More on this book
Community
Kindle Notes & Highlights
At a time when President Lyndon Johnson needed funds to pay for the growing costs of the Vietnam War, privatization conveniently removed Fannie Mae’s debt from counting as a government liability, making the government’s balance sheet look a lot healthier.
It is hard, though, to imagine that strapped households would go out and borrow to buy houses. The borrowing was not driven by a surge in demand: instead it came from a greater willingness to supply credit to low-income households, the impetus for which came in significant measure from the government.
that Indian state-owned banks increase their lending to the politically important but relatively poor constituency of farmers by about 5 to 10 percentage points in election years.51 The effect is most pronounced in districts with close elections. The consequences of the lending are greater loan defaults and no measurable increase in agricultural
output, which suggest that it really serves as a costly form of income redistribution.
investment. A current-account surplus typically also means a trade surplus: the country exports more than it imports. We found a positive correlation for developing countries: the more a country finances its investment through its own domestic savings, the faster it grows. Conversely, the more foreign financing it uses, the more slowly it
grows.
A government-directed, producer-biased strategy of growth tends to stunt the development of that country’s financial sector. Because banks are told whom to lend to, and because domestic competition among producers is limited anyway, banks tend not to seek out information or develop their credit-evaluation skills. The legal infrastructure to close down weak borrowers, or to enforce repayment from recalcitrant ones, is virtually nonexistent. As we saw earlier, the government does try to help producers by setting deposit rates low in order to lower the cost of credit. However, because interbank
...more
foreign lenders demand protection, which the government can typically give only by eroding the rights of existing domestic creditors—for instance, the more the overindebted government borrows in foreign currency, the higher the inflation it will eventually have to generate to erode domestic-debt claims on it. Moreover, because foreign investors make short-term loans, any adverse political development may scare them into refusing to refinance the government.
The 1994 Mexican crisis was a classic populist emerging-market crisis, driven by excessive government spending. The 1998 East Asian crisis was different, first because the crisis stemmed from excessive investment by countries that did save considerable amounts, and second because in many countries, the domestic private sector was centrally at fault.
in a developed country, especially one with well-functioning capital markets and financial institutions, foreign investors typically have information and rights similar to those of domestic investors. They do not demand special rights and privileges; nor do they try to get implicit government backing (by lending via domestic banks) or explicit backing by lending to the government.
But voters want politicians to respond to their current needs. A politician’s counsel of patience is taken as a reflection of impotence and is therefore not conducive to her reelection.
Specifically, politicians bring out all their pet projects during a downturn, and then some more, all under the guise of stimulus to support recovery. Significant elements of spending are simply payback to powerful interest groups, or a fulfillment of election promises with little need to justify their short-term benefit. Over one-third of the stimulus package passed by the Obama administration in its early months consisted of one-time tax rebates, which are known to, and did, have little effect on spending: they were more a form of redistribution to fulfill election promises.25
A lower long-term interest rate increases the value of long-term assets such as equity, bonds, and houses because dividends, interest payments, and the services provided by the house are discounted at a lower rate. It thus increases household wealth and, consequently, spending. A low long-term interest rate also makes it less attractive for households to save and more attractive to consume, thus again contributing to demand. Finally, long-term interest rates determine the profitability of real investment: lower long-term interest rates make today’s value of future profits higher, giving
...more
fueled the flames of asset-price inflation by telling Wall Street and banks across the country that the Fed would not raise interest rates to curb asset prices, and that if matters went terribly wrong, it would step in to prop prices up. The commitment to put a floor under asset prices was dubbed the “Greenspan put. ” It told traders and bankers that if they gambled, the Fed would not limit their gains, but if their bets turned sour, the Fed would limit the consequences.
Such contingent regulations have two effects. First, because they kick in only some of the time, they are less cumbersome than regulation that is not contingent, and banks will not invest as much ingenuity in trying to evade them. Second, the level of the regulatory requirement—such as the required level of capital—can then be increased if necessary, so that it has the desired effect when really needed.
regulations that are not particularly costly for the regulated to implement or for the regulator to enforce are less likely to be evaded or ignored.
Indeed, government largesse can crowd out, if not corrupt, individual and community initiative. That does not mean, however, that all societal problems will be solved by spontaneous voluntary initiative, the second dangerous notion. Government effort (and sometimes money) is needed at key leverage points to coordinate individual and community action.
Success in school, as in work life, depends significantly on noncognitive abilities, such as perseverance, determination, and self-discipline.10 And whereas cognitive abilities are relatively fixed early on, noncognitive abilities can be changed for considerably longer.
But pay increments should be tied to teacher performance in and outside the classroom, which should be measured in part by improvements in student performance. Additional increments should be given to those who teach difficult but required subjects such as math and science and to those who teach in difficult school environments, such as the inner cities.
