L'Information est d'Or

The Gallois report about the French industry's competitiveness has just been made public (links here ) and received a lot of publicity from the French media. As a trained economist and French patriot, I was eager to read it. The author, a respected businessman - formerly head of aerospace giant EADS -  describes rather briefly the declining state of the French industry over the last ten years, which accounted for 18% of GDP in 2000 and is now down to 12.5%. What are the causes of this decline? The author cites various causes, ranging from product quality, technology, labour flexibility, cost, competition, education and regulation. Standard economic theory says the government should increase labour flexibility, promote competition, support education and enact smart regulation. For example, the Porter Hypothesis (cf Ambec et al 2011 ) states that market-friendly environmental policy can enhance business competitiveness through innovation. What are the main propositions? Create...

The Nobel Prize in Economics has been awarded to US economists Lloyd Shapley and Alvin Roth for their work on market design . Market design is a subfield of microeconomics that studies how to make markets work efficiently. By efficiently (also called Pareto efficiency), economists mean that the outcome (in terms of who gets what in the market) cannot be improved without making at least one person worse off. Most often this outcome can be achieved by letting people freely trade goods using money as a means of exchange. However, there are some cases where money cannot be used. For example, Alvin Roth studied the market for kidney transplants where buying kidneys is not allowed on ethical grounds. By creating a database of likely donors and patients along with an algorithm to match them, his work allowed to increase the number of transplants and therefore of lives saved. Below is a lecture from Alvin Roth where he explains this case and other applications of market design: At a time...

Yesterday, the US Federal Reserve Chairman Ben Bernanke gave an argumented speech in defense of Large Scale Asset Programs (also called Quantitative Easing in the Financial jargon) initiated in 2009 and that have been since then continued and expanded. Being a former academic researcher, Professor Bernanke was very careful in explaining his vision and his speech was both nice to read and very informative. What are the Large Scale Asset Programs? The role of LSAP is to continue easing financial conditions in the economy when the Central Bank's benchmark rates have reached the zero lower bound. This program is called unconventional because it lacks a standard model explaining why and how it should be used, and has been little used in history. It consists in letting the Central Bank purchase government assets (Treasury boons, or bonds issued by government sponsored agencies) so as to reduce the yield of such assets.  Quantitative evidence Econometric evidenc...

I just finished reading the fascinating book "SOCCERNOMICS: why England loses, why Spain, Germany and Brazil win, and why the US, Japan, Australia, Turkey - and even Iraq - are destined to become the kings of the World's most popular sport" . It is the first time I ever read anything interesting about football! The authors, Simon Kuper and Stefan Szymanski, are two economists interested in sports and they enjoy to apply - in sometimes an unconventional and surprising way - their economist's tools and reasoning to sports. Using plenty of data, they try to answer the following questions: Why do clubs have so much debt? Is a club a business? How efficient is the transfer market? Should we regulate more the sports markets? aka limit debt, share the revenues more equally among clubs Is it worth hosting a major sports event like the World Cup or the Olympics? How to shoot a penalty? What does the rise and decrease of some clubs tell us? Rather t...

In a paper presented at the National Bureau of Economic Research (NBER) Macro Annual Conference (April 20-21, 2012), Adrian, Colla and Song Shin (2012) present four stylized facts about financial frictions: In a contraction, bank loans are reduced but bond financing increases to make up for most of the gap. For example, during the 2007-2009 crisis, the number of bank loans issued in the USA declined by 75% whereas the number of bonds increased by two fold. Credit spreads (= risk premium) increase in a contraction Bank lending changes dollar for dollar with a change in debt, with equity being "sticky". So, credit supply by banks is the consequence of their choice of leverage. (cf. figure 1 and 2) Bank leverage is procyclical figure 1: Investment Banks: change in equity and debt in relation to the change in assets figure 2: Commercial Banks: change in Equity and Debt in relation to a change in assets They then develop a model of financial intermediation that...

In March, the Chairman of the Federal Reserve (ie the US Central Bank) gave a series of four lectures about the Federal Reserve system and the Financial Crisis to students of Georges Washington University. I have enclosed the videos of these classes. Dr. Bernanke, who is also a prominent academic researcher, is very skilled at explaining very complex problems with easy words. So, even non economists will find these lectures accessible and useful to understand the sequence of events that led to a global financial crisis and how the Federal Reserve responded to it. Let me give you a few extracts and comments that I found particularly worth highlighting: The three pillars of central bank action are: Monetary policy (setting interest rates) Provision of liquidity (lender of last resort) Financial regulation and supervision (shared with other agencies) "We did not foresee that declining house prices would trigger a financial crisis." This is an honest but clear ...

