• Markets, Bubbles, and Bowling

    Over at Quartz, John McDuling gives us a bit of a history lesson on a forgotten bubble of half a century ago.  The bowling bubble.  It is a story of a popular pastime, but also of market behavior.

    Bowling has been around in America since before the revolution: Versions of the pastime were brought across by Dutch settlers in the seventeenth century. But bowling really blossomed, particularly among blue-collar types, in the 1950′s and 1960′s after the introduction of the automatic pin setter. According to HighBeam Business research, the number of bowling alleys in America nearly doubled from 6,600 in 1955 to 11,000 by 1963. Over the same period, the number of people bowling in leagues increased from less than three million to seven million.

    Around this time, “action bowling,” which the New York Times described as “a high-stakes form of gambling in which bowlers faced off for thousands of dollars” was particularly popular in New York City. ““You’d go at 1 in the morning, and there were 50 lanes and the place was packed,” one exponent of the sport, hall of famer Ernie Schlegel told the Times. “The action was huge back then, like poker is today.”

    All of this ebullience was reflected in the stock prices of bowling companies such as Brunswick Corporation, which according to the Wall Street Journal (paywall) increased 1,590% between 1957 and its 1961 peak.

    And then lifestyles changed and bowling leagues became less popular.  While the bowling business didn't exactly roll into the gutter, the glory days became little more than an interesting market case study.

    Read the full article here.

  • Shiller on What Drives Markets

    Robert Shiller recently sat down with David Wessel and took a step back from current events to talk about how his thinking on markets and market behavior developed.  The takeaway: academics can get caught up in "fadish" thinking, and good economists must be careful to always search widely for information.  He also says it would be nice to "tame" bubbles, but "we don't want to do draconian things that would upset the whole system." From WSJ.Money:

  • Planet Money: Greece's Economy May Stop Shrinking

    Greece's economy has a had a bad six years.  At times, very very bad.  But it may be getting better.  The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast.  If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking." 

  • Personal Income and Spending Continue to Climb

    Personal income is steadily rising, according to the Commerce Department.  Income and disposable personal income both rose by 0.3 percent in February, after rising 0.2% in January.  Spending is just a step behind income (perhaps as it should be).  Real consumer spending rose 0.2% after rising 0.1% in January. Take a look at the monthly change:

    From the Bureau of Economic Analysis release:

    Private wages and salaries increased $13.0 billion in February, compared with an increase of $17.2 billion in January. Goods producing industries' payrolls increased $5.2 billion in February and were unchanged in January; manufacturing payrolls decreased $0.3 billion in February, compared with a decrease of $2.8 billion in January. Services-producing industries' payrolls increased $7.8 billion, compared with an increase of $17.3 billion. Government wages and salaries increased $2.0 billion, compared with an increase of $1.2 billion.

    Read the BEA's full report here.

  • The Case for Data Driven Management

    The Wharton School is hosting a conference on people analytics this weekend.  What are people analytics?  In this case, the term refers to a data-driven approach to management, in which human resource decisions are made through analyzing information rather than intuition.  As Wharton professor Cade Massey notes in this Knowledge@Wharton interview, there is so much data about human behavior available, that shrewd managers can be much more strategic and forward thinking about how they build teams and organizations.  IF they know how to use the data effectively:

  • Liberty Street Economics: Cost Benefits of Big Banks

    There has been a lot of discussion about the potential problems with very large banks, and about policy efforts to minimize the risk of those "too big to fail."  But one thing that policy makers have to consider when thinking about breaking up big banks are the costs associated.  Conventional wisdom suggests that bigger banks have cost benefits. 

    New York Fed researchers Anna Kovner, James Vickery, and Lily Zhou have been testing that conventional wisdom.  For the most part, they find that the larger the bank, the more cost advantages.  While they do note some caveats about their findings, they argue out that "limiting the size of banking firms could still be an appropriate policy goal, but only if the benefits of doing so exceed the attendant reductions in scale efficiencies."

    Here is an excerpt from their latest paper:

    Large Bank Holding Companies Have Lower Noninterest Expense Ratios

    Our analysis focuses on U.S. bank holding companies over the period 2001 to 2012. We find a negative relationship between bank size and noninterest expense ratios, robust to the expense measure or set of controls used. Quantitatively, a 10 percent increase in assets is associated with a 0.3-0.6 percent decline in noninterest expense scaled by income or assets. In dollar terms, our estimates imply that for a BHC of average size, an additional $1 billion in assets reduces noninterest expense by $1 to $2 million per year, relative to a base case where operating cost ratios are unrelated to size.

