Spain has recently banned the short selling of its debt (government bonds). This move has been greatly critized by many analysts as shooting the messenger instead of solving the problem. But isn't shortselling part of the problem? That's what I will discuss in this post (hint: things are always more complex here..)
Short selling, or shorting, is the process of selling an asset that you don't posses. This wikipedia page explains it all quite well. The short version: When you short you sell an asset that you have borrowed. Later you buy that same asset and return it to the borrower. With this proces you're actually betting on a decrease in value. A more devious business is naked shorting where you do not borrow the asset but sell it anyway. After the asset has decreased in price you quickly buy it and complete the previous selling transaction
Interestingly shorting is a neutral action, since there is both a selling and a buying transaction. This also holds true for naked shorting. It is because of this that traditional economics expects no long term effects from these practices. Actually shorting increases the value of the asset for two reasons. The first is that the buying and selling transactions create more liquidity in the market, giving other players the opportunity to easily buy and sell that asset. The other enhancing value is that it allows players to lend their assets to these speculators and thereby increasing the return of it.
So if shorting is good for the value of the underlying stock, why ban it? First massive shorting creates a surge of assets on sale thus depressing the price. This is later compensated, but it will depress the price for some time. In the case of naked shorting the number of assets on sale can actually be larger than the total number of assets, leading to a very unstable market. There is also a psychological issue: massive shorting signals a distrust in the asset, and issuers of the asset (e.g. the Spanish government) generally do not like that.
Thus it seems that banning shorting is in fact shooting the messenger, but it is not the whole story. The financial markets have another unnamed aspect: uncertainty. Most players, mainly conservative ones, rely on other players to gain information on an asset. When an asset is massively shorted, many long term players will also leave the market out of fear that there is unknown information. Even if the players don't leave immediately the strong variations in price, due to massive buying and selling, will create a distrust by themselves. Therefore massive shorting does actually bring down the value of an asset.
There are many ways to deal with shorting: the most mature way is to accept shorting as an inevitable side effect of trading in your asset. For most cases shoring does not affect the price of the asset in a great matter itself. However there are cases were action needs to be taken.
This is when a massive shorting campaign on your asset is taking place. Simply banning the shorting of your asset will drive out most long term holders, since they can't rely on the liquidity and the extra income provided by shorting. This will then result in a non-neutral action on your asset driving prices further down. Even worse, since long term holders do not like to be in your asset anymore the price will remain depressed.
The only other way is to keep the price from your asset up, since shorting and especially naked shorting is often only for a small period of time. It is only necessarily to keep the price up for some time. This can be done by buying up the asset under covert plans. By doing so you actually reward the holders of your asset while you punish those that doubt you. Precisely what you'd want to achieve. Therefore don't ban the shorting of the stock but strongly discourage massive shorting.
Thursday, July 26, 2012
Sunday, July 22, 2012
The real problem with economics
Abstract: I believe that economics should focus more external validation of models. It's refusal leads to an economic religion. With implementation of economic theories local factors and alternatives should be more prominent. If you want to know why, please read the rest of the article.
For some time now, the attack on economics as a science has been made by the media, the politicians and even economists themselves. The main focus here is on mainstream macro-economics (aka neoclassical economics). People criticize the simplistic nature of the science and mainly the weird assumptions that are being made. Now it is true that perfect rationality, homo economus, perfect competition perfect information and such do not actually exist. In fact they don't exist anywhere in the real world. But in my opinion and that, this is not the real problem
To assess the actual problem it is useful to compare economics to the science it wants to be: physics. In physics some very weird assumptions are also made: the existence of holes with negative mass in electric currents is but one example. Also extreme simplifications of reality are present: no gravity, no friction, no air, infinite time to relax a system and many others. Yet physics is not in any distress at the moment. Weird underlying simplifications and assumptions could not possibly be the only explanation then.
In fact economists are not that protective of their assumptions either. When I discuss with a more traditional economist, I find that challenging assumptions and replacing them with more realistic ones can often be achieved quite simply. This often happens when I introduce evolutionary models to them. Assumptions and simplicity are simply not the main culprit here.
