Rule it out

SHOULD experts in the public service follow rules, or rely on their own judgment? The answer is crucial for many areas of public policy, including criminal sentencing, immigration and education. It is also of pivotal importance to monetary policy.

Central bankers usually have discretion over how to use interest rates to achieve their goals. Yet it is easy to see the problems that result, as analysts pore over every word any central banker utters and markets see-saw in response. This tendency is becoming more frenzied as America’s Federal Reserve prepares to raise rates, issuing tantalisingly vague statements along the way. Some Republicans in Congress think it would be better if the central bank’s actions were more predictable. Jeb Hensarling, who heads the committee that oversees the Fed, frequently urges it to set interest rates using a simple formula.

The debate about rules versus discretion is an old one. In 1977 economists Finn Kydland and Edward Prescott—who went on to win the Nobel prize for their work—showed how too much tinkering with interest rates can be harmful.* In a simple model of the economy, two things...

from The Economist: Finance and economics http://ift.tt/1M7Y5ln

Advancing, not retreating

BIG crises can lead to big political upheavals. Think of the Depression and the subsequent rise of fascism in Europe and the New Deal in America. What is remarkable about the financial crisis of 2008 is the limited nature of the reaction.

Protest parties of the left and right have gained ground, but only in Greece have they gained power. The biggest policy change has been the introduction of quantitative easing, a technical shift that arouses few passions on the street.

This lack of action is a source of frustration on the left, for whom 2008 seemed to herald capitalism’s collapse. Some, including Paul Mason, the author of a new book called “Postcapitalism”, still hold out that hope. They view the “sharing economy”, in which outright ownership of goods is less important (think car clubs and “freecycled” furniture), as a sign of capitalism’s impending demise. Jeremy Rifkin, in his book “The Zero Marginal Cost Society”, talks about “the internet of things, the collaborative commons and the eclipse of capitalism”.

However, if you define capitalism as the interaction of individuals with a market economy, the system is advancing,...

from The Economist: Finance and economics http://ift.tt/1Htopjn

Back on its feet

AMID the drama of the past few months over a possible Grexit, it has been easy to overlook that other parts of southern Europe have been recovering—just as Greece itself would have done if politics had not got in the way. The revival of Spain’s economy is especially important because it is the fourth-biggest in the euro area and the one whose troubles seemed most likely to prompt a break-up of the single-currency club only three years ago. For some, the Spanish rebound is proof that structural reforms pay off. Yet so deep was the downturn that Spain is still far from regaining all the ground it lost. Moreover, it is not clear how much the recovery has to do with Spain’s vaunted policy shifts.

The Spanish economy has been growing for two years, following the extended double-dip recession in 2008-13 (see chart). The recovery was initially lacklustre but it picked up in the spring of 2014 and has sparkled particularly this year, with growth of 0.9% in the first quarter (an annualised rate of 3.8%) and 1% in the second quarter. Unemployment remains troublingly high, at 22.5% in June, but has fallen sharply from its peak of 26.3% in early 2013.

...

from The Economist: Finance and economics http://ift.tt/1Htop31

The dreamboat next door

DO FRIENDS of the opposite gender distract teenagers, hampering their academic performance? It may seem obvious, at least to paranoid parents, and yet it is hard to prove. Simple analysis of a survey of American schoolchildren conducted in 1995, for example, suggests no link between the proportion of a girl’s friends who were boys and her grades. Boys with lots of female friends actually achieved better results than those with fewer.

A new paper* by Andrew Hill of the University of South Carolina, however, digs deeper into the data, and comes to a different result. Friendship groups are not random, which makes it tricky to isolate the effect of fraternising with the opposite sex on school performance. Pushy parents, for instance, may both encourage after-school activities (hotbeds of hobnobbing across the gender divide) and help out with homework. By the same token, the sort of boys who do not find it embarrassing to join a clique composed mainly of girls may also be more studious.

Mr Hill gets around this by looking at the proportion of schoolmates of either sex living near each student. He reasons that parents do not choose...

from The Economist: Finance and economics http://ift.tt/1Htop2X

Plunging like it’s 1998

NOT since Bill Clinton was president and Barack Obama was a law professor with a sideline in local politics have the beaches of Bali and Langkawi looked so inviting to Americans. Four years ago, a dollar fetched just over 8,500 Indonesian rupiah, and just under three Malaysian ringgit. Today a dollar is worth nearly 14,000 rupiah and almost four ringgit. Both currencies hit 17-year lows this summer, and kept falling (see chart).

