I have the best wife in the world and she has been extremely understanding about my odd idea to start blogging, but there is one thing she is not too happy about and that is that I tend to leave printed copies of working papers scatted around our house. I must admit that I hate reading working papers on our iPad. I want the paper version, but I also read quite a few working papers and print out even more papers. So that creates quite a paper trail in our house…
But some of the working papers also end up in my bag. The content of my bag today might inspire some of my readers:
“Monetary Policy and Japan’s Liquidity Trap” by Lars E. O. Svensson and “Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rate” by Bennett T. McCallum.
These two papers I printed out when I was writting my recent post on Czech monetary policy. It is obvious that the Czech central bank is struggling with how to ease monetary policy when interest rates are close to zero. We can only hope that the Czech central bankers read papers like this – then they would be in no doubt how to get out of the deflationary trap. Frankly speaking I didn’t read the papers this week as I have read both papers a number of times before, but I still think that both papers are extremely important and I would hope central bankers around the world would study Svensson’s and McCallum’s work.
“Regime Uncertainty – Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” – by Robert Higgs.
My regular readers will know that I believe that the key problem in both the US and the European economies is overly tight monetary policy. However, that does not change the fact that I am extremely fascinated by Robert Higgs’ concept “Regime Uncertainty”. Higgs’ idea is that uncertainty about the regulatory framework in the economy will impact investment activity and therefore reduce growth. While I think that we primarily have a demand problem in the US and Europe I also think that regime uncertainty is a highly relevant concept. Unlike for example Steve Horwitz I don’t think that regime uncertainty can explain the slow recovery in the US economy. As I see it regime uncertainty as defined by Higgs is a supply side phenomena. Therefore, we should expect a high level of regime uncertainty to lower real GDP growth AND increase inflation. That is certainly not what we have in the US or in the euro zone today. However, there are certainly countries in the world where I would say regime uncertainty play a dominant role in the present economic situation and where tight monetary policy is not the key story. My two favourite examples of this are South Africa and Hungary. I would also point to regime uncertainty as being extremely important in countries like Venezuela and Argentina – and obviously in Iran. The last three countries are also very clear examples of a supply side collapse combined with extremely easy monetary policy.
Furthermore, we should remember that tight monetary policy in itself can lead to regime uncertainty. Just think about Greece. Extremely tight monetary conditions have lead to a economic collapse that have given rise to populist and extremist political forces and the outlook for economic policy in Greece is extremely uncertain. Or remember the 1930s where tight monetary conditions led to increased protectionism and generally interventionist policies around the world – for example the horrible National Industrial Recovery Act (NIRA) in the US.
I have read Higg’s paper before, but hope to re-read it in the coming week (when I will be traveling a lot) as I plan to write something about the economic situation in Hungary from the perspective of regime uncertain. I have written a bit about that topic before.
“World Hyperinflations” by Steve Hanke and Nicholas Krus.
I have written about this paper before and I have now come around to read the paper. It is excellent and gives a very good overview of historical hyperinflations. There is a strong connection to Higgs’ concept of regime uncertainty. It is probably not a coincidence that the countries in the world where inflation is getting out of control are also countries with extreme regime uncertainty – again just think about Argentina, Venezuela and Iran.
“Morality and Monopoly: The Constitutional political economy of religious rules” by Gary Anderson and Robert Tollison.
This blog is about monetary policy issues and that is what I spend my time writing about, but I do certainly have other interests. There is no doubt that I am an economic imperialist and I do think that economics can explain most social phenomena – including religion. My recent trip to Provo, Utah inspired me to think about religion again or more specifically I got intrigued how the Church of Jesus Chris Latter day Saints (LDS) – the Mormons – has become so extremely successful. When I say successful I mean how the LDS have grown from being a couple of hundreds members back in the 1840s to having millions of practicing members today – including potentially the next US president. My hypothesis is that religion can be an extremely efficient mechanism by which to solve collective goods problems. In Anderson’s and Tollison’s paper they have a similar discussion.
If religion is an mechanism to solve collective goods problems then the most successful religions – at least those which compete in an unregulated and competitive market for religions – will be those religions that solve these collective goods problems in the most efficient way. My rather uneducated view is that the LDS has been so successful because it has been able to solve collective goods problems in a relatively efficient way. Just think about when the Mormons came to Utah in the late 1840s. At that time there was effectively no government in Utah – it was essentially an anarchic society. Government is an mechanism to solve collective goods problems, but with no government you have to solve these problems in another way. Religion provides such mechanism and I believe that this is what the LDS did when the pioneers arrived in Utah.
