A great misunderstanding

Mark Carney has been appointed the next governor of Bank of England. Some people believe that BOC's policy under Carney has been so expansive that he has built the way to destruction.  I doubt it. As far as I know BOC's policy was classic counter-cyclical monetary policy. This is what the Bank of Canada has done  to its monetary base during his term:

The Bank expanded its balance sheet through 2009 and the early 2010 but it contracted through the mid 2010 and the first half of 2011 and has steadily increased the monetary base as the NGDP grows, (whether or not in intended). The information is from CANSIM.

It is not what you can expect from an expansionary central banker. The information is from FRED. The problem of housing bubble is probably not from low interest rate. Plus the low interest rate is not from the BOC's loose money. That is generally from the weak recovery in the U.S. economy and the low velocity of money in Canada, which represents low money demand. The information is from FRED and CANSIM.

Long Run Economic Growth and Constant Monetary Growth

I have recently started thinking about this issue while speculating on the relationship between IS-LM model and AD-AS model. Of course, the IS-LM is a short-run model and may not be adequate to think about the long run. However....

First, assume that prices are sticky in the short run. All of sudden, productivity is expected to be improved and potential output increases. Then LRAS curve will shift right while the SRAS curve stays the same. There is no output gain because prices of goods and services do not fall as the supply increases: the consumers cannot purchase them because their wages are so sticky that they do not rise as potential output increases; their bosses insist they will raise wages only if their goods are really sold. As a result, there is no change in the money market; there is no change in the goods market. The IS-LM curves stay the same.

Second, assume that prices are flexible. The SRAS curve is upward sloping. As much as the previous model, the LRAS curve shifts right as productivity is enhanced. Unlike the previous model, however, the SRAS curve shifts right too. Even though the firms cannot expect their absolute input costs not to go down, their relative input costs to output will go down. If they lower prices, then more goods and services at lower prices. As a result, output will really grow while the price level falls. Since the price level goes down, the real money supply will increase, lowering interest rate. Then the LM curve will shift right; since the low price level induces the great consumption, the IS curve will shift right, too.

The Single Transferable Voting System

Today, Justin Trudeau made very interesting remark on the Canadian election system. He would like to reform the current fast-past-the-post system into preferential voting system or single transferrable voting system.

Let's imagine a constituency of 100 voters. There are four candidates, A, B, C and D. Instead of choosing one of them in the ballot, a voter rank them from the most preferred to the least preferred. When the ballot box opens, it turns out A won 35; B: 30: C: 25; and D:10. D is eliminated. Then the D voters' second preferences are counted. A won 4; B: 5; C: 1. Those numbers are added to A, B, and C's the first preference votes'. Now A scores 39; B: 35; C: 26. C is eliminated. Then the C voters' next preferences will be counted. I.e., C voters' second preferences, and the third preferences if a vote's second preference is D, are counted Among 26 votes, A wins 10 and B wins 16. Eventually B wins the election in 51 to 49.

A strength of this system is that every vote really counts. Even if a voters's first preferred candidate is eliminated, her second and third preference will still matter. Then it restrains the parties from becoming radical because they will have to conform with the demand of, at least the voters in the middle.

Another strength of this system is that it does not prevent a politician from running independently. Russia has a full party list proportional representation system with 7% of threshold. It indeed favours Putin and his supporters' parties. Even if the system is more open like Germany's mixed part list proportional representation system with 5% of threshold, it might be considered a barrier to independent politicians and small parties.

Of course, there could be some problems. If voters are not well aware of the system, they may just mark the ballots nily-wily.

I was glad that Mr. Trudeau clearly had an agenda for election system reform.

Why it is not the case that the commercial banks would not lend because of the low interest rate.

I have seen some people argue that lending activities by the commercial banks have been weak because the central banks are pushing the interest rate low. Indeed, lending activities have been weak although they are bouncing back now.

The question is why they have been so weak and not been returning to the pre-crisis level despite the historically low interest rate. Does it imply that the banks do not want to lend because of the low interest rate? Some people misunderstand what is happening in the world, for example, Denmark's negative interest rate policy. This is what many people get wrong. The interest rates close to or below zero are policy rates such as the target for overnight interest rate or central bank funds rate. Those rates are the interest rates that the central bank offers the commercial banks under its charter. As long as the commercial banks are allowed to lend money higher than those rates, they can make comparable amount of profits to the pre-crisis level and this is what is happening:

The U.S. commercial banks can still make profit of 3% on the top of its federal funds rate from each lending activity even though the federal funds rate is very close to zero. That's the rate of profit even before the crisis. The interest rate is not now rising despite growing lending activities since the mid 2010 simply because zero federal funds rate is not low enough yet. That is why the actual monetary aggregate growth is relatively low even though massive increase in monetary base.

Even though the MZM growth rate is about 10%, it is actually not high enough given the fact that the economy is annually growing by 2% and the annual inflation rate is between 2-3%. Don't forget the velocity of money is historically low; in other words, people rather sit on cash or put it in the bank than spending it. It is not the case that the banks do not want to lend because of low interest rate; it is low investment demand and low money demand.      

What Shinzo Abe would do...

The next will-be PM of Japan Shinzo Abe of the Liberal Democrats said:

"Money will be forced to go out to the market by (the government) having the BOJ buy construction bonds directly if possible...[I] would like to choose someone who supports the inflation target."(http://online.wsj.com/article/BT-CO-20121117-700066.html)

Now, some people apparently misunderstand the concept of central bank's independence and Abe's approach is against it. His speech may sound like a violation of central bank's independence. However, it is not independent from the government in terms of policy goal. Abe is stating the next Japanese government's goal here and calling for BOJ's coordination with it.

By no means, the LDPJ is my favourite because historically it has too many figures in it that defend Japan's war crime during the WWII. However, I believe Abe's approach would be basically good and help the Japanese economy end the Lost Decades. 

Of course, here is some Austrian style complaint: http://seekingalpha.com/article/1010651-shinzo-abe-i-come-to-bury-the-yen

However, the truth in Japanese inflation rate is:

I clearly see a deflationary spiral here. Simply, those who believe in the stuff like central bank printing money nothing but raises price level do not understand the relationship between price level and money supply.

What some people have got wrong with price level.

Obviously there is a conspiracy that the central banks and government stat authorities manipulate CPI down and quite a few people believe that. Therefore, it might be better to use the GDP deflator to measure our inflation. the GDP deflator should be better if you do not trust the CPI since it includes all the goods and services domestically produced.

Are you still seeing a run-away inflation? Much milder than the inflation rate measured in the CPI, isn't it? Unless the GDP deflator is manipulated as well...

Stagflation concerns?

I really don't know if Israel really will strike Iran. If so, then it will be disastrous. However, I doubt oil price will really likely rise at this moment.

It is more likely that crude oil price is stabilized around $90/barrel and the percentage change is very low now.

