America vs. Europe: some personal observations

I’ve spent a lot of time in the US in recent years, and will spend much more time there next year. I get asked a lot about the differences between living in America and in Europe, which caused me to compile a list of the differences that I found most striking. Some of them may be clichés, others may be more surprising. All of them are true, I believe, but my confidence in their truth is not uniform. I have discussed many them with friends and colleagues on both sides of the Atlantic, and found them controversial to varying degrees. Some of these differences have an obvious explanation, others seem hard to understand or even puzzling. I’m looking for economic explanations of these differences and might blog about that in the future. Comments are highly welcome!

An obvious caveat: My observations are biased due to the fact that I’ve only seen parts of America (California, part of the Northwest, part of the Midwest, and New England), and only parts of Europe (Central Europe, part of Scandinavia, part of France and England). One should realize that large cultural, political and economic differences exist both within the US and Europe, so all the statements below refer to averages with wide confidence bands around them.

Economic life:

  1. Prices are normally stated net of sales taxes. (high confidence, uncontroversial)
  2. Tips are higher and more common. (high confidence, uncontroversial)
  3. Tap water is much more heavily chlorinated. (high confidence, uncontroversial)
  4. Air-conditioning is vastly more common both in private homes and offices. (high confidence, uncontroversial)
  5. The average quality of houses is much lower. (high confidence, somewhat controversial)
  6. The proportion of people living in single-family houses as opposed to apartment buildings is much higher. (medium confidence, uncontroversial)
  7. The price of gasoline is about 50% lower. (high confidence, uncontroversial)
  8. There are both more cars per person and cars are much bigger on average. (medium confidence, uncontroversial)
  9. Automatic cars are vastly more common. (high confidence, uncontroversial)
  10. The price of necessities (food, clothing, personal hygiene) is lower, but not much, and the quality is generally lower. (low confidence, highly controversial)
  11. Food is bought and sold in much larger quantities. For instance, the smallest available bottle size for milk is usually half a gallon (about 1.9 liters). (high confidence, uncontroversial)
  12. Extreme obesity is vastly more common. (high confidence, uncontroversial)
  13. The quality of infrastructure (roads, railways, electricity grid) is lower. (medium confidence, somewhat controversial)
  14. Roads are more often built in strictly rectangular patterns, both in cities and on the countryside. (high confidence, uncontroversial)

Social life:

  1. Racial diversity is immensely higher, especially in urban areas, but also in rural areas. (high confidence, uncontroversial)
  2. So is religious diversity. (high confidence, uncontroversial)
  3. Religion plays a more central part of public life, including in politics (high confidence, uncontroversial)
  4. Interest in family history and genealogy is much higher. (high confidence, uncontroversial)
  5. Bodily contact between people in everyday interactions is much less frequent and more often regarded as inappropriate. (medium confidence, somewhat controversial)
  6. Conversations are much less formal both in professional and private contexts. (medium confidence, uncontroversial)
  7. Small talk is a much more important part of everyday life both in professional and private contexts. (high confidence, uncontroversial)
  8. Adolescents and young adults seem to be more mature both in terms of physical appearance and character development. (low confidence, highly controversial)
  9. Elderly people seem to be more familiar with, and more adept at, using new technology as well as social media. (high confidence, somewhat controversial)
  10. Knowledge about foreign countries (geography, history, politics) is generally much poorer. (high confidence, highly controversial)
  11. Patriotism is more wide-spread, more frequently expressed and more strongly felt. (high confidence, somewhat controversial)

Political life:

  1. There are more elected (as opposed to appointed) public officials and elections occur at higher frequencies. (high confidence, uncontroversial)
  2. Personal political opinions are more frequently expressed in public. For instance, pumper stickers with political messages are a much more common sight. (medium confidence, somewhat controversial)
  3. Political polarization is more profound. (medium confidence, somewhat controversial)
  4. There are more prohibition and warning signs on the streets as well as in public and private buildings and facilities. (low confidence, highly controversial)
  5. There are more local political initiatives  such as petitions, awareness campaigns, fund raising events etc. (medium confidence, somewhat controversial)
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What is economics? A survey

When people ask me what I do, I tell them that I am economist and that my research is about the eurozone crisis, which is enough to satisfy most but not all my conversation partners. Many people want to know exactly what economics is and why it is important. This happens frequently enough that I have prepared a standard response and saved it in my head. But I often wonder how other people respond to the same question.

Therefore I decided to set up a small survey consisting of only 3 questions:

  1. What is economics?
  2. What is economics good for?
  3. What is the most important insight economics has to offer?

You can answer these questions in short or long form, anonymously or with your name. I’d like to get as many different perspectives as possible, so I would encourage you to share this post and/or the survey link below on your social media pages. Warning: I may quote your response in a future post and I may steal it if it’s better than mine.

https://freeonlinesurveys.com/s/XtU7oo9d

Looking forward to reading your answers!

