I’ve been carrying around my copy of Grand Pursuit for a couple of months — it’s been my “airplane book” as I’ve traveled to give book talks. It has been perfect for this because each chapter tells a clear story and it is easy to pick up, set down, and return to once again. And now I’ve finally found time to finish it.

A Puzzle with One Piece Missing

Or almost finish it, because mine is an “advanced reader’s edition” — basically the uncorrected page proofs — sent out to reviewers ahead of the official release.  It isn’t necessarily the final edition — the author can still change a thing or two before the final book goes to press

Or, as in this case, the author can actually finish the book after the review copies have been put in the mail. The last six pages of my edition, marked “epilogue,” are left intentionally blank to accommodate a last minute addition that I imagine ties the book’s themes tightly to current events, setting the hook as a fisherman might say

I guess I could go to the library and read these last few pages — it wouldn’t take much time — but since I’ve read the rest of the book I ought to be able to guess what Nasar says in the end.

A Book About the 90 Percent

Nasar starts and ends Grand Pursuit with a reference to the economic plight of the 90 percent — stated initially in a quote from Edmund Burke regarding the misery of the “nine Parts in ten of the whole Race of Mankind.”  The final page of my edition returns to the “nine parts” theme with a comment made in reference to Amartya Sen’s work on poverty. I take this as a sign that the book is meant to address the “grand pursuit” to eliminate want and achieve prosperity for the majority of the world’s population.

This theme is either advanced or interrupted, depending upon your point of view, by Nasar’s decision to tell it through the lives of “economic genius” in the persons of Marx and Engels, Alfred Marshall, Beatrice Web, Keynes, Schumpeter and Hayek, Irving Fisher, Milton Friedman, Paul Samuelson, Joan Robinson and the already mentioned Sen. None of these “lives of the saints” (and the sinners) is comprehensive, but how could they be? Skidelsky’s three volume biography of Keynes runs well over two thousand pages. It is impossible to do complete justice to all the people and events found here in only about 500 pages. So compromises must be made.

Striking a Balance

Nasar’s extended biographical sketches actually pass my test for decent popular work. In the cases where I already knew a lot (Keynes, for example) I found the text somewhat superficial and I wanted more. But I think I learned a lot about the people with whom I was less familiar.

That suggests that Nasar has struck a good compromise between depth and breadth (although it doesn’t guarantee that she is always even handed or picks the events and ideas that I would have highlighted).

But this really isn’t the story of the economic geniuses or even their genius (which would be a history of economic theory, which this book clearly is not). Rather, and against the odds, it really is a history of the “grand pursuit” of broadly shared economic prosperity — the welfare of the 90 percent.

Unfinished Business

And, of course, it is an unfinished pursuit. The Occupy Wall Streeters may not have everything right, but they do have this. Much has been accomplished, I truly believe this, but it has come against the background of false starts, false gods, false optimism and false pride. (After all, the geniuses are only human.)

As Nasar proclaims on the first page, the idea that “humanity could turn tables on economic necessity — mastering rather than being enslaved by material circumstances” is audacious when set in historical context. The pursuit of this goal is grand, indeed.

But there is a another answer that relies upon simple mathematics.

The financial key for countries like Greece and Italy is not to repay their large sovereign debts — no one really expects that — they must simply be able to outgrow them. If the economy grows faster than the compounding debt, the burden of the debt (as measured by debt to gdp) will slowly decline and tensions ease.

Suppose, for example, that country A has current debt equal to 100% of its gdp and has to pay 3% interest on its debt. They it can slowly escape the debt burden only if its nominal growth rate is higher than 3%. I stress the nominal part because the growth can be either real production increases or inflation. There is a big difference between real and inflationary growth for the economy, of course, but in terms of debt math it doesn’t make any difference. Anything that increases the debt/gdp denominator will do.

Eurozone countries cannot influence their individual inflation rates because the European Central Bank controls the monetary levers and does not seem interested in risking higher inflation, so real growth is the only answer for them (unlike the British and Americans).

So this creates a three-factor problem: interest rates, debt levels and real growth. A country like Greece, which has a debt level more than 150% of its income according to this chart from the Economist website, must have real growth of 150+% of its sovereign debt interest rate — which is functionally impossible at today’s interest levels. Writing down the debt is the only realistic option.