So if I was going to write a book about LDS from an economic perspective I think I would have to call it “LDS – the efficient religion”. But hey I am not going to do that because I don’t really know much about religion and especially not about Mormonism. Maybe it is good that we are in the midst of the Great Recession – otherwise I might write about the economics and religion or why I prefer to drive with taxi drivers who don’t wear seat belts.
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Update: David Friedman has kindly reminded me of Larry Iannaccone’s work on economics of religion. I am well aware of Larry’s work and he is undoubtedly the greatest authority on the economics of religion and he is president of the Association for the Study of Religion, Economics and Culture. Larry’s paper “Introduction to the Economics of Religion” is an excellent introduction to the topic.
Mikael Olai Milhøj
/ October 19, 2012I read “World Hyperinflations” after you suggested it somewhere on your blog. Really good (and extremely terrifying) stuff!
Lars Christensen
/ October 19, 2012Thanks Mikael…keep on reading – the rest of the papers in this post is also worth reading.
David Friedman
/ October 20, 2012You might want to look at Larry Iannacone’s work on the economics of religion.
Lars Christensen
/ October 20, 2012David, thank you very much. It is always a pleasure when you drop by my blog. Your comments are highly appreciated.
I am well aware about Larry’s work on economics of religion. Anybody interested in the topic should in my view start by reading his work. I have now added some references to my post above.
Lenina Rautonen
/ October 20, 2012Again, Lars, very interesting. Keep up with your papers and write that book!
Alexander Guerrero
/ October 20, 2012Regime uncertainty in Venezuela ? I do not think so, President Chavez call it “socialism XXI century”, I am afraid we have plenty of that. Markets are strongly intervened by government; prices are fixed, including interest rate. Exchange rate is under tight government control, interest rate are negative, national currency is not convertible from 10 years ago, Foreign exchange is rationed, we just have the right to ask at the foreign exchange government body -in charge of the rationing- for not more than 4500 US dollars yearly, but we have to travel abroad to have the right to buy those dollars.
Financial transactions, credit, is repressed, we have to pay, -some time we cannot afford to pay- a good amount of transactions costs –Coase, Williamson type- to get credit for instance, to by an electro domestic, make long queue to by cars, etc., and not because the real interest rate is negative, but because the government is the main debtor, it crowds out available bank credit, remember socialism XXI century!.
If someone wants to buy additional dollars, being a business men or any individual, he has to apply for some kind of public debt bonds swap, national currency denominated bonds against those dollar denominated bonds. To do so, there is a long way of government regulations to have the right to apply for them.
There is no monetary policy at all; ok, I know, there is some kind monetary policy, but the one which is not arbitraged by markets. People play around with something they call “black market for dollars”, but it is not a foreign exchange market, you do not exchange dollars for bolivars. Purchases of dollars is an off shore transaction, If I want dollars I have to find one which needs bolivars –national currency- to carry any economic activity here, I sell him my bolivars here in Caracas. You in “exchange” transfer your dollars to my US account in New York. As you can see there is not exchange. These communists are very cleaver regarding money issues, they like it some much, particularly when that money is not theirs. Looks at Cuba, we have been told by the government that we are heading to that type of certainties.
Government modified the Central Bank several times and converted it in some kind of development bank, chiness type; so helicopter money flows easily to pay government deficit. Inflation in these ten years averages –annually- about 27%, the highest in the world, it is not yet hyper type, but obviously we are dying at slow pace. Some people say they prefer hyperinflation, at least it leads to something very interesting at the end of the road, towards regime change!!. Lastly, we export only oil, even though current account is positive, and public debt is about 75% of GDP, not too bad for highly indebted country these days.
Sorry for being too long!!, I apologize.
Lars Christensen
/ October 20, 2012Alexander, thank you for your comment.
I believe that the horrors of the Venezuelan economy is exactly an example of what Robert Higgs has termed “regime uncertainty”. In the paper that I mention Higgs discusses the statist organization of the US economy during the second World War – including massive price controls. This is basically how the Venezuelan economy today is organized.
And Venezuela surely has a monetary policy – it is just conducted in an utter horrible fashion. THe regimes massive money printing is highly inflationary and the regime is trying to curb inflation with price controls. That is the reason there is no goods in the shops.
The Venezuelan economy is a tragic story. The country could be in very good shape, but given the disasters policies of the Chavez regime the country seem to be in more or less permanent decline. But it is no surprise to economists like myself – this is always the result you get with socialism. Unfortunately it is not only economic suffering you getting, but socialist regimes always also turn highly totalitarian and corrupt. The Chavez regime in that sense in no different from any other marxist regime the world has seen.
I hope you and you fellow country soon will get the freedom and prosperity you deserve.
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PS I have early written about food shortage in Venezuela: http://marketmonetarist.com/2012/04/22/food-shortage-is-always-and-everywhere-a-monetary-phenomenon/