Archive for November, 2011

the problem of democracy

Buying a newspaper in almost any Western country today, you will certainly find the word ‘crisis’ on the front page. And this is not a recent phenomenon but has now been true for more than three years. One might ask how this is possible, given that in all those nations, people are free to elect their politicians. In other words, how can a democratic┬ásystem produce outcomes that are frequently described as a ‘crisis’?

A great (general) answer to this question was given by Elmer T. Peterson:

A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing.

More commonly known might be Alexis de Tocqueville’s version of this statement:

The American Republic will endure, until politicians realize they can bribe the people with their own money.



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fiscal devaluation

As Greece more and more turns out to be unwilling or uncapable of leaving the Euro zone, economists have thought about alternative ways to increase their economy’s competitiveness. An interesting approach has now been formulated by two economists from Haravad and one from Princeton:

Fiscal Devaluations

Even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation.

As the authors show, there are basically two policy options:

  1. increase both import tariffs and export subsidies
  2. increase VAT and lower pay roll taxes

In theory, these policies have zero impact on the fiscal budget but increase the country’s international competitiveness. Whether or not this can “solve” the economic mess in Greece, however, is more than disputable.


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So far, all Republican candidates for 2012 have tumbled within weeks. Except for Mitt Romney, only Dr. Ron Paul has kept a two-digit share in the surveys. Recently, his supporters launched another impressive money bomb campaign, called Tea Party 11:

The closest we have to a Founding Father.

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Fantastic overview of the economy’s lubricant (full version here):

Money all over the place, by

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One of the greatest statistics cartoons ever, by Randall Munroe:

Correlation vs. Causation (by

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Without making a great stir, President Obama celebrated the third anniversary of his 2008 election success. Despite the fact that he inherited a mess from George W. Bush, one might offer a first summary. What has he done in the first three years, what has he achieved, and especially who is better off now?

The other day, Judge Andrew Napolitano raised exactly this question for Freedom Watch:

Only he is better off.

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european battle

Many politicians currently ask for the ECB to step in as Lender of Last Resort in order to solve the Euro crisis. However, St.Gallen Professor Simon Evenett argues that the discussion alone might already cause this strategy to fail. An interesting article about the role of expectations in monetary economics:

Have the Hawks Effectively Won the Lender of Last Resort Argument in Europe?

Europe’s monetary policy hawks may well lose the battle and yet win the war.

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the purpose of the euro

When the Euro crisis emerged in spring 2010, Harvard economist Kenneth Rogoff brilliantly described the currency’s purpose and its success:

Europe finds the old rules still apply

The euro was designed to be a superior debt financing machine and, to a considerable extent, it has delivered.

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highway to traffic

What to do about highway traffic? More roads or public transport?

In a new study by two Canadian economists, the answer is neither nor. However, the authors come up with another proposal:

The Fundamental Law of Road Congestion: Evidence from US Cities

These findings suggest that both road capacity expansions and extensions to public transit are not appropriate policies with which to combat traffic congestion. This leaves congestion pricing as the main candidate tool to curb traffic congestion.

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For sure money is not everything. But every now and then it helps.

Per capita income and life expectancy, The World Bank data

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