Where many people get it wrong on money supply and price level

I have recently heard some people saying expansionary monetary policy causes inflation. In most cases, that happens. However, it does not happen all the time, and this is the time when it is not happening. Consider the following graph:

The initial money supply is MS1 and money demand is MD2. All of sudden, the unemployment rate rises and income falls. As a result, the money demand falls from MD2 to MD1. Since P=(MV)/Y, the price level will fall as income falls. To restore the full employment output, the quantity of money required is M2. The central bank tries to expand money supply by lowering the nominal interest rate and purchasing bonds. However, it is not willing to lower the interest rate below zero. Then, actually, the quantity of money in the economy is only M3. As much as M2-M3, the economy lacks in the quantity of money. Since the actual quantity of money is smaller than M2, the price level rises only as much as M3-M1. Then, the price level does not change so much or the inflation rate will be very low. Now look at the U.S. inflation rate using the CPI for urban consumers.  

Whenever the Fed QE kicked in, the inflation rate rose and that was it. Then, the inflation rate stopped growing and fell. We really do not see a run-away inflation.

For the "Federal-ReserveI-Is-Scamming-Out-American-Public" zombie

Who owns the Fed?

http://www.federalreserve.gov/faqs/about_14986.htm

Can the Fed finance the U.S. government debt?

http://research.stlouisfed.org/publications/es/10/ES1014.pdf

Look at the first footnote: "The Fed is forbidden by law to purchase government securities directly from
the government. The government first sells securities to the private sector and
the Fed then purchases securities from the private sector, specifically, government
securities dealers."

A Zombie of Fiscal Hawks

It is from my personal conversation  with someone else.

That Person: The U.S. government has never run surplus since it went off the Gold Standard.
Me: It did sometimes. It barely did and the most recent one is in the Clinton era.
That Person: That is because he included Social Security Funds. Without it he did not actually run surplus. He balanced the budget but did not run surplus. So he did not decreased the debt.

Oh gosh. This kind of zombie comes to me whenever I talk with fiscal 'hawks'.

First, the fact: it is very simple. Even without Social Security funds, the Clinton Administration would still run surplus. The 2000's surplus including Social Security surpluses was 236 billion dollars. Social Security surplus was the biggest contributor to the surplus, but without it the U.S. federal government would still run 86 billion dollar surplus. Including Social Security budget balance is, in my opinion, much better because social securities benefits ought to be paid by the government if it runs out of fund. If it runs deficit, the government must take the deficit like it takes surplus.  

Second, these people do not understand what really matters when it comes to public debt. What matters is net public debt to GDP ratio, not total amount of public debt or gross public debt to GDP ratio. Why does public debt matter in the first place? If public debt is considered too large, it will drive up interest rates, so both private sector and public sector will be worse off eventually. Both will suffer from too high borrowing costs. Then, we must learn how financial institutions make decisions to lend money to a government. It is basically the same as lending to the private borrowers. They assess the government's assets in terms of value and safety and revenue collection, in other words, income. That shows the government's borrowing (more precisely paying-back) ability. However, here, the government is always in a better position than private sector. Due to its size and authority, usually, financial institutions do not require the government to provide collateral. It is enough for the government to issue bonds as security to promise it will pay back its loans. Therefore, what really matters is not total debt amount. What matters is debt to GDP ratio. If GDP is growing, then debt to GDP ratio can fall even though the total debt amount is increasing, as long as GDP grows faster than debt. Growing GDP means growing tax revenue in the given tax rates. Financial institutions know that, and so has kept lending money to the U.S. federal government even though it has huge amount of debt in total. Then another question can arise: why net debt to GDP ratio? The U.S. states and sub government agencies have debts to the federal government. The federal government may just erase those debts if it finds those states or agencies never pay back. Therefore, the actual burden to the public is only net debt. It also means the federal government ran surplus but gross debt can increase if sub-national government or sub-agencies ran greater deficit. However, net debt may still decrease and indeed did during Clinton's last three years. This is what happened then.

Or, if you still remain zombified...

The velocity of money and money demand at the zero lower bound

I have been confused with the relationship between the money demand and the velocity of money.

The quantity theory of money implies that the greater the money demand is the slower the velocity of money will be at the given money market equilibrium, assuming other conditions remain the same. In other words, the more money the people demand, the longer at their hands the money will stay.

However, somewhat the situation in the U.S. economy does not seem to fit this theory. Even though the velocity of money is very low, the interest rate is also quite low and most of the expanded Fed monetary base stays within the Fed vaults, indicating the demand for money is low. It appears the quantity theory of money is being violated.

I realized that the problem of my first intuition lies within something basic in economics that most undergraduate students are struggling with : the difference between movement along the curve and shift of the curve. I suspect the following description shows what is happening.

1) The Fed has increased monetary base and set its interest rate target at zero, and so M1 and M2 have increased accordingly.

2) Since the quantity of money in the market has increased and the interest rate has fallen to zero, the quantity of money demanded by people has increased as much as that along the money demand curve. As a result, the velocity of money has fallen.

3) However, this increased quantity of money is not large enough to restore full employment given the assumption that the money demand itself has fallen, i.e., the money demand curve has shifted downward drastically. The nominal interest rate at zero is not low enough.

4) Therefore, the current velocity of money is not slow enough to keep the newly printed money at people's hands so that they will be able to consume and invest. The newly printed money has disappeared too quickly to the Federal Reserve vaults to stimulate the economy.

If my speculation is right, then we really don't have to expect hyperinflation will occur sooner or later. The money supply is still too tight and the money demand is too low.

A Federal Reserve Conspiracy

A conspiracy theory I heard recently from someone else: the Fed is privately owned and it is scamming out the American public; the U.S. economy is on the verge of hyperinflation due to the rounds of QEs and what the Fed is doing is huge theft of wealth from the public. Unfortunately, that 'theory' is believed by many although most portion of the Fed expansion in monetary base is still sleeping in the Fed vaults and the velocity of money has slowed. However, you may still suspect that M2 has indeed increased and the U.S. economy is about to face hyperinflation.  

Since the quantity theory of money shows MV=PY or P=(MV)/Y, an increase in M will lead to a growth of price level only if V does not fall or Y does not grow. However, the truth is Y has slowly grown anyway and V has fallen. Accordingly, inflation pressure has been offset. 

I think that kind of widespread belief, even among very intellectual people, that monetary base expansion like QE directly causes hyperinflation is partly, (not mainly), due to how we are taught in macro class. Our Econ professors show a simplified MD/MS diagram, which assumes money supply appears fixed by the central bank. That diagram also appears that the central bank has some magical power to fix the interest rate. Of course, no central bank has that kind of power. It can increase MONETARY BASE, not directly M1 or M2, which are actual money supply indicators; it SETS the TARGET for some interest rates, not fixing interest rates. I think it is a very important notion that is often ignored in our macroeconomics class. If the Bank of Canada or the U.S. Fed really could control the money supply and fix overnight rate, then monetary policy would be much more of mechanical process and our economy would not have any problem from the business cycle.

