Inequality

aje on November 26, 2020

⭐ Required readings:

Activity: Thinking about wealth

Watch: $456,000 Squid Game in Real Life

Watch the full movie Parasite (2019), Bong Joon Ho

Lecture handout: Inequality*
Here is a thread containing 10 books about inequality.
Many consider inequality to be a key social problem, and yet economics is all about delving beyond intuitions. Do we have good data on what has happened to inequality over time? What type of inequality matters? Is there an important trade-off to consider when confronting inequality? The answers to these questions may be controversial, but they are relevant and important.

Imagine trying to answer the following question:

A study by Gimpelson and Treisman (“Misperceiving inequality“, NBER Working Paper 21174) found that:

  • In 29 of the 40 countries a majority of respondents who ventured a guess guessed wrong.
  • In 29 countries, the leading choice attracted fewer than 50 percent of those who guessed.
  • In almost three quarters of countries, most respondents who thought they could identify the general pattern of inequality got it wrong.

As Sam Bowman has argued,

“loads of the objections people have to inequality, if there is any truth to them, are probably actually objections to perceptions of inequality, which may be more driven by media coverage than reality. If that’s true, then trying to reduce inequality in fact is a waste of time — you should try to get the media to talk about it less instead”

I think it’s important to recognise that we simply don’t have sufficient wealth for everyone to have a reasonable standard of living. Even if you somehow confiscated the entire global GDP and shared it equally everyone would only get a monthly amount of $1,191 for one year. ($117.2 trillion between 8.3 billion people). This is a reasonable income for many parts of the world, but would lock us in to present consumption power. Would you have wanted your parents to have made a similar trade back in 1985, which would be $12 trillion between 5 billion = $2,400, i.e. less than $7 per day? (I’ve used income, rather than wealth, because the data is better. These figures should also be adjusted for purchasing power, but it’s only meant as a back of the envelope exercise).

Here is a debrief about the wealth tax quiz.

Vincent Geloso has challenged some of the work done by Gabriel Zucman. You can read more here:

and here:

Vincent has also criticised this chart showing the supposed derailment between productivity and wage growth:

According to Scott Winship, “the charts used to demonstrate the supposed breakdown of this relationship obscure the reality that productivity and hourly compensation continue to track each other”. The main problem is that the chart shows family income rather than hourly pay (or, better still, hourly compensation). This chart shows a more like-for-like comparison:

I’ve often seen students link to this graph:

On initial inspection this graph looks highly dubious:

  • The selection of countries is suspicious (why exclude countries that have more income inequality than the US, and why include Finland but not Singapore?)
  • The “Index of health and social problems” looks arbitrary and prone to manipulation

However I’ve not been able to find the actual source yet. I assume it comes from ‘The Spirit Level‘, which I believe has been quite firmly debunked:

  • Snowden, Christopher “The Spirit Level 10 Years On” – When The Spirit Level was released back in 2009 it caught the imagination of the public, by providing empirical evidence to claim that rising inequality was a serious problem. Chris Snowden debunked a lot of the analysis in his book, The Spirit Level Delusion, and this short blog post updates the data to show that not only was the original analysis flawed, but it no longer holds.

Oxfam are also renowned for using dodgy statistics. For example:

Here is an article from Marginal Revolution providing context and assessment of the tribunal that found Next had broken the Equality Act of 2010.

Aside: Sometimes I’m asked what I really think about inequality. Really? That the there is no ethical basis for being concerned about inequality per se.  In fact, the best argument to take it seriously is because low educated and xenophobic natives, who have hit the jackpot in where to be born, hold civilised (i.e. cosmopolitan) society to ransom by threatening extremism of various sorts and civil disorder unless their concerns are met. Ideally, we prevent all that from happening by ensuring nominal income stability and productivity growth. But there’s no moral basis for “equalising” arbitrary distributions. Our moral concerns should be focused on eradicating poverty and destitution; and ensuring a competitive market economy that rewards wealth creation and limits rent seeking. If forcing Charles Koch to emigrate improves your metrics of success, then I demur.

For more on Mr Beast see this twitter thread and this interview with Joe Rogan:

Or this one with Lex Fridman:

 

A key point from the lecture is that when assessing inequality it is important to look at consumption (or living standards) as well as income and wealth. In this post Scott Sumner makes the case for why the only sensible way to look at inequality is through consumption.

My view of the inequality debate is informed by “Fast” Eddie Felson, from ‘The Hustler’.