Requiring teachers to hold degrees in education or teaching tends to shrink the pool of candidates for teaching jobs substantially and likely deters many subject-matter experts who would otherwise become teachers. Instead, schools should create a more formal system of mentoring, with star teachers advising inexperienced teachers and sharing experiences. Furthermore, the school system should find ways to make use of those who are highly motivated and talented but are unlikely to see teaching as a long-term career.
nationwide testing standards, evaluation of teachers based on student test performance, and the entry of more charter schools, using the lever of additional cash for states and districts that adopt reforms.
A system of formal education that terminates when one is twenty-five probably provides too much information related to the first few years of one’s career and too little knowledge for the half-century that follows.
#education
The Smoot-Hawley Act passed by the U.S. Congress in June 1930 raised trade tariffs on imports in an attempt to protect U.S. jobs, making it still more difficult for debtor countries around the world to service debts. These countries either defaulted on their debt or overthrew governments that tried to adopt the austerity measures required to service it. Hitler was carried to power on the coattails of economic distress, and one of his first acts after taking power in January 1933 was to declare that Germany would not pay its foreign creditors. His
Nationalism, coupled with great faith in the power of the government to enact domestic bargains between labor and capital, has been seen before: it was called fascism then. It is a development to be avoided at all costs.
#national #fascism
sui generis,
One of its kind
Most of the macroeconomic principles that are taught derive from the experiences of industrial countries, where organized markets typically function fairly well. So it is natural for the staff to favor certain kinds of intervention in the functioning of markets, such as monetary policy, while being critical of other kinds of intervention, such as those in the foreign exchange market.
The IMF’s recommendations are not backed by any power of enforcement: most industrial countries and large emerging-market countries do not need IMF funding, which constitutes its main means of persuasion. Moreover, the kind of reforms recommended are typically the kind that go against a ruling party’s electoral calculus, making it impossible for a finance minister or head of state to commit to implementing them.
Multilateral organizations like the IMF and the World Bank need to do far more to expand their reach—to speak for the world to the world. In addition to trying to persuade finance ministers and heads of state, they should go directly to the public, including political parties, nongovernmental organizations, and influential personalities in each country and explain their position.
The public has a longer-term horizon than the government in power and typically more idealism and concern for the global good.
Bretton Woods that created the IMF and the World Bank.
Birth Of world bank and #imf
In an international athletic race, one of the participants is found to have taken an energy booster. He is disqualified for violating the rules. But on closer investigation, we find that when the race began, one set of participants had the latest, specially designed aerodynamic equipment, specifically allowed by the rule-making body, which is dominated by representatives of this set of countries, whereas the participant who took the energy booster used ordinary, off-the-shelf, cheap equipment. Who is competing unfairly now? Under the rules of the game, it is still the competitor who took the
...more
Japan made the mistake of agreeing to U.S. pressure in 1987 and allowed the yen to appreciate sharply. Japan’s woes, according to the Chinese, date from that period, for they slowed the growth of the successful export sector without replacing it with anything else.
hoi polloi
Derogatory - the masses
The role of financial markets is to allocate resources to those most capable of using them, while spreading the risks to those most capable of bearing them. The role of democratic government is to create a legal, regulatory, and supervisory framework within which financial markets can operate. However, democratic government has other roles, including limiting the most inequitable consequences of the market economy through taxes, subsidies, and safety nets.
laissez-faire
Let things take its course
Few countries have grown rapidly from abject poverty even while their people have enjoyed full democratic freedoms. If messy, chaotic India—with its many communities, languages, religions, and castes—can still pull it off, it can undercut the legitimacy of authoritarian regimes in much richer countries who insist that the loss of political freedoms is the price their citizens have to pay for economic growth. The world has much to gain from a successful India.
The Naxalites (Maoist radicals, named after the village of Naxalbari in West Bengal where the movement had its origins)
rapacious
Always wanting money
India was the country with the second largest number of billionaires per trillion dollars of GDP, second only to Russia. Given that Russia has fared somewhat worse during this crisis, it would not be surprising if India has already overtaken Russia in this dubious distinction. I say “dubious” not because I am against wealth but because three factors—land, natural resources, and government contracts or licenses—are the predominant sources of the wealth of India’s billionaires. And all of these factors come from the government. It would augur better for India if more of its billionaires came
...more
V.S. Naipaul eloquently put it, India is a land of a million mutinies, and so long as these are non-violent, that is a reason for hope.
China’s output of scientific and engineering articles went up from just below India’s in 1995 to three times India’s output in 2005. And science and engineering are subjects where, as a result of Jawaharlal Nehru’s push, some of India’s universities are still first rate. More alarming, the economics departments in Indian universities have steadily lost their luster; gone are the days when a Jagdish Bhagwati, a Sukhamoy Chakravarty, an Amartya Sen, or a Manmohan Singh roamed the corridors of Indian universities. My humanities colleagues at the University of Chicago suggest that matters are
...more
Of course, not every college degree is a passport to a job. Sometimes the lack of appropriate vocational training or job-related skills is the key impediment.