In one sense, Indonesia and Malaysia are far from unique: declining commodity prices, the slowdown in China and the growing likelihood of an interest-rate rise in America have combined to make 2015 a miserable year for emerging-market currencies. Brazil and Russia are in recession, sending the real and the rouble falling. Turkey, with its slowing economy, huge current-account deficit and growing political instability, has seen the lira decline steeply; the Chilean, Colombian and Mexican pesos have all drooped.

But in Asia the rupiah and ringgit lead the race downwards, having fallen by 8.4% and 9.8% against the dollar this year—much further than the Thai baht (6.4%) and the Philippine peso (2....

from The Economist: Finance and economics http://ift.tt/1M7Y54L

The Tarullo show

The book of Daniel

IT IS the job of the Federal Reserve, according to the law that created it in 1913, to supervise banks and “to furnish an elastic currency”, among other things. Those tasks, it turns out, are quite elastic themselves. The Dodd-Frank act of 2010, which overhauled America’s financial regulations in the wake of the crisis, requires the Fed to write no fewer than 58 new regulations. It gives the Fed a say in everything, from how much collateral firms trading certain derivatives should provide their counterparties, to the “diversity policies” of financial institutions.

Dodd-Frank also creates a new position within the Fed, a vice-chairman responsible for regulation, to oversee many of those new rules. The president has never nominated anyone to fill that post, perhaps for fear of the awkward debate that would doubtless ensue during confirmation hearings in the Senate, about how appropriately the Fed was exercising its new powers. In fact, two of the seven seats on the Fed’s board are currently vacant. In the meantime, the administration of the Fed’s ever-expanding powers has fallen, more often than not, to...

from The Economist: Finance and economics http://ift.tt/1M7Y54J

Hard LIBOR

You could keep a brothel, deal in firearms and engage in “wanton or furious driving”, all at the same time, and still end up with a shorter prison sentence than that received by Tom Hayes, a former investment banker who on August 3rd got 14 years for market-rigging.

Mr Hayes was found guilty of eight counts of fraud by a court in London. The judge, Jeremy Cooke, called him “the hub of the conspiracy” to rig LIBOR, a benchmark interest rate. The nature of his offence is less easy to explain than, say, burglary, making explosives or cannabis-peddling—other offences that carry 14-year sentences in Britain. He made his employers—UBS and then Citi—hundreds of millions distorting LIBOR to suit his trading positions. Interest rates on lending worth trillions, from mortgages to corporate loans, were swayed by Mr Hayes’s schemes to bolster his bonus.

The sentence is steep by financiers’ standards, too. Beyond Bernie Madoff, the Ponzi-schemer who copped 150 years in American jail, few white-collar criminals spend more than a year or two behind bars. Other crooked traders, including Kweku Adoboli, a former colleague of Mr Hayes...

from The Economist: Finance and economics http://ift.tt/1HtomEj

Hurricane warning

Rainy days ahead

IT WAS barely a month ago that Alejandro García Padilla, the governor of Puerto Rico, first asserted that the American territory’s $72-billion public debt was unsustainable. At the time, his warning that the only alternative to a comprehensive restructuring was a “unilateral and unplanned non-payment of obligations” was seen by most as a spur to negotiations with creditors. But on August 3rd Puerto Rico’s Public Finance Corporation (PFC), a government agency, failed to make a $58m payment to bondholders. “We don’t have the money,” explained Víctor Suárez, the governor’s chief of staff.

The PFC depends on the island’s legislature to appropriate funds to service its debts. But following a decade of uninterrupted recession, lawmakers were unwilling to extract more revenue from taxpayers. A loss of faith among investors, meanwhile, has left them unable to tap the capital markets. As a result, the PFC only managed to send off $628,000. Moody’s, a rating agency, promptly announced that it considered the bond in default.

