Edward Hadas

Russia and the unreliable West

Edward Hadas
Mar 12, 2014 16:13 UTC

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

When the Communists took over Russia in 1917, they imported a theory that had been thoroughly discarded in its European homeland. Under the influence of Eduard Bernstein, Karl Marx’s own political party, the German Social Democrats, refused to support an attempted Communist revolution in 1918. The Marxist USSR made some economic progress, but growth eventually dwindled as the system was frozen by inefficiency and corruption.

When the Soviet Union finally collapsed, Russia imported another Western idea which had basically been discredited at home: blind confidence in free markets. By 1989, the wise minds in development economics knew very well that markets are only healthy when they are set in a favourable institutional environment. And the Chinese had already shown a better way to organise post-Communist economies.

How hunger and obesity go together

Edward Hadas
Feb 26, 2014 15:32 UTC

Global hunger is shrinking. Yet each winter operators of food banks in rich countries like the United States and Britain speak movingly of the plight of those who must choose between heating and eating. The desperation seen by Feeding America and the British Trussell Trust is real enough, but this is not a massive economic failure. The weakness is predominantly social.

When people do not have enough to eat, there are three possible causes: an inadequate food production system, a bad political choice or poor personal arrangements. Through most of history, the first problem was the most important cause of hunger. However, as the economist Amartya Sen pointed out three decades ago, food shortages can no longer be acts of nature.

The reason for Sen’s judgment is that nature has been tamed. More than enough food is already produced globally to feed all the people, and the technology of food transport and storage is sufficiently advanced to get the food to those who need it most. When that does not happen, there must be a human problem. Within a country, a shortage of food comes down to a failure of government to serve the governed. Internationally, it is a failure of the strong countries to help the weak.

Bitcoin repeats gold-standard errors

Edward Hadas
Jan 22, 2014 15:07 UTC

I cannot judge whether bitcoin represents a technological breakthrough, but I am confident that the pseudo-currency’s popularity shows widespread economic amnesia. If bitcoin ever became a real currency, it would suffer from the crippling problems of the gold standard.

The underlying problem is the belief that the electronic token’s independence from the government is a good thing. This libertarian notion could hardly be more wrong. Money is a common good for the whole society, and in the contemporary world governments are the pre-eminent social guardians.

It is true that under dire circumstances people might have to resort to an inferior monetary substitute. If a government collapsed or totally trashed the monetary system, then some privately issued money could be the least bad alternative. In such apocalyptic times, though, a software protocol which relies on secure electronic communications would not be first choice. Gold, which is tangible and not subject to hacking, is more plausible. So are old baseball cards.

Madoff/subprime – spot the difference

Edward Hadas
Jan 15, 2014 15:36 UTC

Bernard Madoff still has some magic. The public finds anything connected to the fraudster’s case fascinating, from a prison interview to JPMorgan’s agreement last week to pay $2.3 billion for Madoff-related sins. And why not? Madoff was a grandmaster of the confidence trick. But there is more to it than that. His way of doing business was alarmingly close to the perfectly legal practices which brought down the financial system in 2008.

To see that, compare Madoff to a hypothetical pre-crisis hedge fund manager – one with a special interest in U.S. subprime residential mortgage securities. The common tale starts with a commitment to provide higher returns than the economy can safely offer to financial investors. Both Madoff and the hedgie took in funds without making any specific promises, but their investors’ expectations were lofty.

Madoff, of course, knew that he could not live up to those expectations. That makes him smarter than the hedgie, who was either foolish, if he thought American house prices would keep rising for many years; or arrogant, if he was confident that he could sell out before the losses hit.

How not to do healthcare

Edward Hadas
Dec 11, 2013 16:26 UTC

Almost every healthcare system in the world is a lesson in how not to do it. The pricing-based model fails miserably in the United States. The rationing model works almost as badly in the UK. Both fail in the core task of ensuring that the right healthcare goes to the right people.

Price systems should provide clear information to consumers and producers, helping both make sounder decisions. They can help make hard decision about what care is worth giving, but only if the prices accurately reflect the costs. But that doesn’t happen in American healthcare.

