New Old Glasses: Review Of Series Of Lectures “Economics And Life” By New Economic School
The New Economic School (NES) held the series of lectures “Economics and Life.” The main theme was insightful: in your everyday life, do not forget to put on economic glasses.
The series included the following lectures –
- Crisis: Does the Current One Look Like the Previous Ones?, Ruben Enikopolov
- Exchange Rates: How do the Price of Oil, the Pandemic and Economic Crisis Affect the Value of Money?, Oleg Itskhoki
- Incentives: Panic, Buckwheat and ‘Cobra Effect’, Andrei Bremzen
- Inequality: What is It and Can We Fight It, Sergey Guriev
- Coronavirus: A Test for the Strength of the Financial Systems of the USA, Europe and Russia, Anna Obizhaeva
- Epidemic: How Do Economy and Health Affect Each Other?, Evgeny Yakovlev, and
- Corruption: Why We Cannot Defeat It but Can Reduce It?, Mikhail Drugov
Here I post some ideas I found interesting from each lecture.
Crisis: Does The Current One Look Like The Previous Ones?, Ruben Enikopolov
The Alphabet Is Not What It Seems
V, U, L are not just letters, but forms a crisis may take, Enikopolov stated.
V means sharp drop and subsequent rapid recovery. U means a sharp and more prolonged fall and subsequent recovery. And L means a sharp and long-term decline.
The form a crisis takes depend on epidemiological and medical factors (characteristics of the virus, the development of vaccines and drugs, the proliferation of rapid tests, the development of herd immunity), as well as the state policy (support for general demand, compensation for losses).
The Past Is The Past
Enikopolov calls to be careful when comparing the consequences of previous pandemics and COVID-19.
For example, the economic effect of the Spanish flu was associated primarily with the disease itself and the enormous mortality. Then the situation was fundamentally different: states were weak, coordination between states was poor, state medical systems were underdeveloped.
Nonetheless, previous pandemics may be useful when considering what would happen if there were no restrictive measures.
Exchange Rates: How Do The Price Of Oil, The Pandemic And Economic Crisis Affect The Value Of Money?, Oleg Itskhoki
Let’s Drop An Anchor
Itskhoki reminded of the status quo: US dollar is an anchoring currency for the majority of countries. The USA are the main supplier of reliable assets in a world with a huge deficit of such assets.
Is such position an exorbitant privilege or an exorbitant obligation? Itskhoki advised to read Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System by Barry Eichengreen.
We’ll see how the picture is going to change, let’s say, within 50 years. The outcome depends on many factors, including whether China will use yuan in its export operations more actively. Anyway, the issuer of a reserve currency should have a strong reputation (its building usually takes years or even decades).
Incentives: Panic, Buckwheat And ‘Cobra Effect’, Andrei Bremzen
You Choose Between Red Pill and Blue Pill
Bremzen talked about the choice, and argued that economics is about how people make choices every day.
To be exact, people have to make decisions. You just cannot proceed without making a decision. Everything is the result of a choice once made.
Sometimes mathematical methods, including game theory, can help in choosing the optimal solution.
Stay Calm and Buy Buckwheat
Bremzen considered the case of the increased demand for buckwheat in Russia at the rise of the pandemic in March 2021.
Panic is when our actions change both supply side and demand side. In case of increased demand for buckwheat, it was not a panic, but a temporary shift in the demand curve, Bremzen supposed.
Despite of extraordinary circumstances, there was no reason to believe that the supply of buckwheat could have ceased due to the increased demand. In such cases, we can rely on the market price mechanism to effectively regulate the consequences of sharply increased demand for certain goods.
Snakes Don’t Lie
People respond to incentives. So it is necessary to predict how people will behave in response to a particular policy decision.
Bremzen illustrated his point with the cobra effect described by Horst Sievert. The story goes as follows -
During British rule in India, British government, concerned about the number of venomous cobras in Delhi, offered a reward for every dead cobra. Initially, this was a successful strategy; large numbers of snakes were killed for the reward. Eventually, however, people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped. When cobra breeders set their now-worthless snakes free, the wild cobra population further increased. Source: https://en.wikipedia.org/wiki/Perverse_incentive.
Also Bremzen pointed out that bad decisions happen: we should not exaggerate our ability to manage things.
Inequality: What Is It And Can We Fight It, Sergey Guriev
Money Can Buy It
During a pandemic, it’s better to be rich and well-educated, Guriev argued.
Big monies enable you to access high quality medical help and have a bigger, more comfortable home where you can isolate yourself with comfort.
Good education raises your chances to be able to continue working effectively from home, and to minimize the need to go outdoor for work.
We Are All Different
Guriev noted that income inequality by itself does not necessarily lead to inequity or inefficiency; what makes a difference is a type of inequality.
The efficient market economy awards those who work harder and better — and, thus, creates fair inequality. The situation where your income depends on factors mostly out of your control (like place of birth, skin color, or gender identity) produces unfair inequality (first of all, inequality of opportunity).