Österreichs Klimastrategie ist viel zu konkret

Ökonomen kannten die Lösung für das Problem des Klimawandels als es ihn noch gar nicht gab. Im Jahr 1920 veröffentlichte Arthur Pigou sein Buch “The Economics of Welfare“, worin er erklärt wie man mit negativen Externalitäten umgeht: Man besteuert diejenigen, die die negative Externalität verursacht – und zwar möglichst so, dass durch die Steuer die privaten Kosten möglichst den sozialen Kosten angeglichen werden.

Der Klimawandel ist die Mutter aller Externalitätenprobleme. Unsere CO2-Emissionen hier und heute haben einen Effekt auf das globale Klima in der fernen Zukunft – und die Veränderungen im globalen Klima haben wiederum eine Reihe von komplexen, schwer vorhersehbaren und höchst unterschiedlichen Effekten auf Ökosysteme und unsere Gesellschaft.

Österreich hat sich mit den anderen Staaten dieser Welt im Pariser Abkommen dazu verpflichtet CO2-Emissionen zu reduzieren in der Hoffnung damit die globale Erwärmung auf 2 Grad gegenüber dem vorindustriellen Zeitalter zu begrenzen. So weit, so gut, obwohl man an der Effektivität und auch an der Sinnhaftigkeit des Abkommens zweifeln darf. Aber lassen wir diese Debatte beiseite und schauen wir uns lieber die neue „Klimastrategie” der österreichischen Bundesregierung an.

Was steht da drin? Im wesentlichen will die Regierung dass es in Zukunft keine Ölheizungen mehr gibt, dass möglichst viele Gebäude thermisch saniert werden, dass mehr mit Bahn und Rad und weniger mit Autos gefahren wird und wenn, dann mit Elektroautos.

An der Strategie wurde in den letzten Tagen viel kritisiert. Zu wenig konkret sei sie, die Finanzierung der vorgeschlagenen Maßnahmen sei unklar, die Zuständigkeiten seien nicht geregelt, usw.

In meinen Augen ist diese Kritik völlig verfehlt. Das wahre Problem ist: Die „Klimastrategie” ist viel zu konkret!

Es ist komplett unnötig, dass sich unsere Regierung Gedanken macht wie viele Ölheizungen es in Zukunft geben darf oder wie viele Solarpanels installiert werden müssen oder wie viele Elektroautos herumfahren sollen. Alles, was sie tun muss, ist eine Steuer für CO2-Emissionen einführen und dann dem Markt die Aufgabe überlassen herauszufinden, welche Heizungssysteme, welche Verkehrsmittel und welche Stromerzeugungsmethoden sinnvoll sind.

Natürlich gibt es wie bei jeder neuen Steuer administrative Herausforderungen: Wer genau soll die Steuer abführen? Wie genau wird die Steuer ermittelt? Wie geht man mit Importen und Exporten um? Aber ich bin mir sicher die braven Beamten des Finanzministeriums sind kreativ genug diese Probleme zu lösen, zumal sie auf die Hilfe von Umweltökonomen und Finanzwissenschaftlern zählen können. Schlaue Leute haben sich über all das schon Gedanken gemacht und Konzepte entwickelt. (Z.B. hier)

Es könnte so einfach sein.

Luis de Molina on the Quantity Theory of Money

I always thought the Quantity Theory of Money was a discovery of the 18th century Enlightenment, one of the first intellectual achievements of the new science of political economy.

However, I recently stumbled across a “Treatise on Money“ by the 16th century Jesuit theologian Luis de Molina which contains, among other economic ideas, a concise statement of the quantity theory as well as some empirical evidence for it.

Molina is best known for coming up with a clever solution to the theological problem of reconciling the omniscience of God with the free will of humans: God, Molina reasoned, knows exactly how humans would behave in any given hypothetical situation (this kind of knowledge Molina called scientia media, „middle knowledge“). In other words, God is the perfect economist: He has complete knowledge of all His creatures’ preferences, their beliefs and their cognitive biases, and therefore can predict what choices they will make freely when faced with any possible budget constraint. This idea helps solving a number of important theological problems, like the issue of predestination or the theodicy.

Anyway, Molina was not only a great theologian, but also a superb economist. For instance, he clearly understood the logic of supply and demand in determining market prices and also saw the logic of no-arbitrage conditions. And here is his explanation of differing price levels in different places:

There is another way that money may have more value in one place than in another: namely, when it is more abundant. In equal circumstances, the more abundant money is in one place so much less is its value to buy things with, or to acquire things that are not money. Just as the abundance of merchandise reduces their price when the amount of money and quantity of merchants remains invariable, so too the abundance of money makes prices rise when the amount of merchandise and number of merchants remain invariable, to the point where the same money loses purchasing power.

