May 29, 2003
Irregular blogging coming up

Blogging will be more irregular than usual for the coming week or so, as I'm off to various parts of the world once more. This trip includes a return to the wonderful madness of Manhattan; it's been over a year since my last visit. Far too long.

Updates will take place as and when opportunity allows. I wish they'd hurry with in-flight internet access.

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May 27, 2003
Threat to cap wage growth

It seems we finally have a new government in the Netherlands (more on that later). With the economy doing as poorly as it is, the new government has its work cut out. Trying to revive economic growth is going to have to be the main task for the new coalition. But some of the ideas being floated make very little sense. The minister-designate of Social Affairs and Jobs spoke at a gathering of his Christian Democrat party, and said that high wage growth would be inadvisable. So far, so good. The Dutch competitive position in international markets has been hurt very seriously by the strength of the euro, as the Netherlands has one of the most open economies in Europe. So high wage growth indeed would add to the problems of the Dutch economy. This is not a particularly controversial thing to say. But he then went on to issue a threat: the government would consider legislative measures to cap wage growth. In other words, the government would dictate the rate of increase in wages, negotiated by employers and employees (sometimes in the form of central bargaining with employer organizations and labor unions, sometimes on a company-by-company basis).

This is a horrible idea. It's applying a very blunt instrument to heterogenous problem. Not all companies or industries are equally affected by the loss of international competitiveness. A simple ceiling on negotiated wage growth removes the case-by-case finetuning that would be possible otherwise. It does not guarantee optimal results in every case, as unions may be able to extract more than the companies can afford to pay. Interfering in the economy in this way would set a very bad precedent for the rest of the 4-year term of this government. The last time a government used wage-restraint legislation is 30 years ago. We really don't want to go back to those days.

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Please deactivate your conscience

Over the weekend I caught a glimpse of a weekly news-roundup on German television. The program is the Wochenspiegel, aired on the public ARD network, and they were running an item on opposition to Schröder's reform proposals. Opposition runs high on the left wing of his own SPD party, and the labor movement has been vocal in opposing the plans too. So they interviewed one of the SPD members of parliament who might vote against the plans. Unfortunately I can't remember the name of his guy, but one thing he said really struck me. Speaking of his threat to vote against the government, he said that in his 30 years of being a member of parliament for the SPD, he had used his conscience three times. He added something to the effect "so it's not like I do this very often."

And this is completely unremarkable. Not using his conscience is seen as a Right Thing To Do, because party discipline is much more important. Voting against the party line ("using your conscience") is very rare in most parliamentary democracies in Europe. The Party is most important. This is a result of the incentive structures in European politics, where parties are dominant. Proportional representation breaks the direct link between candidate and voter. More importantly, in order to advance your career in politics, you have to curry favor with the party, not the voter. Vote against the party and your future prospects take a nosedive, your career is in doubt. So absolute loyalty to the party line is essential.

This leads us to the absurd situation that a politician is interviewed on national TV and proudly proclaims that he's only used his conscience thrice in thirty years. And nobody thinks it's remarkable.

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German companies looking abroad

The German economy has become the emblem of Europe's economic problems. Many of the problems that afflict the European economies are at their most acute in Germany. Compare today's Europe to that of 25 years ago and the economic landscape has changed enormously. Britain was the "Sick Man of Europe," while the German economy was invincible. While the UK economy is by no means invincible, it is one of the healthier ones in Europe. Countries can and do go through poor economic times, and the economic cycle has not been conquered. But when a spell of poor performance starts to stretch out into infinity, additional problems begin to arise. For one, if there's no hope for economic growth, both people and companies begin to look elsewhere. The outsourcing of manufacturing to lower-wage countries has been a phenomenon throughout the world's developed economies; even Japan is now succumbing the economic logic of moving production to China, for instance.

It gets worse if companies start to move higher value-added services abroad. It's the high value added part of the corporate chain that's essential to generating profits. Once you start losing those kinds of jobs, your economy has a much more serious problem. Job losses in the manufacturing sector can be accomodated more easily, as it's generally easier to find another job that pays about the same, even if it's in services rather than manufacturing (assuming there is economic growth). But job losses at the high value added end are much harder to replace. German companies said again that they're thinking of moving abroad:

But as reminder of the tough economic times ahead for Germany, the nation's Chamber of Industry and Commerce (DIHK) released a survey Monday showing that nearly one in four German companies was planning to shift production outside Germany in the next three years to escape high tax and labour costs.

This could result in the loss of about 50,000 jobs each year up until 2005, the chamber presenting a survey of about 10,000 companies.

"The alarming thing is that increasingly it is not just wage- intensive production sectors that are being transferred abroad, as it was in the 1990s," DIHK head Martin Wansleben said in a statement on a new survey of German companies.

"Our recent surveys show that areas like administration, research and development and even company headquarters are being examined," he said.


Threats of corporate flight are not new, and these things don't happen overnight either. Emigrating is not something that is undertaken lightly, but it is becoming ever easier. Modern technology makes the location of a whole swath of corporate functions increasingly irrelevant. And companies will act on their economic best interests sooner or later. If they can move, they will. Eventually. Germany still has time to avert a massive corporate exodus, but the clock is ticking. Schröder's reform plans, known as "Agenda 2010" are small step in the right direction, but don't go far enough. Even so, he's faced with massive opposition from the left wing of his own party and from the labor union movement. Labor unions have been organization mass protests against the plans, which they say will eviscerate the welfare state. If only.

June 1st will be an important date for Schröder. That's when the SPD holds a special congress to vote on the reform plans. Schröder has already threatened to resign three times to obtain backing for his Agenda 2010. Thus far, the SPD fora at which he's uttered this threat have backed him. The question is how many on the left wing will be willing to call his bluff. The weekend congress should give us a clearer idea. But with just a four-vote majority in the Bundestag, just a few defections could sink the plans (assuming the opposition votes against the proposals; they might do that if they think they can hurt Schröder, even though they might otherwise be in favor of the plans).

