In the western world outright racism and sexism (which I will group in this post under racism) seems to be (mostly) eradicated; even though we should always be vigilant that it may return, sooner than we think. However, the fight against racism has not been won. In fact, the most difficult part of the fight against this despicable human practice has began: the fight against hidden racism. It is in this fight that statistics play an ambivalent role.
So what is hidden racism? For me, it is racism that is not bound by formal rules and strict practices, but something that is more under the surface. An example: suppose that every time you had to make a choice between a white guy and a black guy, and that all things being equal you choose the white guy 75% of the time. This is obviously a racist process, since you're making a clear difference between the white and black guy. It is however very hard to prove that you are being racist since every case (white or black guy) is not necessarily obviously racist (you can still choose the black guy). That is the problem with hidden racism.
The use of statistics can help identify these cases. In general we know that women are still being discriminated when it comes to jobs in our societies. All things being equal women often earn 10% less than their male coworkers. But this is hard to judge on a case by case basis, since the pay scale is often not constant, because many jobs pay more depending on experience; extra tasks and other factors. However if you have a larger group of cases then statistical analyses can show a severe distortion in the wage levels. Large companies are vulnerable to this use of statistics, reference the women vs Walmart case. If we can eradicate sexism from large companies we have already won a great battle in the fight against discrimination. I believe that smaller companies will eventually follow the big ones and will discriminate less as well.
Unfortunately, statistics can also be used to hide racism, or even worse: they can create racism. A good example of this is the statistical algorithms that banks use to decide whom they lend to. These algorithms use a variety of factors including zip-code. Since zip-code was apparently a good predictor of loan delinquency, entire zip-codes were excluded, 'red-lined', from obtaining mortgages and other credit. The main groups that were living in these zip-codes (which were in the poorer neighborhoods in the larger American cities) where black and latino communities. This is a very racist policy because it is not easy to change your living space to a better and more expensive neighborhood, therefore these people were already discriminated against from birth. The redlining example shows that a process that did not start out as racist (I hope) became racist thanks to the use of statistical algorithms.
This leads to a problem: are statistics inherently good, bad or neutral? As with many technologies this is all related to the actual use of the statistics. It is clear that statistics in the first example provide a weapon against widespread sexism and are therefore very good. The second example is more ambiguous: even though the objective was not racist, the consequences were. I see this as a warning: we should always be vigilant that racism does not creep up to us, even when we operate with the best intentions.
Saturday, March 10, 2012
Monday, March 5, 2012
Why there should not be a 'one-size-fits-all' approach in macro-economics
Within the macro-economic field there is this idea that essentially all economies are the same. This is because the abstraction in the field has led to ignore the underlying structures of economies. A good example of this is the classical Keynesian theory that deals only with macro variables (investment, consumption, government spending etc.). There is no mentioning of how these variables are related to essential economic structures (e.g. companies, markets, government policies etc.)in an economy. My fear is that this line of thought has persisted in mainstream macro-economics.
However, there is are alternative ways of looking at economies. One of these I will discuss shortly here: the theory of institutional complementarities (from Hall and Gingerich). According this theory institutions (laws, politics, taxes, unions, corporate structures, decision making structures etc. etc.) support each other and create a stable economical system. This means that, in theory, there are different well-functioning economical systems possible. In practise this is precisely what is observed; through different histories different countries have developed different systems.
Two distinct economical systems have developed in the western world: the Anglo-Saxon Liberal Market Economy (LME) and the North-European Coordinated Market Economy (CME). (There is also a Southern-European variant but I don't agree with the descriptions given to it so far) The reason for the divergence is quite simply put: history. Where the UK and the US championed liberty and individual responsibility, European countries opted for cooperation and the welfare state.
The LME and the CME are quite different, even though they are both definite forms of capitalism. Within the LME there is in general a lot of fluidity: liberal labor laws make that employees can get easily fired and easily rehired. The focus on shareholders makes that one can easily opt out of an agreement by selling stock. There is a lot more to describe, but in general the LME is focused on rapid change and individuality in most sectors.