And here is his evidence for the theory:

So we see that, in the present day, money is worth in the Spanish territories much less than what it was worth eighty years ago, due to the abundance of it. What was bought before for two today is bought for five, or for six, or maybe for more. In the same proportion has the price of salaries risen, as well as dowries and the value of real estate, revenues, benefices, and all other things. That is exactly why we see that money is worth much less in the New World, especially in Peru, than in the Spanish territories, due to the abundance there is of it. And wherever money is less abundant than in the Spanish territories, it is worth more. Neither is it worth the same in all parts because of this reason, yet it varies according to its abundance and all other circumstances. And this value does not remain unaltered as if it were indivisible, yet fluctuates within the limits defined by the people’s estimation, the same as happens with merchandise not appraised by law. This money’s value is not the same in all parts of the Spanish territories, but different, as ordinarily it is worth less in Seville—where the ships from the New World arrive, and where for that reason there is usually abundance of it—than what it is worth in other places of the same Spanish territories.

A perfect prediction (self-congratulation)

Three years ago, Christoph Zwick and I wrote a paper about the sustainability of Austria’s public debt. Under our preferred model, we forecasted the debt-to-GDP ratio, which at the time stood at slightly over 80 percent, to recede towards 60 percent within the next decade. We concluded that the long-run probability distribution of Austrian public debt given current data indicated no cause for alarm. How good was our projection?

Well, the new Austrian minister of finance just held his budget speech, in which he announced a zero budget deficit in the coming years. Assuming the government follows through on this plans, this would indeed bring down the debt-to-GDP ratio to 62 percent, exactly as our main projection predicted.

Here is the finance ministry’s proposed budget path:

Bildschirmfoto 2018-03-21 um 09.00.09

And here our main projection from the paper (note that the initial debt level is slightly lower due to different definitions of public debt; the dark and light blue areas indicate the 75 and 95 percent probability bands around the median, which is in black):

Bildschirmfoto 2018-03-21 um 08.54.12

Ladies and Gentlemen, this is what a perfection prediction looks like.

 

Debt crises in a monetary union: the case of Indiana

As Europeans we tend to think of America as new, young, and modern, whereas in Europe everything is old and traditional. At least that’s what I thought, until I noticed this while driving around in the American Midwest:

in_licenseplate

The license plate celebrates the 200th birthday of the State of Indiana in 2016. 200 years! This means, in a sense, Indiana is older than many of the states of the European Union. In 1816, Germany was still a patchwork of small territories, loosely connected through the German Confederation – of which Austria was a part. Italy was merely a geographical description – the process of Italian unification had not even begun. Greece was just a province of the Ottoman empire. Belgium, until 1815 known as „Austrian Netherlands“, was part of the United Kingdom of the Netherlands. France did exist as a nation then, however, while the people of Indiana lived for 200 years under the same political system and only once made marginal changes to their constitution (more about this below!), the French during the same time went from the post-Napoleonic Bourbon monarchy to the Second Republic to the Second Empire, then back to the Third Republic, then to totalitarian rule under the Nazis, and finally back to Fourth and now the Fifth Republic. As far as I am aware, there is no European country which has had the same constitution for the past 200 years without interruptions or major changes – the single exception I can think of is the United Kingdom which always had the same constitution: none.

There is another striking fact about the history of Indiana. Indiana has been in a monetary union with the rest of the United States for as long as it existed. And during its early history, it has had its own debt crisis which bears a striking resemblance to the recent history of the much younger European monetary union.

When Indiana became a State in 1816, it was mostly a wilderness at the margin of civilization. The only major road in the country was the Buffalo Trace – literally a trace created by migrating bison herds. Population was only 65,000 initially, but growing fast. The government of the young state decided to take the country’s infrastructure into the 19th century. And 19th century infrastructure, they figured, was going to be canals. So, they launched a giant public investment program, called the Mammoth Internal Improvement Act, spending 10 million dollars (equivalent to 260 million current dollars, roughly 100% of GDP at the time) on canals and toll roads. The heart of the project was the Wabash & Erie Canal connecting the Great Lakes with the Ohio River. „Crossroads of America“  was the official state motto of Indiana.

To finance these projects, the governor of Indiana, a certain Noah Noble, had a plan: some money was to be raised by selling public lands, some by raising taxes, and some by borrowing from the Bank of Indiana, which was partly state-owned. The Bank of Indiana refinanced itself by issuing bonds, backed by the state, at the London exchange.

Initially, the plan looked like a big success. The construction works employed many thousands of people and provided a stimulus for the economy. Borrowing costs were low and spirits were high. But soon, problems started to appear. It turned out that the government had greatly underestimated the costs of building the canals, mostly because they failed to take into account the damage done by muskrats who burrowed through the walls of the dams. Critical voices in the State Congress regarded the canals as a total waste of money. Railroads, they argued, were the future! Nobody seemed to listen.