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May 22, 2003
Dutch AEL leader arrested

One of the leaders-designate of the Dutch branch of the AEL, the Islamist Arab-European League has been arrested, together with his brother. He is accused of theft and extortion after an incident last November. At a McDonald's restaurant in the eastern town of Hengelo, he and his brother allegedly had arranged a meeting with an entrepreneur from the nearby town of Enschede in order to transact a deal involving laptop computers. When they met, the two brothers are said to have to threatened their victim with a firearm and forced him to hand over his money to them.

Dutch media can't give the full names of those who are being investigated, so the AEL guy is only known as "Nabil M." It's not as though his past is entirely squeaky clean. He used to deal in stolen laptops and had a website offering to remove passwords from laptops. He actually admits to all this, but calls these activities "youthful indiscretions." Apparently the tail end of his exuberant youthful behavior was still in evidence last November.

We'll see whether the prosecution can get a conviction in this case.

May 20, 2003
Casablanca redux

The Dutch media are reporting that the terrorists responsible for the attacks in Casablanca may have had help from the Netherlands and Belgium. These reports are based on anonymous sources in the Moroccan justice system, so a healthy dose of skepticism is recommended. If true, it must be a pretty depressing development. It would mean that the Moroccan expats living in the Netherlands have become a destructive influence on not just the Netherlands, but on their own home country as well.

Morocco is, as Arab countries go, a fairly easygoing and tolerant place. One of the attacks on Saturday was on the Jewish quarter of Casablanca. It's one of the few Arab countries to have one, and although many Jews have left for Israel, the community still exists and can function. It is in fact, the largest Jewish community in any Arab country. There are tours for tourists, and even kosher tours. Although I tried to find more information on this on the web, there wasn't much about the actual daily life in the Mellah, the Jewish quarter of Casablanca is known. But here's a disquieting thought: it might now be safer for a Jew to walk the streets of Casablanca than go into Amsterdam-West with its Moroccan population. (Well, that might have been true until the bombs went off; fortunately, we haven't had any of those here.)

The radicalization is in no small part the work and influence of Saudi money. There are schools and mosques funded by the Saudis, and apparently they've left their mark, even to the extent that the expats are now willing to murder their own compatriots at home for not adhering to the medieval savagery of Islamofacsism. Meanwhile, recruiting for the jihad continues in the Netherlands.

On that note, a Dutch judge today released four men from custody, who were being tried on charges of recruiting youngsters to the anti-western Jihad. Several others are still on trial, potentially face up to two years in jail. That is, if the public prosecutor's demands for a three-year sentence are granted; this would put them back out on the street in two years. It's probably going to be less. A previous trial last year collapsed completely.

The only silver lining in all of this might be that the Moroccan authorities will become more active in their fight against Islamofascist terror. Morocco would be an obvious candidate for progress in the transformation of the Arab world that is necessary if the region is to emerge from its self-inflicted backwardness. But a stronger response in the Netherlands wouldn't do any harm either.

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Read More on Islamism , The Netherlands
May 19, 2003
Choosing sides in World War II

At the beginning of May, there are two important days in the Dutch calendar, the 4th and 5th. The fourth of May is Remembrance Day, when the dead of the Second World War are remembered and honored, followed by Liberation Day on the 5th. At 8 PM on the fourth of May, the country comes to a halt to remember the fallen and the murdered, silence descends on the country, with only bell tolling on the Waalsdorpervlakte, a plain near the dunes of the Hague where the Nazi executed Dutch resistance fighters. All over the country, wreaths are laid, speeches made and above all, the memory of the of occupation and the Holocaust are renewed.

This year, the remembrance ceremonies were descrated. There hadn't been much attention paid in the media to this initially, but there are now more reports appearing the papers. Today's edition of the Trouw newspapers has a long article on the events. I shan't translate all of it, but here are salient excerpts:

It was the leader of the D66 Michel Rog from the Amsterdam precinct of de Baarsjes who went to the media. He was furious over what happened on Sunday May 4th at the remembrance ceremony in his neighborbood. But neither the organizers, nor the precinct council, nor the police reported the incident. "Subsequently it turns out that the ceremonies were disrupted in several Amsterdam precincts. That's serious. But everywhere it's been kept quiet, even when reports had been made to the police. Shocking. Some of the incidents have even now not been publicized yet."

[...] The horn sounded, it turned quiet. Almost immediately afterward [..] Rog heard from behind him, further down the street, the chanting of slogans. There was a group of boys, apparently Moroccans, between the ages of 10 and 18. At least five of them chanted "We have to kill the Jews." [In Dutch, this rhymes]

[...] After the ceremony Michel Rog managed to identify together with the neighborhood police officer one of the boys, just a child, who strenuously denied having participated. But a friend of his furnished indirect proof, pleading with the cop "Mister, he did not know there were Jewish people there."

The article goes on to the question whether this is just plain vanilla vandalism of youngsters who don't know any better, or whether there is something deeper going on. The appropriate answer is probably a "duh" here.

Amsterdam-West, where this and other such incidents took place has a large Arab immigrant population, mostly consisting of Moroccans. The schools there, according the article, "find it ever harder to teach about the second world war." Anti-semitism is a way of life there. Most May 4th incidents involve Moroccan youngsters. Playing soccer with the wreaths, shouting anti-semitic slogans, throwing eggs and otherwise disrupting the ceremonies. Some apologists claim it's "just vandalism," that does not wash. These scumbags knew exactly what they were doing, and what the significance of the event was. This was a calculated attack to cause as much offense and grief as possible. These disturbances were very deliberate attempts to offend. On the day when we remember the victims of the Nazis, the Moroccans youths came out and supported the Nazis. They consciously and deliberately aligned themselves with a regime that has become the generic shorthand description of evil.

The newspaper article recites the rise of anti-semitism:

All over the Netherlands the number of complaints of anti-semitism keeps rising. The problem is most visible in Amsterdam, because that's where the biggest Jewish community is. According to the CIDI [Centrum Information and Documentation Israel] it's usually verbal abuse, almost always in Amsterdam, almost always by Moroccan boys. [...] "Yehoud" has become a well-known expletive. Jewish men wearing a yarmulke can be certain nowadays to be accosted. Moroccan boys last year threw stones at synagogue visitors in Amsterdam-West. [...] A few months ago, in a busy shopping street, the house of a Jewish man was vandalized. "JEW" it said with big red letters on the windows."

