Paul Krugman Drinking Game

In Australia, universities are currently on their summer holidays. This is a time where instead of allowing students to finish their degrees earlier, universities allow their lecturers to do their “real work” without all those pesky students to teach. In the absence of formal education students need to find fun ways of learning more about economics. In response to this need I have created the Paul Krugman drinking game. The rules of the game are simple.

1. First one person is chosen to read articles from Paul Krugman’s New York Times blog, the Conscience of a Liberal.
2. Everytime Prof. Krugman refers to one of his own papers or claims to have written about something before anyone else you have a drink.
3. Don’t drive home after this game as you will be very drunk.

Just to be fair to Paul Krugman I have enjoyed reading many of his papers, blog entries and his book return to Depression Era Economics.

Iceland: The Forgotten Country

I was thinking the other day, whatever happened to Iceland? At the beginning of the global financial crisis Iceland’s three banks collapsed leveraged beyond the small nations GDP. Total debt reached 9.553 trillion Icelandic krónur (€50 billion) compared to Iceland’s GDP in 2007 of 1.293 trillion krónur (€8.5 billion). Iceland went cap in hand to the IMF, its currency collapsed to about half its previous value compared with the USD. The world for the most part wrote off Iceland and the IMF required a significant austerity package in condition for their support.

So what has been the experience of Iceland since 2008?

GDP Growth: 2008 1.4, 2009 -6.9, 2010 -3.5, 2011 2.2, 2012 2.9.

Unemployment: 2009 7.2%,2010 7.5%, 2011 7.0%, 2012 6.2%, 2013 5.3%

Government Debt (% of GDP): 2008 102%,2009 120%,2010 120.2%

Government Fiscal Condition: 2008, -13.5, 2009 -10.0, 2010 -7.8 (Expected to return to surplus 2013)
(Source OECD, http://www.oecd.org/document/62/0,3746,en_33873108_33873476_45269950_1_1_1_1,00.html)

So what can be learnt from Iceland? First Iceland did not bailout its banks, choosing only to bail out its depositors and not the investors. Second, Iceland has managed to stage a slow recovery despite the ongoing crisis amongst its European neighbors. Thirdly, having a national currency that can respond to crises may help other industries stage a recovering. Large energy intensive investment projects and a residential construction boom has led economic growth. Finally, austerity measures that led to sustainable government debt levels may play a role in supporting the economic recovery.

While I can’t claim to know enough about Iceland’s unique situation or how it impacts on the sovereign debt crisis, I suspect that there has been little effort to learn any lessons from Iceland and instead the Government’s in Europe continue to look for a painless recovery.

Creative Destruction and How it impacts on our lives.

So often in the news we hear of some formerly successful industry going bust. Trade unions and industry groups lobby hard for their industry to be saved through government intervention. A recent example in Australia and globally has been bookstores. I remember my excitement when the first Borders opened in the Brisbane CBD. I could buy a mocha caramel-latte at Gloria Jeans, choose from a range of specialty books that were never offered in Brisbane before. Having an interest in management literature, it wasn’t long before a had a large library of business titles and career development books.

Books would cost between $20-30 and textbooks could be up to the cost up $100. Now ten years on, Borders has gone bust and rumor has it that the building will become one of those ghastly Apple stores. Sorry, couldn’t resist. This is where creative destruction comes in. The Oxford economic dictionary describes creative destruction as, “A model of economic growth driven by quality-improving innovations that make old technologies or products obsolete.”

That pretty much describes my once beloved Borders, obsolete. I now have two new superior ways of buying books, first, Better World Books and second Amazon kindle. For my studies I have only bought one new textbook in 2 years. Others, I have bought secondhand on Better World books. Technology has allowed me to connect with bookstore all over America where slack students have foolishly sold their old textbooks allowing me to buy them for between $10-$20. Amazon Kindle has allowed me to purchase new books at a fraction of the price I would have paid at Borders.

This technological innovation has dramatically increased my consumer surplus. Not only in quantity but in quality. I recently was preparing for a job interview as a Business Analyst and realised I didn’t have sufficient skills using Microsoft Excel. In the bad old days, I would have driven to the bookstore, not found a book that really covered what I wanted and would have settled for some more basic book about Excel with a few accounting formulas in it. Instead, I went to the Amazon Kindle store, within five minutes I had a book called Business Analysis in Microsoft Excel 2010. I could read reviews about the book confirming the books quality and ensuring the author handled the topic well. This book covered everything I needed, there would have been almost no chance of me finding such a book in a bookstore in Australia.

From a bookstores point of view had they had such a book it would have sat on their shelf for months waiting for an econ nerd like me to come in, if I had come in at all. The price would have been significantly higher to cover the much higher costs of having that inventory sitting on their bookstores shelf for so long. So technological innovation increased the quantity of products I could choose from and lowered the price. Creative destruction.