Tuesday, September 10, 2019

Greatest happiness for the greatest number. Or not?

People who follow my blog know that I travel a lot. Travelling for conferences and giving book talks has of course many advantages (and perks), among which not the least is meeting people in different countries under the basically same conditions (you are there to give a talk; period) and then observing how conventions with which you are received vary. Now, observing how conventions vary may be interesting because it provides you an inexhaustible supply of anecdotes with which to entertain your friends; it may be useful also if you plan to write a book on culture; but for an economist it is useful because it lets you see how very different arrangements and behaviors may be all, in some sense, optimal. In other words there is not only one, but many optimal arrangements—depending on what seems to be the desirable goal.

To be more concrete, let me relate one such story. Several years ago I was invited to one of the most beautiful cities of Italy to give a talk to an assembly of industrialists, entrepreneurs, professors and other regional “notables”. There were several of us who were supposed to be “keynote” speakers for the evening. We were put up In the best hotel in town, and treated super nicely. (The other keynote speakers, having come from the US, were paid business class fares.)

We delivered our talks in a beautiful villa that was specially opened for the occasion. The talks and the dinner that was to follow were attended by approximately 80-100 people, all beautiful-looking, fully international and conversant in English. Just after the talk, and seconds before we were to take our dinner seats, as the waiters were about to bring our first course, my “handler” came to direct me to an English-speaking table making sure I do not get lost in the crowd and accidentally end up sitting with the Italian audience. I thought it was a bit heavy-handed especially when he motioned me quite explicitly saying “you should sit there” –raising his hand somewhat dismissively—“with other people who do not speak Italian”. The dinner was delectable and my dinner companions great. I remember talking to a journalist from “The Economist” and his wife, and I found both interesting and charming.

Happiness was shared, it seemed obvious, by the Italian audience sitting at Italian-only tables and merrily chatting away. They were not there to hear what we had to say but to meet other people, share some gossip, and network in order to promote their businesses. They would have been equally--or probably more-- delighted if instead of our talks they were treated to a performance of fire-eaters, snake charmers or a Balkan brass band, but that would not have been considered  socially acceptable. They would not have brought their wives or girlfriends nor would other people have come, thus wasting an opportunity to network. The keynoters’ task was to lend to the gathering an aura of respectability but not otherwise to interfere or spoil the dinner.

It is thus that myself, people at my table, and almost certainly everybody else in the room had the most pleasant dining experience.

Yet something was amiss. Wouldn’t it be more polite to treat the speakers as people who really had something to say and to intersperse them with the audience? Sure, there might have been some awkward moments, but we would have had a chance to hear each other and perhaps even learn something. It would have been also, according to the conventional rules of hospitality, more polite. Politeness however does not enter the economist's toolkit, and, as I already mentioned, we were all happy with the arrangement. So was the handler’s decision right? Didn’t he manage to achieve the greatest happiness for the greatest number?

Yes. But at a (dynamic) cost of us failing to meet somebody new. Not only that: the handler’s decision projected a vision of society where everyone  is happy meeting only people who speak their language, or share their culture or background, or religion or whatever. If such “compartmentalization” makes people happy—since they feel much more at ease with people with whom they share certain important characteristics—isn’t that an optimal arrangement? After all, to use an Italian economist’s name, our dinner table distribution was Pareto optimal: you could not improve anybody’s position without making somebody else’s worse. Even better: we had gone beyond Pareto: everybody might have been at his/her peak of satisfaction given the attendance present there. So all is for the best in all possible worlds?

Yet: do we really want to have societies where everyone is happy not interacting with anyone different from himself/herself?

Friday, August 30, 2019

Argentina’s infernal cycle

It is by pure coincidence that I spent the last ten days in Argentina while the country sped to one of its periodic disastrous economic crises. The purpose of this post  is simply to share some of my impressions. I do not claim that they are necessarily right because some of them are clearly out of my area of expertise.