    No Flattening of the Relationship between Size and Cost Even for the Largest BHCs

    These results hold across the size distribution of banking firms and over different parts of our sample period. As shown in the chart below of the efficiency ratio and bank size, which is based on our statistical estimates, we find no evidence that these lower operating costs flatten out above some particular size threshold. This is in contrast to the early academic literature on scale economies, which suggested that these economies taper off above a relatively low size threshold. If anything, the estimated slope steepens, although the statistical uncertainty associated with the estimate becomes larger due to the small sample size.

    Read Do Big Banks Have Lower Operating Costs? here.

  • Brookings Paper on Long Term Unemployed

    Princeton economists Alan B. Krueger, Judd Cramer, and David Cho have released a new paper for the Brookings Institution in which they look at "plausibility of a unified explanation for the recent shifts in the price and real wage Phillips Curves and Beveridge Curve in the U.S."  In other words, they study the long term unemployment problem.  Their findings lead them to calling long term unemployed workers "unlucky."  From the conclusion:

    Although the long-term unemployed have about a one in ten chance of moving into employment in any given month, when they do return to work their new jobs are often transitory. After 15 months, the long-term unemployed are more than twice as likely to have withdrawn from the labor force than to have settled into steady, full-time employment. And when they exit the labor force, the long-term unemployed tend to say that they no longer want a job, suggesting that many labor force exits could be enduring. The subset of the long-term unemployed who do regain employment tend to return to jobs in the same occupations and industries from which they were displaced, suggesting that significant challenges exist for helping the long-term unemployed to transition to growing sectors of the economy. A stronger macroeconomy helps the long-term unemployed in part because it raises demand in their previous sectors. But even in good times, the long-term unemployed are often on the margins of the labor market, with diminished employment prospects and relatively high labor force withdrawal rates.

    The portrait of the long-term unemployed in the U.S. that emerges here suggests that, to a considerable extent, they are an unlucky subset of the unemployed. Their diverse and varied set of characteristics implies that a broad array of policies will be needed to substantially lower the long-term unemployment rate and stem labor force withdrawal, as concentrating on any single occupation, industry, demographic group or region is unlikely to have a substantial impact reducing long-term unemployment by itself. Understanding the labor market and personal hurdles faced by the long-term unemployed should be a priority for future research in order to craft solutions to reduce long-term unemployment.

    Read the paper here.  And watch Justin Wolfers discuss the paper in this video:

  • Case-Shiller Home Price Indices Flatten Out

    The latest Case-Shiller Home Price Indices release is out, and if you look at the data through a narrow lens, things don't look so great.  Average home prices dropped 0.1% for the Case-Shiller 20-city composite in January.  Twelve cities saw declines in prices, with Chicago leading the way at -1.2%. 

    But if you zoom out a little, the picture looks a lot different.  Prices were up 13.5% for the 10-city composite and 13.2% for the 20-city composite.  Here's a look at the long term trend:

    Overall, it was a strong year.  From the release:

    “The housing recovery may have taken a breather due to the cold weather,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Twelve cities reported declining prices in January vs. December; eight of those were worse than the month before. From the bottom in 2012, prices are up 23% and the housing market is showing signs of moving forward with more normal price increases.

    “The Sun Belt showed the five highest monthly returns. Las Vegas was the leader with an increase of 1.1% followed by Miami at +0.7%. San Diego showed its best January performance of 0.6% since 2004. San Francisco and Tampa trailed closely at +0.5% and +0.4%. Elsewhere, New York and Washington D.C. stood out as they continued to improve and posted their highest year-over-year returns since 2006. Dallas and Denver are the only cities to have reached new record peaks while Detroit remains the only city with home prices below those of 14 years ago.

    “Expectations and recent data point to continued home price gains for 2014. Although most analysts do not expect the same rapid increases we saw last year, the consensus is for moderating gains. Existing home sales declined slightly in February and are at their lowest level since July 2012.”

    Read the full release here.

