by hilzoy
Every so often, I read an op-ed or blog post that informs me all I need to answer some complicated policy question is "Econ 101." I almost always think that a statement like that is not just wrong, but a sign that I don't really need to read further. When, for instance, someone tells me that "Econ 101" means that I should support the latest trade deal, I just get the giggles: having actually tried (and failed) to read CAFTA in its entirety, the very idea that "Econ 101" has anything to say about a document that complicated, with that many puzzling side deals on intellectual property, the proper fora for dispute resolution and appeal, etc., etc., etc., is just ludicrous. Likewise the idea that "Econ 101" tells us that raising the minimum wage increases unemployment: anyone who says that, imho, indicates that s/he has not thought about the assumptions built into the models used to get that conclusion in Econ 101, whether they obtain in the real world (no), and whether that significantly affects the arguments about the results of the minimum wage (yes.)
However, every so often I encounter a policy proposal that I really can evaluate using nothing more than Econ 101. (This is lucky, since Econ 101 was one of only two econ courses that I ever took, the other being a fascinating class with Burt Malkiel that involved reading a lot of fiction rather than straight economics.) This, for instance:
"President Robert Mugabe's government has ordered prices of basic goods and services be slashed by half to protect Zimbabweans battling with the world's highest inflation rate, official media reported on Tuesday.
"Government has directed manufacturers, retailers and wholesalers to reduce prices of basic commodities ... by up to 50 percent with immediate effect as it takes measures against the wave of unjustified price increases over the past few weeks," the Herald newspaper said. (...)
It is unclear whether Mugabe's latest bid to tame runaway inflation will have better results than in the past. Previous efforts to control prices have prompted manufacturers to cut production, resulting in shortages and a bigger black market."
On the contrary, I think that the only reason not to say that we know this won't work is that we cannot exclude the possibility of an unforeseen miracle. Maybe it would be like the temple lamp in the Hanukkah story -- the one that burned for eight days though it had only one day's supply of olive oil -- only for cash flow rather than olive oil; or maybe it would be like the miracle of the loaves and fishes. Absent something like this, however, Econ 101 tells us that this will be disastrous. There is no reason whatsoever to think that Zimbabwe's inflation is the result of excessive profit-taking by producers. If it is not, then asking them to cut prices by 50% will simply lead them at best to cut production, and at worst to stop it entirely or go out of business.
The only other reason to wonder how this will work out in practice is that prices (in currency) seem to be increasingly irrelevant in Zimbabwe:
"Zimbabweans are switching to barter, payment in kind and the use of foreign currencies, such as neighbouring South Africa's rand, instead of the local dollar to survive hyperinflation and the accelerating economic meltdown.
Zimbabwe's currency is still officially pegged at Z$250 to one US dollar; early last week the informal market price was about Z$100,000 to US$1, but by Monday 25 June it had crashed to Z$400,000 against the US dollar. In January this year US$1 was being traded for Z$3,000.
The country's inflation rate - the highest in the world - is officially at more than 3,700 percent, although independent economists believe the real rate of inflation is around 20,000 percent and could reach 1.5 million percent by the end of 2007."
Stop and think about that for a minute: inflation could reach 1.5 million percent by the end of the year. If my back-of-the-envelope calculations are correct, that means something that cost a dollar on Jan. 1 would cost $15,001 at the end of the year. No one can run a business under those conditions without switching to some other medium of exchange. This might work out well for those who have something other than Zimbabwe dollars to trade. Farmers might have food if the crop were not failing; the well-to-do might have access to hard currency. But what about those people who really only have access to the local currency? Apparently, they're just out of luck:
"THE unemployment rate must be edging closer to the 100% mark as increasingly more people are leaving work not because they no longer want to work, but because they can't afford to go to work. This should be a source of considerable worry for any government under normal circumstances.
Over the past two months workers throughout Zimbabwe have had to face the realities of the hardships the country is going through. Industries across the country are reporting rising numbers of their workers who are not reporting for work because their wages cannot cover their transport requirements. They are giving up with little or no prospects of providing adequately for their families."
Meanwhile, the government is proposing to extend its insane land expropriation policy to the rest of the economy:
"Zimbabwe will transfer control of all companies, including foreign-owned banks and mining operations, to locals if a planned empowerment bill is passed, a government minister said on Tuesday.
The move is likely to deepen the country's economic turmoil and could give President Robert Mugabe an opportunity to enrich his supporters and consolidate ranks ahead of general elections next year, analysts say.
"The bill refers to both public and private companies and yes, this includes mining companies and banks, which will be impacted like everyone else," Minister of State for Indigenisation and Empowerment Paul Mangwana told Reuters.(...)
Analysts said the new law was unlikely to have a major impact outside the mining sector, as most of Zimbabwe's economy was already in local hands and many foreign companies, which once operated in the country, have already left.
But they said the remaining foreign firms were instrumental in transferring new technology to Zimbabwe and had kept foreign currency trickling in from parent companies after donors such as the International Monetary Fund, stopped lending to Harare. (...)
The bill defines indigenous Zimbabweans as anyone who was disadvantaged by unfair discrimination on the grounds of race before the former white-ruled Rhodesia won independence in 1980."
That last bit, of course, means that companies owned by white, Indian, etc. citizens of Zimbabwe do not count as locally owned, and can be expropriated. Great.
Here's the advice a Zimbabwean MP is offering her constituents:
"We have to help each other and make contingency plans, to be as prepared as we can be for any emergency or unrest. We are not a country at war, but we are in the kind of situation prevailing in a country at war, and we need to realise this and plan accordingly.
At home, make sure you always have some water stored, some candles and matches, some emergency rations, etc. At neighbourhood level, see how you can help or get help with water, power, transport, emergency response -- e.g. one person with a vehicle could offer transport if another could provide some fuel and another repair the vehicle, etc.
If you can help the elderly, the sick, the vulnerable in your neighbourhood, so much the better! Families with members outside the country should alert those members that they may need assistance, and indicate what that assistance might be.
Do not leave your plans to the last minute hoping that maybe it won't be necessary. It probably will be necessary to react to various emergencies in the next few months, so be prepared! Remember that those who are prepared are always in the lead."
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