US Congressional Study: Is Copyright the Free Market at Work?

http://www.publicknowledge.org/files/withdrawn_RSC_Copyright_reform_brief.pdf

In November 2012, the Congressional Republican Study Committee briefly launched - and subsequently retracted - an ideologically-unusual study casting skepticism on the state of American intellectual property law. While the study focuses on Copyright law, its conclusions are valid for intellectual property law at large. Overall the, the study challenges three standing ideas about IP law. 

1. The purpose of copyright is to compensate the creator of the content:

According to the study, purpose of the copyright system is to “promote the progress of science and useful arts.” IP law is supposed to incentivize innovation. To the extent that IP law fails to do so -as  has been the demonstrable case in the IT industry- IP law is not fulfilling its constitutionally-intended purpose. 

2. Copyright is free market capitalism at work:

In fact, IP law currently entitles the IP holder to a guaranteed, state-enforced monopoly. The retarding effect of this on the progress of economic growth cannot be overstated. 

3. The current copyright legal regime leads to the greatest innovation and productivity:

This echoes the claims many of economists who conclude that current IP stifles innovation and encourages rent-seeking, while interfering with productive participation in the economy as new information is systemically prevented from ever entering the public domain. Productive parties must deal with hampered access to useful knowledge, even decades after the initial discoveries.   

Ruffled Feathers

Responding to protests from congressional Republicans, the RSC removed the brief from its website in less than 24 hours and fired Derek Khanna, the study's constitutional strict-constructionist author. Khanna, a Yale Law Fellow, has subsequently become a contributor for Forbes. 

What Can Be Done?

A package of solutions was also proposed by the study. Currently, US has no disincentive against bogus IP claims, which do not actually have innovation behind them (such as attempts to copyright or patent traditional, folkloric knowledge). This could be reformed. Fair Use should also be expanded, and damages awarded for infringement should also be reformed. These measures would serve to discourage anti-competitive patent-trolling. 

The most significant reform that Khanna proposes, is to limit the length and renewability of IP protection, restoring IP protection to the competition-favoring, industrial-revolution-era version of itself. 

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Warren and Bernanke on Addressing Too Big to Fail in US Banking Sector

http://www.kc.frb.org/Publicat/Reswkpap/PDF/RWP07-05.pdf

During a hearing of the Senate Banking Committee on February 26, Senator Elizabeth Warren interviewed Federal Reserve Chairman Ben Bernanke on the status of the US' largest banks. The central topic of the discussion was the "Too Big To Fail" issue. According to Warren, the TBTF  problem has actually gotten worse since the crisis began. Bernanke, agrees with the specification of TBTF problem. The plan apparently is to develop institutional mechanisms by which America's large systemic banks can be wound-down, should they fail. 

TBTF is toxic to the incentive structure underpinning a well-working financial market because it creates expectations that banks and other economic actors which are large enough to be systemic to a country's economy, and whose collapse would cause severe negative knock-on effects, making the consequences of bank failure disastrous to the economy as a whole. Market expectations are therefore, that the state would bail the banks out in case of failure, thereby dis-incentivizing prudent risk-management within the largest banks.

According to empirical research conducted by the Federal Reserve, banks are willing to to pay billions in added premiums associated with M&A costs in order to acquire TBTF status. What this should tell us is that American banks are definitely able to detect economic rents from becoming so large. 

Abstract

This paper examines an important aspect of the “too-big-to-fail” (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders’ wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.

http://www.kc.frb.org/Publicat/Reswkpap/PDF/RWP07-05.pdf

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Are Tax Cuts Good for Growth?

http://www.dpcc.senate.gov/files/documents/CRSTaxesandtheEconomy%20Top%20Rates.pdf

Just before the 2012 US federal elections, a bi-partisan congressional study investigated the economic effect of tax cuts found their effects to be of limited usefulness. While proponents of higher tax rates argue that revenues are necessary for sovereign debt reduction, and that higher rates on the rich mitigate income inequality, the conservative camp argues that low tax rates are positive for investment, innovation and growth.

Nevertheless, the study found higher tax rates to be correlated with slightly higher GDP per capita growth rates. Meanwhile, the effect tax cuts on GDP growth is either small, or non-significant.“The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution,” concluded the report.

Senate Republican leader Mitch McConnell protested the study's ideological bias. It was subsequently removed from circulation by the Library of Congress.