  • Charities Aid Foundation Ranks U.S. As Most Charitable Nation

    Ted Hart, the CEO of the the American branch of the Charities Aid Foundation, recently heralded the giving record of Americans in an article for the Stanford Social Innovation Review.  "Americans give more to charity, both overall, and per capita, than any other nation," Hart writes.  He goes on to note that Americans are also more engaged in charitable activity than people in any other country, based on CAF's measurements, which you can find at the end of the CAF's World Giving Index.  One has to be careful not to equate charitable giving with caring for others, as the different social spending records of countries based on their tax structures surely has to be considered, but that should not take away the value of watching the trends within countries.  And it appears the recovery in giving in the U.S. has outpaced GDP growth post-recession. 

    You can read the full report here.

    Many of the key findings are in this infographic:

  • Shiller on Narratives and the Psychology of the Global Economy

    "We seem to be at the mercy of our narratives," writes Robert Shiller at Project Syndicate.  On a speaking tour in Japan, Shiller was struck by how people there responded to the "positive change" in Prime Minister Shinzo Abe's economic reforms.  A "comprehensive" and seemingly effective plan led to greater optimism, and then a narrowing of the gap between actual GDP and potential GDP.  Shiller says our collective optimism was up in the early 2000s (to our detriment, as it turned out).  We kept the real estate bubble going because we wanted to believe it could last forever.

    Then the financial crisis erupted, scaring the entire world. A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dimwitted experts, and captured regulators. The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board – call them the 1% – were slipping away in the only lifeboats.

    By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, according to the University of Michigan Consumer Sentiment Survey, was at its highest level since the second oil crisis in the early 1980’s. Stories of the Great Depression of the 1930’s were recalled from our dimmest memories – or from our parents’ and grandparents’ memories – and retold.

    To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology. One example is the rapid advance in smartphones and tablet computers. Apple’s iPhone was launched in 2007, and Google’s Android phones in 2008, just as the crisis was beginning, but most of their growth has been since then. Apple’s iPad was launched in 2010. Since then, these products have entered almost everyone’s consciousness; we see people using them everywhere – on the street and in hotel lobbies, restaurants, and airports.

    This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming, and entrepreneurship is alive and very well. But the confidence-boosting effect of the earlier real-estate boom was far more powerful, because it resonated directly with many more people. This time, in fact, the smartphone/tablet story is associated with a sense of foreboding, for the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country.

    These stories awaken our fears of being overtaken by others on the economic ladder. And now that our phones talk to us (Apple launched Siri, the artificial voice that answers your spoken questions, on its iPhones in 2010), they fuel dread that they can replace us, just as earlier waves of automation rendered much human capital obsolete.

    Read The Global Economy's Tale Risks here.

  • McKinsey Insights: Leading Companies Out of Crisis

    Given the state of the global economy over the last seven years, a person who knows how to manage companies through crises is highly valued.  Doug Yakola runs "recovery programs" for McKinsey. He shares ten tips for leading companies out of crisis for McKinsey Insights.  Here is the list:

    1. Throw away your perceptions of a company in distress

    2. Force yourself to criticize your own plan

    3. Expect more from your board

    4. Focus on cash

    5. Create a great change story

    6. Treat every turnaround like a crisis

    7. Build traction for change with quick wins

    8. Throw out your old incentive plans

    9. Replace a top-team member—or two

    10. Find and retain talented people

    Read Yakola's full explanation of these tips here.  And watch him discuss what he has learned helping companies through crises:

  • Angus Deaton on Global Quality of Life, Health, and Wealth

    In his latest book, Princeton economist Angus Deaton argues that the world is a much wealthier and healthier place today than it was a half century ago, but that progress has not come without some setbacks, and a danger of "vast inequalities."  Deaton has an introduction to the book, titled The Great Escape: health, wealth, and the origins of inequality, at Vox, where he shares this graph:

    The figure plots life expectancy at birth (for both sexes together) against per capita GDP in price-adjusted international dollars. Each point is a country, shown as a circle whose area is proportional to population; the lighter circles are for 1960, and the darker circles for 2010. The arrow points in the direction of progress, where both per capita incomes and life expectancy increase over time. The 2010 line is above the 1960 line so that, for a typical country, life expectancy has increased by more than would have been expected given a movement along the 1960 line. Preston suggested that movement along the curve was the effect of income on health, while the upward movement of the line could perhaps be attributed to technical progress.