Luxury

I was very disappointed when Rimowa were sold to LVMH and switched from being a high quality travel company to part of a luxury brand. As Michael Story said,

As per Mary Douglas I view high status consumption goods as part of our need to separate ourselves from others, and signal which groups we belong to. I don’t play those games (at least not on those margina) and think it’s a bit of a waste of resources to do so. But I respect people who admire beauty, design, and the pursuit of aesthetics. Live and let live, I say. But tax the hell out of them.

Universal basic income

A universal basic income is a policy programme that provides all citizens with a specified amount of money irrespective of need. This Vox article provides a good summary of different examples of how they work in practice. In 2023 the UK trialled a scheme paying £1,600 per month.

I largely share Martin Wolf’s (2023, p. 283) criticisms of a universal basic income (UBI) in that by being so intentionally ill targeted it creates too much of a waste of limited public funding – “A UBI at a high enough level to render targeted assistance to those who are vulnerable, needy, and deserving would be unaffordable, while a UBI  that is affordable would benefit many people who do not need the money and fail to benefit important services and people who need more than they have now.” I prefer a moderate income tax with generous allowances and incentive compatible welfare payments.

We can think of the state as an “insurer of last resort”, with its access to taxation permitting favourable terms for mitigating risk (p. 274). By being able to compel people it also avoids the “adverse selection” problem that befells individuals in particular need. This helps to explain the main economic justification for a well functioning welfare state (p. 276):

  • Incomplete private insurance
  • Incomplete capital markets

Note though that improving the market in those two areas would reduce the need for widespread social protection.

Slavery

For an overview of the debate surrounding the role of slavery in the rise of the West see:

Recommended audio:

  • “Claudia Goldin on Inequality“, Conversations with Tyler, Oct 6th 2021 – this conversation focuses on gender inequality and the labour market in particular, and although some of the discussion is aimed at graduate students they pose some excellent questions to reflect on.
  • “Thomas Piketty on the politics of equality“, Conversations with Tyler, April 20th 2022 – Tyler challenges Piketty on some of the political economy arguments relating to progressivism and does a good job putting Piketty’s work into a history of economic thought perspective.
  • Ep. 28: Vincent Geloso — Should We Care About Inequality?, The Curious Mind, February 12th 2020 – Vincent talks about which types of inequality are most important to reduce and discusses some of the academic literature that has contributed to our understanding of the issue. His main claim is the need to build a dashboard and avoid overly simplistic explanations or solutions.
  • “Roland Fryer on Race, Diversity, and Affirmative Action” EconTalk, September 4th 2023 – Fryer explains how the study of discrimination can be approached in three main ways: preference based (e.g. Gary Becker); information based (e.g. Kenneth Arrow); and structural (i.e. sociologists). He summarises his career, talks fondly about the influence of his grandmother, and the importance of combining intuitive wisdom with rigorous data analysis. His main point is that wage discrepancies are not necessarily discrimination, and companies often lack the curiosity or capability to use the data at their disposal to really understand the problems they face. This helps to explain why the benefit of diversity training is zero, and the impact of mandatory diversity training is possibly negative.

Recommended film:

You can see the trailer to Parasite here:

Here are what I consider to be a conventional and alternative take on the movie:

I also recommend the 2021 BBC series Chloe. As this Guardian review demonstrates, when it says “I hope she gets away with everything”, some viewers can actively root for despicable behaviour if it’s presented as a commentary on inequality.

During the class I say that it is inconceivable to have an American movie that portrays wealthy people in a positive light.  Potential counter examples include:

  • The Dark Knight Rises (2012) – the good guy is a billionaire, the police are heroes, and Bane occupies Wall st… I’m not sure the Batman is a positive depiction of wealth, but it’s certainly a very rare example of a movie that is more right wing than left wing.

  • One Day (2023) – Dexter is obnoxious and his wealth and priviledge is not portrayed in a positive light, but we certainly sympathise with him and, as this Guardian review points out, his “wide-boy charisma and frightful yet endlessly forgivable privilege are perfectly pitched; I forgive him a thousand times. His poshness is neither glossed over nor glamorised; it is simply integral.”. Dexter’s dad is a good man, who we sympathise with, and we don’t hold his wealth against him. That’s something, I guess. (Note this isn’t American, or a movie, but I’m open to anything!)