Germany, on the other hand, has debt equal to 82% of gdp and faces low interest rates. Growing its way out of debt is a realistic proposition (so long as Germany doesn’t somehow inherit Greece’s debt). But if growth slows down or interest rates rise dramatically, even Germany could have a problem. This is the concern with France, which has a slightly higher debt burden but much softer growth prospects.

So where do the jitters come from? Well, there are so many possible sources of good and bad news that the markets are whip-lashed. Today’s good news on budget reforms (bringing the debt ratio down a bit) is followed by tomorrow’s bad news on growth prospects, which in turn pushes up interest rates, which makes the bad news worse.

Fasten your seat belts. We are in for a bumpy ride.

Yes, I know that the stock market recovered pretty well (before it tanked and recovered and … well, you know). And yes, national output has risen, which is the technical definition of a recovery.

But I am not convinced. It seems to me that output fell so fast and far because retailers and consumers decided to draw down their inventories. Eventually the shelves were bare and so they reordered, causing industrial production to pick up. But now the shelves are restocked and orders have dried up again. That’s what bouncing along the bottom looks like today.

Yes, I know that this is not the whole story. But the rest of the story isn’t so different. It’s a single dipper so far and that’s not a good thing.

Martin’s Wolf’s column in yesterday’s Financial Times comes to the same conclusion, but backs it up with more analysis. It is required reading. Here’s a telling excerpt. Click on the link to read the entire essay.

“Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become. The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008 (see chart). The US and Germany are close to their starting points, with France a little way behind. The UK, Italy and Japan are languishing far behind.

“The authoritative National Bureau of Economic Research of the US does define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months”. This is to focus on the change in output, rather than its level. Normally, that makes sense. But this recession is not normal. When economies suffer such steep collapses, as they did during the worst of the crisis (the peak to trough fall in gross domestic product having varied between 3.9 per cent in France and 9.9 per cent in Japan), an expansion that fails to return output to the starting point will not feel like recovery. This is especially true if unemployment remains high, employment low and spare capacity elevated. In the US, unemployment is still double its pre-crisis rates.”

Torschlusspanik

In economics this German term is most closely associated with financial crises. Charles Kindleberger used it to describe the situation when investors (or speculators as the case may be) realize that there isn’t enough liquidity to cover all the assets that they hold and all rush for the door (to cash out) at once. I don’t have to tell you that the result can be pretty gruesome when everyone tries to squeeze out at once.

The current issue of The Economist features a cover story about the possible collapse of the Euro and it made me think about Torschlusspanik. The Euro was designed to make Torschlusspanik impossible by simply having no gate. There are requirements to get into the Euro zone, but no procedure to exit. No way out. Hence no gate shut panic. Simply unthinkable.

But now it is thinkable. In a recent poll of top economics bloggers, my answer to the question of whether the Euro would exist in five years (in some form) was still “Yes,” but I said that there was a 40% chance that one of more countries would drop out. Forty percent may be a bit high (I wonder what odds The Economist would give?) but it indicates that I am now willing to think the unthinkable.

So what happens if Greece or another country leaves the Euro zone? I am starting to think that it will be a Torschlusspanik as every country with any doubts at all about the future rushes for the door. Weak countries that stay behind will certainly be subject to intense pressures both economic and political. And I am not sure that the terms and conditions to leave will become any better. Better find the door … quick.

Where would a Euro Torschlusspanik lead? I wonder.

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Apparently Torschlusspanik has an anthem!

Globaloney 2.0

Click on the image of the Mt. Washington Hotel to see an interesting Financial Times report by Gillian Tett and Martin Wolf.

Oh yeah. It’s that globe made out of a ball of yarn. Where have I run across that before?

Now I remember. We used that idea on the cover of my 2010 book …

… and on this 2005 cover, too. It was a clever visual pun. “Unraveling the Myths” illustrated by an unraveling ball of yarn. A nice image, don’t you think? Not quite sure how it illustrates Rodrik’s paradox — anyone have a theory?

Well, they say imitation is the sincerest form of flattery, so I guess the artist who designed my covers at Rowman & Littlefield should feel sincerely flattered.

The list of formal sessions of the WEF always make it look like the coolest conference ever, whether you want to debate key global issues, rub shoulders with high government officials, get face time with corporate giants, hang out with rock stars and Nobel laureates or … well I suppose you could go skiing if you wanted to (and I guess some of the attendees actually do that!)