The PFC’s missed payment is unlikely to set off an immediate cascade of...

from The Economist: Finance and economics http://ift.tt/1HtomEf

In the land of the blind

THIS picture is the only one of Mullah Omar that is confirmed as genuine. It was taken in 1993, the year before he founded the Taliban, when he was merely a fighter against the Soviet occupation of his country. He needed it as evidence that he had lost his right eye to enemy shrapnel, so that he could claim compensation. He never knowingly faced the camera again, since it was contrary to Islamic law.

The flyers dropped by American planes over Kandahar later, offering $10m for information about him, showed a photograph; it was not him. Portraits appeared of a man among yellow chrysanthemums, turning his right eye away. It was not him. Even when, as leader of the Taliban, he became emir of Afghanistan between 1996 and 2001, he so seldom left his house in Kandahar that most of his followers had no idea what he looked like. He saw almost no journalists, and hardly talked when he did. Discussion was difficult, and negotiation impossible. After 2001 he was in hiding, flitting between Afghanistan and Pakistan. “Nobody recognises him,” said Hamid Karzai, who led Afghanistan in his turn. “This is a man nobody has seen.”

There was a story...

from The Economist: Obituary http://ift.tt/1W3NjRD

One regulator to rule them all

THE new masters of the financial universe are neither bank bosses nor hedge-fund titans. They are the regulators whose job it is to make finance safer. Daniel Tarullo, Andrew Bailey and Danièle Nouy, senior regulators in America, Britain and the euro zone respectively, may not have the salaries, egos or profiles of Wall Street superstars, but the decisions they and people like them make are shaping the industry. As John Mack, a former boss of Morgan Stanley, reportedly told his successor: “The government is your number-one client.” Even for those who deeply mistrust finance, that ought to give pause.

The global financial crisis made new rules inevitable and necessary. Taxpayers need protection from the risks of failure: hence a series of measures to ensure that banks finance themselves with more equity, have lots of liquid assets and will “bail in” creditors if they collapse. The disaster of 2008 persuaded officials not just to write harsher rules, but also to be more flexible. Risks can materialise in unexpected places—dull old money-market funds, for instance, proved a shocking source of vulnerability. The industry can game static,...

from The Economist: Leaders http://ift.tt/1gMGHaD

Party on the beach

SUMMER holidays are always the same for China’s leaders. Every year they decamp from the hot and humid capital and gather in villas by an exclusive stretch of beach in Beidaihe, a resort town of little appeal except to those Chinese who cannot afford glitzier getaways, and to Russians from Siberia who are relieved to be anywhere with sun and sand. Mao Zedong established the Beidaihe-going tradition. He is the only Chinese leader who is known to have felt sufficiently inspired by the place to write a poem about it. It was an anxiety-tinged one, finishing with the words: “The bleak autumn wind whispers and sighs; Nothing has changed, except in the world of man.”

President Xi Jinping and his colleagues are now thought to be in Beidaihe, where they have continued Mao’s practice of combining a little relaxation with weighty affairs of state—thrashing out strategy for the year ahead at seaside meetings held in utmost secrecy (see article). How much indeed has changed in China, Mr Xi might reflect, since he came to...

from The Economist: Leaders http://ift.tt/1gMGHar

The German test

IT IS one of Europe’s shining successes. Alone in the European Union, Poland did not suffer a recession after the financial crisis. Its economy has grown by 33% since 2007, compared with 2% for the euro zone. Its transport and energy infrastructure has been transformed. Poland has been a dependable partner for policymakers in Berlin, Brussels and Washington, DC. Even the French, ever suspicious of the EU’s eastern members, have started to court the country. As president of the European Council, Poland’s former prime minister, Donald Tusk, has become a central figure in European politics.

Yet Poles are fed up. President Bronislaw Komorowski, of the ruling centre-right Civic Platform party, narrowly lost a re-election vote in May. The prime minister, Ewa Kopacz, is heading for a crashing defeat in parliamentary elections in October. The danger for Poles is that, in throwing out a lacklustre government, the country may revert to a narrow, mistrustful populism, forsaking its own impressive gains.

Back to the Kaczynski era?