Also the mathematical way of structuring the models, another thing critiqued by some, seems to work out reasonably well. After all what better tools do we have that can provide such internal validity to any science?
The validation of the science is touching a critical part here. The external validation is where economics and physics diverge. In physics anything that can not be proven will remain a good theory, but not an absolute one, until proof is found. This is why we spend billions of euros on the CERN complex with a primary goal of proving the existence of the Higgs boson. Regardless of the field of physics this almost always holds true (fields in which this doesn't hold are often ridiculed by other for providing mathematical fantasies).
Economics is rather different. It is true that there are a lot of people, some of which great economists, working on external validation. This is not the problem. However, the main divide in economics seems to be occurring not between economists of different traditions (Classical, Keynesian, Austrian, Evolutionary etc.) but between those that make models and those that look at the real world. This leads to a situation in which great models are made but are never tested thoroughly. And great discoveries that are made in economic data and also within other sciences are not seriously being taken into economic models. Rather they are added as outside features. This leads to so called fads, Naim has a good paper on this from the asia crisis.
The sad thing what then happens, is that models that were introduced with a very good intent are being used in the wrong way. They are also never really validated or adapted to new insights. In fact they are even more simplified into one concept or idea. Some examples are 'the free market' (Neoliberals), 'stimulus' (Keynesians) and 'class warfare' (Marxists). This then leads to an orthodoxy and dogma in the economics science that borders on religion. This is most visible and most painful in the economic experiments from the 20th century.
It is therefore not a coincidence that I chose a paper about developing economies when it comes to fads. This is usually where the dissonance between economic macro theories and reality is often the most visible. Also this is where economic religions cause the most harm. A good example of this is the free market paradigm that is presented by neo-liberals. Look at Russia and the former Warsaw pact after the fall of the iron curtain. If you want to know how the 'stimulus' experiment is working out just look at the US or for more historic reference: Japan. Finally the Marxist experiment (communism) does not need further introduction.
The main issue with all of this is that the real world experiences are not used to update, alter or refine the existing theories. At the current time economists are still calling for free markets and stimulus, even though history has already shown that the economy does not behave according to these grand concepts.
In an additional note it is often astonishing how economic macro theory often fails to appreciate the different structures that are present in the economy. In a previous post I have addressed different institutions and their impact on economies. But not only institutions are different: culture and history are also of major influence of the economic workings in a country. Therefore a policy that succeeds in one country can fail completely in another even when economic factors (capital, labor etc.) are similar. I would still like to see a push into adapting global theories more into local contexts and also local experiences adapting the global theories.
In conclusion, the economic science needs to change. This change is not better models or better data collection but a better communication between the two. This will actually lead to better models and better data to work with. Local contexts are important and are often missing completely from the theories. They should at least add to them that a given theory is only valid under a certain underlying structure of the economic system.
A final note: I don't think it is actually possible to find a grand unified economic theory as we can find it in physics. People are not electrons and at times behave unpredictably, also when in groups. Therefore be very wary when an economic solution is offered that can be summarized in one term. The world is just not that simple. This should not stop us from finding increasingly better ways to model economics as by doing so we can improve many lives.
For some time now, the attack on economics as a science has been made by the media, the politicians and even economists themselves. The main focus here is on mainstream macro-economics (aka neoclassical economics). People criticize the simplistic nature of the science and mainly the weird assumptions that are being made. Now it is true that perfect rationality, homo economus, perfect competition perfect information and such do not actually exist. In fact they don't exist anywhere in the real world. But in my opinion and that, this is not the real problem
To assess the actual problem it is useful to compare economics to the science it wants to be: physics. In physics some very weird assumptions are also made: the existence of holes with negative mass in electric currents is but one example. Also extreme simplifications of reality are present: no gravity, no friction, no air, infinite time to relax a system and many others. Yet physics is not in any distress at the moment. Weird underlying simplifications and assumptions could not possibly be the only explanation then.