Tax Reductions and Their Spending Cuts

http://www.imf.org/external/pubs/ft/wp/2006/wp0616.pdf

Against this evidence the effect of cuts must be considered. According to an empirical study undertaken by the IMF, spending cuts are useful for reducing sovereign risk spreads. Nevertheless, gains realized via reductions in sovereign risk spreads are short-lived and subject to market-bias. In 2011, the IMF launched another empirical study casting a skeptical light on the merits of using reductions in sovereign debt service costs due to cuts as an economic growth strategy. 

http://www.imf.org/external/pubs/ft/wp/2011/wp11158.pdf

Public expenditure returns on investment must be weighed against potential gains due to reductions in debt service costs. Taking all three studies into consideration, depending on tax cuts to deliver economic growth  yields little little-to-no long-term growth, while aggravating income inequality and increasing sovereign debt  - and private debt- service costs. In addition, the associated cuts generally lead to a contraction in GDP.   

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Iceland Takes a Different Course

Fitch Ratings Full Report

We are perhaps all familiar with the meme in which Icelandic President Ólafur Ragnar Grímsson says that Iceland has been successful because it "Bailed its people out and put its bankers in jail". However, beyond the meme, what did Iceland's policy response actually look like?

As a result of Iceland's banking crisis, the country's sovereign debt stood at a staggering 240% of GDP. As Iceland's economy collapsed, the country suffered a 6.7% GDP contraction in 2009. Since then, sustained GDP growth between 2.5% and 3.0% has made-up for lost ground. 

In 2009, President Geir Haarde was indicted along with the CEOs of Iceland' three largest banks, Glitnir, Kaupthing, and Landsbanki. Thereafter, Iceland's policy response was partial forgiveness of home-owner debt, currency controls to contain risk, and a takeover and re-establishment of the domestic operations of Iceland's three main banks. According to Fitch's February 2012 Full Rating Report, "Iceland‟s unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness at a price; capital controls continue to block repatriation of USD3bn- 4bn of non-resident investment in ISK instruments". Due to measures taken by Iceland, it has been largely unaffected by the Eurozone crisis. According to Fitch, Iceland's sovereign debt returned to investment-grade a year ago. Furthermore, future sovereign risk is considered minimal. 

In this clip, President Grímsson (Haarde's successor) was briefly interviewed at Davos. He cautions against a financial system combining privatized profits and tax-payer held losses, which bailing out the banks has led to. 

Last month, Iceland won a case at the court of the European Free Trade Association over disputes concerning tax-payer funded outlays to UK and the Netherlands stemming from collapse of Iceland's main banks, whose combined balance sheets stood at nine times Iceland's GDP.

Fitch's Full Rating Report
EFTA Court Judgement
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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

IMF: Austerity Has Failed Europe

http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf
In a recently published working paper, IMF chief economist Olivier Blanchard acknowledged that the IMF under-estimated the size of the macroeconomic multiplier. The result is that the negative economic effects of austerity in the Eurozone have also been under-estimated.  Whereas, the IMF estimated a GDP contraction of $0.50 for every dollar of spending cuts, the real contraction was in fact $1.50 for every dollar of spending cuts. According to the Washington Post, this amounts to an earthquake in policy circles. The allegations are that the IMF intentionally under-estimated the negative effects that austerity would have on Greece and its Eurozone neighbors.

Washington Post Wonkblog

Notwithstanding, words of caution were first issued by the IMF in a 2011 study which contested the idea of expansionary austerity, calling studies that support the concept biased in favor of over-estimating the expansionary effects that brought on by expanded private consumption expected to result from spending reductions.
http://www.imf.org/external/pubs/ft/wp/2011/wp11158.pdf

At the center of the IMF's under-estimation, is an overlooking of the fact that multipliers change over time. In its conclusion, the study cautions that, in general, multipliers grow during a crisis. "It seems safe for the time being, when thinking about fiscal consolidation, to assume higher multipliers than before the crisis." According to the study's conclusion, this change in multiplier size is due in part to changes in credit availability. Apparently, due to unexpected changes in the size of the multiplier, the paradox of thrift was - at least in this specific case - true after all.

Abstract:

This paper investigates the  relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal  consolidation has been associated with lower growth than expected, with the relation being  particularly strong, both statistically and economically, early in the crisis. A natural  interpretation is that fiscal multipliers were substantially higher than implicitly assumed by  forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.
http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

http://www.imf.org/external/pubs/ft/wp/2011/wp11158.pdf

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

The Election of Shinzo Abe: Voters Mull over Monetary Policy

http://www.telegraph.co.uk/finance/economics/9751609/Japans-Shinzo-Abe-prepares-to-print-money-for-the-whole-world.html

http://www.ft.com/intl/cms/s/0/7e64027c-2f04-11e2-b88b-00144feabdc0.html#axzz2FguSUj9z

http://www.ft.com/intl/cms/s/0/a14281d8-2266-11e2-8edf-00144feabdc0.html#axzz2FguSUj9z

In the world's top creditor nation, a change in policy might soon be in store. Last week, hawkish opposition leader Shinzo Abe was elected to his second term. Abe's first term in 2006-2007 collapsed in the aftermath of Agricultural Minister Toshikatsu Matsuoka's suicide. Adopting an overtly expansionist economic stance for this election, Abe called for "unlimited" monetary policy easing in order to combat deflation and higher spending on both public works and national defense last month.