I knew that the economic situation had deteriorated, and I read with some surprise that Alberto Fernandez won hands down against Mauricio Macri in a mock elections but, like many foreigners, I did not even understand what that mock election was. In the English-language press it was dubbed a “primary” and while, in some formal ways, it was indeed a primary, fundamentally it was something else, as I will explain below  

The first thing to realize is that everything that in the last month or so could go wrong did. So let’s start with the mock election, PASO by the Spanish language acronym. It was supposed to be a primary where, on the same day, voters would choose a candidate, among several from their own party, who  should run in the presidential election. More or less like Democrats in the US choosing among various Democratic candidates, and Republicans likewise among various Republicans. But in this year’s PASO each party had only one candidate. There was thus no inter-party choice at all. The vote became a giant election  poll. The fact that almost 50% of voters, under the conditions of obligatory vote valid for both the PASO and the general election, decided to vote in the Fernandez  “primary”  (16% more than the number voting in the Macri “primary”) thus indicated a clear intent of vote in the real election. 16 percentage points seems like an unbridgeable gap for Macri.  

Thus the result of this weird mock election transformed the sitting president into a lame duck president with four months yet to go  before the presumed new president takes over (two months until the election, and then two months before the formal transfer of power). The all but certainty of Fernandez’ win spooked foreign investors (Alberto is running on a ticket with Cristina Fernandez de Kirchner, the former president and widow of Nestor Kirchner) and Argentina’s debt, in the midst of an IMF negotiation,  was downgraded. It also produced the first signs of a run on the peso.

The political situation could not have been worse for economic stability. Macri maintains the hope of a remontada, or winning from behind, and his economic policy is, I suppose, now predicated on that political calculation. Fernandez is seen as a future president, but at this time, he has no economic power whatsoever. Clearly, the situation would have been better if Fernandez could become immediately the new president, or if PASO had not taken place. As it is, the most destabilizing political situation is afoot.

One adds to that economics. With the devaluation of the peso (during the ten days that I was there, the peso went from 56  to a dollar to 62, that is devalued by some 10% in ten days), a dollarized economy like Argentina is immediately exposed to increased inflation. It is now running at 50% annually, but is likely to accelerate. In a country where all economic decisions are dollarized, every increase in the value of the dollar implies higher peso prices. The loss in peso’s value makes the dollar ever more attractive as the store of value, and the expectation of further inflation and peso devaluation exacerbates the demand for the dollar and the flight of capital abroad.

Time becomes, like in all high inflations, crucially valuable. A peso received tomorrow is not of the same value as the peso received today. Some stores are thus accepting only cash payments or debit cards; not credit cards. In my experience, this is still an exception, but it could soon become more widespread.   

At the same time, the economy is contracting at an annual rate of about 2% which obviously means lower incomes and higher unemployment. Poverty is estimated at almost 40% of the population. Real earnings of people paid in pesos will decline (as nominal peso incomes fail to catch up with inflation) and their incomes in dollars will decrease even further. In such conditions, the Church has just asked the president to declare a food emergency and to presumably freeze prices of food. Rationing cannot then be far behind.  

We thus get to a situation of an infernal cycle where everybody tries to save themselves by converting all pesos into dollars which only gives an additional incentive to those who have not yet converted all their pesos to do it as promptly as possible.

I was in Greece where the euro withdrawals were limited. I saw some signs of panic but I think that the Argentine short-term situation is worse. The euro continued to be the store of value and the unit of transaction; the problem was the shortage of the euros like the shortage of the dollars in Argentina, but there was (obviously) no danger of hyperinflation.

To stop this infernal cycle which is essentially driven by politics and lack of confidence one needs massive inflows of foreign exchange. The fear is voiced at times in Buenos Aires that even that might not help if most of that inflow is immediately sent abroad. But clearly there must be such a substantial inflow that would be sufficient to stop speculation and capital flight and reintroduce some stability. Argentina seems to me to be in a situation where the short-term dominates all other concerns. It is like a patient that is bleeding, and the role of the doctors is not to ask whether the patient has health insurance or not but to rush him to the emergency room. All other considerations about the rescheduling of the debt and the rest can, I think, take place only when a modicum of stability is reintroduced. 

The role of the IMF is crucial. It lent enormous amounts of money to Greece. There is no reason why Latin America should be treated differently than Europe.