It's not really news that the Arab immigrants here are virulently anti-Semitic, but the descration of the of May fourth remembrance ceremonies is a further escalation, taking the anti-semitism to a brazen new level. And while the war may have ended over half a century ago, the May ceremonies still play an important role in Dutch life. By disrupting them, the Moroccan thugs have placed themselves even further outside of civilized society than they already were. Choosing the side of the Nazis so blatantly makes it very hard even for the most deluded multiculturalist to defend them. They've been forcibly deblinkered, at least temporarily. It won't take long for new blinkers to grow back on though, but perhaps not all of them will regenerate.

Repercussions of the Casablanca attacks

The terrorist attacks in Casablanca are having repercussions here in the Netherlands as well. With about a quarter of a million Moroccans living here, it is hardly surprising that these attacks have attracted some attention here beyond the standard newsworthiness. Vile as these attacks may have been, something positive may yet come out of them. What struck me is the reaction by one of the organizations representing Moroccans, the "Samenwerkingsverband Marokkanen Tunesiërs," which not only expressed its shock and disgust at the attack, but also followed it up by saying that they would have to have a closer look at the recruiting practices by Islamic terrorist organizations, and a denounced the suicide bombings. (Unfortunately, I can't find a link although I did see it in the news over the weekend.)

It's hard to say if this is for real, or whether it's just a spasm in the immediate aftermath of the terrorist attacks. If the terrorists managed to awaken some opposition to their methods within the Moroccan community here, that must be a positive sign. It's a start to rooting out Islamic terrorism, but only by the follow-up will we be able to determine whether they mean it or not. It's also sad, but not surprising, that it wasn't until these attacks in Morocco that they ventured forth in speaking out against suicide bombings. Apparently blowing up Israelis by these means is OK. To be fair, I don't know the specific position of the one organization I mentioned by name above on this, but the prevailing virulent anti-Israel sentiment in the Arab immigrant community never had much of a problem with murdering Israelis. Thus they helped create this monstrosity, the psychotic death cult born of Palestinian terrorism, and that is now becoming the defining hallmark of Islamic terrorism in general. And the monster is turning on its erstwhile sympathizers.

Also missing this time around are the usual attempts at exculpating the terrorists. The usual litany of "understanding" for their "desperate acts," the recitation of the sins of the victims, the praising of the "courage" of the murderers, the susurration of support are all missing. Those only apply if the victims are Jews or Americans. Where are the apologists for the terrorists now that the terrorists attack Muslims? The absence of the terrorist apologia is of course welcome, but somehow I suspect this position won't be carried to its logical conclusion: the condemnation of terrorism against Israel.

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May 16, 2003
A new Hollywood ritual

Perhaps this has been going on longer and I never paid attention to it, but it looks like a new Hollywood ritual can soon be added to the release of any major movie: the Whine. After the Muslims' whine about X-Men 2, we now have albinos whining about The Matrix Reloaded. I also vaguely remembered some complaints about the Harry Potter books and films from the camp of Christian fundamentalists. A quick googling comes up with links to ExposingSatanism.org and how Harry lures kids to witchcraft.

It's of course shameful that the so Politically Correct Hollywood crowd can't create a movie that doesn't offend important victim groups in society. Being the enlightened progressive citizens they are, they should have long since seen the obvious and start making films with only average, featureless people in them. And perhaps make no more movies with villains at all. It's the least they can do.

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Government spending and GDP growth

I've written previously about the growth gap that's been opening up between the US and Europe over the last decades, and particularly Germany's poor economic performance. Digging down into the numbers, there are some more interesting observations to be made. In the following I am using annual GDP data from the OECD. The total GDP numbers are broken down into a few categories, such as private consumption, government consumption, capital formation, imports and exports. As one of the big differences between Europe and the US is the size of government, it might be interesting to look at the impact of government consumption to total GDP growth.

It should be noted that government final consumption expenditure does not cover the total impact of the government on economic growth. As the name says, it's only consumption that's covered. The difference between total expenditure and consumption goes into categories like capital formation. Government consumption as a percentage of GDP has remained fairly constant over the years for most countries, as this graph shows. In other words, the percentage of total GDP that comes from government spending has not changed much. In the US it has declined, while in Japan it has increased. Europe has been more or less constant. France has unsurpringly had the highest share of government consumption to overall GDP.

The actual contribution to GDP growth (in percentage points of overall GDP growth) is plotted in this graph. The high volatility makes it hard to deduce much from the graph itself, but in general, government consumption has had a positive impact on overall GDP growth. It has been growing as the size of the economy has increased.

To see the true impact of government consumption on growth, compare this graph of total cumulative GDP growth with the plot excluding government consumption. In both cases, the US has done best since 1991 (the earliest point for which OECD data are readily available, due to reunification). Japan has done worst, which was to be expected. But taking out government consumptionn shows just how big the impact has been. In the case of Japan, the rest of the components of GDP have contracted by almost 20% since 1991, and it's only been the enormous amounts of cash that the government has pumped into the economy that have prevented an actual contraction. But that has come at the price of running up the national debt to 140% of GDP, so it's all borrowed money that's been spent. Not on invesment, but on consumption, so it's gone.

Looking at the US, the recession of 2001 and 2002 is clearly visible, and the increase in government consumption has only partially offset these losses elsewhere in the economy. But there are some surprises in Europe. Germany and the UK have seen the economy grow to roughly the same cumulative gain since 1991 if government consumption is taken out of the equation. The UK had built up a lead from 1991 to 1998, after which it remained stagnant. (This incidentally coincides with the tenure of the Labour government.) The German economy has managed to grow during that time, but for the very large part that's due to exports. In 2002, exports amounted to 36% of GDP. Taking exports out of the picture, the German economy would have contracted by about 3% cumulatively since 1991 (this still includes government consumption). Over that period, the export contribution grew from 24% of GDP to the above-mentioned 36%. The strong euro is a real headache for the German economy, because it undermines the one sector that has actually been doing well.