The CME model is quite different: it focuses more on stability. More strict labor laws prevent employers from easily firing employees. The stake holder model gives more structural connections within the economy. This makes it hard to walk away from undesirable agreements and more incentives to improve them. Again this is a short description but the CME is generally focused more on stability and cooperation.
What I am not arguing here is that one model is per definition better than the other. What I am arguing here is that a policy that may work in a LME could be disastrous in a CME and vice versa. Therefore a 'one size fits all aproach' should not be used when macro-economic policy is discussed.
However, there is are alternative ways of looking at economies. One of these I will discuss shortly here: the theory of institutional complementarities (from Hall and Gingerich). According this theory institutions (laws, politics, taxes, unions, corporate structures, decision making structures etc. etc.) support each other and create a stable economical system. This means that, in theory, there are different well-functioning economical systems possible. In practise this is precisely what is observed; through different histories different countries have developed different systems.
Two distinct economical systems have developed in the western world: the Anglo-Saxon Liberal Market Economy (LME) and the North-European Coordinated Market Economy (CME). (There is also a Southern-European variant but I don't agree with the descriptions given to it so far) The reason for the divergence is quite simply put: history. Where the UK and the US championed liberty and individual responsibility, European countries opted for cooperation and the welfare state.
The LME and the CME are quite different, even though they are both definite forms of capitalism. Within the LME there is in general a lot of fluidity: liberal labor laws make that employees can get easily fired and easily rehired. The focus on shareholders makes that one can easily opt out of an agreement by selling stock. There is a lot more to describe, but in general the LME is focused on rapid change and individuality in most sectors.
The CME model is quite different: it focuses more on stability. More strict labor laws prevent employers from easily firing employees. The stake holder model gives more structural connections within the economy. This makes it hard to walk away from undesirable agreements and more incentives to improve them. Again this is a short description but the CME is generally focused more on stability and cooperation.
What I am not arguing here is that one model is per definition better than the other. What I am arguing here is that a policy that may work in a LME could be disastrous in a CME and vice versa. Therefore a 'one size fits all aproach' should not be used when macro-economic policy is discussed.
Saving Portugal and Spain: My solution
In the previous post in this series I addressed the need for investment in the countries most affected by the current crisis. In this post I will explain what in my opinion would be the best investment in Portugal and Spain.
My proposal would be to invest in green energy production on the Iberian peninsula.
The reason for choosing the green energy sector in general is that this is producing something that Europe desperately needs: reliable unending clean energy (see also an earlier post in this series).
The investment should be in the two most promising green energy technologies: wind and sun. I chose wind and sun because water technology is often either already taken or impossible (in the case of hydro dams) or it is in a very early stage (tidal energy), but that may change. I will return later to the biomass option. Wind and sun are two commodities that are very present in the south sides of the Iberian peninsula. They are also being used already. Therefore my proposal would merely expand an existing industry rather than creating an entirely new one.
My proposal would be for the EU/Eurozone to set up a fund that invests in turning relatively dry agricultural grounds into places where solar and wind energy plants can be tested and expanded. The removal of agriculture would probably lead to a drastic reduction in the use of water and therefore would help solve some of the water issues that these countries are facing. Since there are sever issues with water, biomass plants would not be a preferable option.
The installation of high technological equipment would also create a need for well trained engineers. Because it is taking place in the home country of the people who originally left it would be likely that they would return, also bringing the knowledge that they have acquired abroad. This in turn could help alleviate the effects of the brain drain that is occurring right now.
Finally, putting the newly constructed energy valley in the Iberian peninsula has the advantage that it is in a reliable area. Portugal and Spain are stable democracies as opposed to the countries where the energy valley would be if the European Saharan energy plan would be implemented.
There is however one maior issue with this investment plan and that concerns the people whose land would need to be taken. A good plan would need to be devised to convince farmers and other citizens to volunteer their land. In practice this means offering a premium on top of the price of the land so that farmers can relocate or find other occupations. This buying up of land would then help slightly with the housing crisis (by injecting money in the real estate sectors) that is now present on the Iberian peninsula.
In this post I have only outlined the what and why of investing in green energy. In the next post in this series I will outline a more detailed plan of the investment. If you agree or disagree with this post please use the comment section below for your arguments :-)
My proposal would be to invest in green energy production on the Iberian peninsula.