The new president, Andrzej Duda (pictured), took office this week and Poland’s allies are asking...

from The Economist: Leaders http://ift.tt/1EaZbGq

Life, the multiverse and everything

“I SEEM to have been only like a boy playing on the seashore, and diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, whilst the great ocean of truth lay all undiscovered before me.” Those words, ascribed to Sir Isaac Newton, might still be spoken, with the appropriate correction for sex, by any scientist today.

The discipline of natural science that Newton helped found in the second half of the 17th century has extended humanity’s horizons to a degree he could scarcely have envisaged. Newton lived in a world that thought itself 6,000 years old, knew nothing of chemical elements or disease-causing microbes, believed living creatures could spring spontaneously from mud, hay or dirty bed-linen, and had only just stopped assuming that the sun (and everything else in the universe) revolved around the Earth.

Yet even today, deep problems and deeper mysteries remain. Science cannot yet say how life began or whether the universe is but one of many. Some things people take for granted—that time goes forwards but never backwards, say—are profoundly weird. Other mysteries, no less strange, are not...

from The Economist: Leaders http://ift.tt/1ge5t2s

Alpine Android

KIRT MCMASTER has the right stuff to be a successful software boss. He talks a mile a minute with a booming voice. And he projects inevitability: “We’re creating something everybody wants.” But communication skills are not the only reason why his firm may succeed where others, including Amazon and Samsung, have failed: establishing a third mobile-computing platform to compete with Google’s Android and Apple’s iOS, which have market shares of 78% and 18% respectively.

Most previous efforts to launch a new mobile platform were controlled by a single company or a consortium, so they were either supported by few others or were hampered by complex decision-making. What is more, new operating systems require makers of apps to rewrite their programs—a costly undertaking with an uncertain outcome. Cyanogen has avoided these pitfalls, says William Stofega of IDC, a market-research firm. It was born in 2009 as an open-source project. The platform is fully compatible with Android but is also more customisable and boasts more features, such as better privacy settings. Although installing it is tricky and often voids the device’s warranty, around 50m smartphone...

from The Economist: Business http://ift.tt/1McSjjW

Stuck on the runway

INDIA is not the place most people would expect to find precision engineering. Yet Guillaume Capato is on the shop floor of the Mahindra Aerospace factory, an hour’s drive from Bangalore, explaining the complexity of an aluminium halter, used to reinforce the fuselage on a jet aircraft. Formed from a single piece of metal into a U-shape using a press, each side is of a different size and shape and drilled with holes of varying dimensions so that the part will precisely match all the other bolt holes around it. The halter is accurate to an exacting degree: it only makes sense to add weight to an aircraft’s structure if it also adds strength. That principle is lost in India, where the weight of regulation has sapped the strength of manufacturing.

Mahindra Aerospace is the sort of modern, jobs-rich enterprise that Narendra Modi, India’s prime minister, probably had in mind when he launched his “Make in India” drive a year ago. Components produced here must meet the strict standards of the global aircraft industry. In June the firm, an offshoot of a family business better known for rugged SUVs, won a landmark order from Airbus. Mr Capato, who worked at...

from The Economist: Business http://ift.tt/1McSj3x

Life is suite

THE 41-storey clock tower at Five Madison Avenue was once the domain of insurance clerks working for Metropolitan Life. Now, the building in New York is a swanky hotel, called the Edition, where beautiful people air-kiss in the lobby. The hotel sector has undergone a similar switch from toil to glitz of late. Arne Sorenson, boss of Marriott, an American hotel firm that owns the Edition brand, says that business has rarely been better.

The hotel industry ought to be in a worse state than a hung-over guest who has drained the minibar. The financial crisis caused commercial-property prices to collapse and rooms to remain vacant. Hotels have suffered relentless disruption from the internet. Online travel agents, such as Expedia, take hefty commissions for bookings and sharing-economy upstarts such as Airbnb offer a cheap alternative. Yet the large American and European hotel firms are thriving.

The industry’s favoured measure of success, revenue per available room (RevPAR, revenue divided by rooms available in a given period), has climbed for the past five years in America, surpassing peaks in 2000 and 2007, according to Smith Travel...

from The Economist: Business http://ift.tt/1IKkpvR

Who gets what?