Going back to the ex-government consumption numbers, the graph shows that net cumulative economic growth in the Eurozone in the period 1991-2002 was close to zero. In other words, if it had not been for government consumption, the Eurozone economies would not have grown at all in this period. That's a pretty glaring indictment of economic performance.

The total cumulative contribution to GDP growth from final government consumption expenditure is plotted here. It shows that the net contribution in the US has not been very different from that in the Eurozone. The difference in economic performance is largely due to growth (or lack thereof) in the other components of GDP, which will largely be due to private enterprise.

The total cumulative outperformance of the US economy relative to the Eurozone does not change if you take government consumption out. This is a somewhat surprising result, in that one might have expected the gap to widen. But the spending binge by the US government since 1997 has led it to pull even with the Eurozone in this regard. However, the crucial difference is that the US economy has been able to grow in its other GDP sectors too, whereas all the Eurozone growth since 1991 has been due to government consumption growth. That's not a sustainable or healthy position to be, witness the plight of Japan. Moreover, the share of GDP coming out of government consumption in the US has been declining, although the recession has nudged it back up. In th Eurozone, the share has remained constant.

Europe desperately needs to get its real economy going again. But it's facing the headwinds of the strong euro and the suffocating regulatory environment. As the Japanese experience has shown, hoping that government spending will kick-start the economy is not a wise strategy. So it's back to the old mantra: Europe needs economic reforms. But somehow they never quite seem to happen.

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May 13, 2003
An actual money shortage

Running a central bank with fiat currencies gives you a unique opportunity to make a profit. The cost of printing notes is obviously much lower than the cost of the bank notes themselves. The difference between the cost of producing bank notes and coins and the face value of them is a profit that accrues to the Central Bank, and is usually passed on to the government. This profit is known as seignorage. If the cost of creating a note or coin is higher than the face value, it makes no sense to continue producing them. That's why the penny still exists; the US government is making a profit on producing them, so any decision to get rid of it would be a political one, and not driven by economics.

Pumping up the money supply by printing more and more notes thus actually generates revenue for the government. In countries with hyperinflation, the effects can be enormous. At the height of Ukraine's hyperinflation in 1993 (with inflation rates of 10,000% annualized), the seignorage profits amounted to 13% of GDP. While it may be tempting for a government to keep on printing as much money as it can, the resulting hyperinflation will still wipe out the gains. Real economic growth in the Ukraine was negative during hyperinflation, and other experiences with the phenomenon have been negative as well. The Weimar Republic is one example, but hyperinflation also ravaged oher European countries in the 1930s, and the people of Latin America still think back with dread on their brushes with worthless money.

But how bad must the situation be that the central bank can't afford to print any money at all? The answer is Zimbabwe bad. Chirac's new bestest friend on the African continent has managed to run the economy into the ground to the extent that the central bank can't even afford to print money any more. This must be a first in the history of central banking. Amazing.

There is something to be said that part of the cash shortage is due to hoarding of notes. In modern times the actual amount of currency in circulation (i.e. notes and coins) is just a fraction of the total money supply. In the United States, the actual amount of currency in circulation is just $600 billion, whereas broad money supply (M3) is $8.6 trillion. There'd be a real problem if everyone wanted to cash in all paper deposits at the same time. A structural collaspe of the financial system would bring something like that about, and this is what's happening now in Zimbabwe. It's tragic to see a country that used to be (relatively) rich, and could have been even richer to fall so low. No country is ever rich enough that a communist-inspired dictatorship can't destroy it.

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The art of whining

I complain a lot about how poorly Arab immigrants assimilate into our western society here, but in some case they have useful aspects of our culture down pat. They're quite the Master Whiners now. Take this story for instance, about X-Men 2. Various Islamic groups in the US are demanding an apology from director Bryan Singer. They also want the DVD version of the film to be edited. Najee Ali explains:

"Within the first five minutes of 'X2,' an evil villain, 'Colonel William Stryker,' is in the White House signing a document," Ali declares. "As he signs, he is shown wearing a ring featuring the Arabic symbol for 'Allah.' Col. Stryker was never depicted as a Muslim in the comic book series. We feel this is a subtle but obvious attack on Islam . . . It is unfortunate, as we continue to live in a post-9/11 world, that Bryan Singer would engage in a subtle campaign to breed intolerance and hate."

I read this story before seeing the film, and even with this knowledge and looking for the scene, it flashed by before I had realized it. It's hardly a "subtle but obvious attack on Islam" if you have trouble finding the right scene in the film while looking out for it. Moreover, how many people actually know what the Arabic symbol for Allah looks like, much less can identify it from a detail in a quick scene in a movie? Of all the ways of attacking Islam in a film, this must be the most obtuse and ineffective ever. Even if it was the intention (which is a ludicrous claim in itself), it has failed miserably.

What a bunch of whining sissies. But it's not just them. The era of Political Correctness has spawned the Whining Reflex within self-identified Victim Groups. That's the way to get attention: first, be a victim. Second, whine. The whining has become a way of life, a substitute for argument or thought. Unfortunately it has been successful in many areas, as in the evisceration of cartoons. The inventive, hilarious and deeply un-PC Bugs Bunny episodes of yore are no longer shown on TV. Literature is castrated if it refers to any "sensitive" subject. The rewriting of history is progressing apace in what once were centers of learning, the American universities. I wonder how long it's going to take them to rewrite the Civil War in non-racial terms. They way things are going, someone somewhere at an elite university is probably doing Ph.D. thesis on this very subject at the moment.

The lesson is that whining can be successful. In that light, the Muslim groups' attempt to whine about X-Men 2 is almost rational in a contorted way. It's not going to work though. Tolerance for whining has come way down, and especially if it's on an idiotic premise as this one. So my advice to these whiners: grow up.