Among the key issues in the election, was the general timidity on the part of the BOJ to aggressively pursue inflation targets. Japan's financial markets, as well as its overall economy has been consistently undermined by deflation over the past 15 years.  

What it comes down to is there has been a feeling among the Japanese electorate, that monetary policy should be more aggressively expansionist. So far there have been five rounds of monetary stimulus in Japan. In February of this year, the BOJ set a short-term inflation goal of 1% and a long-term inflation goal of 2%. A move referred to as "meaningless" by Abe. 

BOJ's Independence

The Bank of Japan's independence is being called into question. Although a 1997 reorganization of the BOJ granted the central bank more independence, making the BOJ one of the last central banks in the world to gain independence, this electoral cycle saw both political parties campaigning on monetary policy issues. Both parties promised to call for more monetary easing. 

The new government has the power to appoint a majority bloc to the BOJ's policy board. It is likely this will happen. Furthermore, Abe has threatened to revise the Bank of Japan Act. 

What Does this Mean for Japan's Economy?

In general, there is a consensus that Japan must combat its deflation at all costs if indeed it is going to regain its lost economic growth and dynamism. 

While some may talk of structural reforms, the fact that Japan has an extremely high median age is -and thus a high dependency ratio- is a fact that cannot easily be maneuvered around. On the other hand, three prominent features of Japan's economy are its deflation rate, its extremely high savings rate, and the fact that Japan's investors have massive amounts invested overseas, making Japan the world's largest creditor. Expansionary monetary policy might be a positive step in addressing these issues.

Monetary stimulus would also help reduce the price of export-dependent Japan's currency on international markets, providing a boon to Japanese manufacturers.  

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

A Thought About Greek Austerity

Time to Scrap a Failed Policy. Time for Greece to Stand up for Itself

These days, we are living in the middle ages of economics, where we still treat headaches by drilling in to the head.. and we treat flesh wounds by hack-sawing limbs.... but at least we as a profession are (hopefully) starting to realize how foolish it all is.

This story is one where austerity demands lead to a full-on dismantling of the Greek GDP.. ostensibly to help things. Of course, if the GDP gets worse, then the Debt-to-GDP ratio will also get worse.. leading to yet another round of austerity (complete with the promise that *THIS TIME* it really is the last round of austerity). Greece has seen six rounds to far, and the situation only gets worse.

http://en.wikipedia.org/wiki/Greek_government-debt_crisis

When it's all said and done.. it will all seem as foolish as when the Austrians printed money in the 1920s in an attempt to alleviate hyperinflation. At the time, only Hayek saw the foolishness of it. Prescribing austerity to a country whose economy is collapsing is equally foolish.  In 20 years, we'll all look like idiots for not having known any better.

Results of Austerity

So far, Greek unemployment has tripled is this time in 2008, when the Greek crisis emerged, while interest rates on government bonds have reached 177%. If ever an economic policy failed, German-backed Greek austerity failed. To quote the BBC (a news source which is not sympathetic to any party in the eurozone crisis),

"The new Greek budget foresees a deepening of the worst recession of any country in modern history, our correspondent says.

The national economy is expected to shrink next year by 4.5% and public debt is likely to rise to 189% of GDP, almost double Greece's national output. This year, public debt stood at 175%.

The head of Syriza, a left-wing opposition party, said the latest budget cuts would leave Greeks unable to afford essential goods this winter."

http://www.bbc.co.uk/news/world-europe-20293058

Greek Left Detects the Pattern

Alexis Tsipras was quoted by NPR "I wouldn't be surprised if you were back again in a few months, asking for more cuts. Because these measures are going to bring a deeper recession and we'll have bigger debts." For some reason, this result  common to almost all austerity budgets that ever were, certainly true of Argentina, was not immediately obvious earlier.

http://www.npr.org/2012/11/08/164669209/greeks-in-store-for-more-austerity-cuts

What Should Be Done? 

As a matter of National Interest, Greece should realize the pattern being played out and act accordingly. The idea of the Greek government so beholden to foreign (German) economic interests that it is only able to survive by surrounding itself with increasingly massive security cordons is utter foolishness. The Greek government should come to its senses before it turns into the Argentine government. given both the current events, and the direction of things, that is evidently not far off. The looming threat is one of a complete loss of market confidence in Greek markets and Greek debts. But then we must ask... "Has this not already happened?" On the other hand, continuing with austerity will only exacerbate the already desperate economic situation. At this point, Greek citizens have nothing to lose but their chains.

As for economists, we should realize how ridiculous this all is.  Prescribing austerity to a country whose economy is collapsing is pure foolishness and we should see it for the quackenomics that it is.

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Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.