  • Saltburn (2023) – this film is a challenging watch but very good (the line “she’d do anything for attention” is perhaps one of the funniest I’ve ever heard). If you’ve read Engleby then I think you lose a large part of its power and originality, and if you understand the Solow growth model you may be confused by the ending. In terms of its implication for inequality, you do sympathise with the rich, and it sort of parallels Parasite’s warning about trust and naivety. But Oliver isn’t poor (despite his bad accent, Prescott is fine!), and the Catton’s aren’t portrayed as having earned their wealth. They are not horrible people but we do laugh at their buffoonery and aren’t asked to respect them. Felix isn’t atrocious but he’s manipulative. Like Parasite, it shows the rich as victims of those less fortunate, and unlike Chloe we’re not supposed to cheer them on. But it doesn’t portray wealthy people in a positive light.

  • Loot (2022) – I haven’t seen this but the basic premise (I think) is that it is possible to feel sympathy and even affection for a multi-billionaire. And yet, only if they become a philanthropist. And also, the husband is the villain.

Finally, if you like the plot device from Parasite, with people appearing from underground captivity, confronting a confusing situation as a result of odd costumes, leading to violence and mayhem… then I recommend Emir Kusturica’s Underground (1995):

Learning Objectives: Survey the latest empirical work on inequality and relate this to wider social issues.

Cutting edge theory: Assessment of a wealth tax

Focus on diversity: Thomas Sowell has written extensively on topics such as race and inequality. In this interview he discusses the myths of economic inequality. One of the most famous academic economists working on labour market inequality is Roland Fryer.

Stagnation

aje on November 26, 2020

⭐ Required readings:

Activity: Transformative Innovations

Watch “iPhone 1 – Steve Jobs MacWorld keynote in 2007” (the first 17 minutes is sufficient)

Lecture handout: Stagnation*

“Stagnation, my dear boy, what is more soul-destroying than stagnation?” C.S. Lewis, The Great Divorce

In the lecture I say that “start up rates are falling” but that was from a 2014 paper that I wrote. Data from the US Census Bureau suggests that since then they have been rising.:

According to Max Grossman, as of 2021 half of all scientific papers that had even been published had come in the last 12 years, and yet much less than half of scientific progress had happened in that same period.

Here’s a great image showing a long-term timeline of technology (but notice the gap between smartphones and Now):

Here is a video showing the opening of the Empire State Building:

And don’t forget just how amazing it was when people saw the iPhone for the first time:

 

For more on whether Jeanne Calment really was the oldest person ever, see Wikipedia. Saul Newman is a demographer who has found that the places that have lots of people living over the age of 100 tend to be riddled by clerical errors and pension fraud – he won an Ig Nobel in 2024. This chart shows that once birth certificates became widely adopted far fewer people claimed to be very old.

Here is The Economist on how claims of people living to a great age decline when birth certificates are introduced.

As Alec Strpp says, “Areas of the world with people claiming to be 110+ years old are actually just places with poor record keeping and a lot of pension fraud.”

Isn’t it weird how you used to be able to easily tell when a TV series was set from the fashion? And yet long running recent shows are much harder to date. For example,

I was saddened to learn recently that same amount of time had passed between the first human airplane flight and the first human spaceflight as between the first spaceflight and 2018 (see here).

Here is a good defense of the importance of aviation:

“It has offered people the opportunity to migrate from one country to another It lets them return home to visit their families. It has provided jobs. Driven innovations in new technologies. It has made our societies more diverse and multicultural and has allowed us to experience the beauty of other countries. these are experience I want everyone in the world to have access to” (Ritchie, 2024, p.99)

To some extent this lecture is about trying to work out what happened in the early 1970s. This website poses the same question: https://wtfhappenedin1971.com/

Some interesting (and possibly related) facts about this period:

And here are some iconic photos from 1974.

Perhaps, in future, people will look back on 2007 and say “what happened??”

The lecture provided some pessimistic views on transformative breakthroughs. But every now and then I notice the power of steady, incremental progress. For example:

Noah Smith has a nice Twitter thread on progress since 1970.

This website: My Ordinary Life: Improvements since the 1990s. And here’s a great video showing the progress made in car passenger safety:

If you found the point about complacency convincing, see

Finally, a lot of the themes from this session was covered in a quarterly report that I wrote for Kaleidic Economics over 10 years ago!

Recommended audio:

Learning Objectives: Understand the scholarly literature on the secular stagnation thesis

 

Value creation

aje on October 16, 2020

Lecture handout: Value creation*

Textbook Reading: Chapter 1 (Section 1.2, pp. 16-29)

The purpose of this session is to realise that value comes from satisfying people’s needs, and that this leads to a broad and insightful realisation that:

  • Competition is when anyone else tries to satisfy the same customer needs that you do.
  • Innovation is trying to find better ways to satisfy your customers needs.
  • Entrepreneurship is successful when you understand your customers needs better than they do.