In fact economists are not that protective of their assumptions either. When I discuss with a more traditional economist, I find that challenging assumptions and replacing them with more realistic ones can often be achieved quite simply. This often happens when I introduce evolutionary models to them. Assumptions and simplicity are simply not the main culprit here.
Also the mathematical way of structuring the models, another thing critiqued by some, seems to work out reasonably well. After all what better tools do we have that can provide such internal validity to any science?
The validation of the science is touching a critical part here. The external validation is where economics and physics diverge. In physics anything that can not be proven will remain a good theory, but not an absolute one, until proof is found. This is why we spend billions of euros on the CERN complex with a primary goal of proving the existence of the Higgs boson. Regardless of the field of physics this almost always holds true (fields in which this doesn't hold are often ridiculed by other for providing mathematical fantasies).
Economics is rather different. It is true that there are a lot of people, some of which great economists, working on external validation. This is not the problem. However, the main divide in economics seems to be occurring not between economists of different traditions (Classical, Keynesian, Austrian, Evolutionary etc.) but between those that make models and those that look at the real world. This leads to a situation in which great models are made but are never tested thoroughly. And great discoveries that are made in economic data and also within other sciences are not seriously being taken into economic models. Rather they are added as outside features. This leads to so called fads, Naim has a good paper on this from the asia crisis.
The sad thing what then happens, is that models that were introduced with a very good intent are being used in the wrong way. They are also never really validated or adapted to new insights. In fact they are even more simplified into one concept or idea. Some examples are 'the free market' (Neoliberals), 'stimulus' (Keynesians) and 'class warfare' (Marxists). This then leads to an orthodoxy and dogma in the economics science that borders on religion. This is most visible and most painful in the economic experiments from the 20th century.
It is therefore not a coincidence that I chose a paper about developing economies when it comes to fads. This is usually where the dissonance between economic macro theories and reality is often the most visible. Also this is where economic religions cause the most harm. A good example of this is the free market paradigm that is presented by neo-liberals. Look at Russia and the former Warsaw pact after the fall of the iron curtain. If you want to know how the 'stimulus' experiment is working out just look at the US or for more historic reference: Japan. Finally the Marxist experiment (communism) does not need further introduction.
The main issue with all of this is that the real world experiences are not used to update, alter or refine the existing theories. At the current time economists are still calling for free markets and stimulus, even though history has already shown that the economy does not behave according to these grand concepts.
In an additional note it is often astonishing how economic macro theory often fails to appreciate the different structures that are present in the economy. In a previous post I have addressed different institutions and their impact on economies. But not only institutions are different: culture and history are also of major influence of the economic workings in a country. Therefore a policy that succeeds in one country can fail completely in another even when economic factors (capital, labor etc.) are similar. I would still like to see a push into adapting global theories more into local contexts and also local experiences adapting the global theories.
In conclusion, the economic science needs to change. This change is not better models or better data collection but a better communication between the two. This will actually lead to better models and better data to work with. Local contexts are important and are often missing completely from the theories. They should at least add to them that a given theory is only valid under a certain underlying structure of the economic system.
A final note: I don't think it is actually possible to find a grand unified economic theory as we can find it in physics. People are not electrons and at times behave unpredictably, also when in groups. Therefore be very wary when an economic solution is offered that can be summarized in one term. The world is just not that simple. This should not stop us from finding increasingly better ways to model economics as by doing so we can improve many lives.
Tuesday, July 10, 2012
The economics of the complaints book
We all know the feeling: you enter into a restaurant on a trip, things look well from the outside but when you enter things are quite different. The staff is rude; you are not being serviced; the food is cold/raw/burned/rotten and at the end you get a bill that is at least 50% more than the menu said. In most cases this is an exercise in bitter helplessness: you don't want to sue them because it is to small. Also you can't use your economic position, since you weren't really planning on coming back there in any case.
Enter the complaints book, a neat innovation from Portugal. The complaints book (livro do reclamações) lets you file an official complaint against the business that has wronged you. This is how it works(the short version): you file a complaint in the book, the complaint is send to a smaller court. If you're complaint is deemed valid, the business is fined. Nothing to major for first offences, but in any case way more than they ever made of wronging you. For repeated offenders the fines get quite severe, up until forced closing. The system also has a safety in it: if you file a bogus complaint you will get fined.