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May 12, 2003
The Phantom of the future

A recent visit to London coincided with surprisingly good weather, and as I had some time to spare, I went for a walk along Park Lane. This is the street running along the eastern edge of Hyde Park. Being one of the most expensive parts of London, the car dealerships there are less than standard. I knew about the McLaren F1 shop, where they sell the world's most expensive road car at £500,000. There's also an Aston Martin shop, and I was looking forward to seeing the new Jaguar X350 further up the road (it looks better in real life than in pictures). However, since last time I was there, a Rolls-Royce shop had sprung up as well.

Given the prices of real estate in the area, these aren't full-blown dealerships, but just cars in a window. The Rolls-Royce shop was no different: just a big new Phantom standing there on its own. More bizarre was the spec sheet in the window. It was a plain piece of A4 paper, listing the features of the Rolls, starting with "beverage holders front and rear." It ended with the quarter-million pound price tag. Very incongruous and tacky.

This was the first time I'd seen the new Rolls-Royce in real life, and I spent considerable time looking at it from all possible angles as best the window permitted (it was after closing time). It's huge. It's really, really big. But Rolls-Royces have always been big cars, so that in itself is not surprising. Although I am a fan of big cars in general, this one did not do much for me. It was big and bulky without being refined, subtle or beautiful. Looking closely at the car there are some styling elements that you can't see well in pictures. The headlights are more than just plain quandrangles, but this can't make up for the sheer angular appearance of the car in general. The effect of the Phantom is too overwhelming for that.

The proportions are wrong. The grille is too big, the lights too small, the windows too compact. It it lacking in grace, and goes for bulk for bulk's sake. It remains to be seen how it does on the road, as a car's true impact can only be judged in relation to its surroundings. For instance, the Jaguar X-Type looks a lot better in isolation than it does on the road, when it becomes obvious that it's a small car, and nothing really special. It's the differential in design with the rest of the cars that determines how good a car looks in the wild. Showrooms can be deceptive.

Rolls-Royces have a tradition of being huge. If you ever see a Silver Cloud on the road, you'll know what I mean. The Silver Cloud is a true classic in terms of design, and epitomizes the Rolls-Royce aesthetic. The Silver Cloud series dates back to 1955 with the introduction of the Silver Cloud I, which also was produced in beautiful drophead versions. The Silver Cloud III was marked primarily by the quad headlights. What I can't judge is these cars' impact when they were new; most cars on the road in those days were smaller (at least in Europe) than they are now, and the Silver Cloud must have made an imposing sight as the sailed down the streets. But even while the Cloud was in production, it was not the only Rolls-Royce on sale. There was the even bigger Phantom V, which was meant for those who could still afford a driver. It's interesting the the new Rolls picks up the old name of the Phantom and marks a break with the "Silver" series. The current Phantom should perhaps be called the Phantom VII to be consistent. The Phantom VI was in production until 1991. It's big enough to be a passenger-in-the-back car rather than one for people who enjoy driving themselves. Perhaps Rolls-Royce will bring a second, smaller car to the market to complement the Phantom.

Still, the design of the Phantom, despite its retro styling cues cannot entice me. Rolls-Royce had been improving with the Silver Seraph and the Corniche after the dreary and unimaginative Silver Spur series of the 1980's and 1990's, which marked the low point in Rolls-Royce design; not only were they lacking in aesthetic virtue, what's worse, they were bland and forgettable. The current Phantom may be ugly, but it's not a car you'd overlook. Any publicity is good publicity, right?

BMW's first attempt at creating a Rolls-Royce is less than an overwhelming success aesthetically. They tried too hard. The Phantom has all the classic Rolls-Royce features, such a big grill, front wheels very far forward, a huge engine, a flat compartment floor in the back, lots of leather and wood even waftability... but while they managed to identify and assemble the individual features that make a Rolls a Rolls, they never managed to synthesize a coherent whole out of it. The new Phantom is a paint-by-numbers Rolls Royce.

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May 08, 2003
Monetary union and economic flexibility

The question whether the euro will in the long term benefit Europe or harm it cannot be answered at this point with any certainty. I have been skeptical about monetary union in Europe as it is constituted now, as there are serious divergences undermining EMU. There is no agreement between economists (is there ever?) on whether even in theory it is better to have fixed exchanged rates or floating ones. And the split goes right down the middle of the free market camp too, with both views represented by the Big Names of Economics.

So I was very interested to find a discussion between Milton Friedman and Robert Mundell on this very issue. (I came across it via Arnold Kling, whom I found through this post at Asymmetrical Information). The discussion goes around in circles to a certain extent, but in the end it boils down to the issue of economic flexibility. As exchange rates are prices, they convey information on supply and demand of currencies, which again is based on numerous other factors in the real economy. By shutting down a mode of expression for the information by fixing currency prices, you can't make the information go away. It will have to express itself by other means, and that's where economic flexibility comes into play.

Mundell argues that having a sound monetary policy is of vital importance, and that economic benefits will follow if only there's stable money. In fact, he takes the argument to its logical conclusion and advocates having a world currency. The larger an area a currency covers, the greater the stability will be. Mundell does say he does not advocate a single world currency, but just a world currency; the difference though seems to be semantic rather than substantive. He says:

My ideal and equilibrium solution would be a world currency (but not single world currency) in which each country would produce its own unit that exchanges at par with the world unit. We could call it the international dollar or, to avoid the parochial national connotation, the intor, contraction of “international” and the French word for gold. Everything would be priced in terms of intors, and a committee—in my view, say, open market committee designated by the Board of Governors of the International Monetary Fund—would determine how many intors produced each year would be consistent with price stability. Every country would its currency to the intor following currency-board system principles.
This is different from having a single world currency only in that it retains the option of re-floating national currencies, which would be harder if they were abolished altogether. And the practical difficulties are enormous too, as its ultimate viability would depend on the proposed "G3 Open Market Committee" being able to determine the right amount of intors to issue. In effect, this creates a single fiat currency for the whole world. I get nervous with three fiat currencies being dominant. The art of central banking has not evolved to the point where one would wish to bet the world's economic future on central bankers getting it right.