For more information about David Reynold’s model of the Brent Bravo oil rig, see here and here. In 2013 Barry King tried to beat Reynold’s record by constructing a model of Salisbury Cathedral (which is a popular tourist destination for KGB agents). You can read more here. Since 2012 Steve Waller has spent around 12 hours a day to create a scale model of the St Hilda district in Middlesbrough. We may respect these creations, but unless we have a need that they satisfy, that doesn’t make them valuable.

Here’s a list of items that have caused controversy over their value:

  • The ‘I am rich’ app (link)
  • Among Us shaped chicken nugget sold for almost $100,000 (link)
  • A banana duct taped to a wall fetched $5.2m (link)
Activity: Here is a worksheet on understanding value. Here is a short quiz on understanding value.

Here is an application to Food and Beverage management.

Steve Job’s famous advice was to not listen to your customers. This is in contrast to Tyler Cowen’s “law of interesting content” – which is that interviewers should have the conversation that they want, not what they think their listeners want.

I think it is incorrect to say that the reason diamonds are more valuable than water is because they are scarcer. This would be using the term “scarcity” to refer to a relative amount of present consumption, but that is obtuse. We normally use scarcity as a collective assessment of the availability of a good. In other words, there is no such thing as personal scarcity.

For an overview of the water-diamond paradox:

Recommended reading:

  • Christensen, C., et al, 2016, “Know Your Customers’ “Jobs to Be Done”” Harvard Business Review – the seminal account of thinking about service provision and how to understand your work from the perspective of your customers.
Learning Objectives: Link a thorough concept of value with implications for competition and innovation. Derive demand curves.

Cutting edge theory: Jobs to be done

Focus on diversity: Economists typically take preferences as given, but we can provide a theory of demand reflecting “the individual’s commitment to an intelligible universe” (p.52), where goods are considered to be a visible reflection of culture. Mary Douglas (1921-2007) was one of the world’s most admired social anthropologists, and her 1979 book, ‘The World of Goods’, provided a rich and compelling illumination of consumption patterns. 

Spotlight on sustainability: Plastic packaging

New York

aje on February 25, 2020

 

New York is the classic metropolis and when you stand in Times Square you feel that you are in the centre of the world.

Most great cities have a similar aspect – the river upon which it originates provides a bearing and context. I love Liverpool in part because the two Mersey tunnels preserve the unique skyline (and provide a clear view of where I got married).

Liverpool – the city of my adoption and my affection

New York – and when I say New York I obviously mean Manhattan – is special because there is no dominant waterfront. The fact that it’s an island makes it inward looking, and instead of being in a city to judge by itself, you feel that you are at the centre of all cities, and therefore all modern civilization.

My first trip to New York was via bus from Washington DC. We were offloaded in Chinatown and it was freezing cold, so we went straight into the nearest diner for coffee and doughnuts. After dumping our bags in the hostel we raced to the Empire State Building and caught the last elevator ride up. What was damp rain at street level was snowfall at the top. Romantic, and majestic.

I call myself a citizen of the world and New York the capital of the world, Jack Reacher (in Gone Tomorrow, p. 16)

My last trip was to present a paper at the Eastern Economic Association annual conference. The keynote was delivered by Ed Glaeser, the world’s leading economist on cities. He is a sharp, dazzling speaker, and watching him perform with a New York City backdrop was a thrill. Satisfying, and triumphant.

The city as the engine for social change and increasing well-being is one of the truly great triumphs of our amazing ability to form social groups and collectively take advantage of economies of scale (West, 2017, p.186).

What I love most about cities is the juxtaposition of energy and possibility and the amount of personal space they provide. An atomised city provides a certain sanctity. Here’s how to spend time alone in NYC.

Cities are the crucible of civilization, the hubs of innovation, the engines of wealth creation and centres of power, the magnets that attract creative individuals, and the stimulant for ideas, growth, and innovation. (West 2017, p.215).

They incubate immense wealth creation by permitting specialisation and market exchange. Consider David Schmitdtz (2023, p. 101):

In a village, a poor man’s son might grow up to be a doctor, but no one will push the frontier of oral surgery. Why not? Because in villages there aren’t enough customers. Specialized trades emerge only where a customer base is large enough to sustain them. To find specialists, we go to a commercial hub such as London. In London, someone who might otherwise be the village carpenter can specialize in crafting violins. Economies of scale make possible fine-grained specialization, thereby fostering new heights of excellence.