Of course, My econ profs indeed taught me that expansionary monetary policy itself does not directly lead to inflation and why. I really appreciate that.

"Inflation is always and everywhere monetary phenomenon." MiltonFriedman

A lot of people who believe we are on the verge of hyperinflation probably misunderstand what Friedman meant. They simply believe an increase in monetary base will raise the price level. However, if our demand for money is so low that the newly-created money is not used, then inflation never arrives.

Let's look at the very simple quantity theory of money equations:

MV=PY
P=(MV)/Y

This equation means price level will rise as money supply increases only if the velocity does not fall in the given income level. Usually, all these variables change simultaneously, so this theory is a little problematic to apply to our real life. However, since the last few years the U.S. real GDP has grown very slowly, it is a very good chance to conduct a natural experiment.

The Federal Reserve has since Q4 of 2007 increased its monetary base by three times. As a result M2 has risen by about 38%. If velocity of money had not changed, assuming Y constant, the price level should have risen by 38%. However, we haven't seen that and will probably never.

The velocity of money has slowed by about 22% during the same period. Plus, the U.S. Real GDP has risen even though it is not such a good performance. Therefore, huge inflation has not arrived here and it doesn't seem to happen sooner or later.

Core Inflation: Why Are Food and Energy Prices Excluded?

While helping out one of my colleagues at university doing homework, I got into graphing stuff. Thanks to that, I'm now a little bit behind my reading for another class, but it's all fine. Hope so. Here are graphs for inflation rate, core inflation rate, food inflation rate, and energy inflation rate.

As you can see, changes in food prices and energy prices are much more volatile than general inflation rate.
Food and energy price volatility is caused mainly by very unstable supply of those markets. Their prices are very easily affected by changes in climate or military tension in the Middle East.
Every year I see news that the price of cabbage skyrockets all of sudden because of sudden coldness or snowfall, and Korean restaurants are considering to stop serving kimchi. The truth is about a month later I see another news that farmers plow up their yards because of a drastic fall in price of cabbage mainly in response to retailers' import of Chinese cabbages to fill the supply shortage. By the way, the bottom line is these volatile prices play a role as outliers. They change so much that an inflation rate that includes those price changes may skew the result and not reflect changes in other prices.
On the other hand, a lot of other prices are set by firms that produce those products. In other words, firms, more or less, have market power. For example, the Apple Inc. just sets its products prices; it does not even let its retailers change prices in response to every day change in demand; when it sets its prices, probably the production costs matter more than any other factors and they are usually pre-determined. In the short run, therefore, their prices are sticky. Therefore, by taking off too volatile food and energy prices, you can see a broader tendency in price changes. 

The Vice-Presidential Debate

Actually this is not on the vice-presidential debate last night. I haven't watched it. However, I have seen some news articles on it. Therefore, "on media responses to the debate" might be the proper term. It seems to have been very intensive and exciting unlike the presidential debate. However, this is not really for the debate but for the sampled data analysis.
Some say Biden won (CBS, 50 to 31) but some other say Ryan won (CNN, 48-44). Still we'll have to wait until Monday the debate result is taken into account and opinion polls adjusts accordingly. However, other media than CBS and CNN are saying Biden won because the CBS poll shows much greater margin in favour of Biden than the CNN poll. I was not sure this was a proper way to analyze the data in the first place. However, there may be some other better reasons why we can believe so.
CNN conducted survey on 381 registered voters who watched the debate (http://politicalticker.blogs.cnn.com/2012/10/11/cnn-poll-on-debate-winner-ryan-48-biden-44/comment-page-183/); CBS collected data from 431 uncommitted voters. According to CBS, an uncommitted voter is defined a person "who [doesn't] yet know who [he or she] will vote for, or who [has] chosen a candidate but may still change their minds."(http://m.cbsnews.com/fullstory.rbml?catid=57531059&feed_id=null&videofeed=null) Obviously, there is some gap between the CNN poll and the CBS one. The former seems to be more random than the latter. The latter's sample seems to represents only swing voters's opinion. Therefore, we may conclude the CBS survey is biased, and CNN's survey is better. However, is it?
Since this election campaign is a neck-to-neck race, the margin between the two is very narrow. Neither Romney nor Obama is the sure one. They are fighting within the error range. Therefore, the lead in the CBS's sample is a bigger deal than in the CNN's one. Of course, I will have to say I will wait till Monday a better conclusion can be made.

Election forecast jitters

It seems obsession and irrational reaction to believe that Romney's recent lead means some significant changes. This morning Obama is narrowing the gap. Both are converging towards Romney's "47%". And the trend from the past shows Romney's surge didn't last long. I think it may be true again at this time.

Is it because of the debate?

Romney is on rise obviously. However, I started half-doubting if it is really due to the debate on October 3rd. Of course, a lot of people say Obama lost and Romney won. However, is his lead really due to that debate? Let's look at the following graph offered from RealClearPolitics.com Romney started rising well before the debate. He hit the bottom around September 27.His rate started rising on September 30. Before the debate, Obama's popularity was also on rise but Romney's slope was much steeper. After the debate, Obama's rate started falling very drastically while Romney has kept on the rising track. My conclusion: Obama's support is falling due to the debate: it seems so. What about Romney? I think it is just a reactive bounce due to his weak performance in September. Since he was very weak in September, the Republicans felt threatened and started gathering around Romney. According to Romney, there are 47% who vote for him whatever he does; there are also other 47% who vote for Obama whatever he does. I think he is right. Currently neither strongly gains in the rest 6%. If only Romney surge is very stable until November, I may believe Romney is leading because of the October 3rd debate.

Liquidity Trap and Foreign Exchange Rates: A Speculation

I might be wrong, but I want to share this idea. I'm not even sure I'm original at this.

Let's imagine an open economy in a liquidity trap. In the short run, price level is sticky but not one hundred percent. Perfect capital mobility and flexible exchange rates are assumed too. Nominal interest rate is zero, but the demand for money is much shorter than the money supply at zero nominal rate. It needs to fall further, but the central banks somewhat do not let it happen. The central bank has made a pledge to price stability and it is very responsible.

To stimulate the economy, however, the central bank implements very aggressive expansionary monetary policy. Initially, the return on foreign assets is expected to rise because much more domestic currency in the FX market is expected. Due to the lack of money demand and zero lower bound, actually, the quantity of money in the market does not grow: the market is worried about the central bank's future contraction and do not use the newly printed money. As a result, the expectation of higher exchange rate does not come true. Rather, the interest rate is not low enough at zero, so the domestic currency remains over-valued. As a result, return on foreign deposit is expected to fall and it will really come true because the interest rate does not change and there is net capital inflow; the economy runs the current account deficit.