FIGHTS over splitting the loot have gone on for as long as there has been loot to split. In America, those brawls are now part of the remit of the Securities and Exchange Commission (SEC). After heated arguments and a vote that passed by three ballots to two, on August 5th the SEC approved rules (themselves tied to provisions in the Dodd-Frank act of 2010 that overhauled financial regulation) which will require public companies to publish the ratio of their chief executive’s pay to that of their median earner, starting in 2017.

“To say that the views on the pay-ratio disclosure requirement are divisive is an obvious understatement,” acknowledged Mary Jo White, who chairs the SEC. A mind-boggling 287,400 letters commenting on the proposals were sent. In a reflection of how the issue had become the subject of an organised political campaign, only 1,500 of these were unique.

Shareholders have an interest in compensation, in as much as it is a significant cost under management control. Pay therefore raises issues of “agency” that arise from the delegation of power by shareholders to bosses. That, at least, is the pretext for squeezing the issue into the SEC’s jurisdiction under its authority to protect investors. The reality is that the proposal was included in Dodd-Frank after lobbying by trade unions aiming to shame bosses into paying themselves less and...

from The Economist: Business http://ift.tt/1IKknEp

Snapping into gear

We need more cars

TEHRAN’S clogged streets hint at one industry poised to profit from the lifting of some sanctions on Iran after a deal to curb its nuclear programme. Foreign manufacturers are set for a race into Iran to take advantage of a car-hungry population of nearly 80m. Its huge domestic market is the largest in the Middle East after Egypt’s.

The timing of Iran’s re-opening is a boon for the world’s big carmakers. Sales in America are at or near a peak and Europe’s rapid rebound may be coming to an end. Meanwhile big emerging markets such as China and Brazil are slumping. Sanctions hit Iran hard. Vehicle sales, which hit a peak of 1.6m in 2011, halved by 2013 as sanctions tightened. Then, as relations thawed, the market grew steadily again. It should surpass 1.3m vehicles this year before bouncing back to 1.6m by 2016, according to IHS, a consulting firm.

French carmakers, once the market leaders in Iran, are seeking to re-establish their grip. PSA Peugeot Citroën, which alone accounted for around a third of sales in 2011, and Renault are well-placed, given their pre-sanctions presence, to join...

from The Economist: Business http://ift.tt/1McShsu

Taking the gangster rap

EARLIER this year the founder of Medical Marijuana of the Rockies, Jerry Olson, was selling his firm’s dope for $120 an ounce, half the average retail price for good gear. He had fallen victim to the Racketeer Influenced and Corrupt Organisations Act (RICO) and had to liquidate his inventory. The nascent firm had been targeted by an anti-drugs group, which complained that its presence on the high street in Frisco, Colorado, was putting guests off going to a nearby hotel. A RICO suit was filed against a bank, a bonding company and others that were planning to service the business. They backed away, fearing portrayal as accomplices to racketeering.

This is “clearly not what RICO was intended for”, according to Adam Wolf, Mr Olson’s lawyer. With medical marijuana legal under state law, and the federal government happy to turn a blind eye, the lawsuit is “a political crusade by those who have lost on the legislative front”, says Mr Wolf. Congress passed RICO in 1970 to go after organised-crime syndicates that were infiltrating legitimate businesses. It was named after a gangster played by Edward G. Robinson in a 1931 film, “Little...

from The Economist: Business http://ift.tt/1IPY5VX

At sea in the city

City rapids

MANY Chinese cities offer “sea views”, but of a kind that arouse fear and anger rather than raise spirits. The term is often used scornfully by Chinese media to describe the floods that render roads impassable and sometimes kill people during heavy downpours. They are largely the product of woefully inadequate drains. Urban areas have more than doubled in size since 1998, but officials have scrimped on arrangements for keeping them dry.

During the summer rainy season, the complaints of urban residents swell as fast as the foul water in the streets. They are targeted at the government. Even the state-controlled press joins in. On July 28th China Youth Daily said it was “beyond understanding” that city planners should give priority to high-profile “vanity projects” while ignoring the need for storm drains and the like. “Money doesn’t seem to be a problem,” it said. Residents of Beijing still harbour bitter memories of flooding in 2012 that killed 79 people (mostly outside the urban core) and caused 12 billion yuan ($1.9 billion) in damage. Much of the mayhem was caused by the flooding of...

from The Economist: China http://ift.tt/1Io8Nl6