    Death 'ages' as we move along each curve; this is the epidemiological transition. In the poorest countries, parents still live with the agony of watching their children die from long-conquered maladies like pneumonia, diarrhea, or vaccine preventable diseases like measles. In the rich countries, where disease has moved out of the bowels of children and into the arteries of the elderly, death comes from chronic diseases – heart disease and cancer – and comes to the old, not to the young. The aging of death recapitulates what happened in history, though poor countries today have achieved comparable health at much lower levels of per capita income than was the case in the rich countries in the past. When I was born in Edinburgh in 1945, life expectancy in Scotland was lower than it is in India today; when my father was born in the Yorkshire coalfield in 1918, child mortality in England was higher than it is in sub-Saharan Africa today.

    Progress has been repeatedly interrupted by horrors, not all of which are safely locked up in a historical museum. The Figure shows the huge increase in life expectancy in China between 1960 and 2010, most of which happened, not slowly over time, but immediately after 1960. In fact, this is not a story of progress, but of the unwinding of the disaster of the great Chinese famine. Mao’s demented attempt to catch up with rich countries in a few years, to assume leadership in the Communist world, and to preserve his own political position at home, led him to ignore the mounting evidence that millions were dying. Eventually, perhaps 30 million people died, Yang (2013). This is far from the first time in history that toxic politics has brought human catastrophe. It is sometimes hard to see the benefits that good policies bring, but the Great Leap Forward is a spectacular example of what bad policies and bad politics can do.

    Read the full post here.

  • Marketplace Whiteboard: The Wealth Effect

    As we learned from Andrew Kohut, a lot of Americans are not feeling it when it comes to the U.S. economy.  Or, for many of them, when it comes to their own finances.  And that makes it a little harder for the economy to keep picking up steam.  As Paddy Hirsch explains in this Marketplace Whiteboard, when people feel wealthy, they spend more. 

  • Pew: Americans Remain Bearish About the Economy

    Americans don't seem to be letting traditional economic indicators get in the way of their feelings about the economy.  Andrew Kohut--Founding Director of the Pew Research Center--looks at some of the latest survey data he and his team has gathered, and calls citizens' "bearish" views of the economy as a big puzzle.

    As the new year began, the Associated Press summed up the optimistic outlook of experts succinctly: “Consumers will spend more. Government will cut less. Business will invest more. And more companies will hire.” In that regard, the Bureau of Labor Statistics first report of the year showed that the unemployment rate fell to a five-year low of 6.7 percent, and essentially remained at that level in February.

    But even so, much of the American public is still not over the Great Recession. And the factors that drive economic pessimism are not easily mitigated. Surveys show that a complex combination of partisanship and widening socio-economic gaps are in play, undermining chances of an improvement in the public mood any time soon.

    At the outset of what appeared to be a brightening economic climate, the Pew Research Center’s January national survey found just 16% of the public rating the national economy as excellent or good while a whopping 83% rated it as only fair or poor. This is little different than a year earlier when the survey found 12% giving the economy a positive rating and 86% rating it negatively. In fact, this is only modestly better than at any point since the onset of the Great Recession.

    The same pattern is seen in how Americans size up their personal finances. While Americans have a better opinion of their own finances than of the national economy, ratings of personal financial well-being remain well below what they were pre-recession. In 2007, and for much of the decade before it, about half of Americans rated their finances as excellent or good. Today, just 39% do.

    While there is a significant split on Americans' views about the economy based on political party affiliation, the split on personal finance issues is based on what Pew terms an education gap:


    Read the full article here.

  • Business Strategy and Curation of Big Data

    Philip Evans starts this recent Ted Talk by urging us to recognize that "assumptions about technology" have always been central to business strategy.  He then proceeds to argue that past assumptions about technology have been invalidated, and that successful business strategy today requires a contemporary understanding of how to use big data, and of "curation of these kinds of horizontal structure, where things like business definition and even industry definition are actually the outcomes of strategy, not something that the strategy presupposes."  

  • The Long View on Rising, Rising, Productivity in U.S.

    Forget about a chart of the day.  At their House of Debt blog, Atif Mian and Amir Sufi share what they say is the most important economic chart on the U.S. economy. Period.  Here it is:

    Note that blue line.  Productivity has skyrocketed since 1947.  A "spectacular achievement by an advanced econonomy," note Mian and Sufi:

    The gains in productivity were quite widely shared from 1947 to 1980. Real income for the median U.S. family doubled during this time just as output per hour of work performed doubled. The rising tide was lifting all boats.

    However, what we want to focus on today is the remarkable separation in productivity and median real income since 1980. While the United States is producing twice as much per hour of work today compared to 1980, a small part of the gain in real income has gone to the bottom half of the income distribution. The gap between productivity and median real income is at an historic all-time high today.