Now, the government implements a massive expansionary fiscal policy. As a result, the domestic price level and output is expected to rise and the demand for money starts rising. The central bank still secures the increased monetary stock to stay there; in other words, it makes a pledge to be responsibly irresponsible at inflation over its target. The quantity of money in the market will grow, the zero nominal interest rate eventually becomes low enough, as a result, the domestic currency is eventually expected to depreciate and it indeed does. Then people start depositing in foreign accounts. As a result, there is a rising net capital outflow, so the net export will rise. There is not only no crowding out effect but also gains in the current account from expansionary fiscal policy.      

A news article on North Korean sweatshop in China

I just read a news article from South Korea. Unfortunately it is written in Korean, so I cannot post it in entirety. However, I translated some interesting parts:

"There are about 20,000 North Korean workers and 400 in Liaoning and Jillin, China respectively... North Korea is eager to send its workers there...It doesn't matter whether a business is one in which South Koreans invest as long as that fact does not appear on official documents...

"The (Chinese) employers can use North Korean workers in half wages they are supposed to pay Chinese workers for equivalent jobs...

"Since 2010 when the Battleship Cheonan sank, the South Korean government banned South Korean businesses from...newly investing in North Korea...and contacting with North Koreans...It is 'impossible' for South Korean firms (operating within China) to hire North Korean workers...

"In one factory, the Chinese employer pays 1,500 yuans, but those North Korean female workers receive only 150 yuans after the North Korean and Chinese authorities take taxes and some 'common expenses'. The next morning after the first pay day, their North Korean managers already took those expenses from the female workers. In their hometown, the local authority takes some money from their families too one the authority notices their daughters have been sent to China for work. However, the remaining money in their hands are still very large amount in their sense, so job application is very competitive."

A fallacy of the broken windows fallacy

The Austrians have attacked Keynesian economics for about 70 years. Their blame (not criticism because what they argue is neither logical nor evidence-based at all) is based on a Bastiat's argument made about one and half century ago, which is called "the fallacy of broken window". I have found this blame very improper.
Of course, Bastiat probably did not write it to criticize stimulus programs, which didn't exist in the 1850s; rather, he seemed to criticize the people who believe destruction leads to production and we should destroy things.
If we break a window to buy another window, the entire economy will not be stimulated. It is simply to move resources from one place to another. In Bastiat's story, the glazier will appear to be better off by selling a newly produced window but the shoemaker will lose because he has to spend on what he would not have to if the boy had not broken the window in the first place. Plus, since the glazier has to spend his time and resource on something that would not be necessary, it will eventually lead to waste of his time and resources. As a result, the entire community ends up being worse off.
However, does it mean that the shoemaker must not buy a new window? It is much more stupid to leave the window broken because it can give the shop a bad image. If it is winter, the shoemaker may suffer from the cold. In summer, his shoes can be damaged by rain water through the hole in the broken window. Then, the shoemaker's rational choice is to buy another glass. He may lose some of his existing funds, but his business may not yield loss any more due to the broken window.
As liquidationists, the Austrians are supposed to say "Leave the window broken, and it will fix by itself." A broken window will be eliminated eventually (and quickly) without any further shoemaker's action. The invisible hand will fix it! Since the Austrians are liquidationist, they should believe any attempt to replace the broken window with extra expenditure will cause greater damage to the shoemaker's business.
Am I being ridiculous? Yes, I am. However, what the Austrians believe has exactly the same logic.

I do not have enough time for this right now, but I will get to this later this week.
http://youtu.be/7R3cwn6GlaA

In addition to the previous post

Somewhat Denmark and Finland are worse off than their neighbors. I didn't think about that, but their governments spend more than Sweden and Norway. Norway is a resource-economy, so it may not be fair to compare it to its neighbors. The Swedish government obviously spends much less than Denmark and Finland, but the labour market performances in terms of unemployment rate are about the same. How? The secret seems to lie in exchange rates. Sweden has devalued its Krona since the crisis while Finland has adopted the euro and Denmark has pegged its krone to the euro. As a result, the relative prices of Swedish goods have fallen and are more competitive than Finnish or Danish goods. It might give Sweden better leverage in overcoming the crisis. Since Finland and Denmark are tied to euro, their governments have had to nothing but spend more. Swedes seem to enjoy their monetary sovereignty.

A big government's failure....has not come yet.

Today, I was looking at the Eurostat to figure the correlation between unemployment rate and the government spending. The typical right wing argument on this issue is that government does not create jobs and government spending is simply moving the problem from one place to another. When I looked at European countries government expenditure data, it surely appeared so.

All these countries have well above 40% of the government spending to GDP ratio. Sweden and Greece have no significant difference. The former is doing well, but the latter is not. No correlation between government spending and unemployment rate seems to exist.

Unfortunately, it is a statistical bias from loose specifications and Type II Error. First, if you do not specify which variable will significantly affect the outcome, then your result will be skewed. In this case, if you just call government expenditure all the same thing, then you are making this mistake. This mistake causes Type II Error, which means that you are not rejecting false null hypothesis, which is that the government does not create jobs. Let's look at the next graph.

     

If you compare Sweden's social benefit spending and Greece's equivalence, then you will realize that Greece spend much more. Then, you may hastily conclude "the greater social spending, the higher unemployment rate." Then you make a fallacy of reverse causality. Actually, Greece spends more on social benefit because it has higher unemployment. Finland spend more than Italy and Spain simply because its welfare benefits are much more generous than them. It will be clearer if you look at the next graph on unemployment rate.

As you can see from the graph, all those troubling PIIGS have relatively high unemployment rate. This has driven their governments to spend more on social benefits. Then, however, still you may think government spending is irrelevant to creating jobs. I'm not one hundred percent sure, but I suspect government spending indeed creates jobs and waters down crisis in better-off countries. Let's look at the next graph. 

Those better-off countries have much greater government output level. I was not sure in the first place what "government output" means. However, I've figured it refers to anything produced by government. In those countries, the governments manage such a lot of things as research, education, transportation, healthcare, and even housing. Since all those goods and services are produced by government, they really add jobs to their economies. Somewhat a big government isn't necessarily bad.   

Tax Freedom Day?

I have thought it is simply ridiculous because the concept of Tax Freedom Day contradicts what the Fraser Institute has supported. This is how they calculate it. Divide an individual's income by annual work days. Then times by the number of days until the value equals that individual's tax amount. The number of days is the time of the year you work for the government. In that time you nothing but pay taxes. This is simply wrong. First, how can we live in that time if we nothing but pay taxes? I have never seen a Canadian die because all the income is used to pay taxes and he can't buy a piece of bread. We all receive some disposable income every paycheck. You may choose one-shot payment option, but we are not all that stupid. We choose installments. Second, even if you choose one shot payment option, you are still eligible for a lot of government services, for example, primary and secondary education, universal healthcare, non-tolling roads, etc. You must take that into account because you receive that from the government. According to the government, the Government of Canada is running primary deficit this year, too. It implies it actually return more to us. Therefore, our 'net' Tax Freedom Day is supposed to be in the past. Does it mean budget deficit is okay? No, that's what we owe to the future. We better not do that. However, the logical sense of the Tax Freedom Day necessarily leads us to some greatness in deficit spending. What a socialist Fraser Institute!

