Focus on bottlenecks and not moral hazard

Prof Charles Wyplosz of Graduate Institute Geneva in this voxeu piece:

Governments should be very careful not to undermine the resumption of growth as they feel the urge to wind down the deficits that they opened up during the crisis. The now-classic example is the euro area’s double dip after the Great Recession. Suspending the budget constraint, even for good reason, creates a moral hazard. The response is not premature austerity, nor is it ever lasting laxity. Finding the right balance will be challenging.

The euro area faces a number of specific challenges. We hear many calls for coordination. There is no doubt that some coordination would help, but not in every dimension. Targeted fiscal measures, which imply transfers to erase the bottlenecks, are ill-suited for coordination. Most measures must target well-identified bottlenecks. In the absence of a fiscal union, providing support to firms and households is a national competence for the obvious reason that it is financed by national taxpayers. In addition, these targets are probably better understood and more effectively dealt with at the local level. However, there is a risk that some governments cannot borrow what they need because they are already overindebted. Given the amounts likely to be required, the risk of another debt crisis is serious because, as we now know, the euro is a foreign currency because member countries do not own their central bank, the ECB. This is where coordination is required. 

One solution would be a mutual guarantee for new national borrowings. An alternative is that the borrowing be undertaken collectively through jointly issued Eurobonds. This is a function that could be entrusted to the European Stability Mechanism (ESM), but its resources (3.5% of GDP) are too limited, the conditions too drastic and the decision-making process, which requires unanimity, too inefficient.

Unfortunately, both mutual guarantees and Eurobonds have been rejected repeatedly in the recent past because of moral hazard considerations. Indeed, countries that managed to attain low public indebtedness are unwilling to protect those that did not. Under the current exceptional circumstances, it would make sense to set the moral hazard concern aside but, given the urgency of the situation, it seems unlikely that an agreement can be worked out after so many years of heated discussions.

 

What We Know and Don’t Know about Climate Change, and Implications for Policy

Prof Robert Pindyck of MIT Sloan in this NBER WP:

There is a lot we know about climate change, but there is also a lot we don’t know. Even if we knew how much CO2 will be emitted over the coming decades, we wouldn’t know how much temperatures will rise as a result. And even if we could predict the extent of warming that will occur, we can say very little about its impact. I explain that we face considerable uncertainty over climate change and its impact, why there is so much uncertainty, and why we will continue to face uncertainty in the near future.

I also explain the policy implications of climate change uncertainty. First, the uncertainty (particularly over the possibility of a catastrophic climate outcome) creates insurance value, which pushes us to earlier and stronger actions to reduce CO2 emissions. Second, uncertainty interacts with two kinds of irreversibilities. First, CO2 remains in the atmosphere for centuries, making the environmental damage from CO2 emissions irreversible, pushing us to earlier and stronger actions. Second, reducing CO2 emissions requires sunk costs, i.e., irreversible expenditures, which pushes us away from earlier actions. Both irreversibilities are inherent in climate policy, but the net effect is ambiguous.

The tangle humanity has got itself into. Why did we ignore years of warning on warming of climate?

Pune’s Gokhale Institute of Politics and Economics turns 90!

Gokhale Institute of Politics and Economics was established on 1930. and completes 90 years:

Gokhale Institute of Politics and Economics, Pune, established in 1930 by the Servants of India Society, is the oldest research and training institute in Economics in the country. It is dedicated to research into the socio-economic dimensions of the Indian society, and carries forward the legacy of Gopal Krishna Gokhale who founded the Servants of India Society in 1905 with a view to promote education and develop capabilities among Indians for the governance of the nation after it had attained its political independence. The Institute is registered under the Societies Registration Act, 1860, and the Bombay Public Trusts Act, 1950. Over the decades, the Institute has established strong credentials in empirical and analytical research. In recognition of its contribution to higher learning and research in Economics, the Institute was awarded the status of institution Deemed to be University, in 1993.

Ram Upendra Das pays tribute to his alma mater…

Many more to come.

After lockdown, Australians seek to learn survival skills in the bush

Reuters has this story from Australia:

Learning Australian bush survival skills is becoming popular as city folk turn to nature with the easing of the coronavirus lockdown, organisers of a course outside Sydney said.

The Bushcraft course teaches basic survival skills like foraging for food and water, and also offers insight into traditional indigenous cultures. The course filled up soon after the lockdown began to be eased late last month, and there is a lot of demand, the organisers said.

“A lot of people come to learn self discipline. How to organise themselves and organise themselves in a natural environment,” said instructor Gordon Dedman at Bushcraft Survival Australia, who is a former army commando.

“The more knowledge you have… it actually gives you a sense of confidence and then you can make better informed decisions.”

Who knows, we all could be headed where we came from!

Central banking jobs for near future: Climate economists and money futurists

My new piece in MC.

The article discusses these two recent announcements, one by Denmark Central Bank and other by RBNZ. Denmark central bank invited application from climate economists (link not available anymore) and RBNZ for a money futurist.

Most central banks will need both these jobs and really soon.  RBI should act and try recruit such profiles right away.

New Zealand is Covid-19-free, last remaining active case has recovered

Stuff happens. NZ has declared itself Covid-19 free. They have not had a case since last 17 days and the last patient recovered as well. There could be cases in future but for now NZers can relax a little.

It is a tragedy of sorts that countries which are most affected and continue to be affected are not learning/caring to learn from any of these countries. Yes these are small island countries which makes them special but this could have backfired on them as well.