The reason for choosing the green energy sector in general is that this is producing something that Europe desperately needs: reliable unending clean energy (see also an earlier post in this series).
 |
| Solar power tower operating near Seville, Spain |
My proposal would be for the EU/Eurozone to set up a fund that invests in turning relatively dry agricultural grounds into places where solar and wind energy plants can be tested and expanded. The removal of agriculture would probably lead to a drastic reduction in the use of water and therefore would help solve some of the water issues that these countries are facing. Since there are sever issues with water, biomass plants would not be a preferable option.
The installation of high technological equipment would also create a need for well trained engineers. Because it is taking place in the home country of the people who originally left it would be likely that they would return, also bringing the knowledge that they have acquired abroad. This in turn could help alleviate the effects of the brain drain that is occurring right now.
Finally, putting the newly constructed energy valley in the Iberian peninsula has the advantage that it is in a reliable area. Portugal and Spain are stable democracies as opposed to the countries where the energy valley would be if the European Saharan energy plan would be implemented.
There is however one maior issue with this investment plan and that concerns the people whose land would need to be taken. A good plan would need to be devised to convince farmers and other citizens to volunteer their land. In practice this means offering a premium on top of the price of the land so that farmers can relocate or find other occupations. This buying up of land would then help slightly with the housing crisis (by injecting money in the real estate sectors) that is now present on the Iberian peninsula.
In this post I have only outlined the what and why of investing in green energy. In the next post in this series I will outline a more detailed plan of the investment. If you agree or disagree with this post please use the comment section below for your arguments :-)
Sunday, March 4, 2012
Saving Portugal and Spain: Solutions(2)
In this next post in the series on the Iberian peninsula, I will deal with economic solutions that can be taken by outside actors. By which I mainly mean the European Union but also some specific member states.
The first solution is in fact remarkably easy: create an higher inflation by some form of quantitative easing. If one looks at most member states in the EU, nominal debt (loans, mortgages, government debt etc.) is a serious issue. Here I say nominal because this debt is nominated in euros. Also certain prices such as those on houses and those of wages are incredibly hard to bring down. By instilling inflation this would be done automatically and most markets (mainly housing) could find better equilibriums.
The inflation that could be a solution here should be not incredibly high but somewhere in the range of 4-6%. This is because an inflation that is to high will have more stronger negative effects. The disadvantage of this solution is that inflation often hits lower and middle classes very hard, since they don't own many non-monetary assets (houses) and their wages/entitlements won't go up. It could also create a dereciation in the euro because investors will trust the euro a little less.
The second solution is to spend more money in the northern states to fuel the economy in there. This strategy would not only be beneficial for the people in the north, who would get more spending power; it would be also good for the southern countries since these countries can export more goods if the north is booming. The effect would be much larger than an increase in the world economy because the European economy is very connected. In my research on Portugal I found that all its main trading partners are within the EU (and are specifically Germany and Spain). Therefore the better the EU economy operates the better Portugal can get out of the debt crisis. I have no doubt that the same will hold for Spain.
Finally a solution that I would prefer the most: investing in these countries. Instead of lending hundreds of billions in bailouts, investing fewer billions would be better. This is because investing has a number of additional benefits. It creates jobs and it stimulates the economy. It also raises tax revenue directly and it will provide a continuous money source for the investor. Just plain borrowing of money to pay of government debt will not do this (except for the last effect). In the case of Portugal and Spain the investments could be used to reform and transform their economies so they can join a better Euro Zone. Naturally this should not be a simple bailout, through investments, because that would create moral hazard and it is necessary to avoid a to big to fail notion for countries.
These are three proposals that I think should be implemented by the EU. In my next post in this series I will discuss the investment option in more detail.
The first solution is in fact remarkably easy: create an higher inflation by some form of quantitative easing. If one looks at most member states in the EU, nominal debt (loans, mortgages, government debt etc.) is a serious issue. Here I say nominal because this debt is nominated in euros. Also certain prices such as those on houses and those of wages are incredibly hard to bring down. By instilling inflation this would be done automatically and most markets (mainly housing) could find better equilibriums.
