Thesmar palazzo geremia 2giu_ore11e30eng

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David Thesmar al Festival dell’Economia di Trento: perché è sbagliato credere che la crescita dipenda dall’industria

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Thesmar palazzo geremia 2giu_ore11e30eng

  1. 1. Lobbying through economic fallacies David THESMAR (HEC Paris & CEPR)
  2. 2. motivation • In several countries in Europe, economic literacy is low – Cynical view of economists not shared (incentives) – General equilibrium effect hard to grasp – Financial literacy / accounting are limited • Fallacies in the general public can be exploited – By interest groups – Political endorsement is key • Sincere deceivers (politicians believe in fallacies) • Strategic PR (politicians cater to common beliefs)
  3. 3. This talk • Two fallacies of public opinions used by interest groups – We should reindustrialize our economies – Competition policy hurts the economy • Conclusion: leveraging policy makers’ misconception of finance
  4. 4. We should reindustrialize our economies
  5. 5. We should reindustrialize our economies
  6. 6. We should reindustrialize our economies • Who does it benefit? – Industrialists looking from subsidies • R&D subsidies, employment subsidies • Favorable regulation (shale gas etc.)) – Trade unions linked to manufacturing – Larger firms who carry bigger political weight – Politicians who can claim • To restore “national pride” on global markets • In the post-crisis world: back to “real stuff”
  7. 7. Sub-fallacies • It is possible to increase share of manufacturing output • Without manufacturing, there is nothing to export • Without strong manufacturing base, it is impossible to create unskilled jobs • Without manufacturing, there is no growth
  8. 8. It is possible to increase share of manufacturing output
  9. 9. (the myth of the US manufacturing renaissance)
  10. 10. Without manufacturing, there is nothing to export -80 -60 -40 -20 0 20 40 60 80 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 2006.0 2007.0 2008.0 2009.0 2010.0 2011.0 2012.0 French trade deficit
  11. 11. Without manufacturing, there is nothing to export Trade deficit -80 -60 -40 -20 0 20 40 60 80 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 2006.0 2007.0 2008.0 2009.0 2010.0 2011.0 2012.0 French trade deficit Service surplus + net profit from FDI
  12. 12. Without strong manufacturing base, it is impossible to create unskilled jobs
  13. 13. Polarisation in the post industrial society (US data) Routinizable tasks (manufacturing) Household services Managers, doctors, Lawyers, engineers Jobs ranked by their 1980 wage Cumulative employment growth since 1980 Nurses, School teachers
  14. 14. Without manufacturing, there is no growth
  15. 15. Competition policy hurts the economy Competition is Harmful Competition is harmful France 5.03 South Korea 4.01 Chile 4.94 Germany 3.91 Poland 4.94 South Africa 3.91 Argentina 4.67 Canada 3.82 Netherlands 4.66 Australia 3.75 Italy 4.42 Switzerland 3.62 Japan 4.3 Norway 3.49 Hungary 4.29 United States 3.48 Turkey 4.21 Indonesia 3.44 Spain 4.2 China 3.41 Great Britain 4.18 Peru 3.41 Brazil 4.16 Sweden 3.39 Malaysia 4.15 New Zealand 3.27 Russia 4.12 Mexico 3.22 Finland 4.03 Romania 3.09 Morocco 4.03 India 2.78 Source: World Value survey
  16. 16. Competition hurts the economy • Firms want to raise barriers to entry – Would be unprofessional not to try • Empirically, competition is good at: – Reducing prices (consumers notice this) – Increasing quantities and therefore employment (retail industry, cab drivers for instance) – Improving quality (telecom, air travel) – Effect on innovation: ambiguous, often >0 • Case study: the French mobile phone sector
  17. 17. French market concentrated
  18. 18. Average revenue / user
  19. 19. Time line • In January 2010, French authorities opened the door to a 4th mobile operator – Already big in fixed broadband – No political tie (firm < 10 years old) – Huge dissent among politicians • Sarkozy publicly against (1 is too much) • Independent regulator + competition authority in favor • Entry effective in 2012.
  20. 20. A fourth mobile operator enters
  21. 21. harder competition  Moreinnovation
  22. 22. French mobile Phone industry Moreinnovation harder competition 
  23. 23. Bottom line • Subscription prices fell by 50% – Consumption of mn & data increased • Employment did not fall (but it will, eventually) – Not competition, technical change! • Investment in 4G accelerated
  24. 24. Conclusion • An alternative: leveraging economic fallacies believed by politicians (not by people) • A strategy of choice for the financial sector – If banks are forced to recapitalise, it will jack up the cost of capital, and hurt lending – A sovereign cannot default on its debt, even partially
  25. 25. If banks are forced to recapitalise, it will jack up the cost of capital, and hurt lending
  26. 26. Bank recaps do not affect the cost of capital • bank balance sheet (loans) have given level of risk – Depositors are made whole, whatever comes. – Shareholders pick up the rest  they bear all the risks  shareholders are sensitive to % of deposits – If lots of deposits to finance loans, they demand higher returns because their claims are risky – Conversely, when a bank recapitalize, shareholders demand LOWER returns • When the bank uses more capital, capital is less expensive  cost of capital = constant.
  27. 27. Bank recaps do not affect the cost of capital • This is the Modigliani-Miller theorem – It holds in the medium run • Policy-makers do not know it. – Bank lobby exploits this ignorance to fight recapitalization – WHY? – Because recap primarily benefits depositors and taxpayers, but hurt existing shareholders • Since the crisis, armies of economists have taught this to central bankers. Now they know.
  28. 28. A sovereign cannot default • When a state is too indebted, it increases taxes: – discourages investment (a long-term effect) – Discourages consumption (a short-term effect) – This hurts growth over very long periods (reinhardt&rogoff) • Solution out of debt overhang = debt restructuring – Write-off (hard core) – Lengthening of maturity – After such an episode, growth resumes.
  29. 29. A sovereign cannot default • Common subfallacy: need for riskless asset in the economy – Govt debt is risky (interest rate risk, inflation risk) – When investor believe it is riskless, they invest recklessly, bring interest rates to the ground

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