So what does this mean from an economic perspective? Let's first assume that some people have been wronged enough for them to get a satisfaction out of writing it in the book. Even though it does not give them any direct benefits (like money or higher social status), psychologically it certainly does pay off. I would call this 'revenge utility'.
Eventually these people complain enough for some businesses to get fines. This affects the selection environment leading to companies that will less frequently wrong customers. The higher the fines and the higher the propensity for customers to file a complaint, the faster this process will be. However this could lead to a situation where only non-risk seeking companies are left, therefore there needs to be some minimum level of wronging present (e.g. a minimum time waiting or a minimum threshold of bad food).
This can be instated by raising the difficulty of filing the complaint. This will mean that more wronging needs to be done for people to acquire enough 'revenge-utility' to make the complaint. Or alternatively by simply instating minimum requirements. In practice both of these mechanisms are there. However the first one also reduces the frequency of complaining, thus reducing the speed evolutionary process.
But there is another thing that might happen: the customer might be bought of from filling his complaint. This can be done by giving him a free meal or just being very kind to him. In the case of actually providing services this creates a nice situation: the customer can replace 'revenge-utility' with real utility. This makes a nice two player game where the company needs to make sure it always outbids the revenge appetite of the customer and will therefore always overbid. In any case even if the book is not filled in the customer still gets refunded.
In conclusion: the complaints book reduces the number of bad experiences for customers by changing the system of companies through evolutionary systems. It gives customers the chance of being compensated properly for the wronging occurred. And if all else fails the book provides a 'revenge utility' to the angry customer. I think this is one of the better innovations of the last decade and I would like to see a European wide implementation of the system.
Enter the complaints book, a neat innovation from Portugal. The complaints book (livro do reclamações) lets you file an official complaint against the business that has wronged you. This is how it works(the short version): you file a complaint in the book, the complaint is send to a smaller court. If you're complaint is deemed valid, the business is fined. Nothing to major for first offences, but in any case way more than they ever made of wronging you. For repeated offenders the fines get quite severe, up until forced closing. The system also has a safety in it: if you file a bogus complaint you will get fined.
So what does this mean from an economic perspective? Let's first assume that some people have been wronged enough for them to get a satisfaction out of writing it in the book. Even though it does not give them any direct benefits (like money or higher social status), psychologically it certainly does pay off. I would call this 'revenge utility'.
Eventually these people complain enough for some businesses to get fines. This affects the selection environment leading to companies that will less frequently wrong customers. The higher the fines and the higher the propensity for customers to file a complaint, the faster this process will be. However this could lead to a situation where only non-risk seeking companies are left, therefore there needs to be some minimum level of wronging present (e.g. a minimum time waiting or a minimum threshold of bad food).
This can be instated by raising the difficulty of filing the complaint. This will mean that more wronging needs to be done for people to acquire enough 'revenge-utility' to make the complaint. Or alternatively by simply instating minimum requirements. In practice both of these mechanisms are there. However the first one also reduces the frequency of complaining, thus reducing the speed evolutionary process.
But there is another thing that might happen: the customer might be bought of from filling his complaint. This can be done by giving him a free meal or just being very kind to him. In the case of actually providing services this creates a nice situation: the customer can replace 'revenge-utility' with real utility. This makes a nice two player game where the company needs to make sure it always outbids the revenge appetite of the customer and will therefore always overbid. In any case even if the book is not filled in the customer still gets refunded.
In conclusion: the complaints book reduces the number of bad experiences for customers by changing the system of companies through evolutionary systems. It gives customers the chance of being compensated properly for the wronging occurred. And if all else fails the book provides a 'revenge utility' to the angry customer. I think this is one of the better innovations of the last decade and I would like to see a European wide implementation of the system.
Saturday, March 10, 2012
Racist statistics
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.
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.
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.
Subscribe to:
Posts (Atom)