Does financial innovation boost economic growth?

The Economist provides a forum for an interesting debate on the above question between Ross Levine and Joseph Stiglitz. I tend to agree more with the latter based on the belief that traditional banking seems to provide much higher social returns than most forms of innovation. It is much less risky too.

Well-being and social welfare is more than just GDP

Bloomberg: "Joseph Stiglitz, the Nobel Prize- winning economist, urged world leaders to drop an obsession with examining gross domestic product and focus more on broader measures of prosperity.

“GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said in an interview today in Paris".

The remarks reflect Stiglitz’s study of the issue for French President Nicolas Sarkozy, who commissioned a report at the beginning of 2008 after the onset of the financial crisis. Stiglitz and other contributors to the report will present their results tomorrow in Paris at a daylong conference hosted by Sarkozy and attended by Finance Minister Christine Lagarde.

Check out the full report here

Cross-country data on happiness

There are two websites worth looking at to see how happy your compatriots are relative to other nations: this one and this one

IMF rethinks macro policy - revolutionary!

What a difference a personality makes on global policy making!

For sixty plus years IMF was dead against capital controls and was painfully orthodox on low inflation (the lower, the better, around 2%). Still in July 2007 the former IMF Managing Director, Rodrigo de Rato was quoted saying that capital controls were "rapidly becoming ineffective" and were easily circumvented.

Now, in just two years, the new MD Dominique Strauss-Kahn has changed the IMF beyond recognition. Capital controls are back, countercyclical fiscal policy is de rigeur, printing money (so called quantitative easing) is OK, and slightly higher inflation than the 2% dogma is not necessarily bad. Just read this by Olivier Blanchard, IMF Chief Economist (original paper.) as well as this this paper on the benefits of capital controls and this one on lessons and policy implications from the global financial crisis.

The same people (and I know what I am saying - I have worked at the IMF myself) who proselitized the dogma for all their careers suddenly change their view 180 percent. Have they been persuaded by the crisis that new policies were needed or have they simply been lying to themselves most of the lives for the convenience of a cushy IMF job?

I challenge all those who say that personalities don't matter!

Which institutions matter most for growth?

Voxeu.org has an interesting paper on it here. It argues that "How much do institutions matter? This column provides a new insight into measuring their effects, suggesting that a survey of managers’ perceptions of the impact of institutions should be used as an estimate of the effect. It finds that the combined impact of improving public inputs in low-income countries to their level in high-income ones is equivalent to raising output by about 20%".

What can governments do to make people happy

An interesting NYT review of a new book on "THE POLITICS OF HAPPINESS - What Government Can Learn From the New Research on Well-Being" by Derek Bok.

Problems with measuring the price level and output correctly

See Paul Krugman's entertaining article on "Viagra and the Wealth of Nations" here