Nature vs. Nurture and Equal Opportunity

Mankiw has an interesting post in his blog where he says that: “In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income”. This is logical, but it ignores other important determinants of the nature vs. nurture debate, most importantly the opposite effects of nepotism and indolence. While rich kids benefit from nepotism they are also victims of laziness. The better policy to eliminate the bias introduced by these two factors is to increase the share of market capitalism in the economy. In end, the rise of government and managerial capitalism benefits more the incumbents than the newcomers.

His other point that “moving up and down a short ladder is a lot easier than moving up and down a tall one” is a fallacy. Economic mobility must be measured between all steps of the ladder, not just between the first and last steps (that is why economists prefer the Atkinson measure of inequality). We (I) may wish to claim that a more egalitarian society creates greater economic mobility. However, this only applies in relation to share of capital of the super-rich. If for tax reasons, like in the USA, it rises disproportionally they will obviously capture a top-heavy share of investment opportunities.

Arguments based on the observation that countries with the greatest income inequality (USA and UK) are the ones with lesser intergenerational mobility are not solid. For instance Canada and Sweden, two of the countries with greater mobility (see data here), have substantially different levels of income inequality (find data here).

Krugman finds the Portuguese macro story harder to tell...

It is simply a question of looking deeper. I posted a comment on his blog that lists five of the major cancers killing the Portuguese economy.

Why the IMF therapy is not working in Greece

The main role of IMF-sponsored adjustment programs is to facilitate a normal access of the borrowing countries to external markets. With the CDSs on Greek debt at 11% (above those of Venezuela) and yields on 10-year debt higher than they were before the IMF program (see chart above) the failure of the program is unquestionable.

One of the reasons why markets do not believe that Greece will be able to avoid defaulting, is probably due to the fact that the IMF approach can only use one of the three tools of their standard treatment - fiscal and budgetary policy. With Greece being a member of the Euro-zone, the other two - monetary and exchange rate policy are not available unless Greece is forced out of the Euro.

Unfortunately, the IMF has no experience of dealing with balance of payment adjustments within monetary unions. Moreover, even in relation to budgetary policy, the IMF does not realize that Greece (like Portugal and Spain) has an economic system based on state capitalism. Thus, unless they starve the Greeks (in a Ceausescu experiment) it will not be possible to achieve an external balance without destroying the state capitalism system, which the Greeks are not willing to do.

Thus the only three alternatives for Greece (and to Portugal, who is trying to mimic an IMF program without the IMF) are: a) to force a significant hair-cut on its bond-holders, b) to receive a major grant from other EU countries, or c) a mix of both. None of these is a pleasant solution but there is no other way out.