An economy without cash

When I was taking the Macro 1 class I was convinced that monetary policy was a joke. How can these bankers really think they have any impact whatsoever on the real economy? My suggestion was then to keep the money supply fixed. “No!” I was told by my classmate, “money supply growth must equal GDP growth”.

So what would happen under a fixed money supply? Well, a 5% GDP growth should be accompanied by a 5% decrease in prices, automatically. In other words, shifting prices would ensure market clearing. Now imagine an oil price shock. As an oil importer, you let your currency depreciate (no inflation targeting whatsoever, which would make your currency appreciate instead). So the oil shock is offset by your exports boom.

So with this fixed money supply and shifting prices, you can say bye bye to the inflation monster, as you don’t care about prices that change constantly. Now the question is how can people adapt to this? My solution is to drop cash altogether. Only debit cards and mobile phones and voice signatures. Then prices can become any fraction of nay amount. With sustained GDP growth, a beer could become as cheap as 20 cents, while a phone call could be 0.0001 cent.

The Economist had already predicted the end of the cash era, but not the end of monetary policy.

Luxury lifestyle seekers

I was at this conference on the role of the WTO Secretariat and one of the panellists noted that the quality of the staff there was higher than ever, as PhDs were required for most jobs. Then a deputy to the director general made the comment that him and his work buddies had been selected by him among 80 other candidates, in a clear and transparent contest, and not by political appointment. Then it was mentioned that there was only 8 researchers at the WTO, and still it was able to produce high quality research (no puppets).

I don’t know if all of this is true. Living in Geneva for the last 3 years, almost not a day goes by without hearing someone complaining about the corruption and incompetence of the UN organizations staff, but also about the inefficiency and the uselessness of these offices. Crazy insider stories of the manipulation, the sexual abuse, the appointment of friends, the fake ads in The Economist etc… come out every day. Not so much about the WTO, but especially about the ILO, UNCTAD, WIPO and, worst of all, the Human Rights Council.

I am an internationalist. I don’t want to get rid of these organizations, but I would like them to be less of a waste. Many people talk about reform, but it is most of the time about very general things, like the mission an organization should have, how the security council should be enlarged, how a UN small army should be created. And what’s so funny about these articles is that they always mention how impossible it will be because of China and Russia, or because of conflicting neighbours. One very disappointing report of this kind is the one that came out this week in The Economist, “Who runs the world?”

But what about the inner workings of these organizations, like employment policies or employee benefits? Why don’t diplomats have to pay parking tickets? Get rid of that rule, right now. Isn’t it all about hiring the right employees and then getting their incentives right?

It is such a golden ticket to land a job at the UN in Geneva as you get a relatively higher salary then in the private sector with no taxes, an incredible retirement plan and a standard of living way above the local population. Just look at the jewels the UNCTAD ladies are wearing or the cars the ILO gangsters are driving. But who gets attracted by these organizations? Candid, educated and honest idealists, yes, but also these gangsters (or snakes), because they are interested in the lifestyle, and not in saving the world. And who ends up spending their career there? The snakes, because the good ones have either been fed up by this rotten system or have not gotten the job, which was instead given to a friend by a corrupt boss.

So, yes, first things first, abolish the privileges, abolish the tax free shop. Many snakes will opt for other careers. And no more life time contracts, just simple 4 year contracts, renewable twice. So snakes won’t eternalise there either and won’t be attracted that much anymore. One other way to get rid of the luxury lifestyle seekers was to move the UN Geneva office to Nigeria, as only idealists would move there. But then again, this may be the most corrupt country in the world, so corruption could infest the offices there too. But does the local level of corruption affect the level of corruption inside the office? Is the UN in New York less corrupt then the UN in Geneva? This is an interesting paper idea.

Coming back to the WTO, is the Doha round dead because countries can’t agree or because the WTO twists the incentives of the negotiators? Are the countries’ representatives at the WTO lifestyle seekers snakes completely disconnected with their country’s government trade objective? One panellist was saying that they were representatives of the WTO to their own country, like promoting the free trade global public good to your own national government. If only he wasn’t lying.

Know your CO2 footprints

As PL noted in a post a while ago, the debate over if and what to do about climate change is becoming increasingly more complicated. There is on one side the evidence of the Stern Report and on the other side the praise and criticism surrounding it. Both have generated a fair amount of confusion within the population as noted in the post. A always bigger proportion of people is becoming sceptical about climate change, both for good and bad reasons. The confusion is even more palpable since we are facing the problem of rising food prices: people are concerned that what and if we could do something about climate, is going to be ineffective or even damaging.

If we buy the argument that doing nothing is better because either global warming does not exist, or because if I consume more of fossil fuels today it will lead to automatically more investment tomorrow in alternative, seems plausible, but it is incorrect. The words of wisdom I heard about the whole topic is that, since we do not know what is causing climate change, it is good to take the minimum effort to tackle it. It is then sound and correct to increase the price of what we think is the likely cause of global warming (via the imposition of a tax), since we know it will correct a market failure (pollution).

The other problem I find with the argument is more philosophical. The benefits accruing to society from Climate Change discussion is exactly the impact on our lifestyle. The world has been living with the idea that everything man-made / man-based is fine. The main argument that policy makers should advance instead, is that we can do little to make a huge impact. Be environmentally concerned just reduces the excesses that we were used to, without this implying a drastic change in our lifestyle.