Once again this year I am not in Davos at the end of January. Usually my excuse is that I don’t want to take time away from classes, but I admit the real reason is that I have never been asked. But now I have a new and better reason — I can’t afford to go!

Andrew Ross Sorkin, writing in the New York Times, has been investigating the WEF’s finances and his research makes it clear that getting in the door would bankrupt me.

Just to have the opportunity to be invited to Davos, you must be invited to be a member of the World Economic Forum, a Swiss nonprofit that was founded by Klaus Schwab, a German-born academic who managed to build a global conference in the snow.

There are several levels of membership: the basic level, which will get you one invitation to Davos, costs 50,000 Swiss francs, or about $52,000. The ticket itself is another 18,000 Swiss francs ($19,000), plus tax, bringing the total cost of membership and entrance fee to $71,000.

But that fee just gets you in the door with the masses at Davos, with entry to all the general sessions. If you want to be invited behind the velvet rope to participate in private sessions among your industry’s peers, you need to step up to the “Industry Associate” level. That costs $137,000, plus the price of the ticket, bringing the total to about $156,000.

Of course, most chief executives don’t like going anywhere alone, so they might ask a colleague along. Well, the World Economic Forum doesn’t just let you buy an additional ticket for $19,000. Instead, you need to upgrade your annual membership to the “Industry Partner” level. That will set you back about $263,000, plus the cost of two tickets, bringing the total to $301,000.

Click here to read the whole story.  It seems that the conference is organized on the pizza principle — the toppings you want all cost extra. So the total expense can get pretty high. I wonder how many $10 malaria nets the WEF’s total extended budget would buy?

All these embedded costs have helped make the World Economic Forum a big business — perhaps the biggest conference organizer in the world. According to its annual report, it brings in about $185 million in revenue and spends nearly all of it, with almost half of its costs going toward events and the other half on personnel.

Quite a few! At $10 per net, you could potentially save 18.5 million lives a year. So the meetings have to be awesome to justify their human cost. No wonder they are so cool.

And yet, we are told, Davos Man is left unfulfilled.

But all this spending may soon be going out of vogue. As one attendee, the author David Rothkopf, recently wrote on his blog, “The entire endeavor is fading for several reasons, all associated with the inadequacy of Davos as a networking forum.”

He explained, “As Steve Case, founder of AOL, once told me while standing at the bar in the middle of the hubbub of the main conference center: ‘You always feel like you are in the wrong place in Davos, like there is some better meeting going on somewhere in one of the hotels that you really ought to be at. Like the real Davos is happening in secret somewhere.’ “

Wow! That’s just how I feel now. So I guess I’m better off where I am, don’t you think?  [Memo to Bob Dylan: here's an idea for a new song -- Stuck inside of Mobile with the Davos blues again!]

That’s the most important question of the year, according to the FT gurus and one that I address in Globaloney 2.0.

A Zero-Sum Year? Yes and No.

Five points of view are presented in the FT. Gideon Rachman, author of a new book on the Zero–Sum World kicks off the discussion, warning that globalization (and the prosperity associated with it) is indeed threatened unless there is a “coordinated global recovery.” Positive-sum actions are needed to prevent a spiral of individually zero-sum (which collectively become negative-sum) responses to the global crisis and the uneven recovery.

Former EU trade minister Peter Mandelson takes a contrarian view. He finds three reasons for optimism. First, he thinks technology that increasingly links us into tight networks is a positive force leaning against protectionist policies. Second, he finds that global leaders have on net kept their commitments to avoid beggar-thy-neighbor policies — a good sign. Finally, he believes that this might be the year that the Doha round of trade talks is completed.  Really! Well, I’m glad someone is optimistic about that!

Microchips and Metaphors

Google CEO Eric Schmidt picks up on the technology theme, arguing that open systems are the way forward, both in terms of information technology and more generally (open systems used here as both a techie term and a social metaphor). The focus should be on developing an open world to build the next economy.

Nandan Nilekani, former Infosys CEO, argues that if globalization does in fact retreat in 2011, it will be just a blip on the trend line. He argues that the rise of India and China will pull globalization forward. “Globalization might pause briefly in 2011, but it cannot be reversed when many billions of Indians and Chinese want it.”

More? Less? Or Better?

