Opinion

Edward Hadas

Central bankers’ reward for failure

Edward Hadas
Aug 28, 2014 09:12 UTC

Economic systems that work well do not have many heroes. The elevated status of the world’s central bankers – seen in the close attention paid to their annual get-together last weekend in Jackson Hole, Wyoming – is a sign that the financial system works badly.

Most of the modern economy flourishes without much help from professional economists. That would have pleased John Maynard Keynes. The British economist thought his peers should be like dentists – “humble, competent people” who could deal effectively with specialised problems. Such technicians do in fact take care of the production and distribution of goods and services, the allocation of incomes, the protection of the environment and even the development of new products.

These practical, almost anonymous experts have been a huge success. The prosperity of developed economies is fantastic by any historic standard, and many goods and services are available to rich and poor alike. The system deals fairly easily with innovations, changes in taste, natural disasters, military action and pretty much every sort of disruption – except severe financial problems.

Of course, economic problems remain. In rich countries, the biggest by far is a shortage of good jobs. The recent positive German experience of falling unemployment suggests that the main solution is, as Keynes would have hoped, detailed and bureaucratic. The main tricks have been refinements in the terms and conditions of employment contracts and in the details of the tax and unemployment systems. In other countries, different adjustments are needed, perhaps more equal wages. But what is required is detailed work by economist-dentists.

For all that, most professional economists are still not much like dentists. They generally work with grand theories about such abstract concepts as equilibrium interest rates and economic cycles. They rely on idealised concepts like “the firm,” risk premiums and gross domestic product. Their simplifying equations are impressive, but not very useful.

Time to retire unemployment

Edward Hadas
Aug 20, 2014 09:25 UTC

Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Give Janet Yellen credit. The chair of the U.S. Federal Reserve is keen to use monetary policy to help get more people into good jobs. Her priority – work is more important than finance – is reflected in the subject of this week’s get-together for the world’s central bankers: “Re-Evaluating Labor Market Dynamics.” One item should be on the agenda of the distinguished guests at Jackson Hole, Wyoming: how to replace the concept of unemployment.

The suggestion may sound frivolous, but the idea of a simple measure of unemployment is tied to a wrong view of how modern economies work. The unemployment rate made sense in developed economies a century ago, when workers were men who wanted full-time jobs as soon as they finished school, and to continue until they died or retired. In that world, unemployment was easy to define – working-age men without a job.

Do autocrats and strong economies go hand in hand?

Edward Hadas
Aug 15, 2014 08:52 UTC

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Are authoritarian governments bad for the economy? Turkish voters do not seem to think so. On August 10, Tayyip Erdogan won an absolute majority in the country’s presidential election. Observers say that the country’s increasing prosperity is a big part of his AK Party’s appeal. Erdogan is not the only popular authoritarian around. Viktor Orban, who reportedly endorsed “illiberal” government, wins similar majorities in Hungary. If Russia had an election today, President Vladimir Putin would win big. And Xi Jinping, who seems to be making one-party rule in China more authoritarian, would undoubtedly triumph if the government bothered with elections.

The success of such leaders irritates many Americans and Western Europeans, who believe that genuine multi-party democracy is the natural political arrangement in the modern world. Clearly, though, most voters in some countries want authoritarian leaders who tolerate no effective opposition and who impose their vision on the nation.

Why the global recovery is so slow

Edward Hadas
Aug 6, 2014 17:39 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.

Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.

Not all banks are alike

Edward Hadas
Jul 30, 2014 14:38 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Competition is fierce for the Bankers’ Bad Behaviour Award. Rate-rigging, client-fleecing, dishonest documentation, reckless trading and exorbitant pay were all widespread before the 2008 financial crisis, and faulty practices have proven remarkably persistent. It sounds like there is something wrong with all banks. The ethical problem, though, is not universal.

Many of today’s lenders do have deep and disconcerting similarities. Their culture has been shaped by a faulty ideology, the cult of the market. They believe that society gains from fierce competition among firms which aim only at maximising returns for shareholders. Leaders of such enterprises only pretend to care about the future for marketing purposes and think they have no ethical responsibilities beyond obeying the letter of the law.

Growth in a rich and crowded world

Edward Hadas
Jul 23, 2014 14:23 UTC

Perky, productive robots, or nothing more than a few new smartphone apps? Cascading innovation, or just a few tweaks? Economists and technologists are debating what the future holds.

Pessimists like Robert Gordon of Northwestern University see decades of slow growth ahead, with little scope for big leaps forward. The optimists, among them Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology, expect new technological glories. Both sides are more wrong than right.

Everyone is wrong when the wrangling is numerical. Arguments based on GDP and productivity growth are too circular to resolve anything. A main cause of any slowdown in reported productivity numbers is a judgment that innovations are becoming less valuable. So a reported slowdown cannot logically be used to support the argument that technology is advancing more sluggishly.

Google, privacy and the common good

Edward Hadas
Jul 9, 2014 14:41 UTC

The public has a right to know. Individuals have a right to privacy. The common good is served by both these contradictory statements, so someone has to decide how to balance them when they come into conflict. When it comes to internet search, the European Union’s Court of Justice has given the job to search engine providers such as Google. In a way, that’s a good call.

The court decided in May that some internet links deserve to be “forgotten” because certain data can over time become “inadequate, irrelevant or no longer relevant”. The search operators were held responsible, in the first instance, for judging whether to grant requests to remove links.

The court’s decision creates a mess, because it provides no practical guidance. Still, it made a clear step forward in the endless debate between “the legitimate interest of internet users” and “the right to protection of personal data” by recognising that search engines have changed the meaning of privacy.

The stupidity of student debt

Edward Hadas
Jul 2, 2014 14:31 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.

Overall, American households are deleveraging. Most notably, U.S. mortgage debt outstanding has fallen to 51 percent from 71 percent of GDP since the end of 2008, according to survey data from the New York Federal Reserve. However, over the same period the ratio of student loans to GDP increased to 5.7 percent from 4.3 percent. The $1 trillion now outstanding is economically significant. In England, the ratio of student loans to GDP is only about half as high as in the United States, but the 80 percent increase over the last five years has been even faster.

Housing, the ultimate momentum trade

Edward Hadas
Jun 25, 2014 14:47 UTC

What will happen next in the housing market? The question comes up all the time in many countries, for an obvious reason: house prices jump around too fast for the good of the economy.

The price hyperactivity does not follow a uniform pattern around the world. Look at the indices of average prices for dwellings by nation, adjusted for inflation, compiled by the Bank for International Settlements. Since 2000, the real average price is up by 63 percent in the UK, by 49 percent in Switzerland and by 12 percent in the United States. The average Dutch price declined by 7 percent. In Germany, though, there has been so little house price action that BIS could only find data back to 2003. Since then, the average German price is down by a tiny 1 percent in real terms.

Basic economic indicators – GDP growth, employment levels and general price levels – can explain almost none of this variation. The patterns in the American and European economies over the last 13 years have been far more similar than the house price trends.

Market failure can be sign of fatigue

Edward Hadas
Jun 11, 2014 14:17 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Modern economies work to meet consumers’ needs. So if needs are not met, that must be an economic failure, right? Healthcare suggests otherwise. Sometimes, unhelpful ideologies get in the way of economics delivering the goods.

Chronic fatigue syndrome (CFS) – also known as myalgic encephalopathy (ME) – is a case in point. The economic benefit of treating this difficult condition should be material for patients, drugmakers and society. Yet the treatment is poor.

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