On unemployment continued

However, do those methods I mentioned at the end of the previous post ever help unemployment rate fall? I'm skeptic about that. The theory so called "paradox of minimum wages" has a significant caveat. Unemployment is not just employers' not hiring; employees' quitting. Of course, involuntary unemployment should be much more important, but voluntary unemployment has significant impact on businesses. There are quite a lot of evidences that the higher minimum wage is the lower hiring rate is; at the same time, the lower the minimum wage is the higher quitting rate is. Overall, hiring rate and quitting rate cancel each other, so minimum wage's effect on employment becomes minimal. Businesses' labour costs are not just salaries they pay for their workers; recruiting process also incur quite a bit amount of costs. If workers quit too often, accordingly, these costs will rise. What is worse, too often quitting can cause production disruptions, as well, if the former employer cannot find the replacement workers right away.

Is the unemployment a structural problem

Some people say so and that is true sometimes. For example, Alberta still has 4.7% unemployment rate, even though its economy is booming. I don't believe that number will go down any time soon. Some of those are in structural unemployment. That is, their skills and labour market demand do not match, so they are unemployed. Therefore, one may conclude the solution has to be to eliminate structural barriers in the labour market such as unions, minimum wages, and other legislations related to employment protection or labour standards.

Why does tuition keep rising? A flypaper effect?!

Just a brain-storm. Let's assume a very inelastic demand of university education. Consumers, i.e, students do not decide where to go based on price, i.e., tuition; other factors, such as fame, quality, and reputation of the institution matters more. Producers, i.e., universities, have substantial market power because there are only one or two universities in a city and information asymmetry exists in favour of producers. Its marginal cost curve is very flat, which means even if it has one more student, it does not incur such large extra cost. Without government intervention, the monopoly quantity of university education will be determined where marginal cost equals marginal revenue. Students should pay much higher than reservation price to the university. Now, the government offers every student with subsidies that have to be used to reduce tuition burden. As a result, the demand for university education will shift right. The new equilibrium output should be greater than monopolist quantity (but by a little because of inelastic demand). At the same time students' burden for the tuition will decrease. What if the government provides the equivalent amount of subsidies to the school. It will depend on how that money is assigned. If it is solely used to reduce tuition, the result will be the same as above. If it is unconditional, i.e. completely up to the university's discretion, things could be different. The university may use that money to reduce tuition, but it may use that money to renovate its old buildings, build more parking lots, hire more instructors to reduce the number of students per instructor or just raise employees' salaries. If these things happen, the marginal cost of university education will increase, and accordingly students' burden of tuition will remain the same or may rise. It may reduce the enrollment rate, but given the inelastic demand, the drop rate may increase by a little.

P.S. The flypaper effect, by the way, refers to a distortive effect of unconditional grants, summarized by "Money sticks where it hits."

The ECB's Outright Monetary Transactions

The ECB will implement something called "outright monetary transactions."

http://www.ecb.int/i/index.html

Several people are skeptical of this. I think it is better than nothing but am skeptical, too, because of some fuzzy things, especially, sterilization part. It is very brief and not so detailed. Well, my macro textbooks only show the sterilization cases related to foreign exchanges market operations, eg., the central bank sells foreign exchanges for its currency to defend its currency and then buys its government's bonds to keep money stock constant; either, buys foreign exchanges with its currency and sells its government bonds to keep the money stock constant, too. Is there any other way of sterilization? I'm not sure. Maybe in this case, the ECB will sell its existing foreign exchanges to offset the expansionary monetary policy's disturbing effect on FX market?! Given the argument of several prominent economists such as Rogoff, Krugman, and even Friedman would support that the Eurozone needs some inflation, this policy seems contradictory to achieving internal balance because as a result, its money stock will stay the same. Some argue it is a compromise with Germany, whose central banker has resigned as a member of the executive right after the decision was made, arguing central bank debt financing would cause hyperinflation. That is, the ECB will sterilize to lower inflation pressure, but I am still not sure about this sterilization's impact if it means the ECB will sell the FXs it holds at the moment. It may keep money supply constant and reduce inflation pressure, which I don't believe it is necessary right now, but Euro will appreciate and it will harm competitiveness of the troubling countries. Another possibility is to sell German bonds, which are considered relatively safe assets. Still, it will keep monetary stock constant and offset stimulative effects of OMTs. In this sense, this policy seems just buying a little bit more time.

Barry Eichengreen. 1992. Golden Fetters

I just started reading this, and it seems to give us hints on the Eurozone crisis. According to Eichengreen, the inter-war gold standard was the cause of financial instability and the subsequent Great Depression because of lack of leadership credibility and cooperation, both of which Europeans do not have right now. Pretty easy to read and not so much technical.

Ma'am, what you are describing is not two-tier health care.

Here's the very misleading concept of two tier health care. http://fullcomment.nationalpost.com/2012/06/28/tasha-kheiriddin-think-two-tier-health-care-would-be-a-disaster-ask-a-swede/
Two tier health care does not just mean private sector involvement. If so, Canada already has one. Most physicians run their clinics privately, dental care is not so much publicly funded, and many employers provide their employees with supplementary health insurance through private insurance companies. Canada already has those options, so we can say Canada is already in the world of two tier health care. Two tier health care system, however, is a system where private insurances and service providers play main provisional role of medical service along with public system. In that sense, its perfect form only exists within the U.S. among OECD nations. In most developed countries, insurance for primary care is provided only through public system while service itself can be delivered by private service providers. I'm always bugged by Danielle Smith-like people mentioning German health care system as an example of two-tier system's superiority. The truth is if a person wants to opt out public insurance that person must have income above about 50,000 euros. Well, then the income for typical family of 4 should be 200,000 euros. Only quite wealthy people can opt out. However, I have never seen Danielle Smith or the Fraser Institute mentions that fact.