Finally, Nobel-winning economist Joseph Stiglitz sounds a cautious note. “2011 will be a hard year for globalization,” he says. The initial cooperative spirit of G-20 meetings in 2008 and 2009 have given way to more protectionist actions in 2010.  He paints a fairly dark picture of currents trends, including the continuing currency wars. “In a moment of dreaming one can imagine a better year,” he says. There is hope for progress on trade, finance, the euro and so forth. “Some of this could happen, although I wouldn’t bet on it. But we should still strive to make sure as many of these dreams come true as possible in the not too distant future.”

My own viewpoint, as explained in Globaloney 2.0, is that perhaps we shouldn’t worry so much about whether we have more or less globalization, but rather what kind of globalization. Some policies, like limited capital controls, that are being cited today as attempts to roll back globalization might in fact be useful improvements to the world wide financial system.

A trilemma is a situation where are three desirable choices that are internally inconsistent. You can have any two, but once you’ve made this choice the third option is no longer feasible.

The classic example of a trilemma is choosing lunch in a busy cafeteria or food court. You can have good and fast, but it won’t be cheap. You can have good and cheap, but expect long lines. You can have cheap and fast, but it won’t be very good (if it was good, the price would be higher or the lines much longer).

I explain the concept of the trilemma in more detail in chapter 9 of Globaloney 2.0 where I explore the future of globalization in terms of two famous trilemmas: Mundell’s international finance trilemma and Rodrik’s trilemma of global governance.

Ferguson and Forstmann introduce a new dilemma that especially applies to domestic financial markets. The three options are (1) efficient capital markets; (2) no bail outs to big banks and (3) a depression-free economy.

Since 2007 we have learned  that picking (1) and (2) had a high trilemma price — we left ourselves open to  a economic crisis. Poor choice, I believe and the authors argue.

So what is the right choice? Well, I will have to give this particular trilemma more thought because trilemmas can be tricky (in particular, their constraints do not always bind).

But the argument that I make in Globaloney 2.0 suggests that some restrictions on capital markets (giving up (1) in the current context) has certain advantages. Some growth is sacrificed for a more stable financial and economic system. This is pretty much consistent with Ferguson and Forstmann’s analysis.

Their advice to financial reformers: don’t imagine that you can avoid the trilemma and have a financial free lunch.

Good advice.

Honestly, it’s enough to make you want to scream like my friend Homer shown here.

The good news is that some important people are taking the need to rethink and reform seriously. The International Monetary Fund, for example, has released a couple of policy papers that challenge the conventional wisdom about economic policy. They suggest that (1) maybe we need to rethink inflation-targeting goals and (2) maybe we need to rethink global capital market regulation.

Both these ideas challenge contemporary economic dogma. Both are worth considering. (Read this article in today’s New York Times to learn more about the IMF’s proposals.)

The Conventional Wisdom about Inflation

The conventional wisdom is for central banks to aim for zero inflation. The IMF papers ask if maybe low but predictable 4% inflation might not be better. Why? Well, the Times article gives one argument, but my opinion is this.  When global financial crises hit, central banks sometimes need extreme tools to use to combat the effects. Sometimes (as we saw in Japan in the 1990s and around the world in recent years), pushing interest rates down to zero is not enough. In extreme emergencies you need to actually make interest rates negative (in real inflation-adjusted terms).

If inflation is zero, then the lowest that real interest rates can go is zero in a practical sense. And, as I’ve said, when the big crisis hits, that may not be enough. A 4% inflation rate would give central banks room to lower real interests as low as -4%. The fact that the IMF wants to consider this option suggest that they take seriously the possibility of another major crisis.

(BTW I think this is the reason the Federal Reserve increased the discount rate last week. Raise it now so that there is more room to lower it later if that is necessary.)

The Conventional Wisdom about Capital Flows

The conventional wisdom holds that nations grow fastest when they have open access to global capital flows. The conventional wisdom, however, seems to ignore the fact that higher returns come with higher risks associated with these flows and there are good arguments to be made for imposing sensible capital controls to reduce risk.  The IMF acknowledges this trade-off and proposes some models of sensible capital controls.

Hopefully we can all appreciate today that maximizing return by maximizing risk is not maximizing common sense. Time to rethink the conventional wisdom.

I am not sure that many countries will embrace the IMF’s new ideas, but I think this is a good place to start. Ideas come first, after all. The necessary policy changes can only build  upon them.