The inflation that could be a solution here should be not incredibly high but somewhere in the range of 4-6%. This is because an inflation that is to high will have more stronger negative effects. The disadvantage of this solution is that inflation often hits lower and middle classes very hard, since they don't own many non-monetary assets (houses) and their wages/entitlements won't go up. It could also create a dereciation in the euro because investors will trust the euro a little less.
The second solution is to spend more money in the northern states to fuel the economy in there. This strategy would not only be beneficial for the people in the north, who would get more spending power; it would be also good for the southern countries since these countries can export more goods if the north is booming. The effect would be much larger than an increase in the world economy because the European economy is very connected. In my research on Portugal I found that all its main trading partners are within the EU (and are specifically Germany and Spain). Therefore the better the EU economy operates the better Portugal can get out of the debt crisis. I have no doubt that the same will hold for Spain.
Finally a solution that I would prefer the most: investing in these countries. Instead of lending hundreds of billions in bailouts, investing fewer billions would be better. This is because investing has a number of additional benefits. It creates jobs and it stimulates the economy. It also raises tax revenue directly and it will provide a continuous money source for the investor. Just plain borrowing of money to pay of government debt will not do this (except for the last effect). In the case of Portugal and Spain the investments could be used to reform and transform their economies so they can join a better Euro Zone. Naturally this should not be a simple bailout, through investments, because that would create moral hazard and it is necessary to avoid a to big to fail notion for countries.
These are three proposals that I think should be implemented by the EU. In my next post in this series I will discuss the investment option in more detail.
Friday, March 2, 2012
What to do if your country leaves the Euro
Recently there has been a lot of discussion on countries that may or should leave the euro. In a later post I will clarify my position further, but for now it is the following: It would be disastrous not only for the country but also for the Eurozone.
In this post however, I would like to describe what I think would happen if your country leaves the Euro. How to see the warning signs and what you should do when you see them. The technical scenario that I will describe has been partially borrowed from this site, which also describes other countries leaving a monetary zone.
First, the warning signs. in the case of Greece they´re already there: capital flight, unrest in the streets, default of the government en problems with banks. But it is mainly that a lot of people that are saying Greece will leave the Euro. The only thing that is missing is a firm official denial from the government (which would mean that they have given the idea some thought). In the case of Portugal the obvious sign is Greece leaving the Euro.
So what would happen if a country, for arguments sake Greece, would leave the Euro? The first thing is that it would happen overnight in a weekend without any official warning. Banks will close for a number of days to complete the transfer. This is to prevent massive capital flight.
All euros will be marked in the following way: for the notes they would get a stamp without which the note will lose its value withing Greece (that means that the banks will not accept unmarked notes). For other euros like those on banks, they will be transferred to the currency under which laws they operate. So if you have a Greek account your euros would be transferred. The same will hold for contracts, loans and bonds under Greek law. To make this all work, strict capital controls will be imposed: nobody will be allowed to transport money across the border. That means that you can´t travel with notes on your pocket and that you probably can´t transfer money.
Now for the more personal consequences. If this all happens it is certain that the new coin will drastically be devalued. That means that all goods from abroad (things like medicines, oil, other food and factory goods) will be substantially more expensive. So if you need medicines (especially expensive ones) it may be prudent to keep a reserve in case that you can´t afford or won´t be able to buy them.
A lot of things will depend on how the owners from stores and other producers will accept the new coin. This in turn is very much dependent on the actual depreciation of the coin. If it depreciates little then life for Greeks will be more expensive but livable. If the depreciation is large then bad things will happen.
In the later case a following scenario could occur: banks will remain closed as people frantically try to get to their savings, while they are still worth something. That in turn will lead to the shutting down of the banking system of the whole country. A disaster since the majority of payments and wages is done using a bank.
Because of that shop owners will essentially not accept the new coin and all virtually monetary traffic breaks down (this happened in Argentina, where gold parts of necklaces became currency in some cases). Whatever the new currency will be a lot of people will not have enough of it to subsist. Therefore you can expect the looting of supermarkets and other stores if this situation lasts for more than a couple of days.