On bailouts

GM is once again headed for bankruptcy. http://www.forbes.com/sites/louiswoodhill/2012/08/15/general-motors-is-headed-for-bankruptcy-again/4/
And some start arguing that it is the evidence that bailouts haven't worked. But I would say, "haven't they though?" Bryan Caplan, a conservative economist at any aspect, made a very good point on bailouts four years ago.
http://econlog.econlib.org/archives/2008/09/how_would_we_kn.html
Caplan, of course, does not defend bailouts here. He actually has been very skeptical of them ever since. However, according to his argument, now that unemployment rate is a bit above 8%, we can possibly say they have worked for last four years. (Even though it does not confirm my position though, of course, according to his logic, huh, interesting.) GM has since survived anyway, so how can we possibly simply conclude they were failure. It could have been worse, and it is very obvious that things would be uglier if all the GM employees were laid off all of sudden.
It is stupid to believe that bailouts would save GM. However, it is also stupid to argue that bailouts were total failure now given that the goal of bailouts is truly not to save jobs in entirety or the receiving firms market share. They are given simply to give the recipients chance to slowly decline or adjust to changing environment. With bailout money, GM was supposed to shut down several unproductive plants or innovate itself to effectively compete with its domestic and international competitors, and it indeed did.
Apparently, GM is failing again, but does it really mean bailouts are destined to failure? I think it is just another problem. Probably, it is due to the fact that the world economy is sliding into another recession. GM was returning to a profitable business last year and fully paid the U.S. and Canadian governments back what it was supposed to until 2016, including both principal and interest.
Ignoring this fact, isn't it too sloppy to blame a doctor who has helped a person in hospital for four years when it turns out that person does not have a will to live or has gone wrong with everything in that time?

Rational Expectation and An Economic Theory of Labour Strike

Just a great research topic struck me. The title of this post is that. After having a little more speculation, I will come back with more detailed post.

In the long run, indeed, we are all dead...

Keynes probably meant a metaphor when he said "This long run is a misleading guide to current affairs. In the long run we are all dead." Or did he? Suicide rate is now soaring in Greece: http://www.dailymail.co.uk/news/article-2188879/Greek-economy-Suicides-rise-financial-crisis-takes-toll.html#ixzz23yDpqVbt While EU leaders are doing nothing but debating, the ECB is persistently resisting further action and the Greek government is playing a chicken game, Greek people are literally dying.

Richard Muller: The Conversion of a Climate-Change Skeptic

http://www.nytimes.com/2012/07/30/opinion/the-conversion-of-a-climate-change-skeptic.html?smid=pl-share

My comment: It may be a finish blow to global warming skeptics. Muller's research was conducted in the Koch borthers' money. Of course, these guys wanted to find counter-evidence to anthropogenic global warming. What they have actually found is the evidence of it. Of course, those who do not believe anthropogenic global warming are willing to not accept any evidence though.

Josh Barro "Who Needs Posner When You Have Mises and Hayek?"

http://mobile.bloomberg.com/news/2012-07-06/who-needs-posner-when-you-have-mises-and-hayek-.html

My comment: I think we are observing the biggest shift in the U.S. conservative movement since the WWII. I do not know much about philosophy and culture, but have a little bit of knowledge on economics. Even though the post-WWII U.S. conservatives were reluctant to take lessons from Keynesian economics, the logic of their policy had remained within something based on evidence, which I call neoclassical. During the Reagan Administration, public sector and airline industry deregulations were rationalized by William Baumol's contestable market theory or the Coase Theorem, not by the Austrian belief that free market is always better whatsoever. The Reagan tax-cuts were based on supply-side economics, and the supply-side economists, such as Art Laffer and Robert Mundell, have argued they got that idea from the Keynesian model. Even Milton Friedman was unable to avoid Keynesian concepts of aggregate demand and supply when he explained macroeconomics. Still within the profession, things are like that and the Republican candidate Romney is surrounded by very respected economists who are within neoclassical and New Keynesian tradition. That used to be conservatism in the U.S. and actually Romney represents that old conservartism. Now the people who still remain within that tradition are minority in conservatives. Mitt Romney had to nominate Paul Ryan as his vice-candidate to make sure these days' radicalized conservatives that he would pledge to what he is saying but apparently does not believe in according to what he did as a governor of Massachusetts and what he himself reveals occasionally. In this circumstance, it is not surprising that a person like Richard Posner, who has been conservative and libertarian for his life and devoted himself to making every aspect of our life more conservative and libertarian, confesses, "Now,I'm Keynesian" or "the recent GOP has made me less conservative."

Why an MRU student will be better off with having an ECON and Math tutor.

Students often have hard time at the beginning of semester. Especially, some courses use disciplines' jargons and seemingly complicated math stuff a lot in class. A student that has never taken those courses before usually say, "it doesn't make any sense. it is simply a torture. The prof does not think like other normal people.!" A lot of students end up giving it up or simply wish the prof will be a very generous marker. I'm talking, of course, about economics and mathematics.

There is no perfect solution, but having a tutor may help. MRU has a very well-designed peer tutor program. You can easily request tutors at Student Learning Services, T123 http://www.mtroyal.ca/AcademicSupport/ResourcesServices/StudentLearningServices/PeerTutoring/index.htm. However, a lot of students misunderstand the program or do not even know its existence. Here are some myths and truths about the MRU peer tutoring program.

First, I have seen several students who ask me if they must pay tutors. Absolutely not. Tutors are hired by the university. The university pays them. Then, the additional question is if students who get tutored pay the university anyways. Not really. The cost is already included in tuition. Peer tutoring is a type of student's enrollment benefit. No additional cost is incurred for having tutoring services. No matter you get tutoring, the cost is already incurred. Students can have opportunities to be successful in troubling courses with zero marginal money cost. The only cost is time that you use for it.

Second, some students think a tutor request requires very complicated process. No. All you need is fill a form, get your prof's signature, and submit it into Student Learning Services. It does not even take more than 5 minutes. I have never seen any prof who refuses to sign on it. Then, Student Learning Services will take care of the rest of the process. If you already know a registered tutor (me, me, me!!!) and want to have that person (me, me, me!!!), just refer to the name (Chun Lee!!!).

Third, I have seen some students feel uncomfortable having sessions in Student Learning Services. Well, tutors are required to have sessions only at designated locations within campus, T123 or T134. However, as long as a tutor and tutee sign in another location, then tutorial may be held somewhere else.

If you are interested in this program, please contact with Student Learning Services T123 and T134. Plus, don't forget to refer to "Chun Lee" in your request. ECON 1101, 1103, 2211, 2213 & 2221 and MATH 1200 are available Fall 2012.