Here though, the problem is how to improve the quality of the debate. We have been rightly hitting so far at SUV as a monstruosity that makes no sense. People are starting to think that Air Travels may be a problem as the true statistics about their impact are starting to emerge. While renouncing to a SUV is cheered, for Air Travel things are thornier. I advance here another element: What about food? Does food pollute? Of course it does. Here is an example. This guy has calculated that a cheesburger produces 4.5 Kg of CO2. To make things comparable, this is the amount of emission produced by a 2003 Toyota Yaris in a 30 Km ride. Some people I know find Cars outrageous because are polluting and prefer biking (or skating) instead. They would though never renounce to a Cheesburger. What would happen if people were aware of the Carbon Footprints of the food they consume? Well, they would probably know that, in order to be Carbon Neutral, they should go to their favourite Burgers' store by bike instead of taking the tram. This simple exercise would not only lead to a lower emission, but also a healtier lifestyle. What if they get tired? Won't they eat two burgers? Yes, but the ride by car has been offset by the bike ride. If you don't like biking, fine, here is an alternative: take a drive on a less polluting car (or an electric bus) and eat one instead of two burgers. The total footprint would be probably the same in the two situations, but the attitude toward the world we live in, and our concerns about the actions have changed: because what we are doing is just being more responsible for what we do vs ourselves and vs our planet. Peace

Gross Domestic Product

This map comes from some cool trade guy. US states have been replaced by countries with a similar level of GDP. Uzbekistan is Wyoming!

Okay, his much talked about paper on how Chinese imports reduced inflation more for the poor than the rich in the US and hence reduced consumption (or real income) inequalities was a bit too conservative, as it omits the fact that if poor people consume different products (even though equivalent for economists) than the rich, it pisses them off.

Climate change economics

What (if anything) do you do now to fight global warming that you didn’t do two years ago?

Since I believe that global warming is largely natural, and not man made, I don’t do anything to “fight” global warming since that would be futile. But to the extent that we will need to eventually move away from carbon based fuels, I am helping to spur the investment in new energy technologies by consuming as much as possible today. Increased consumption builds wealth and that wealth will be needed to fund the R&D into alternative energy technologies. And the second thing I do? Encourage others to do the same.

It would be exceedingly difficult for me to go without: air conditioning in the summer, heating in the winter, a good filet of beef on occasion, gasoline to go wherever I want, and everything else that we use in life that requires energy … which, last I knew, includes everything. But since doing and using all of these things will encourage new investments in energy technology (see above), I’m happy to report that I don’t need to give up anything!

My question is is this argument valid? Should I reduce my carbon emissions or not, since, by consuming more of it, I increase its price and encourage others to reduce their consumption...

This answer is from Roy Spencer, author of Climate Confusion and the U.S. Science Team leader for the Advanced Microwave Scanning Radiometer flying on NASA’s Aqua satellite. It appears along otherpeople on freakonomics who tell us what they think of climate change.

Long-haul flights and price discrimination strategy at Ryanair

Airline companies are the textbook example of price discrimination, the practice to charge different prices to different customers for the same products (for reasons unrelated to their costs). The low-cost airlines have very well understood this concept and have thus made huge profits out of it. Now, Michael O'Leary, CEO of Ryanair, has announced that "the company is considering launching a separate airline that would fly long-haul between Europe and the United States around the turn of the decade". The strategy is to charge very low prices for the economy class (let's say 15 CHF) and very high prices for the Business class (whatever price). Perfect, but how to convince people to fly business class? Here it is the press conference where he explains how:

A preliminary analysis of the Euro results

The Euro UEFA Cup 2008 currently jointly hosted by Austria and Switzerland, has already emitted its first verdict. At the time of writing, one of the host countries, having lost both the first and the second game, is out of the tournament...I won't tell you which one, but the other will probably follow soon the same faith.

In terms of results from the first wave of games, they have also been in some cases surprising, confirming once again that the tournament is really competitive and unpredictable. Take the example of Italy (guess why??). The latest World Cup Champion, has badly lost against Netherlands with a striking 3-0: in one game, Italy has conceded more goals than the ones conceded in the whole World Cup in 2006! A little worried by this event, me and Cosimo had a look at the data of the results in the Euro cup since 1980, to answer the following question: does it matter if you lose the first game? Can you still pass the round? The answer is, yes and no. It does not matter overall, but it matters if you have lost badly, with a big margin of difference in goals. For those of you interested in the methodology and the exact results of the exercise, they are described here. It's quite intuitive to understand that a bad start may be psychologically costly, but, if you are able to score 4 points, it has never happened that a team did not pass the round. In this respect, even losing a second match does not matter. What about the probability of winning the tournament? Do those who qualify as first have more chances to win the cup? Well, apparently not. It does not give you better chances. It may sound strange, but actually, it gives you slightly more chances if you arrive second! How can you interpret this strange result? If you think harder, it is actually not so strange. Being as competitive as it is, there is really not so much of a difference between the winner of a group and the runner up of another. If you have poorly performed in your group, while the other teams have had supreme performance, the psychologic effect may work in reverse, favoring those who had a worse start. We are not giving advice on betting. The intention is not to forecast anything. We just wanted to see what has historically happened in the Euro so far. Then, let's wait and see what happens on the field, and enjoy this wonderful show!

P.S.
I just saw that Germany, one of the favourite team for the final victory quite unanimously across bookmakers has just thirty minutes ago incredibly lost against Croatia for 2-1. May my Germans friends be scaramantic as much as I am, but maybe they should not worry that much...