    Read the full post here.  And we'll keep an eye on House of Debt for ongoing analysis.

    (Hat tip Mark Thoma)

  • Jeffrey Frankel on Europe's Need to Ease

    Europe needs to do something, according to Jeffrey Frankel.  Specifically, the European Central Bank needs to do something about low inflation, which could soon become deflation in some EU economies.  So Frankel is advocating for easing monetary policy.  Does that mean quantitative easing?  Not so much.  Frankel:

    QE would present a problem for the ECB that the Fed and other central banks do not face. The eurozone has no centrally issued and traded Eurobond that the central bank could buy. (And the time to create such a bond has not yet come.) That would mean that the ECB would have to buy bonds of member countries, which in turn means taking implicit positions on the creditworthiness of their individual finances. Germans tend to feel that ECB purchases of bonds issued by Greece and other periphery countries constitute monetary financing of profligate governments and violate the laws under which the ECB was established. The German Constitutional Court believes that OMTs would exceed the ECBs mandate, though last month it temporarily handed the hot potato to the European Court of Justice. The legal obstacle is not merely an inconvenience but also represents a valid economic concern with the moral hazard that ECB bailouts present for members’ fiscal policies in the long term. That moral hazard was among the origins of the Greek crisis in the first place.

    Fortunately, interest rates on the debt of Greece and other periphery countries have come down a lot over the last two years. Since he took the helm at the ECB, Mario Draghi has brilliantly walked the fine line required for “doing what it takes” to keep the eurozone together. (After all, there would be little point in preserving pristine principles in the eurozone if the result were that it broke up. And fiscal austerity by itself was never going to put the periphery countries back on sustainable debt paths.) At the moment, there is no need to support periphery bonds, especially if it would flirt with unconstitutionality.

    What, then, should the ECB buy, if it is to expand the monetary base? It should not buy Euro securities, but rather US treasury securities. In other words, it should go back to intervening in the foreign exchange market. Here are several reasons why.

    First, it solves the problem of what to buy without raising legal obstacles. Operations in the foreign exchange market are well within the remit of the ECB. Second, they also do not pose moral hazard issues (unless one thinks of the long-term moral hazard that the “exorbitant privilege” of printing the world’s international currency creates for US fiscal policy).

    Third, ECB purchases of dollars would help push the foreign exchange value of the euro down against the dollar. Such foreign exchange operations among G-7 central banks have fallen into disuse in recent years, in part because of the theory that they don’t affect exchange rates except when they change money supplies. There is some evidence that even sterilized intervention can be effective, including for the euro. But in any case we are talking here about an ECB purchase of dollars that would change the euro money supply. The increased supply of euros would naturally lower their foreign exchange value.

    Read the full post here.

  • China Investment in French Milk Production

    One Chinese company is looking to some French cows for a little assistance.  Apparently, China, which seems to have more of everything than other countries these days, does not have enough suitable dairy cows to keep up with demand for milk.  So Synutra is building a fancy new milk factory in Brittany. 

    The story of these French cows and China's need for milk presents an interesting case study into how the global marketplace works today.  Wall Street Journal's Ruth Bender reports:

  • Economic Letter: 'Private Credit and Public Debt in Financial Crises'

    In a new San Francisco Fed Economic Letter economists Òscar Jordà, Moritz Schularick, and Alan M. Taylor try to settle the debate over whether private credit or public debt was the bigger culprit in the global economic crisis.  They award points to each.  In short, their research seems to show that private credit booms put economies in difficult positions.  And public debt makes it difficult for economies to recover.

    The narrative of the recent the global financial crisis in advanced economies falls into two camps. One camp emphasizes private-sector overconfidence, overleveraging, and overborrowing; the other highlights public-sector profligacy, especially with regard to countries in the periphery of the euro zone. One camp talks of rescue and reform of the financial sector. The other calls for government austerity, noting that public debt has reached levels last seen following the two world wars. Figure 1 Credit and debt since 1870: 17-country average Credit and debt since 1870: 17-country average Source: Jordà, Schularick, and Taylor (2013). Figure 1 displays the average ratio of bank lending and public debt to GDP for 17 industrialized economies (Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States). Although public debt ratios had grown from the 1970s to the mid-1990s, they had declined toward their peacetime average before the 2008 financial crisis. By contrast, private credit maintained a fairly stable relationship with GDP until the 1970s and then surged to unprecedented levels right up to the outbreak of the crisis.