I will choose small but efficient one: Mancur Olson. (1965). The Logic of Collective Action (Havard University Press)

Why do corporations usually win their policy goals very successfully? Even though labour unions have a great market power and large membership, and small and medium businesses and unskilled workers are greater in their numbers, why are they typically unable to contend with corporations in terms of mobilizing resources to win their collective goods? Some may say they are so weak that they can’t, but doesn’t it mean that are unsuccessful because they are unsuccessful? Isn’t it a simple tautology?
Mancur Olson’s the Logic of Collective Action (1965) suggests a fine explanation on these phenomena. According to Olson, a group does not act; individuals do. Without an effective method to enforce the collective action to individual members, a group will not be able to efficiently achieve its common goal. He used an analogy to a group of firms in a perfectly competitive market that seek a government policy and attempt to collectively act to organize a lobbying group. However, in this bid:

 ”Just as it was not rational for a particular producer to restrict his output in order that there might be a higher price for the product of his industry, so it would not be rational for him to sacrifice his time and money to support a lobbying organization to obtain government assistance for the industry.” (Olson, 1965, p. 11)

In this view, a group, composed of a large number of members, cannot efficiently mobilize its members because a rational individual member is hardly expected to coordinate his or her action with other members in his or her own expense. Especially, the common goal of the group is typically not what can exclude some individual members from being benefitted (p. 15). For example, a union contract benefits all the members of the union once it is ratified by the union’s general congress regardless of an individual member’s effort to participate in such a union activity as a strike or picketing. The union may formally or informally impose coercive methods such as disciplinary punishments on strikebreaking or worksite harassments on traitors, but it does not change the fact that the union contract must benefit all the members (pp. 75-76). Therefore, an individual member in a group would rather take “free-riding” action than committing himself or herself to the group’s collective goal unless a type of coercion or compulsory duty is imposed.
Although Olson took an example of a success story of American labour unions through the late nineteenth century and the first two thirds of the twentieth century (pp. 76-91), it is not possibly comparable to corporations’ success story because corporations’ success has been established mainly by their voluntary efforts while unions have been dependent on legislations and coercive methods towards their own members as well as the employers. Applying to the Olsonian theory, corporations have strength at their size and number of members when it comes to influencing a government’s policy making process. Olson argues:

”The high degree of organization of business interests, and the power of these business interests, must be due in large part to the fact the business community is divided into a series of (generally oligopolistic) “industries,” each of which contains only a fairly small number of firms.” (p. 143)

Obviously, the number of corporations is not smaller than the number of labour unions. The number of large firms, as of July, 2011, is 2,708 in Canada(Industry Canada, 2011). However, a corporation does act like an individual, or at least a relatively small number of individuals in its executive committee or board of directors easily coordinate their action. In an industry level, there are only a few dominant firms that need to coordinate. As Olson puts, “[t]he multitude of workers, consumers, white-collar workers, farmers, and so on are organized only in special circumstances, but business interests are organized as a general rule” (Olson, 1965).
Regarding the other two groups, small and medium enterprises and unskilled labour population, it is not unclear, according to Olson, that it is very hard for those to be well represented in policy-making process. Unskilled workers are mostly not represented because the number of them is so large that they are almost unable to coordinate actions. Unlike labour unions, they lack mechanism to enforce duties for their common goals on their fellow unskilled workers, as well.
Small and medium businesses might be more successful in achieving their goals than unskilled workers, taking into account their sizes and number. Whether they could win over labour unions, however, would rather depend on how much corporations would be willing to take risk fighting unions than SMEs’ own power.
Olson’s theory provides a keen insight into how a society, composed of self-interesting beings, work. Once the first chapter, including mathematical descriptions of group activities is finished, it is very easy to read the rest of the book. If you have a good ECON101 knowledge, and basic calculus, actually, you will find that part great. I personally love it.

Do unions really benefit workers? Think again. Assar Lindbeck & Dennis Snower. (2002). The Insider-Outsider Theory: A Survey

http://anon-ftp.iza.org/dp534.pdf
We are typically told unions represent labour. They always demand their seats in all kinds of committees on behalf of workers. They say, “we are fighting for all the workers.” However, are they, really? The insider-outsider theory shows something different. This theory was proposed first to explain why developed economies have natural unemployment. Even in a boom, unemployment rate never goes below 5% in Canada. Then economists typically say “we are in full employment” despite those poor five percent of unemployed labour forces. Why do we have them?
The principle observation of the insider-outsider theory is that it takes additional costs to replace existing employees by new workers (Lindbeck & Snower, 2002, pp. 1-2). The proposers of the theory name these costs ‘labour turnover costs (LTCs)’. These not only include the costs to recruit, hire, and train new employees but also encompass the costs to dismiss the existing employees. If an employee is very skilful and fired, then this worker may work for another competitor to the ex-employer and her business will suffer from losing some market share; To prevent the fired worker from working for a competitor, the employer may need to pay considerable amount of severance pay; if employees are unionized, especially, a dismissal of employees may lead to a lawsuit or stoppage of production led by the union, and possibly cost more than continuing to employ this worker. Therefore, LTCs give insiders market power. According to Lindbeck and Snower:
“[T]hese labour turnover costs (LTCs) divide workers into three groups: (i) insiders, whose positions are protected by these LTCs, (ii) outsiders, who have no imminent prospect of such protection (e.g., the unemployed, workers in the informal sectors, and inactive individuals), and (iii) entrants, who hold jobs that may lead to insider status.” (p. 2)
In this respect, roughly, union members and skilled workers are insiders; on the other hand, non-union members and unskilled workers belong to groups of outsiders or entrants (pp. 2-3). Union members, as insiders, can enjoy the benefits from union bargaining, such as job security, health insurance, signing bonus, stock options, etc.; on the other hand, non-union members, as outsiders or entrants, are excluded from these benefits. The benefits that insiders enjoy are not only from the expenses of employer but also from (directly or indirectly) imposing “less favourable” conditions towards outsiders and entrants. For example, union contracts typically include “last in, first out” provision; entrants would typically receive lower wages than insiders even if they were actually more productive; outsiders are not allowed to work at insiders’ positions even though they are willing to receive lower wages than insiders; outsiders may get stuck in “jobs with relatively low wages and/or low expected tenure” (p. 4). Since insiders’ market power stems from these LTCs, insiders are motivated to raise them because “[t]he smaller are the firm’s labour turnover costs (ceteris paribus), the more profitable it is for the firm to stop bargaining with its insiders and start bargaining with the outsiders instead” (p. 8). If LTCs are low enough, the labour market is contestable enough for employers to consider outsiders.
Lindbeck and Snower divides LTCs “into two categories: “production-related” costs, which must be expended in order to make outsiders productive within a firm, and “rent-related” costs, which are the outcome of insiders’ rent-seeking activities” (Lindbeck & Snower, 2002, p. 3). The insiders enjoy higher wages and more favourable benefits (union wages premium), because of their bargaining power, than non-members in the same industry. Fang and Verma (2002, Union wage premium, Persepectives on Labour and Income, 3 (9), p. 20) estimated this premium in Canada, as of 1999, is 7.7% on the top of average non-union member wage rate. Economically, this premium is a type of rent. If an employer attempts to cut wages and benefits of unionized employees, then she will easily face labour disputes, such as strikes or picketing, or, at best, collective bargaining, which incurs costs, as well.
Do unions benefit workers? Of course, yes. However, only a part of labour. Unions mainly (very often, only) benefit their members; non-members are usually ignored, or sometimes face hostility from the insiders when their interest is eroded by outsiders.