Friedman argues for flexible exchange rates, arguing that they provide an important escape valve for the adjustment of prices within an economy. Mundell counters that the same adjustment can take place by changing domestic price levels, and that it can be done more effectively that way. In theory, Mundell is right, but in practice it does not work that way, and this is what Friedman argues too. The case of Argentina is instructive in this regard, as it had a fairly orthodox currency board which ultimately failed. The discussion between Friedman and Mundell took place before the Argentinian currency board collapsed in late 2001, so there are no port-mortems of this event, nor do they spend much time discussion the Argentinian situation.

By tying the peso at parity to the US dollar, Argentina did get the immediate benefit of vastly improved monetary policy in 1991, just as Mundell argues. It also introduced thitherto unheard-of macroeconomic stability, and the Argentinian economy prospered. But Argentina was pricing itself slowly out of the market by maintaining convertibility with the dollar. It simply wasn't producing enough economic added value to justify charging the prices in a convertible peso, nor did it have the productivity gains that would allow the economy to remain competitive internationally. The 2001 collapse in Argentina came after Brazil had unpegged the real from the dollar in 1999, which added to the competitive pressures on Argentina. At this point, Argentina had the choice of adjusting its domestic price level downward, or achieve a similar result by devaluing the peso and thus breaking the currency board. In a very messy process that exacerbated the outcome manifold, it ultimately defaulted on its debt and devalued the peso. It sank from parity with the dollar to 4, essentially wiping out 75% of Argentina's wealth if measured in dollars.

The key again is economic flexibility here. Had Argentina possessed an economy flexible enough to adapt quickly to competitive pressures by improving productivity and reducing the domestic price level, it would have been able to keep the peso convertible to the dollar at parity. Looking at a single dimension of productivity, it might have had to reduce aggregate labor costs by, say, 25% in the mid-1990s. Firing 25% of all workers is one way of doing that, or by all workers taking a 25% pay cut. Neither is very appealing.

One of the architects of the Argentinian currency board, Steve Hanke, defended the currency board against the critics (such as Paul Krugman):

And how did the Argentine economy fare during the Menem decade? As Table 1 shows, Argentina responded with a growth spurt that left its neighbours in the dust. All this is not an anomaly. Since 1950, countries with currency boards have realized average GDP growth per capita that is 54% higher than comparable countries that had central banks with discretionary monetary powers.

This is not to say that a sound currency is everything. Indeed, Argentina desperately needs a good dose of supply-side economics. Unemployment is high because labour market regulations are burdensome and taxes are too high and complex. Bring on deregulation and a flat tax. Clone Hong Kong, please. And that's not all. The government apparatus needs a complete overhaul. The only way to attack the endemic corruption spawned by the state is to shrink it. Those reforms, on top of its sound money, would put Argentina back on a high-growth track.

The table at the bottom of his article shows that Argentina's economy grew by 230% in the years 1989-1999 in US dollar terms. The devaluation of the peso (now trading at about 3 to the US dollar) means that all that growth and then some has been wiped out if measured in dollars. In fact, in dollar terms the Argentinian economy contracted about 25% in the period of 1989-2002. Hanke actually sees the seeds of demise for the currency board when he argues for structural reforms. (As an aside, the picture for the Asian economies he mentions would now be different, as some floating-rate countries like South Korea have done pretty well since the crisis of 1997.)

Using the currency board as both the carrot and the stick in Argentina failed to get the necessary structural reforms get implemented. The members of the European Monetary Union are no Argentinas, but there are a number similarities. Structural problems are contributing greatly to the current economic weakness in the entire Eurozone. The problems are the same as in Argentina, although probably not as severe: rigid labor markets and high non-wage costs are preventing European companies from adjusting to the weak global economic environment (and the strong euro too). Mundell's argument is that the single currency will be a driver of reforms, making it more likely that these structural problems will finally get tackled. Are reforms a necessary precursor for monetary union, or is monetary union a catalyst to bring these changes about?

There has been some progress in Europe on structural reforms, but overall far too little has been achieved. While there is a reasonable single market now in goods, the services sector is still highly fragmented. And even the European directives establishing the single market for goods are poorly implemented, with France being one of the biggest offenders. Not very surprising, that. It does show that there is a difference between the Single Market on paper and the reality on the ground. But the intentions here of the EU are good for a change, and Brussels will be trying to create a true single market for services. It's not going to be easy:

A commission report published last year listed 92 barriers encountered by businesses wishing to offer their services in more than one EU country.

The report found problems began with the founding of businesses, which can be hindered by local and national requests for several authorisations.

The distribution of services was also made difficult by laws forcing the provider to have a physical base in the country.

The advertising industry was hampered by a maze of different national regulations.

Belgian electricians have to pay three times the Belgian rate to register with the authorities in neighbouring Luxembourg for a one-day job. And Austrian bakers need eight different licences if they want to set up in Italy.

If the euro is to become successful, it is vital that the internal market be as free as possible. This still does not address the issue of structural reforms within member countries, though. Eurosclerosis is a problem that won't go away easily. Having a true single internal market will make cross-border competition more intense in many more areas than is possible now. This could be one of the great strengths of the European Union, by allowing countries to experiment with their domestic economic policies by competing against one another. Competition is an essential tool in the economic discovery mechanism of what works and what doesn't. But competition is scary to those who like the status quo, and especially those who like the power they wield in their own countries. So plans are afoot to stifle competition between countries, because it's so unfair:
Plans to scrap the national veto on tax to eliminate "unfair" tax competition in Europe will this month be proposed by Valéry Giscard d'Estaing, the man drawing up a new EU treaty.

His plan, designed to stop some EU members poaching inward investment and savings by setting very low tax rates, has the backing of most member states, including France and Germany.

According to aides, Mr Giscard d'Estaing is determined to press the issue, even though Britain and Ireland are opposed to deciding any EU tax issues on the basis of majority voting.

The former French president believes that without reform, the EU's single market will be distorted as countries embark on a damaging race to undercut one another's company tax rates.

It's the same old argument against capitalism and competition, but transported into a different context. It shows that the European elites still don't understand why an economy works and prospers. It's not a new insight, but it's the statists of d'Estaing's ilk who are drawing up the new EU constitution. That does not bode well for the future, but that's not news either.