Unfair inequality is both unjust and inefficient. It is unjust because it grants birthright privileges. It is inefficient because a person born in the “wrong” place and at the “wrong” time cannot realize his/her potential.
All Is Connected To All
Further, Guriev observed that a society with high inequality of opportunity will more likely suffer from political instability and failure to establish and maintain solid democratic institutions. In the end, we face a new “golden age” of populists and nationalists.
Globalization and technological progress can do simultaneously good and bad. Both promote development — but produce not only winners, but losers. Both enlarge the market and innovative activities — but displace humans by automation, offshoring, and optimization.
Also Guriev highlighted that there is no proved causal relationship between inequality and development.
Coronavirus: A Test For The Strength Of The Financial Systems Of The USA, Europe And Russia, Anna Obizhaeva
History Repeats Itself
Obizhaeva reminded of Walter Bagehot’s golden rules for central banks: a central bank should, in a crisis, lend freely, against good collateral, at a penalty rate.
I would emphasize that Bagehot formulated those rules in 1873 in his book Lombard Street: A Description of the Money Market. As the time goes by, some assumptions and conditions Bagehot made and relied on become inapplicable.
Still Bagehot has a message for our days — about central bank transparency: central banks should explain complex ideas simply and elegantly, and acknowledge what they have done openly and fully.
Next Stop Is Last Stop
Also Obizhaeva referred to the idea of Jeremy Stein that in the face of uncertainty public authorities should act as a venture investor of last resort rather than a lender of last resort.
The mindset of venture investor would enable public authorities not only to finance those who can pay back, but also to make risky investments that may have a big social value.
Furthermore, public authorities might benefit from the venture investors’ toolbox — for example, granting loans that are convertible into preference shares, or using phased financing.
Epidemic: How Do Economy And Health Affect Each Other?, Evgeny Yakovlev
The Right Medicine Is Here
Yakovlev stated that a full-scale epidemic will likely cause enormous long-term harm to the economy. Given that, to save lives, you need to save economy.
From the historic perspective, the impact of pandemics on the economy vary significantly. In this context, an interesting question is: how do recessions and crises impact mortality and health, and vice versa?
To assess impact of economy on health, study recessions and crises that were not caused by health issues (like the Financial Crisis of 2007–2008 or the dissolution of the Soviet Union). To assess impact of health on economy, study previous pandemics or invention of drugs that have a significant effect on health (like the 1918 influenza pandemic or the invention of penicillin).
Poverty Is Destiny
There is a correlation (but not a proved causal relationship) between gross domestic product (GDP) and mortality, Yakovlev observed.
The impact of recessions and crises on health and mortality depends on country. The poorer the country, the more mortality increases.
In developed countries, recessions generally do not have a significant negative impact on mortality and health. In contrast, in developing countries, recessions will highlight problems of low levels of social protection and health care and, eventually, increase mortality.
Corruption: Why We Cannot Defeat It But Can Reduce It?, Mikhail Drugov
Strangers Are All Around
It is difficult to define the corruption. But you know it when you face it.
I enjoyed the following quotes from Arthaśāstra that Drugov referred to -
Just as it is impossible to recognize whether the fish floating in the depths of the waters are drinking or not drinking water, so it is impossible to know whether the officials assigned to the execution of affairs are appropriating wealth or not.
You can find out the path of birds flying in the sky, but not the path of acting officials with hidden intentions.
Even though there is no universally recognized definition of corruption, people study and seek to fight corruption. Study includes corruption indexes (Transparency International, World Bank, Political Risk Services), field investigations, comparison of data from various sources, and super data analysis. Fight requires free mass media, separation of powers, political competition, deregulation of economy, and — last but not least — strong political will.
Universal Truth Exists
Corruption is bad. Drugov argues that countries with higher corruption usually tend to be poorer, spend less on education and health and more on military needs, have more economic regulations, be more closed from other states, and have less free press.
Due to corruption, the quality of regulation decreases and the incentives for the market participants are distorted.
In addition, people tend to avoid careers in public bodies for lack of connections or for moral reasons; on the contrary, the system attracts those who are ready for corruption.
Plunge Into Deep Blue Waters
It may sound counter-intuitive, Drugov notes, but some economists suggest corruption can — rarely, but sometimes — be good.
Nathaniel H. Leff suggested in 1964 that if corruption has “wrong” goals or uses inappropriate methods (for example, when corruption helps firms to reduce tax payments), then corruption is beneficial.
Today this view is questioned and rarely supported. However, the economists support the view that the relationship between corruption and economic growth is ambiguous.
Disclaimer: This is my personal blog. This is neither a legal opinion nor a piece of legal advice. The opinions I express in this blog are mine, and do not reflect opinions of any third party, including employers. My blog is not an investment advice. I do not intend to malign or discriminate anyone. I reserve the right to rethink and amend the blog at any time, for any or no reason, without notice.