I like cities for the same reason that Frank Renzo does, in Sebastian Faulks’ ‘On Green Dolphin Street’,

I like the fact that it’s impersonal. No one troubles you. That’s what cities are for.

The downside of this, of course, is the potential to slip out of life, unnoticed. Cities come with costs.

They are the prime loci of crime, pollution, poverty, disease, and the consumption of energy and resources. Rapid urbanization and accelerating economic development have generated multiple global challenges ranging from climate change and its environmental impacts to incipient crises in food, energy, and water availability, public health, financial markets, and the global economy (West 2017, p.215).

But surely we can agree that the solutions to these modern problems must include (i) energy efficiency; and (ii) wealth. Thus cities are crucial.

Of course most cities develop along trading routes, and the best cities are historic ports.

“In port cities, arts proliferate and people innovate because ports are hubs or commerce; they are where cultures meet” (David Schmidtz, 2023, p. 101)

Each trip to New York is a combination of revisiting favourite eateries and seeking new ones.

I recommend:

  • Ivan Ramen – (New York Times, one of my favourite episodes of Chef’s Table). I’ve only been the spin off, Slurp Shop, but enjoyed it immensely.
  • Sombrero – ok, this isn’t particularly impressive cuisine but when you come from the UK, and the alternative is a chain such as Tortilla or Chiquitos, it’s nice to sit in a Mexican restaurant, with a wide range of tequilas, and full plates of decent fare. My main motivation for my first visit was the proximity to my hotel, but I went back a second time for familiarity. Not a strong recommend, but a place close to my heart.
  • Xi’an famous noodles – I vouch for the Spicy Cumin Lamb burger, but there’s a lovely depth of heat and lip tingling joy across the menu.

To try:

Recommended bars:

  • The Turnmill – this is the official bar of the Everton FC NYC supporters club. What’s better than a packed pub in a foreign city, on a matchday, covered in TVs, full of fellow fans? Savour the crisp walk of anticipation from the subway ready to sink a cold pint at 10am. Bizarre, but worth doing.
  • The Garret
  • Employees Only

Things to do:

  • Take a ferry from pier 11 to Dumbo, visit the Time Out Market (in particulate take the lift up to the bar for a view across the terrace) and then walk back across the Brooklyn Bridge

I’m not sure when I’ll next go back to NYC. But I miss it.

Poker

aje on February 25, 2020

I don’t play poker but I have a couple of friends that do. I recently asked them what resources they’d recommend for people wanting to get into it, and thought I’d share their advice.

Scenarios

aje on February 24, 2020

Course introduction

The scenario method is a useful, creative, and increasingly popular way for managers to reframe their perspective and improve their organisational resilience. The course shows how to recognise the driving forces that will affect the future business context and consider the present-day implications. By building detailed and imaginative narratives, participants will learn how to confront uncertainty and become more confident in conditions of change. The lecture content contains the cutting-edge practice of the scenario method and the blended approach permits flexibility, agility, and collaborative project work.

Course content

Pre-course activities

Reading pack: (download all here)

Required reading:

Here is a pre course quiz.

 

Public resources

Oxford Scenarios Programme, Webinar, September 2017 – this provides an excellent overview of two fascinating case studies: Rolls Royce and the Royal Society of Chemistry.

For my report on SMRs see here. For my analysis of the situation in Belarus see here.

To learn more about Everton’s relegation battles and their link to scenario planning, see these two articles:

Here is a recording of my webinar from December 2022 on Scenario Planning for the Energy Industry:

An excellent overview of the build up to Russia’s invasion of Ukraine is this article:

It summarises intelligence success and failures and quotes a German official: “The main thing we took away from all of this was that we need to work with worst-case scenarios much more than we did before.” It concludes, “For many, the key intelligence lesson from Ukraine was stark: do not rule things out, just because they might once have seemed impossible.” Indeed, the Canadian military are now modeling an American invasion.

In 1997 Wired published an article called “The Long Boom” in which Peter Schwartz and Peter Leyden provided a “history of the future 1980-2020”. You can read it here.

Recommended further reading:

If you want a great example of how to build an engaging future reality, l highly recommend: Children of Men (2006).

Learning Objectives: Build and use scenarios. Think creatively about alternate futures. Link scenario planning to strategic issues. 

Why is the scenario method so important? Because, as Adam Martin mentioned in his interview with Peter Boettke, in economics the emphasis on choice is because we live in a world of scarcity. The conditions of uncertainty, however, also means that we require imagination. Scarcity and uncertainty are the context. Choice and imagination are the consequence.

