political crises by central bankers, promoted to acting prime ministers after disgraced or despairing politicians stepped aside.

What economists lack in political experience, they can try to make up for through detailed theory on bargaining, coalition formation, non-cooperative games and collective choices. Of course, being able to draw the political learning curve is not the same as ascending it. To apply such theories successfully to the present situation, Dr Ahmed may need to know how many of the politicians he deals with have studied the same theories, and share the same expectation of the pay-offs. But if he fails, it will be easy to blame this on irrationality of the heads he was called in to knock together. The heuristics and biases that cloud rational judgement under uncertainty are now widely enough recognised to have won discoverer Daniel Kahneman the Nobel economics prize (with Vernon Smith) in 2002.

If he succeeds, and stays in politics, the interim leader may have something to say about the economic and social problems underlying the present crisis. These include, according to the International Crisis Group, “a non-functional parliament, entrenched corruption weak judicial and law enforcement agencies poverty, illiteracy and poor development indicators for women.” Economists have plenty of theories and evidence on what stops parliaments functioning, how corruption blocks useful transactions, why judicial weakness holds back investment and growth, why poverty, illiteracy and neglected women’s rights are as much a cause as a consequence of low and unequally-distributed national income. While success in the job will allow Fakhruddin Ahmed to leave it next month, many will be hoping for a sustained assault on these economic weaknesses, to stop the past month’s political crisis occurring again.

Further reading:

• “Bangladeshi Leader Consolidates Power” The Guardian, 14 January 2007
• “Volatile Bangladesh pins hopes on economist”, Globe and Mail, Toronto, 13 January 2007 (subscription required)

Collier points out that Africa has some fragile democracies which are at real risk of falling to a military coup or descending into civil war. The security that comes from stable government makes it more feasible to escape the cycle of poverty. Hence the rich European countries could help by supplying some of their military power, if backed with a legitimate authority.