What should normal people do? If there are strong capital controls, getting your money from the bank early will only help a little (on a black market people will still accept the unmarked euros because they can smuggle them out). Also putting your money on a foreign account may not work if you're not allowed to import euros. More important is to have some reserves of essential food, water and medicine. If looting actually takes place, the streets will become more unsafe so the less you have to go outside the better. If you have friends or a job opportunity abroad this might be the time to move out.
When the chaos resides, your old job will most likely no longer be there. So it is time to rethink your career. A good example was given in this Dutch documentary of an Argentinian shoemaker who started a black market which now has a turnover of millions of euros per day. Also since many assets from companies (equipment, money, bonds etc.) and people (houses, cars) will be cheap, it may be the time to invest and hope for recovery.
I don't think that in any European country this chaos will last long or will really occur at the first place. Therefore panicking and making rash decisions is unwarranted. What I would recommend though is to have some reserves so that if bad things happen you can ride it out.
In this post however, I would like to describe what I think would happen if your country leaves the Euro. How to see the warning signs and what you should do when you see them. The technical scenario that I will describe has been partially borrowed from this site, which also describes other countries leaving a monetary zone.
First, the warning signs. in the case of Greece they´re already there: capital flight, unrest in the streets, default of the government en problems with banks. But it is mainly that a lot of people that are saying Greece will leave the Euro. The only thing that is missing is a firm official denial from the government (which would mean that they have given the idea some thought). In the case of Portugal the obvious sign is Greece leaving the Euro.
So what would happen if a country, for arguments sake Greece, would leave the Euro? The first thing is that it would happen overnight in a weekend without any official warning. Banks will close for a number of days to complete the transfer. This is to prevent massive capital flight.
All euros will be marked in the following way: for the notes they would get a stamp without which the note will lose its value withing Greece (that means that the banks will not accept unmarked notes). For other euros like those on banks, they will be transferred to the currency under which laws they operate. So if you have a Greek account your euros would be transferred. The same will hold for contracts, loans and bonds under Greek law. To make this all work, strict capital controls will be imposed: nobody will be allowed to transport money across the border. That means that you can´t travel with notes on your pocket and that you probably can´t transfer money.
Now for the more personal consequences. If this all happens it is certain that the new coin will drastically be devalued. That means that all goods from abroad (things like medicines, oil, other food and factory goods) will be substantially more expensive. So if you need medicines (especially expensive ones) it may be prudent to keep a reserve in case that you can´t afford or won´t be able to buy them.
A lot of things will depend on how the owners from stores and other producers will accept the new coin. This in turn is very much dependent on the actual depreciation of the coin. If it depreciates little then life for Greeks will be more expensive but livable. If the depreciation is large then bad things will happen.
In the later case a following scenario could occur: banks will remain closed as people frantically try to get to their savings, while they are still worth something. That in turn will lead to the shutting down of the banking system of the whole country. A disaster since the majority of payments and wages is done using a bank.
Because of that shop owners will essentially not accept the new coin and all virtually monetary traffic breaks down (this happened in Argentina, where gold parts of necklaces became currency in some cases). Whatever the new currency will be a lot of people will not have enough of it to subsist. Therefore you can expect the looting of supermarkets and other stores if this situation lasts for more than a couple of days.
What should normal people do? If there are strong capital controls, getting your money from the bank early will only help a little (on a black market people will still accept the unmarked euros because they can smuggle them out). Also putting your money on a foreign account may not work if you're not allowed to import euros. More important is to have some reserves of essential food, water and medicine. If looting actually takes place, the streets will become more unsafe so the less you have to go outside the better. If you have friends or a job opportunity abroad this might be the time to move out.
When the chaos resides, your old job will most likely no longer be there. So it is time to rethink your career. A good example was given in this Dutch documentary of an Argentinian shoemaker who started a black market which now has a turnover of millions of euros per day. Also since many assets from companies (equipment, money, bonds etc.) and people (houses, cars) will be cheap, it may be the time to invest and hope for recovery.
I don't think that in any European country this chaos will last long or will really occur at the first place. Therefore panicking and making rash decisions is unwarranted. What I would recommend though is to have some reserves so that if bad things happen you can ride it out.
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