Economics of Taxes

I do not support "supply-side" economics, but Arthur Laffer made an interesting point when he created the Laffer Curve. As you can see in the figure I, it will create deadweight loss when the government levies taxes. Who pays taxes depends on elasticity of supply and demand and always inelastic one bears larger share of burden of taxes. The second figure is the Laffer Curve.

At 100% tax rate, the tax revenue will become zero because nobody will work or produce because people expect the government will take all; it becomes zero as well at zero rate simply because the government collects nothing. Therefore, we can conclude that the optimal tax rate exists somewhere between zero and one hundred. If we are on the right hand of the curve, then reducing tax rates will lead to a bigger revenue. What if we are on the left hand? Then, it implies the government will raise tax revenue by increasing tax rates. (However, Laffer has never pulled this one because of political reason. He's always only emphasized tax-cuts.)
As you can see in the figure one, revenue loss from tax-cuts may be larger than revenue gain. That's exactly what happened in the U.S. during the Republican Administrations since 1981. Cutting taxes recklessly while raising spending level does harm the economy. Then, what would be the optimal tax policy? I got a hint from Sweden. Sweden has a relatively low flat corporate income tax rate while personal income taxes and value-added tax rates are relatively high. Why do they have that kind of system?
First, if a country engages in free capital mobility across borders, corporations do not bear burden of the tax and simply it will be shifted to employees, consumers and domestic depositors. A simple reason. As you can see in the figure III, the supply curve of capital is perfectly elastic with perfect capital mobility.

With higher corporate tax rates, they will invest less here and more in jurisdictions where corporate tax rates are lower. Therefore, they do not pay the tax. What about personal income taxes? Labour is less mobile than capital. There are language and cultural barriers as well as legal barriers like immigration regulations, which are presumably stricter than cross-border investment regulations. As a result, labour supply is relatively inelastic. An interesting fact on the relationship between tax incidence and elasticity is the more inelastic the smaller deadweight loss. It means that even if the government levies relatively high rates of personal income taxes, it will unlikely cause such a big efficiency loss. Who bears the burden? Of course, workers, as you can see in the figure IV, because the labour supply is inelastic. (I made up an extreme case for simplicity here.) What about value-added taxes? The same reasoning applies. Since the demand for necessities is very inelastic, levying VAT on those will not create a big mess. So, some lessons: lower corporate income taxes and raise personal income taxes and VAT.

Economics of the Olympics

I share this link http://www.bbc.co.uk/news/business-19071419 with Frontier Centre for Public Policy and their argument:

"Organisers promised that the Olympics would provide an economic boom for London. Basic economics tells us that government spending doesn't "create" wealth, it just moves it around, and regular businesses in London are suffering."

is sloppy.

First, it is not true that "Basic economics tells us that government spending doesn't "create" wealth." Basic economics, i.e. most college level economic text books say government create wealth in that GDP=C+I+G+NX. Of course G is government purchases. Of course you may argue that G is not efficiently achieved but that is whole another matter.


I do agree that such a big event like Olympics have very limited stimulative effect, but because of different reasons.

1. At this moment, Europe is sliding into another recession and the U.S. is still in depression, so Europeans and Americ
ans, presumably the biggest spectators groups (unfortunately, except Japanese, Asians, like Koreans and Chinese, do not travel to Europe so much), may be very reluctant to shop downtown. They may just watch games and go back to hotel.

2. The Olympics last only 15 days. During the Games, there might be a bigger consumption due to an increase in the number of tourists. Therefore, the hosting nation's people can TEMPORARILY have greater income. However, it will be gone soon. Households and businesses will unlikely use that windfall due to the Olympics and instead save it for future use.

3. Usually hosting nation's Olympic Committee bids for the Games at least 7-8 years before the Games. When it bids, its economy is usually very good. When it starts building new venues and infrastructure, that is typically overshooting in
the economy. It probably does not harm the economy at that moment, but can turn toxic if the hosting city is unable to finance the debt they have made for that 7-8 year period. For example, Montreal had got into trouble for next decades since it hosted the 1976 Summer Games.

However, there do exist very rare cases of Olympic success. For example, South Korea's 1988 Summer Games were great success. It was the first surplus Olympics till then. The Korean economy was very fast growing back then and so it needed ne
w infrastructure, expanded subway system, roads, new hotels, clean river, etc., anyway. Plus two years before the Games, Seoul hosted Summer Asian Games, a copycat of the Olympics. So the venues that we used for the Olympics were already used ones and they have been used very often for a lot of domestic or international sport or non-sport events. The apartments built for the athletes were sold to the ordinary people or parts of them are still being used for national teams' accommodation.

Mundell vs. Friedman Debate. If Friedman were alive, he would kick Mundell and Draghi's asses.

http://www.irpp.org/po/archive/may01/friedman.pdf
A lot of people on the right remember Friedman only as a free market advocate, but he was a little complicated figure when it comes to monetary policy, where his main contribution to modern economics belongs. Obviously, he did not support f
iscal stimulus but indeed supported monetary stimulus, i.e., the central bank lowering key interest rates, buying long-term government bonds, and increasing monetary base, when the economy is in recession. Since he was a Irving Fisher influence like many other macroeconomists, he also believed inflation could erode debt overhang, although he expected long-run price stability would be a real concern. In this piece, his main concern on the euro was that Europe is not optimum currency area at all and political division by nation state would lead euro to dysfunction. Mundell was unbelievably optimistic for that even against the theory he himself developed. (He still keeps that position, but sounds very unassertive.) It's been 10 years since this debate. Who was right?

Robert Mundell’s original sin: A Theory of Optimum Currency Areas (1961) American Economic Review 51, 509-517

Robert Mundell is obviously the greatest economist Canada has ever had. However, he committed the original sin when he supported the creation of the Eurozone against the theory he himself initially developed in the 1960s. Read this classic article if you want to know his argument: A Theory of Optimum Currency Areas. (http://www.columbia.edu/~ram15/ie/ie-12.html#1) According to him, an optimum currency area is where perfect labour mobility exists within the area and does not exist across areas. In that area, the use of common currency would be desirable because uncertainty of currency conversion and exchange costs will be eliminated in the environment where a lot of transactions occur between regions. If one region in the area is in boom and the other has high unemployment, people will move from the unemployed region to the inflation region, or the inflation region will buy stuff from the region with the lower prices. If other things remain the same, it would be ridiculous for those two regions to have different currencies. Let’s apply this insight to the Eurozone. As far as I know, there is no common language in Europe. A lot of international conferences are held in English or French, but when it comes to ordinary workers, a lot of Italian, Spanish, or Greek workers do not speak English or French in working environment. Scandinavians speak English very well (some of them are better than Canadians), but they have not joined the Eurozone, except Finland. Definitely, Southern Europeans, who have mass unemployment, cannot migrate to other Eurozone nations to find jobs. Europe is not an optimum currency area, but Mundell supported euro when it was introduced and now he is silent at this miserable situation. It is an academic sin.