Transition economics

aje on February 24, 2020

Learning Objectives: Understand the socialist calculation debate. Consider the empirical record of different transition economies.
Lecture handout: Transition Calculation*

The training scene from Rocky IV demonstrates the difference between the USSR (technologically sophisticated but lacking in heart) and the US (backward but free).

https://youtu.be/1oDTNEEu3Rw

  • Audio: Planet Money, “Peanuts and Cracker Jack”
    • What are the main factors that determine the earnings of a vendor?
    • Why is it better to have the vendors decide on who does what, rather than senior management?
    • How much entrepreneurial profit comes from working harder than others?

One of my favourite ruminations on the differences in economic systems.

  • Further reading: “Havana or Prague” in Hitchens, Christopher, (2010) Hitch-22: A Memoir, New York: Twelve
Lecture handout: Transition Shock*

There’s a big difference between queuing for basic necessities, and queuing in excitement about the first McDonalds in Moscow:

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 12 of ‘Economics: A Complete Guide for Business‘.

Foreign Investment

aje on February 24, 2020

Case: Porter, M., and Ketels, C., “Indonesia: Attracting foreign investment” Harvard Business School case no. 9-708-420, January 11th 2013 (£)

Case preparation: Foreign Investment in Indonesia, May 2016

The 2023 Christmas edition of The Economist included a fascinating account of extended market order, economic development, and the role of capitalism in Indonesia:

Tyler Cowen wants to fund the following question:

  • What should Widodo do? Indonesia is a large, populous middle-income country. It faces no major near-term security threats. It has a small manufacturing base and no major non-commodity export sectors. What is the best non-bureaucratic 10 page economic development briefing document and set of prescriptions that one could write for Indonesia’s president?

Here’s my analysis of Belarus, using many complementary concepts.

Also see my page on Country Competitiveness Dashboard.

Learning Objectives: Consider the role of foreign investment in economic development. Perform a country competitiveness exercise.

Focus on diversity: Asli Demirguc-Kunt is Chief Economist for Europe and Central Asia at the World Bank.

Spotlight on sustainability: This session reveals how policy makers can incorporate social factors in a development plan

Debt crises

aje on February 24, 2020

Reading: Blustein, P., 2005, “And the Money Kept Rolling In” Public Affairs (pp.39-60)

Discussion question: As of July 1998 should the IMF suspend their program in Argentina, or continue their support?

Textbook Reading: Chapter 8 (Section 8.3; pp. 278-280) and Chapter 10 (Section 10.4; pp. 357-366)

Although I use Chapter 3 as the pre reading for this class, I highly recommend the full book: “And the Money Kept Rolling In (and Out)”. Here’s The Economist’s summary. To better understand the dynamics of a sovereign debt crisis, use this model from The Economist.

Instructor Resource: “Argentina: What Happened Next?” January 2014

Argentina’s default in 1998 reveals some downsides to convertibility, such as the fact that Argentina was being affected by US monetary policy. But convertibility had long been abandoned – after all Argentina had engaged in exchange rate controls to boost exports, were holding Argentinian government bonds as reserves (not just USD), and providing lender of last resort services to domestic banks.

Ultimately I think we can point to several key problems:

  • High growth rates masking the deficit and debt problems – which possibly generated a lot of hubris.
  • The “sudden stop” reversal of capital flows due to Russia’s default in 1998.
  • Fiscal policy being too loose in the 90s (when they should have been running a surplus) but then too tight in 2000/1.
  • Post child syndrome affecting the incentives of both Argentina and the IMF.

What’s happened since?

When Javier Milei became President of Argentina in December 2023 there was lots of discussion about how he would fix monetary issues. Several economists have advocated dollarisation and the abolishment of the central bank. For example:

For my assessment of Milei’s first year in office, see:

I also recommend this interview with Milei:

Activity: Complete the Stock Market Crash worksheet
Recommended audio
Recommended reading

For a thorough account of how the IMF conducts their support plans, see:

Lecture handout: Financial Stability*

The key goal for monetary authorities is credibility: [Credibility flashcard]

What constitutes an optimal currency areas? [Optimal Currency Areas flashcard]

Learning Objectives: Understand the causes of a sovereign debt crisis. Understand the role international agencies play in managing a debt crisis.

Focus on diversity: The highly influential paper on sovereign debt tipping points was co authored by Carmen Reinhart, a Cuban-born economist who became Chief Economist of the World Bank in 2020.