Every service and each drug has many prices, depending on who is providing and who is paying. Almost none of the prices bear any clear relation to costs. The New York Times reported earlier this month that the price of a dose of codeine ranges from $1 to $20 in San Francisco. Hospitals routinely send much higher bills to uninsured patients than to people with insurance. The uninsured have less ability to pay, but they have no clout pre-treatment and less clout than insurance companies in the inevitable post-bill negotiations.

Bitcoin is a step back not forward

Edward Hadas
Nov 27, 2013 16:00 UTC

The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. However, the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

America says it has got poorer. That’s rich

Edward Hadas
Sep 25, 2013 14:45 UTC

The U.S. Census Bureau says the median American household’s income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation. That suggests stagnant American consumption for the last 24 years. That assertion is not as ridiculous as North Korean propaganda about the United States – “their houses blow down very easily and they have to live in tents” – but it’s still misleading.

To start, the country is currently enjoying the fruits of major technological advances in electronics. In 1989, there were almost no mobile phones. Today, more than 90 percent of American adults have one, according to the Pew Internet and American Life Project – and more than half of those phones count as “smart”. The same project estimates that about 70 percent of U.S. adults are daily internet users, compared to zero in 1989.

Considering the increased consumption of electronic goods, a typical American household could only be poorer now than then if there were matching declines in the consumption of other goods and services. But none of the statistics I could find shows this. On the contrary.

Detroit, decay and solidarity

Edward Hadas
Jul 31, 2013 14:29 UTC

The bankruptcy of the city of Detroit has many causes, including poor management, industrial history and dysfunctional American sociology. I think there is also an ethical problem: too little cross-border solidarity.

I don’t want to downplay the other failures. A more competent city government would have addressed, rather than added to, the problems. The U.S. car industry proved a disastrously weak economic anchor. And without widespread racism, there would have been fewer ghettoised African-Americans.

Still, the economic and sociological poison has not been spread equally. On the contrary, it is concentrated inside the legal borders of the city of Detroit. The Detroit of common speech and common sense – the big blob on a national map, the urban area served by a single international airport – has suffered much less.

Static in the electricity market

Edward Hadas
Jul 24, 2013 13:41 UTC

Let me start with a confession. I do not fully understand what the Federal Energy Regulatory Commission says Barclays did wrong in the U.S. electricity market, and I am not entirely sure about the claimed misdeeds of JPMorgan. But my inability may well have less to do with my inadequacies than with the fundamental futility of trying to use financial markets to set the price of electricity.

Very approximately, FERC says Barclays sold electricity in order to manipulate a price index in ways that created profit on related positions in a related financial market. The UK bank plans to contest the $453 million judgment. According to news reports, JPMorgan is about to agree to pay almost as much to settle charges that it unfairly solicited “make whole” payments, which compensate utilities for setting up but not actually running power plants on a particular day.

I am not competent to judge the banks’ legal and moral culpability, because the details are little short of diabolical. The jargon includes the “volume-weighted average price of the dailies’ trading”, not to mention spot markets, day ahead markets, physical positions, fixed-to-floating contracts and nodes. Still, FERC’s summary of electricity trading in its latest annual review suggests there is problem. Purely financial strategies can easily play an unhealthily large role in a market where, according to the watchdog, financial volumes represented about 100 times the physical volumes.

Get used to zombie economics

Edward Hadas
Jul 10, 2013 12:15 UTC

Zombies are neither really alive nor fully dead. Moviegoers know that, but the idea is also useful in demographics and economics. Although economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms.

The demographic trends are well known. For the past three or four decades in most developed economies, the number of children born has been too low, often by a wide margin, to keep the population constant. Japan is the leader in this decline. Indeed, the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health.

Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. But as in a horror film, the nation’s life-force is waning. Over the last decade, the number of Japanese people aged between 20 and 25 years old has declined by 22 percent. Since there is almost no immigration, the demographic future is easy to predict: another 22 percent drop over the next 20 years.