You have to be upbeat about the Iranian economy – president Rouhani is a monetarist!

This is the new Iranian president Hassan Rouhani on Twiiter (on November 26):

From an economic perspective, we were in a state of stagflation–negative growth + extremely high inflation–first time in 50 yrs.

…Tracking inflation is very important to me. Change in inflation has been +2.2 – 2.3% MoM, which is now reduced to +1.2%

…Inflation has decreased from 43% to 36%–still very high, but it’s an improvement

…Our plan is to bring inflation below 25% by end of next year, from a level of 43% when we took office.

Ok, fine president Rouhani what do you want to do about it?

And here is his answer:


Wauw! Is Rouhani’s favourite economist Milton Friedman?

I wish President Rouhani the best of luck in reducing Iranian inflation and in reviving the Iranian economy – it is badly needed. I am sure he will succeed if he follows his apparent monetarist instincts.

HT Scott Sumner and Left Outside.


Regime Uncertainty, the Balkans and the weak US recovery

Today I have been in Oslo, Norway for client meetings. The topic on the agenda is Central and Eastern Europe and particularly the investment climate in South Eastern Europe. That gives me reason to discuss a favourite topic of mine – “regime uncertainty – as defined by Robert Higgs – and why the present lacklustre recovery in the US economy is unlikely in anyway to be related to such regime uncertainty.

As an economist who have been working professionally with Emerging Markets for more than I decade I know about regime uncertainty. In fact I think you to some extent can define an Emerging Markets economy as an economy where regime uncertainty is a dominant factor in the economy.

Robert Higgs basically defines regime uncertainty as a lack of protection of property right and a lack of respect for the rule of law. This is a serious problem in many Emerging Markets – including in the South Eastern European countries, which has been the focus of my meetings today.

My favourite source for a numerical measure of these uncertainties is the conservative Heritage Foundation’s Economic Freedom Index. We can use the sub-index for “Rule of Law” in the Economic Freedom Index as a proxy for “regime uncertainty”.

Let’s as an example look at two random South Eastern European countries – Albania and Bulgaria. Here is what Heritage Foundation has to say about the “Rule of Law” in Albania:

Albania still lacks a clear property rights system, particularly for land tenure. Security of land rights remains a problem in coastal areas where there is potential for tourism development. Although significant reforms of the legal system are underway, the courts are subject to political pressures and corruption. Protection of intellectual property rights is weak. Albania is a major transit country for human trafficking and illegal arms and narcotics.”

And similarly for Bulgaria:

“Respect for constitutional provisions securing property rights and providing for an independent judiciary is somewhat lax. The judicial system is unable to enforce property rights effectively, and inconsistent application of the rule of law discourages private investments. Despite legal restrictions, government corruption and organized crime present a threat to Bulgaria’s border security.”

In my view the Heritage Foundation’s description of the lack of respect for the rule of law and property rights in Albania and Bulgaria is pretty close to the reality in these two countries. So there is no doubt that there in both countries are a considerably degree of regime uncertainty.

This heightened level of regime uncertainty very likely is having a considerably negative impact on both foreign direct investments and domestic investments in both countries and therefore on the long-term growth prospects of these countries. Who would for example invest in a sea sight hotel in Albania it might be stolen from you tomorrow or in a year – maybe even with the tacit support of government officials?

Bulgaria and Albania are just two examples of serious regime uncertainty, but many (most!) developing economies and Emerging Markets around the world have serious problems with regime uncertainty. Therefore, as an Emerging Markets economist I find this issue highly relevant. However, I should also stress that I believe regime uncertainty is a supply side phenomenon. Regime uncertainty hampers investment, which reduces the productive capacity of the economy and hence reduces productivity growth, but as aggregate demand in the economy is determined by monetary factors regime uncertainty – in Higgs’ sense – cannot be a demand phenomenon. Yes, regime uncertainty can impact the composition of demand but not aggregate demand in the economy.

The best way to illustrate that regime uncertainty is a supply side phenomenon is to look at three contemporary examples – Venezuela, Argentina and Iran. The regimes in all three countries obviously have very little respect for the rule of law and there is weak protection of property rights in all three countries. However, all three countries also are struggling with high – and to some extent even escalating – inflation. If regime uncertainty were a demand phenomenon then inflation would be low and falling in these countries. It is not.

When I listen to the present political-economic debate in the US many conservative and libertarians economists and commentators (who I would normally tend to agree with) point to regime uncertainty as a key reason for the weak US recovery. Frankly speaking while I acknowledge that there might have been a rise in regime uncertainty in the US – in frank I am certain there has been – I doubt that it in any meaningful way can be said to have had a notable and sizable negative impact on US investment activity. Furthermore, the US economy is showing all the signs of having a demand side problem rather than a supply side problem. If the US economy had undergone a serious negative supply shock then US inflation would has been increasing – as is the case in for example Iran. US inflation is not increasing – rather since 2008 US PCE core inflation has averaged a little more than 1% a year on average.

Furthermore, even though uncertainty about the outlook for US tax rules have increased and Obamacare likely have had a negative impact on the overall investor sentiment in the US it would be rather foolish to claim that property rights are not well-protected in the US.  This is what Heritage Foundation has to say about the rule of law in the US:

“Property rights are guaranteed, and the judiciary functions independently and predictably. Serious constitutional questions related to government-mandated health insurance have been under consideration in the courts. Corruption is a growing concern as the cronyism and economic rent-seeking associated with the growth of government have undermined institutional integrity.”

Even though Heritage Foundation highlights some negative factors the US can hardly be said to be Bulgaria and Albania. In fact the US is in the very top in the world when it comes to protection of property rights and the respect for the rule of law. I therefore doubt that US multinational companies like Apple of Coca Cola are seriously concerned about the rule of law in the US when you take into account that these companies have been seeing there strong sales and income growth in Emerging Markets like China, India, Russia and Brazil.

In fact I could understand if these US companies would be concerned about the present regime uncertainty in China in connection with the ongoing leadership change in the Chinese communist party, the crackdown on freedom of speech in Russia under president Putin’s leadership, the scaling back of economic reforms in India or the ad hoc nature of changes to taxation of inward investments into Brazil.

So while I certainly remain concerned about the regulatory developments in the US over the past decade (yes it started well before Obama became president) I doubt that the present lacklustre recovery can be blamed on these problems. The reason for the lacklustre recovery is rather monetary uncertainty rather than regime uncertainty. Since 2008 US monetary policy has moved away from a ruled based regime to a highly discretionary and to some extent highly unpredictable regime. That is the problem.

So yes, US companies are likely worried about regime uncertainty, but it likely worries about regime uncertainty in China or Brazil rather than regime uncertainty in the US.

A simple way to illustrate this is to look at the Heritage Foundation’s score for protection of property rights in some of the countries mentioned in this blog post. Heritage Foundation considers a score between 80 and 100 to be a “free country”. It is very clear from the graph that investors should worry (a lot) about the protection of property rights in Albania, Bulgaria or in the so-called BRIC economies, but I doubt that many international investors have sleepless nights over the whether or not property right will be well-protected in the US.

Finally I am as worried about the rise of interventionist economic policies in the US and in Europe as anybody else, but we should be right for the right reasons. Interventionist economic policies surely reduce the growth prospects in the US and Europe, but that is supply side concerns for the longer run and we can’t blame these failed policies for the weak recovery.

Papers about money, regime uncertainty and efficient religions

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.


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.

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