And then, in 1837, a financial crisis broke out. The crisis was triggered by the Bank of England which, in an attempt to curb the outflow of gold and silver reserves, raised interest rates. This had a direct impact on Indiana whose borrowing costs skyrocketed. It also had an indirect effect: since the United States was on a gold and silver standard, American banks were forced to follow the Bank of England in raising interest rates, which led to a credit crunch and a nation-wide recession. (A classic example of a monetary policy spillover effect!)

The combination of stagnant tax revenues, exploding construction costs and rising interest rates meant that State of Indiana was effectively bankrupt at the end of 1841. So they sent the head of the Bank of Indiana to London to negotiate a restructuring of the debt. The creditors agreed to a haircut of 50% of the debt. In exchange, Indiana handed over control of most of the canals and roads, many of them still unfinished. The Wabash and Erie Canal was held in trust to pay off the remaining debt. It operated until the 1870s yielding a low profit, but was soon made obsolete by – the railroads which turned out to be the key infrastructure of the 19th century.

The conclusion Indiana drew from this was that the long-run costs of government borrowing far exceed the short-run benefits. Which is why in 1851, they adopted an amendment to their constitution, forbidding the State government to get into debt (except in cases of emergency).

I’d say there is a thing or two our modern European states can learn from this story.

Ökonomischer Analphabetismus in der “Zeit” Teil 2: das Grauen geht weiter

“Das Grauen! Das Grauen!” sind die letzten Worte des Protagonisten in Joseph Conrads Klassiker “Herz der Finsternis”. Das Herz der Finsternis in Sachen ökonomischer Bildung ist bekanntlich der Wirtschaftsjournalismus – eine Horrorshow, die wiedermal um einen grausigen Beitrag reicher geworden ist. Und wieder ist “Die Zeit” die Übeltäterin.

Warum hacke ich auf diesem anständigen Hamburger Qualitätsblatt eigentlich so rum? Nun, wenn es sich hier bloß um harmlose Missverständnisse im Zuge  wirtschaftsjournalistischer Berichterstattung handeln würde, wäre das bedauerlich aber ungefähr so bemerkenswert wie “Hund beißt Mensch”. Doch in diesem Fall fühlt sich eine Zeitung dazu berufen, ihren Lesern zuerst zu zeigen wie wenig sie von „der Wirtschaft“ verstehen um sie anschließend darüber zu belehren was man von „der Wirtschaft“ im Zeitalter der Globalisierung, Digitalisierung, Automatisierung und anderen -ierungen einfach wissen muss.

Und wie glaubt unser hanseatisches Qualitätsblatt dies bewerkstelligen zu können? Natürlich mit einem Online-Quiz. So weit so gut. Das Problem beginnt schon bei den ersten Fragen: “Was schätzen Sie: Bei wie viel Punkten lag der deutsche Aktienindex (DAX) am letzten Freitagabend ungefähr?“ Sorry, aber das muss wirklich niemand wissen. Und zwar nicht nur, weil der Punktstand eines Aktienindex für sich genommen genau gar nichts aussagt, sondern auch, weil das diese Art von Wissen ist, die im Zeitalter der Digitalisierung völlig unnütz ist. Faktenwissen kann ich Googeln. Zahlen interpretieren und Zusammenhänge verstehen – darum sollte es bei ökonomischer Bildung gehen.

Das Quiz versucht das dann auch. Und hier beginnt der eigentliche Skandal. Hier die erste Frage in der Rubrik „Ökonomisches Denken“:

Bildschirmfoto 2018-02-12 um 17.14.59

Ja, genau. Die richtige Antwort wird als falsch gewertet.

Ein ökonomisch gebildeter Mensch sollte wissen, dass die verkaufte Menge und der Preis gemeinsam von Angebot und Nachfrage bestimmt werden. Wenn der Preis steigt, kann damit ebensogut ein Anstieg, ein Rückgang oder keine Veränderung der Menge einhergehen – das kommt ganz darauf an, ob der Grund für den Preisanstieg in einer Verschiebung der Angebots- oder der Nachfragekurve oder beidem liegt.

Das ist die Art von Basiswissen, die jeder Erwachsene haben sollte und über die die Redakteure der „Zeit“ offenbar nicht verfügen.

Natürlich kann sich die „Zeit“-Redaktion rausreden und sagen sie hätten ja eigentlich die nachgefragte Menge gemeint und nicht die verkaufte. Aber eben darin liegt der ökonomische Analphabetismus: nicht zu verstehen, dass zwischen Nachfrage und Verkaufsmenge ein wichtiger konzeptioneller Unterschied liegt. Wer das nicht versteht, sollte sich nicht anmaßen seine Leser über „die Wirtschaft“ belehren zu wollen.