There is some evidence that the euro has indeed spurred greater economic integration and flexibility in Europe. But this enforced discipline has not extended very far, nor is it making much of a difference in the discussions about structural reforms. My view remains that European Monetary Union is currently doing more harm than good.

Meanwhile, in Latin America, the idea of monetary union seems to be catching on. Brazil and Argentina have floated the idea of moving to a joint currency. Coordinating economic policy is one thing, but moving to a joint currency at this stage seems foolhardy in the extreme. Moreover, one report quotes deputy foreign minister Martin Redrado as saying:

"The currencies are worth almost exactly the same, this is the time,"

Yes, the exchange rate between the real and the peso happens to be close to one at the moment, but that is utterly meaningless. You could multiply either currency's nominal value by a constant and it would not change underlying economic reality one bit. If they're going to base a single Latin American currency on this kind of reasoning, it's doomed before they even start.

May 04, 2003
The Den Beste Effect

I figure most of you here read USS Clueless, so you will have read Steven Den Beste's essay on blogrolling. As one of the lucky few who was on his blogroll until he refreshed it, I've always wanted to do an analysis of the actual benefit of the link. A full analysis will have to wait until more time has passed so I have more data following the removal of this blog from his blogroll.

So I will limit myself to just a short observation now, based on the aggregate statistics without delving into the raw logs. Steven Den Beste argues that having a short blogroll makes any single entry more valuable. That certainly sounds plausible, but ideally I'd like to be able to quantify it by comparing incoming visits from different blogs. Again, a fuller analysis will have to wait, so now I'll just focus on the two extremes: Den Beste and Samizdata. While Den Beste had a very short blogroll, Samizdata's stretches as far as the eye can see, to the horizon and beyond and then wraps itself around the planet a few times. During the month of April I had a total 1052 incoming hits from Den Beste, while I had 64 from Samizdata, which works out at 35 hits/day from Den Beste and 2 hits/day from Samizdata.

The other part of the story is the number of visitors the referring site gets. Den Beste's counter for yesterday stands at 8795. On weekdays he gets more hits. Assuming he gets 10,000 hits a day on average, that means about 0.3% of his visitors clicked through to here. Unfortunately, Samizdata does not have an open counter with access to the history. Its counter currently shows a total of 687,078, so I'll check back in a few weeks to determine an average. I'll also include other referring blogs in the statistics to see whether any relationship can be determined between blogroll length and click-through.

Addressing the concept of stickiness is going to be harder, but with some log-mangling it should be possible to address that as well, or at least give a first-order approximation.

UPDATE: I emailed Steven to inquire about aveage page loads, and he says that he's getting around 15,000 on weekdays and about 10,000 on weekends. So let's say it's 13,500 per day on average that works out to about 0.26% click-through on the blogroll. Of course, these are hits, not unique visitors, but that goes for the Samizdata numbers as well.

Posted by qsi at 07:13 PM | Comments (3) | TrackBack (1)
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Blog upgrades

I have been tinkering with the blog over the weekend, and have activated categories. They were there right from the start, but I never exposed them on the blog, and a lot of the work was to clean them up and make them more consistent. In the left sidebar, you'll now find the Category Archives. Now you can see all posts relating to, say, Gretta Duisenberg on one page. At the bottom of each blog entry, there are links to all categories for that entry. I am still fine-tuning the category structure to weed out underutilized categories.

There have been many additional cosmetic changes in the archive pages to make the blog look more consistent. For instance, the Monthly and Category archive pages now have a sidebar listing all the entries. The only remaining item is to show secondary categories on the Category Archives, to fix the search results form and to add an "advanced search" option.

There'll be more tinkering, twiddling and tweaking (but no frobnicating) in the coming days, although I will be stuck in London part of the time. I don't think I broke anything with all these changes, but any feedback is welcome.

Posted by qsi at 06:15 PM | Comments (0) | TrackBack (0)
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May 02, 2003
Work in progress

In the olden days, when I was but a Dilacerator-in-training, I used to revel in the thrill of living on the bleeding edge of technology. Now that I am older, more sedate (and senescent) I know better than to upgrade to the latest and greatest version of anything. With Movable Type arriving at version 2.63 and me stuck at 2.21, I though it was time to upgrade. So I did.

The biggest difference is that I immediately made use of the built-in search function, which you can now see in the left column. I've long wanted to add a search function, but it used to be external MT module, so I never bothered. Since version 2.5 it's been included in the distribution. Other than that, nothing should have changed, although I'll probably tinker with some details over the weekend. I have a full backup, but hopefully that won't be needed. I don't think I'm in danger of destroying anything. Such thoughts have usually been followed by catastrophic data losses in the past.

Time for a shot of Laphroaig Cask Strength. A small one.

Posted by qsi at 11:09 PM | Comments (0) | TrackBack (0)
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May 01, 2003
Careful what you wish for

The euro is a political construct. While the idea may have its roots in economics, the introduction of the single European currency was always a political project, meant to solidify European integration and to give Europe a bigger say in the world. The French definitely did see it right from the start in political terms too, as they wanted the euro to provide a counterweight to the almighty US dollar. It's the old French obsession with their own irrelevance, and the euro was a way of reasserting French relevance in the world, channeled through the dank sewers of the European Union.

Given what's riding on the euro for Europe's ruling elite, the first years of its existence were a bitter disappointment. Virtually since the introduction on January 1st, 1999 the euro fell like a brick against the dollar. This in turn led to much gnashing of teeth of the European elites, because it wasn't supposed to be like this. The value of the currency was seen as a sign of Eurocratic virility, and all it was producing was a high falsetto squeak. It's dangerous to look at the value of the currency in these terms, because it leads to even more contorted economic policy than usual. But there you had it: a massive outpouring of anguish from the ruling elite about the euro's weakness and constant reassurances that the euro was a strong, viable currency.

The United States has long had a "strong dollar" policy going back to the Reagan years. A strong dollar meant a strong America. Intertwining a political message with the external value of the currency was politically opportune, and perhaps even useful as a short-term expedient. The dollar had been on a continuous slide before then, and the external value of the currency does matter. If your currency goes down in value relative to others, then your entire currency area is impoverished by a corresponding percentage. In the long run, currency prices are best left to the interaction of supply and demand on the international markets rather than used as totems in policy making. An agnostic approach from politicians is best.