    Spain provides an example of the woes in the euro zone periphery and the interplay of private credit and public debt. In 2007, Spain had a budget surplus of about 2% of GDP and government debt stood at 40% of GDP (OECD Country Statistical Profile). That was well below the level of debt in Germany, France, and the United States. But by 2012, Spain’s government debt had more than doubled, reaching nearly 90% of GDP, as the public sector assumed large losses from the banking sector and tax revenues collapsed.

    Thus, what began as a banking crisis driven by the collapse of a real estate bubble quickly turned into a sovereign debt crisis. In June 2012, Spanish 10-year bond rates reached 7% and, even at that rate, Spain had a hard time accessing bond markets. Once sovereign debt comes under attack in financial markets, banks themselves become vulnerable since many of them hold public debt as assets on their balance sheets. The new bout of weakness in the banking system feeds back again into the government’s future liabilities, setting in motion what some have called the “deadly embrace” or “doom loop.”

    The conundrum facing policymakers is this: Implement too much austerity and you risk choking off the nascent recovery, possibly delaying desired fiscal rebalancing. But, if austerity is delayed, bond markets may impose an even harsher correction by demanding higher interest rates on government debt. Matters are further complicated for countries in a monetary union, such as Spain. Such countries do not directly control monetary policy and therefore cannot offset fiscal policy adjustments through monetary stimulus by lowering domestic interest rates. In addition, central banks in these countries have limited capacity to stave off self-fulfilling panics since their lender-of-last-resort function evaporates.

    Fluctuations in fiscal balances over the business cycle are natural. As economic activity temporarily stalls, revenues decline and expenditures increase. With the recovery, fiscal balances typically improve. But the debate on what is a country’s appropriate level of public debt in the medium run continues to rage. It is unclear whether high debt is a cause or a consequence of low economic growth. That said, public debt is not a good predictor of financial crises.

    Read the full letter here.

  • Economist Live Chart: Federal Spending

    Many students of the U.S. economy will find this live chart from The Economist useful in its illustration of how the federal budget has changed over the last half century.  Note the rise of mandatory social spending as the Boomers age. 

  • Harvard Business Review: 'Why Is Ukraine's Economy Such a Mess?'

    Harvard Business Review editor Justin Fox looked at growth in Ukraine since independence and compared it to neighboring, former Soviet bloc economies, and was surprised by how much it lagged:

    So he called up Chrystia Freeland, former FT correspondent and now member of Canadian Parliament.  Freeland was in Ukraine when it became an independent nation, and, Fox notes, her mother helped "craft the country's constitution."  Here is an excerpt from the interview:

    Fox: The East has this old industrial base. What does the Ukrainian economy consist of on the whole? Is it heavily agricultural?

    Freeland: The industrial base is important, particularly in eastern Ukraine. We all know about Ukraine as the breadbasket of Europe, and it is indeed an incredibly fertile country. There’s been a lot of Chinese investment in that part of the Ukrainian economy. There is also a technology outsourcing industry. And then finally, in some parts of Ukraine, tourism has been becoming more important.

    Why is the economy such a mess?

    Because of very bad, kleptocratic governments. That is 90% of the reason. In terms of the economy, Ukraine only accomplished maybe half of the things that you need to do, when the Soviet Union collapsed and they moved to a market economy. They did do privatization. There are now a lot of private companies, and there is a market. It’s important for us to remember that not so long ago even selling a pair of jeans was illegal.

    But what they failed to do was build an effective rule of law and government institutions. Corruption, in the Yanukovych era at least, was absolutely rampant. And some important reforms of state finances haven’t happened. In particular, energy prices are still subsidized. Of course, when you move to free-market prices that’s a huge shock to the society. But Ukraine’s failure to liberalize energy prices is part of the reason that it has this great dependency on Russia.

    Having said all of that, and having been in Kyiv* last week, I think there’s a bit of an Italian phenomenon going on, where you actually have a highly educated, very entrepreneurial population, but because you had this incredibly corrupt state, a lot of the Ukrainian economy has gone underground. Walking through the streets of many Ukrainian cities — Kyiv, Lviv in Western Ukraine, Dnipropetrovsk in the East — you feel yourself to be in a much more prosperous society than the official data reflect.

    The official data is incredible. Poland on the one side and Russia on the other are both in the low twenty-thousands in GDP per capita, and Ukraine is officially at $7,298.