Since their top in 2007-2008, leading stock markets indices around the World have significantly declined, making this five year period one of the worst performance ever. As the chart below shows, we can distinguish three groups: The worst performers are the South European indices: Greek (ATHEX), Italian (MIB) and Spanish (IBEX) indices are down over 59%, badly hit by the Euro crisis and subsequent double-dip recession. For those countries, their membership in the Eurozone is put in question, their financial systems are strained by a loss of confidence and large outflows of money. This financial sector stress is having a depressing effect on the real economy, through reduced loans to companies and dampened business confidence. The particularity of this group is that they are now trading at their lowest level since the 2007-2008 crisis because the second crisis (Euro crisis) is hitting them much more than the first crisis (sub-prime then global financial crisis). The second group ...

I have just completed reading the 2007 seminal article by Barry Eichengreen about "The Breakup of the Euro Area". The author describes the barriers that a nation would face should it decide to exit the Eurozone. The barriers are of different natures: legal, technical, political and economic. However, as we will see, the financial crisis, which originated in the USA with the subprime crisis before triggering a Euro crisis, has lowered these barriers significantly to a point where a break-up of the Eurozone has become a realistic scenario. The technical and legal barriers are about creating a new currency, redenominating debt in the new currency and enforcing it while preventing a probable bank run because citizens that expect a devaluation will try to send their money abroad. While undoubtedly large, those barriers are not insurmountable because it has already been done (example Argentina 2001) and this barrier may be effectively lowered when people, anticipating the poss...

Being part of the Eurozone - and therefore in direct competition with other European nations -means that France has no choice but to enact urgently the following economic reforms: Reduce the weight of public spending in GDP (currently at 57%) Reduce debt before the market forces us to Reform labour market to make it more flexible and reduce unemployment. (cf Unemployment and market frictions Otherwise, they will end up in a Cul de Sac   Which of the 2012 presidential candidates offers such a programme? Not too sure...

Back in August 2008, I advised my readers in a post ( Buy USD vs EUR ) of a likely decline of the Euro against the US Dollar because of worsening situation of Europe compared to the United States. And indeed, three years and a half later, the Euro has declined from 1.5 dollars to 1.35 (-10%). What about now? As Euro area is just entering the second leg of a double-dip recession - IMF forecasts -0.5% GDP growth in 2012 compared to +1.8% for the USA. (didn't we also warn you about it? see the post of July 2010 -   Double Dip  ), a further decline of the Euro wouldn't be surprising... EURUSD exchange rate (Google Finance)

In October 2009, I posted a message on the fantastic business story of Iliad . I said "their model is based on innovation in products and simplicity in marketing." After having revolutionized the French Internet broadband access with the "FreeBox", they have done the same when entering the mobile network operating business. Their new offer of unlimited calls and text messages, unlimited Internet access and no commitment for 20 euros per month is both simple and innovative. They managed to dramatically reduce the price compared to existing competitors by not subsidizing the purchase of the phone. As a result, this new offer has forced their three competitors: SFR, Orange and Bouygues Telecom to reduce their prices, hence breaking an oligopoly. The presentation of the new offer by Iliad's CEO, Xavier Niel, one of France's greatest entrepreneurs. (in French) Free : la conférence de Xavier Niel en intégralité par LeNouvelObservateur And this ...

Another article on the divisions of Macro schools of thoughts Just five years ago, macroeconomists talked about a new synthesis, bringing together Keynesian and Classical ideas in a unified, microfounded theoretical framework. Following the Great Recession, it appears that mainstream macroeconomics has once again split into schools of thought. This column explains why macroeconomics, unlike microeconomics, periodically fragments in this way. In the 1970s and 1980s, macroeconomics was all about ‘schools of thought’. A popular textbook (Snowdon  et al  1994) had the title  A Modern Guide to Macroeconomics: An Introduction to Competing Schools of Thought . Macroeconomists tended to take sides, and different schools had clear ideological associations. Antagonists often talked across each other, and anyone not already on one side just got totally confused. Schools of thought fragmented mainstream macroeconomics in a way that had no parallel in mainstream microeco...

Economist Jonathan Portes discusses what it means to be an Keynesian economist. Fiscal policy: What does ‘Keynesian’ mean? Jonathan Portes 7 February 2012 What does it mean to be a ‘Keynesian’? This column argues that, like so much in economics, the label has become politicised. The cost is an impoverished policy debate that is resulting in millions of avoidable job cuts. I joined the UK Treasury in 1987 and subsequently went to Princeton, where I studied with Rogoff and Campbell. Eventually, I ended up in the Cabinet Office, advising the Prime Minister, on the eve of the 2008 crisis. At no point during this period, however, did I think of myself as a ‘Keynesian’. Nor was it really a meaningful question. You might as well have asked a physicist if he was a ‘Newtonian’. Keynes was a great figure (indeed, one of the greatest Britons of the 20th century) and you had to understand his insights to understand macroeconomics; but the debate had moved on. The Treasury approa...