However, that's not how real life works. The danger of making a wish is that it might come true, and the Euro-elites are now discovering the hard way that the consequences of their wishes are in reality different from their imagined outcomes. The strong euro is a perfect example of this. Over the last year, the euro has gained almost 20% in value against the dollar, granting the Euro-elites their wish. But they're not exactly reveling in the experience, because exchange rate movements have effects in the real economy and do not exist merely to accumulate international bragging rights. Why is the dollar falling though? There are a number of reasons for that: the external financing requirement of the United States is huge. The current account deficit stood at about $500 billion in 2002, meaning that the US had to attract almost $2 billion every working day of the year to finance the deficit. At 5% of GDP it is clearly in a fairly extended position, and coupled with a federal budget deficit, the financing requirements of the US are pretty hefty. This is part of the reason why the dollar has been declining. Other reasons are the low yields on US cash and US Treasury bonds; US cash yields only 1.25% at best, while the euro short-term interest rate stands at 2.5%. Keeping cash in US dollars at the moment does not even get you compensation for inflation.

The flip side is that these low interest rates are stimulating the economy, or at least they should be. There's now an impressive array of positives for the US economy: negative real interest rates, falling oil prices, tax cuts and the weak dollar. In the past, this combination has led to a resurgence of economic growth and risks the reemergence of inflationary pressures. If all of these factors don't produce an economic rebound, then the old metaphors of pushing on strings become eerily appropriate. The next months will tell.

The weak dollar is a positive for economic growth because it makes American industry more competitive internationally, at the expensive of lowering the aggregative relative wealth of all dollar-denominated assets. The effects of the weaker dollar could already be seen in the first quarter earnings season, where both the top and the bottom lines were lifted by the currency effect. The weak dollar is helping America export more.

If the weak dollar is helping US exporters, then European exporters must be suffering, and they are. Interest rates in Europe are higher than in the US, especially at the short end of the yield curve, there is at best a neutral fiscal impact on economic growth and the strong euro is eating into sales and profits. Only the falling price of oil is helping here, but not as much as it is in the US, because of the strength of the euro and because energy is so heavily taxed in euro that swings in the underlying commodity have a smaller percentual impact on the final price than they do in the US.

So now that the Euro-elites have their stronger euro, its effects are not quite what they had in mind. Instead of basking in the warm glow of a rising currency, their exporters are hurting. During the period of dollar strength it was US exporters who suffered, but even during that time European economies underperformed the US. The growth differential between the US and Europe is not likely to close anytime soon. The secret is the more flexible US economy, where it is easier for companies to adjust to changing circumstances by cutting costs and firing people. This is painful in the short term, but has the long-term benefit of building more resilient companies and increasing aggregative wealth in the long run. Europe's labor markets are ossified, locking employers into costly arrangements, that make employing people unattractive and that erode the long-term profitability and even viability of companies.

The strong euro is therefore a problem because the domestic economic price structure is not flexible enough to respond. The cost of labor is high, and not amenable to downward adjustment. After all, people don't like taking a wage cut. The ultimate wage cut is to be laid off, and with unemployment creeping upward in all of Europe, that is what's happening.

There's also a different problem that is new to the Eurozone, and that is the existence of the Eurozone itself. Or rather, it's the single currency that has now put companies into the (for them novel) position where they are faced with strong currency and no escape valve. Countries like Italy used to devalue to their way out of trouble whenever Italian industry had lost competitiveness against, say, Germany. That sort of works, in that it keeps the country in business, but it does impoverish the entire nation and it imports inflation. But now that escape valve of devaluation is no longer there, so the adjustment will have to take place through other means, and that's going to be very hard in an environment of rigid labor markets and no structural flex.

Devaluations are not the way to go, but regional (i.e. national) responses were still possible in the sense that national monetary policy could account for the impact of a strong currency. The strong euro is an asymmetric shock that affects the Eurozone. Some economies (like the Netherlands and Ireland) are much more trade-oriented than others (Italy or Spain). So a strong euro has a much greater impact in the countries with open economies than in those with a less international focus. This brings us back to square pegs, round holes and the European Central Bank. It has to find a single interest rate to deal with the inflationary pressures and the impact of a strong currency on very different underlying economies.

Some time ago, I looked at a simple Taylor-rule approach to EMU, which is a way of trying to find the "right" interest rate by looking at inflation and the output gap. Another approach is to use a Monetary Conditions Index (MCI), which attempts to gauge the effect of real interest rates and exchange rates on the economy. Central banks in Canada, Norway and Sweden use MCIs as a policy instrument. Essentially what the MCI does is to try to find a trade-off between interest rate movements and exchange rate movements. For instance, for an open economy, a 3% change in the value of the currency has the same impact on growth as a 1% change in real interest rates. For closed economies, the multiplier will be bigger.

Looking at a simple MCI for the US, it's clear that monetary conditions in the US have been easing for a long time now. It's actually somewhat worrying that this has not translated into stronger growth yet, but the terrorist attacks and the wars in Afghanistan and Iraq are plausible explanations for the muted recovery thus far. The graph shows the year-on-year change in MCI for the US, but in absolute terms monetary conditions as defined by the MCI are now at their most expansionary in a very long time. Overall monetary conditions in the Eurozone are stimulative too, but as the MCI graph for EMU shows, the effect of the strong euro has meant that monetary conditions have been contracting a little for the last year. This is obviously not helping economic growth in the Eurozone. (MCI constructed with data from the ECB.)

A strong currency is not necessarily a good thing, nor a necessarily bad thing. You don't want a currency that's perennially weak, because that sets you on a course for long-term national indigence. What's more important is how you deal with changes in the exchange rate, and that depends on the flexibility of the economic structure. In that regard, the US is better off than Europe. If and when the US economy starts to pick up more decisively again, the dollar's slide will likely come to an end. The positive scenario for Europe would be that the strong euro forces the politicians into action and compels them to fix the structural problems that afflict Europe. It's a low-probability scenario though.