    There is no doubt that Ukraine has fared much, much worse than Poland. That is a testament to how important government decisions are. These countries were not so far apart in 1991 when Ukraine became independent, and the Poles by and large have done the right things, and the Ukrainian government has not.

    Read the full interview here.

  • Economics Lessons from Babysitting and Prison Camps

    Tim Harford says that we have a problem explaining how the economy works. It is too big.  So we try to explain sections of it.  But then the frame is too small and we misunderstand the way it all works.  So Harford looks for smaller economies that behave enough like the economy at large that we can use them to make sense of recessions, inflation, and the like.  In this Big Think interview, he discusses two such examples: a babysitting cooperative, and a prison camp:

  • Retail Sales Rebound in February

    After a rough January for retailers, consumers picked up the purchasing pace in February, as retail sales improved, according to the latest data from the Commerce Department.  Advance estimates for U.S. retail and food services came in at $427.2 billion, a 0.3% increase over January.  Sales were up 1.3% over February 2013.  From the Census Bureau:

    Bloomberg's Victoria Stilwell reports that the retail data was welcome news and exceeded economists' expectations by 0.1%.

    Read the release here.

  • Crimea Crisis: The Economic Costs to Russia

    War is costly on all levels.  And Russia's involvement in Ukraine is going to be costly economically, not only for all Ukrainians, but for the Russian economy.  How costly?  Very costly, argues Sergei Guriev, a professor of economics and former Rector at the New Economic School in Moscow who is currently a visiting professor at Sciences Po.  At Project Syndicate Guriev writes "The economic damage to Russia will be vast."

    First, there are the direct costs of military operations and of supporting the Crimean regime and its woefully inefficient economy (which has been heavily subsidized by Ukraine’s government for years.) Given the uncertainty surrounding Crimea’s future status, these costs are difficult to estimate, though they are most likely to total several billion dollars per year.

    A direct cost of this magnitude amounts to less than 0.5% of Russia’s GDP. While not trivial, Russia can afford it. Russia just spent $50 billion dollars on the Sochi Olympics and plans to spend even more for the 2018 World Cup. It was prepared to lend $15 billion to former Ukrainian President Viktor Yanukovych’s government and to provide $8 billion annually in gas subsidies.

    Then there are the costs related to the impact of sanctions on trade and investment. Though the scope of the sanctions remains uncertain, the effect could be enormous. Annual inward foreign direct investment is estimated to have reached $80 billion in 2013. A significant decline in FDI – which brings not only money but also modern technology and managerial skills – would hit Russia’s long-term economic growth hard. And denying Russian banks and firms access to the US (and possibly European) banking system – the harshest sanction applied to Iran – would have a devastating impact.

    In the short run, however, it is trade that matters much more than investment. Russia’s annual exports (mostly oil, gas, and other commodities) are worth almost $600 billion, while annual imports total almost $500 billion. Any non-trivial trade sanctions (including sanctions on Russian financial institutions) would be much more painful than the direct cost of subsidizing Crimea. Of course, sanctions would hurt Russia’s trading partners, too. But Russia’s dependence on trade with the West is certainly much larger than vice versa.

    Moreover, the most important source of potential damage to Russia’s economy lies elsewhere. Russian and foreign businesses have always been worried about the unpredictability of the country’s political leadership. Lack of confidence in Russian policymaking is the main reason for capital flight, low domestic asset prices, declining investment, and an economic slowdown that the Crimea crisis will almost certainly cause to accelerate.

    Read Putin's Imperial Road to Ruin here.

  • Customer Centricity and the Economics of Loyalty Programs

    It is hard not to raise an eyebrow when someone names the airlines as an example of an industry ahead of its time in being customer-centric.  But Wharton marketing professor Peter Fader does just that, pointing to airline loyalty programs as innovative and progressive.  The only problem: the programs are a little outdated, he says.  And so he credits Delta Airlines for shifting the focus from miles to dollars spent. 

    It sounds to us like customer centricity is mostly about treating different customers differently.  Now, with all the data about individuals so easy to access, companies can tailor customer engagement to specific customers based on preferences, or based on spending habits (in other words, spend more energy pleasing those customers who are likely to spend more money).  In this interview with Knowledge @ Wharton's Steve Sherretta, Fader uses the airline industry to explain how customer centricity should work and why it is a good thing for businesses and customers: