Saturday, May 04, 2013
Supply and Demand: Politics, Utility, and Liberty
* This article is related to " Happiness related to Monarchy, One Party, and Democracy" published on 12/07/2012 12:57 British Summer Time.
The European Monetary Union is inevitable, but has to be fundamentally revised
Published on 23/07/2011 09:18 British Summer Time
1. Introduction
This Eurozone crisis has been predicted by many economists. These economists put emphasis on the impact of the money supply volume on the stability of economic environments such as the price inflation rate, the unemployment rate, the gross domestic product (GDP), and the speculative trend on financial market. They argued that, when the monetary policy is unified, the common fiscal policy is also required to be established, all the member countries of this monetary union are supposed to have the financial regulation for all these countries, and the labour mobility needs to be flexible for workers in these member countries to move across these countries in order to stabilise the economic environments. In addition, the econometric analysis of the Eurozone average inflation rate indicated that the European Monetary Union (EMU) is beneficial to majority of the member countries owning to the harmonised inflation rate, but it still requires something to control the different inflation rate of each individual member country. The reason of German refusal of issuing Eurobond is assumed to be because of uncooperative attitudes of Greece. Mr. Trichet, the governor of the European Central Bank (ECB) also suggests that the EMU has to fundamentally change its overall structure before allowing any countries to keep incurring their debt. Overall, the solution of the currently ongoing Eurozone crisis is the fundamental improvement on the EMU fiscal, financial, and labour market structure, and getting rid of the common currency will never be a solution.
2. The problem caused by the monetary policy transformation
The disadvantage of abandoning the national monetary policy (to join the common monetary union) is that this country becomes no longer able to set her own interest rate and the volume of her own money supply. Greece used to be heavily relying on her own unique monetary policy, based on the money supply which was remarkably higher than the average of European countries, in order to finance her government expenditure which could not be sufficiently financed by her unsophisticated fiscal policy. However, after Greece joined the EMU, she could no longer use her high money supply. Greece may rely on the tax revenue burdened on her export revenue such as her tourist industry and the growth of her private sectors stimulated by the economic growth of the entire Eurozone economy. Nonetheless, unless she tightens her fiscal policy, when the entire Eurozone economy falls into recession and/or the demand of Greek tourist industry declines, Greece starts struggling to obtain her public finance resource. This problem has been seen in many Southern European Nations such as Italy, Spain, and Portugal. But, Greece seems to be more problematic than these Southern nations. Spanish government shows a strong commitment on tightening Spanish fiscal policy under the European central government’s induction. Italy still has her strong initiative in European economy thanks to her famous industries such as finance, manufacturing, and tourism. Portugal seems to be similar to Greece, but the quantitative data analysis shown in the next chapter indicates Portuguese suffers much less than Greece.
3. The econometric analysis of the Eurozone average inflation rate
This graph (Qualitative method) above shows the different inflation of the Eurozone countries (IMF, 2011). Majority of the Eurozone countries have a synchronised inflation rate trend from 2002 to 2010. The econometric analysis of the Eurozone average inflation rate, whose results are shown by the following figures, indicated that the price inflation of the individual countries joining the European Monetary Union (EMU) is influenced by the price inflation of the other different EMU countries.
This equation is the inflation rate of all individual Eurozone countries (〖Inflation〗_(i,t)) regressed on the inflation rate in the last year 〖Inflation〗_(i,t-1). As the coefficient of 〖Inflation〗_(i,t-1) is less than 1, this variable is stable enough to converge into a particular point in the long run as follows:
So, this proves that the Eurozone inflation rate is converging into 2% which is what the ECB targets to make! The following regression analysis proves that the GDP grows furthermore when the inflation rate becomes closer to 2%:
This result shows the natural log of the GDP in the Eurozone economy, ln(〖GDP〗_(i,t) ) (Footnote 1.) , is significantly negatively correlated with the inflation rate deviating from 2% which is shown as the absolute number of the inflation rate minus 2, |〖Inf〗_(i,t)-2|. The following auxiliary regression shows both the GDP and the inflation are co-integrated each other:
〖 u〗_(i,t) is the residuals from the previous regression. As the lagged residuals 〖 u〗_(i,t-1) is negatively correlated with change in the residuals 〖∆u〗_(i,t), the variables used in the previous regression, ln(〖GDP〗_(i,t) ) and |〖Inf〗_(i,t)-2|, are stable and co-integrated with the EU inflation rate, which means the movement of these variable affects on the other’s. However, the stability test for Greece and Ireland showed a relatively pessimistic result as follows:
Greek inflation on the inflation of the entire Eurozone countries
This analysis suggests that, , not only the percentage of the entire Eurozone inflation's contingency on Greek inflation rate is 47% in average, which is high,(Amended part) but also change Greek inflation is highly contingent to the entire Eurozone (Footnote 2.). Therefore, it is not only Greece suffers more than the other Eurozone countries and but also Greek economy is highly responsible on the entire Eurozone economy. This aspect may suggest both Greece and the entire Eurozone need to cooperate each other very seriously because Greece should not leave the EMU because her business cycle is already tied up with the EMU.
Irish inflation on the inflation of the entire Eurozone countries
On the other hand, Irish inflation rate is neither stable nor co-integrated with the entire Eurozone one. Therefore, Greece seems to suffer from the volatility of the inflation far more than the other Eurozone members so that she needs either the intervention by the European central government or the fiscal restructuration, or both, to calm down her inflation rate. Unlike Greece, Ireland may be benefitted when she leaves the EMU. Irish business cycle is not correlated with the Eurozone economy. But, if Ireland still wants to keep the membership, the Eurozone eventually needs to have a strong fiscal stimulus enough to enable Irish business cycle to harmonise with the entire Eurozone business cycle.
4. German refusal of participating into the Eurobond programme
The concern of Germany on Greece is that Greek catastrophic crisis will be permanent unless Greece tries to reform her fiscal policy fundamentally and cooperates with the EU central governmental policy rather than her own selfish and irrational nationalism. When a person purchases equity, s/he expects its value to be either stable in the long term or predicted to grow significantly. The value of Greek national debt seems to be neither stable in the long term nor predicted to increase its value in the short term. Even if German government is altruistic enough to sustain Greek public finance by purchasing Greek debt in order to rescue the entire Eurozone, there is a risk for Germany to be drawn into the recession or even to be bankrupt.
The Eurobond programme suggests the Eurozone countries to share both the risk and the benefit of issuing the government debts among the entire Eurozone countries rather than burdening the responsibility on each individual country for incurring the government debt. For example, as shown in the graph below, when Germany experiences the economic growth relatively higher than any other nations whilst France falls into the recession, it needs to tune the aggregate demand of both nations.
As there is no national monetary policy available for both France and Germany, one of the optimum solutions would be increasing the tax revenue of Germany to transfer it to subsidise France. The econometric analysis shown in the previous chapter indicates that French and German economies are highly contingent to each other so that French downturn has to be diverted by German contribution to save Germany herself. This is the idea of sharing the risk and benefit of the national debt and its usage under the collective responsibility among the countries.
Nonetheless, this mechanism may work efficiently and effectively because French fiscal policy does not have a problem like Greek. France and Germany have much more similar labour market situation than Greece. In addition, France and Germany are geographically closer each other than Greece. So, the labour mobility is much more flexible between France and Germany than between Greece and them. Furthermore, France and Germany balance their budget without relying on the excess money supply unlike Greece. If this case scenario were Greek instead of France, German tax revenue transfer to subsidise Greece is ineffective and inefficient.
The intervention from the European central government into Greek fiscal policy under the strict guideline of the central government is also emerged. Greece is still resisting against this intervention due to the sentimental irrational populist nationalism. The European central government regards that, in order to make this money transfer to Greece more effective and efficient, Greek fiscal reform lead by the further privatisation of the entire Greek economy are inevitably required. Greek labour market is rigid because of Greek economy’s reliance on the huge public sector, which disrupts the flexibility of the labour mobility. On the top of the inflexible labour mobility, Greek public sectors are not rational enough to balance their budget. They are not used to the market competition and the thread of bankruptcy because they are always protected by the nation unlike the private sectors. By contrast, the private sectors are much more used to balancing their budget under the market competition. As long as Greek public sectors struggle to rationalise their budget to be balanced by their own effort, the enforced privatisation seems to be only the antidote of the fiscal imbalance.
All in all, the responsibility of Greek fiscal policy should be burdened more on European central government to discourage Greek irrational populist nationalism which is notoriously uncooperative to solve this currently ongoing problem for both Greece herself and the entire Eurozone economy. In order to discourage this pathetic nationalism, the privatisation to minimise Greek national government authority can be a key solution before substituting the power of Greek nationalism with the European economic cooperation.
5. The ECB’s point of view and warning from Mr. Trichet
Focusing on the ECB’s point of view on the current Eurozone financial havoc, the ECB executives are suffering from the dilemma between putting priority on saving the Eurozone economy and focusing on calming the inflation by suggesting the fiscal policy of all Eurozone countries to be tightened. In particular, Mr. Trichet, the governor of the ECB, always rejects the optimism on the Eurobond programme without fundamentally reconstructing the fiscal structure in the entire Eurozone. Mr. Trichet has been always suspicious about the stability of the Eurozone economy since the ECB was established. His suspicion is related to the fiscal problem mentioned in the previous chapter.
The ECB has been purchasing a large volume of the national debt of the Eurozone countries by its quantitative easing. In order to keep the value of these bonds to invest to rescue these governments, the ECB has. The ECB cannot survive without an economic activity of these nations so that the ECB needs to save the national governments of the Eurozone. Otherwise, the value of Euro becomes zero so that the ECB itself disappears. However, the expected result still cannot be seen, and the aggregate government bonds incurred has never stopped expanding. This mechanism still enables the Euro exist, but it depreciates the value of Euro further. This phenomenon causes the inflation to hike up, and then the nominal interest rate eventually needs to rise. Overall, rescuing the Eurozone countries damages the private sectors and individual citizens by a high interest rate, and it creates further government deficit which requires the further ECB’s quantitative easing, which again induces a further inflation. Mr. Trichet has already warned this spiral would occur and urged to divert from it since the beginning of the Eurozone crisis (Footnote 3.). Thus, he rejects all the optimism of perpetuating this situation.
The ECB also struggles with negotiating with the private sectors. Although the previous chapter stated the positive aspect of the private sectors in terms of the fiscal policy, the private sectors cause problem in the monetary policy set by the ECB (Footnote 4.). The private sectors are willing to raise their profit and the wage for their executives, and detest the high interest rate. These characteristics of the private sectors perpetuate the inflation which discourages an economic growth of both countries and private sectors themselves in the long term. Generally speaking, the private sectors are uncooperative to the European economic stabilisation. Although the stabilised European economy which the ECB expects to establish benefits to the private sectors in the long term, these private sectors are less interested in it than the ECB.
This aspect infers a danger for European economy which is now also fund by the private sectors. This could be the reason why Mr. Trichet is modest about the private sector contribution to rescuing the Eurozone national economies .
6. Conclusion
In conclusion, there is no optimistic prospect on this current Eurozone economic situation. In order to solve these structural instabilities, the Eurozone may need a fundamental radical revolutionary act on altering both economic and political entire structure. But, they cannot stop the European economic integration because the almost all Eurozone economies are highly correlated with each other as proven by the econometric analysis. It seriously needs an IMF of Europe, which the ECB is trying to act like. The ECB should have a much stronger authority to instruct the fiscal policy of national governments in the Eurozone as same as the IMF does to the national governments in the globe. In addition, if the priority is saving the European economy, the heavy reliance on the private sectors contribution is very risky. Hence, the ECB policy based on Trichetian Monetarism, which is tough against the irrational egos of both the national government fiscal policy and the private sectors’ short-termism, seems to be only the reliable tool, and the economic agents had better listen to it.
-------------------------------------------------------------------------------
Footnotes:
1. When a variable is positively skewed, it needs to be logged or transformed into the root (E.g. square root and cube root) in order to offer a reliable, unbiased, and consistent statistical analysis.
2.
---------------------
My Additional Comment added on 4th of August 2011:
Well, as I mentioned in my essay, it depends on the hamonisation of the business cycles in these candidate nations (I referred to the price inflation rate as an indicator of the business cycle). When the business cycle is harmonised (Synchronised), the monetary union becomes necessary or inevitable, such as the Greek and the other Eurozone countries' case. Otherwise, such as Irish case, it should not join the monetary union or it has to have a great intervention to artificially harmonise the cycles.
Some African nations might be benefited because they trade each other often, and their economy is not self-sustainable i.e. needs to be corroborated each other. But, they indeed need to have a common fiscal policy to modernise and tighten the fiscal policy of all these nations.
South American nations should not have the monetary union yet. These individual South American countries are too big by means of the land mass relative to their population density (I.e. The cost of the inter-country trade inside South America is higher than the benefit from it). Furthermore, these countries do not trade each other often compared to the other blocks of countries in this world such as Europe, North America, Africa, and Asia (According to the statistics shown in Economics of Monetary Union (Paul De Grauwe)).
The trade frequency of among Asian nations is the highest of all the international trade made in this world. So, as Lee Kuan Yew, the first Singaporean prime minister, said forming Asian trade community could benefit Asian nations. However, other than economic factors, the political factors exist as the obstacles which disrupt forming this trade community.
Only the person concerning the EMU whom I can truely respect and trust is Mr. Trichet and his ECB. I claim that not only the EMU national fiscal policies but also all the private enterprises in the Eurozone economy should be instructed by the ECB based on Trichetian Monetarism...!
1. Introduction
This Eurozone crisis has been predicted by many economists. These economists put emphasis on the impact of the money supply volume on the stability of economic environments such as the price inflation rate, the unemployment rate, the gross domestic product (GDP), and the speculative trend on financial market. They argued that, when the monetary policy is unified, the common fiscal policy is also required to be established, all the member countries of this monetary union are supposed to have the financial regulation for all these countries, and the labour mobility needs to be flexible for workers in these member countries to move across these countries in order to stabilise the economic environments. In addition, the econometric analysis of the Eurozone average inflation rate indicated that the European Monetary Union (EMU) is beneficial to majority of the member countries owning to the harmonised inflation rate, but it still requires something to control the different inflation rate of each individual member country. The reason of German refusal of issuing Eurobond is assumed to be because of uncooperative attitudes of Greece. Mr. Trichet, the governor of the European Central Bank (ECB) also suggests that the EMU has to fundamentally change its overall structure before allowing any countries to keep incurring their debt. Overall, the solution of the currently ongoing Eurozone crisis is the fundamental improvement on the EMU fiscal, financial, and labour market structure, and getting rid of the common currency will never be a solution.
2. The problem caused by the monetary policy transformation
The disadvantage of abandoning the national monetary policy (to join the common monetary union) is that this country becomes no longer able to set her own interest rate and the volume of her own money supply. Greece used to be heavily relying on her own unique monetary policy, based on the money supply which was remarkably higher than the average of European countries, in order to finance her government expenditure which could not be sufficiently financed by her unsophisticated fiscal policy. However, after Greece joined the EMU, she could no longer use her high money supply. Greece may rely on the tax revenue burdened on her export revenue such as her tourist industry and the growth of her private sectors stimulated by the economic growth of the entire Eurozone economy. Nonetheless, unless she tightens her fiscal policy, when the entire Eurozone economy falls into recession and/or the demand of Greek tourist industry declines, Greece starts struggling to obtain her public finance resource. This problem has been seen in many Southern European Nations such as Italy, Spain, and Portugal. But, Greece seems to be more problematic than these Southern nations. Spanish government shows a strong commitment on tightening Spanish fiscal policy under the European central government’s induction. Italy still has her strong initiative in European economy thanks to her famous industries such as finance, manufacturing, and tourism. Portugal seems to be similar to Greece, but the quantitative data analysis shown in the next chapter indicates Portuguese suffers much less than Greece.
3. The econometric analysis of the Eurozone average inflation rate
This graph (Qualitative method) above shows the different inflation of the Eurozone countries (IMF, 2011). Majority of the Eurozone countries have a synchronised inflation rate trend from 2002 to 2010. The econometric analysis of the Eurozone average inflation rate, whose results are shown by the following figures, indicated that the price inflation of the individual countries joining the European Monetary Union (EMU) is influenced by the price inflation of the other different EMU countries.
This equation is the inflation rate of all individual Eurozone countries (〖Inflation〗_(i,t)) regressed on the inflation rate in the last year 〖Inflation〗_(i,t-1). As the coefficient of 〖Inflation〗_(i,t-1) is less than 1, this variable is stable enough to converge into a particular point in the long run as follows:
So, this proves that the Eurozone inflation rate is converging into 2% which is what the ECB targets to make! The following regression analysis proves that the GDP grows furthermore when the inflation rate becomes closer to 2%:
This result shows the natural log of the GDP in the Eurozone economy, ln(〖GDP〗_(i,t) ) (Footnote 1.) , is significantly negatively correlated with the inflation rate deviating from 2% which is shown as the absolute number of the inflation rate minus 2, |〖Inf〗_(i,t)-2|. The following auxiliary regression shows both the GDP and the inflation are co-integrated each other:
〖 u〗_(i,t) is the residuals from the previous regression. As the lagged residuals 〖 u〗_(i,t-1) is negatively correlated with change in the residuals 〖∆u〗_(i,t), the variables used in the previous regression, ln(〖GDP〗_(i,t) ) and |〖Inf〗_(i,t)-2|, are stable and co-integrated with the EU inflation rate, which means the movement of these variable affects on the other’s. However, the stability test for Greece and Ireland showed a relatively pessimistic result as follows:
Greek inflation on the inflation of the entire Eurozone countries
This analysis suggests that, , not only the percentage of the entire Eurozone inflation's contingency on Greek inflation rate is 47% in average, which is high,(Amended part) but also change Greek inflation is highly contingent to the entire Eurozone (Footnote 2.). Therefore, it is not only Greece suffers more than the other Eurozone countries and but also Greek economy is highly responsible on the entire Eurozone economy. This aspect may suggest both Greece and the entire Eurozone need to cooperate each other very seriously because Greece should not leave the EMU because her business cycle is already tied up with the EMU.
Irish inflation on the inflation of the entire Eurozone countries
On the other hand, Irish inflation rate is neither stable nor co-integrated with the entire Eurozone one. Therefore, Greece seems to suffer from the volatility of the inflation far more than the other Eurozone members so that she needs either the intervention by the European central government or the fiscal restructuration, or both, to calm down her inflation rate. Unlike Greece, Ireland may be benefitted when she leaves the EMU. Irish business cycle is not correlated with the Eurozone economy. But, if Ireland still wants to keep the membership, the Eurozone eventually needs to have a strong fiscal stimulus enough to enable Irish business cycle to harmonise with the entire Eurozone business cycle.
4. German refusal of participating into the Eurobond programme
The concern of Germany on Greece is that Greek catastrophic crisis will be permanent unless Greece tries to reform her fiscal policy fundamentally and cooperates with the EU central governmental policy rather than her own selfish and irrational nationalism. When a person purchases equity, s/he expects its value to be either stable in the long term or predicted to grow significantly. The value of Greek national debt seems to be neither stable in the long term nor predicted to increase its value in the short term. Even if German government is altruistic enough to sustain Greek public finance by purchasing Greek debt in order to rescue the entire Eurozone, there is a risk for Germany to be drawn into the recession or even to be bankrupt.
The Eurobond programme suggests the Eurozone countries to share both the risk and the benefit of issuing the government debts among the entire Eurozone countries rather than burdening the responsibility on each individual country for incurring the government debt. For example, as shown in the graph below, when Germany experiences the economic growth relatively higher than any other nations whilst France falls into the recession, it needs to tune the aggregate demand of both nations.
As there is no national monetary policy available for both France and Germany, one of the optimum solutions would be increasing the tax revenue of Germany to transfer it to subsidise France. The econometric analysis shown in the previous chapter indicates that French and German economies are highly contingent to each other so that French downturn has to be diverted by German contribution to save Germany herself. This is the idea of sharing the risk and benefit of the national debt and its usage under the collective responsibility among the countries.
Nonetheless, this mechanism may work efficiently and effectively because French fiscal policy does not have a problem like Greek. France and Germany have much more similar labour market situation than Greece. In addition, France and Germany are geographically closer each other than Greece. So, the labour mobility is much more flexible between France and Germany than between Greece and them. Furthermore, France and Germany balance their budget without relying on the excess money supply unlike Greece. If this case scenario were Greek instead of France, German tax revenue transfer to subsidise Greece is ineffective and inefficient.
The intervention from the European central government into Greek fiscal policy under the strict guideline of the central government is also emerged. Greece is still resisting against this intervention due to the sentimental irrational populist nationalism. The European central government regards that, in order to make this money transfer to Greece more effective and efficient, Greek fiscal reform lead by the further privatisation of the entire Greek economy are inevitably required. Greek labour market is rigid because of Greek economy’s reliance on the huge public sector, which disrupts the flexibility of the labour mobility. On the top of the inflexible labour mobility, Greek public sectors are not rational enough to balance their budget. They are not used to the market competition and the thread of bankruptcy because they are always protected by the nation unlike the private sectors. By contrast, the private sectors are much more used to balancing their budget under the market competition. As long as Greek public sectors struggle to rationalise their budget to be balanced by their own effort, the enforced privatisation seems to be only the antidote of the fiscal imbalance.
All in all, the responsibility of Greek fiscal policy should be burdened more on European central government to discourage Greek irrational populist nationalism which is notoriously uncooperative to solve this currently ongoing problem for both Greece herself and the entire Eurozone economy. In order to discourage this pathetic nationalism, the privatisation to minimise Greek national government authority can be a key solution before substituting the power of Greek nationalism with the European economic cooperation.
5. The ECB’s point of view and warning from Mr. Trichet
Focusing on the ECB’s point of view on the current Eurozone financial havoc, the ECB executives are suffering from the dilemma between putting priority on saving the Eurozone economy and focusing on calming the inflation by suggesting the fiscal policy of all Eurozone countries to be tightened. In particular, Mr. Trichet, the governor of the ECB, always rejects the optimism on the Eurobond programme without fundamentally reconstructing the fiscal structure in the entire Eurozone. Mr. Trichet has been always suspicious about the stability of the Eurozone economy since the ECB was established. His suspicion is related to the fiscal problem mentioned in the previous chapter.
The ECB has been purchasing a large volume of the national debt of the Eurozone countries by its quantitative easing. In order to keep the value of these bonds to invest to rescue these governments, the ECB has. The ECB cannot survive without an economic activity of these nations so that the ECB needs to save the national governments of the Eurozone. Otherwise, the value of Euro becomes zero so that the ECB itself disappears. However, the expected result still cannot be seen, and the aggregate government bonds incurred has never stopped expanding. This mechanism still enables the Euro exist, but it depreciates the value of Euro further. This phenomenon causes the inflation to hike up, and then the nominal interest rate eventually needs to rise. Overall, rescuing the Eurozone countries damages the private sectors and individual citizens by a high interest rate, and it creates further government deficit which requires the further ECB’s quantitative easing, which again induces a further inflation. Mr. Trichet has already warned this spiral would occur and urged to divert from it since the beginning of the Eurozone crisis (Footnote 3.). Thus, he rejects all the optimism of perpetuating this situation.
The ECB also struggles with negotiating with the private sectors. Although the previous chapter stated the positive aspect of the private sectors in terms of the fiscal policy, the private sectors cause problem in the monetary policy set by the ECB (Footnote 4.). The private sectors are willing to raise their profit and the wage for their executives, and detest the high interest rate. These characteristics of the private sectors perpetuate the inflation which discourages an economic growth of both countries and private sectors themselves in the long term. Generally speaking, the private sectors are uncooperative to the European economic stabilisation. Although the stabilised European economy which the ECB expects to establish benefits to the private sectors in the long term, these private sectors are less interested in it than the ECB.
This aspect infers a danger for European economy which is now also fund by the private sectors. This could be the reason why Mr. Trichet is modest about the private sector contribution to rescuing the Eurozone national economies .
6. Conclusion
In conclusion, there is no optimistic prospect on this current Eurozone economic situation. In order to solve these structural instabilities, the Eurozone may need a fundamental radical revolutionary act on altering both economic and political entire structure. But, they cannot stop the European economic integration because the almost all Eurozone economies are highly correlated with each other as proven by the econometric analysis. It seriously needs an IMF of Europe, which the ECB is trying to act like. The ECB should have a much stronger authority to instruct the fiscal policy of national governments in the Eurozone as same as the IMF does to the national governments in the globe. In addition, if the priority is saving the European economy, the heavy reliance on the private sectors contribution is very risky. Hence, the ECB policy based on Trichetian Monetarism, which is tough against the irrational egos of both the national government fiscal policy and the private sectors’ short-termism, seems to be only the reliable tool, and the economic agents had better listen to it.
-------------------------------------------------------------------------------
Footnotes:
1. When a variable is positively skewed, it needs to be logged or transformed into the root (E.g. square root and cube root) in order to offer a reliable, unbiased, and consistent statistical analysis.
2.
---------------------
My Additional Comment added on 4th of August 2011:
Well, as I mentioned in my essay, it depends on the hamonisation of the business cycles in these candidate nations (I referred to the price inflation rate as an indicator of the business cycle). When the business cycle is harmonised (Synchronised), the monetary union becomes necessary or inevitable, such as the Greek and the other Eurozone countries' case. Otherwise, such as Irish case, it should not join the monetary union or it has to have a great intervention to artificially harmonise the cycles.
Some African nations might be benefited because they trade each other often, and their economy is not self-sustainable i.e. needs to be corroborated each other. But, they indeed need to have a common fiscal policy to modernise and tighten the fiscal policy of all these nations.
South American nations should not have the monetary union yet. These individual South American countries are too big by means of the land mass relative to their population density (I.e. The cost of the inter-country trade inside South America is higher than the benefit from it). Furthermore, these countries do not trade each other often compared to the other blocks of countries in this world such as Europe, North America, Africa, and Asia (According to the statistics shown in Economics of Monetary Union (Paul De Grauwe)).
The trade frequency of among Asian nations is the highest of all the international trade made in this world. So, as Lee Kuan Yew, the first Singaporean prime minister, said forming Asian trade community could benefit Asian nations. However, other than economic factors, the political factors exist as the obstacles which disrupt forming this trade community.
Only the person concerning the EMU whom I can truely respect and trust is Mr. Trichet and his ECB. I claim that not only the EMU national fiscal policies but also all the private enterprises in the Eurozone economy should be instructed by the ECB based on Trichetian Monetarism...!
Happiness related to Monarchy, One Party, and Democracy
Published on 12/07/2012 12:57 British Summer Time
Jeremy Bentham created an algebraic formula demonstrating the sum of utility derived from how national political system is structured. The algebraic formula is as follows:
Increasing the weight on one branch of these three decreases the weight on the other two branches. Bentham argued that the current (Contemporary) British system balances the weights among these three branches at the feasible level to maximise the utility.
Nonetheless, Bentham also insisted on abolition of sovereign = monarchy or dictator when his/her existence starts reducing the sum of utility rather than increasing it, and then the revolution shall be emerged. The coefficients of these variable, their sign (+/-), and their significance vary across different time, place (culture and civilisation), and occasion (GDP growth, etc).
At the contemporary time period when Bentham was alive, there was little objective ways to measure the sum of individuals' happiness in each nation in the world. By contrast, due to the development of the information technology, we have become able to collect some peer assessed numerical indices of various social scientific data sets. This happiness index is also collected by objective view points and survey methods under an academic peer assessment. Thus, it is interesting to assess Benthamite calculus owing to this world happiness index.
The data showing how the political system is structured in each nation in the world is quoted from "The Independent Map of the world in 2005". The binary variables are used as the indices to show how one nation's politics is structured e.g. Absolute Monarchy, One Party system, or Indirect/Direct Democracy. There is only one change from the original Benthamite algebra, which is that Aristocracy implies the executive member of a national legislature. As Bentham mentioned Aristocrats were those who have wisdom to govern, so it is equivalent to the government and bureaucratic elites. (He mentioned the House of Lord whose member is not elected from citizens. So, as the members of the legislature is directly appointed by an authoritarian legislation not by individual citizens) Then, many countries governed by one party technocratic policy is seen to be a pure aristocratic system. Absolute monarchy is assumed not to have any influential technocratic institution i.e. aristocracy. (Saudi Arabia and Morocco) whereas the constitutional monarchist nations have an influential parliament (E.g. Arab Emirates). All indirect democratic countries hold both Aristocracy = Technocratic Legislature and Democracy. They are still democratic but not the pure direct democracy. Only the nation seen to be a pure direct democratic is Switzerland in this analysis. Thus, the binary variable representing Monarchy is zero, the binary variable representing Aristocracy is 1, and the binary variable representing Democracy is 1.
**************** An important note ****************
The binary variables are usually 0 or 1, but there are some exceptions.
-> All the British Commonwealth nations have the binary variable denoting "Monarchy" that is 0.3 instead of either 0 or 1. These nations technically have a monarchy but s/he is not their own monarchy living in their countries, and his/her influence is not that strong as much as those nations having their own monarchy like Britain and Japan.
-> The "transient" democratic nations have the binary variable denoting "Democracy" that is 0.5 instead of either 0 or 1. It is still democratic but not a stable democracy. So, the effect of the variable "Democracy" is considered to be marginal.
**************** ***************** ****************
In addition, the Happy Planet Index (HPI) used as the dependent variable in this regression analysis is highly affected by the "natural climate" in these nations. Some nations in a certain latitude mark a significantly higher HPI than the others. Therefore, the absolute value of nation's latitude and its squared value, as the exogenous explanatory variables, are regressed on the HPI as same as the previously mentioned binary variables. The reason why the binomial function of Latitude, instead of a single variable (The linear function), is to demonstrate the parabolic function. The linear model (Regressing only on |Latitude|) only express either the right middle of equator or the North pole and the South pole are the happiest place to live. But, the HPI certainly shows that the optimum latitude to maximise the happiness is somewhere not far away from equator but not the zero latitude point.
All in all, the formula for the regression analysis is as follows:
*** The dependent variable is the natural log of the Happiness Planet Index (HPI) ***
The binomial function showing the climate effect (Latitude) is "the absolute value of Latitude + The squared value of Latitude".
In addition, there are the three binary variables. There are three binary variables showing the pure effect. The first one describes the pure effect of Monarchy. The second one describes the pure effect of Aristocracy. Then, the third one describes the pure effect of democracy.
The rest of variables are the binary variable denoting the interactive effect by two or three variables together. The interaction effect by "Monarchy" and "Democracy" is not assessed because there is no country having both monarchy and democracy without an aristocracy=technocratic executive branch.
The coefficients and their significance is as follows:
The coefficients of the variables showing the climate effect are 0.02256 for the coefficient of the absolute value of Latitude and -0.0004 for the squared variable of the latitude. Then, the formula shapes an upward parabola shown in the picture below.
Therefore, the place where the latitude is either +31 or -31 maximises the happiness of people living.
All the three binary variables denoting the single effect have a significant and positive coefficient. Both the interaction of Monarchy and Aristocracy and the interaction of Aristocracy and Democracy have a significant and negative coefficient. The coefficient of the interaction of all three variables is non-significant, so that the half of the coefficient value is used. The HPI derived from each different political structure is as follows:
This is a bar graph showing the policy effect on the H.P.I.:
These trends can be roughly visualised in a picture graph like this:
A nation with the direct democracy (Monarchy = 0, Aristocracy = 0, Democracy = 1 ) produces the highest HIP. But, Switzerland is the only nation with such a system in the world. So, it is not sure if it is still significant number of the sample to prove its superiority.
The absolute monarchist nations, (Monarchy = 1, Aristocracy = 0, Democracy = 0 ) is the second best. But, there are only Saudi Arabia and Morocco as the examples. Furthermore, all the other monarchist nations without any democratic structure (Monarchy = 1, Aristocracy = 1, Democracy = 0 ) showed the lowest HPI. Thus, it can be seen that, in general, monarchism without any degree of democracy is more likely to cause unhappiness rather than happiness.
The nations with one party system mark the second lowest HPI. Even though these nations are more efficient to be stablised than those lowest developed nations, the transient democratic nations, and any non-democratic monarchist nations. Nonetheless, they seem to sacrifice happiness for their stability.
Some of the constitutional monarchist nations with democracy seem to be happier than democratic republic nations. But, majority of the constitutional monarchist nations are less happier than democratic republic nations.
The democratic republic nations, though their democracy is indirect, such as the United States of America and France are the happiest nations next to Switzerland, the direct democratic nation.
All in all, Democratic Republican nations at the latitude of 31 or -31 seem to be the happiest ones. It also looks like that we can try to establish another Direct Democratic country because it looks like maxminising the happiness of individuals in a nation. Nonetheless, only the sample is Switzerland and it is never known if the similar model is applicable to increase the happiness in another country in reality. The democratic republic nations perform well among all. The performance of the constitutional monarchist nations with an indirect democracy varies.
Hence, this econometric analysis seems to be able to assist Jeremy Bentham having argued that, if monarchy start causing disutility rather than utility, then it is time for revolution! Perhaps, we have never known that there will be a revolution for the cause of Direct Democracy, the unknown ideal, in the near future? The Direct Democracy seems to maximise individuals' happiness at the optimum level (Though there is not enough number of the sample to prove in reality) by means of this statistic inference.
* It was difficult to find if the model creates heteroscedasticity: Some tests said no, but the other said yes. But, this analysis was mainly composed of the binary variables, and the dependent variable used in this analysis is not a precisely scientifically accurate variable. So, the aim of test should not be strict as much as the other econometric analyses.
Jeremy Bentham created an algebraic formula demonstrating the sum of utility derived from how national political system is structured. The algebraic formula is as follows:
Increasing the weight on one branch of these three decreases the weight on the other two branches. Bentham argued that the current (Contemporary) British system balances the weights among these three branches at the feasible level to maximise the utility.
Nonetheless, Bentham also insisted on abolition of sovereign = monarchy or dictator when his/her existence starts reducing the sum of utility rather than increasing it, and then the revolution shall be emerged. The coefficients of these variable, their sign (+/-), and their significance vary across different time, place (culture and civilisation), and occasion (GDP growth, etc).
At the contemporary time period when Bentham was alive, there was little objective ways to measure the sum of individuals' happiness in each nation in the world. By contrast, due to the development of the information technology, we have become able to collect some peer assessed numerical indices of various social scientific data sets. This happiness index is also collected by objective view points and survey methods under an academic peer assessment. Thus, it is interesting to assess Benthamite calculus owing to this world happiness index.
The data showing how the political system is structured in each nation in the world is quoted from "The Independent Map of the world in 2005". The binary variables are used as the indices to show how one nation's politics is structured e.g. Absolute Monarchy, One Party system, or Indirect/Direct Democracy. There is only one change from the original Benthamite algebra, which is that Aristocracy implies the executive member of a national legislature. As Bentham mentioned Aristocrats were those who have wisdom to govern, so it is equivalent to the government and bureaucratic elites. (He mentioned the House of Lord whose member is not elected from citizens. So, as the members of the legislature is directly appointed by an authoritarian legislation not by individual citizens) Then, many countries governed by one party technocratic policy is seen to be a pure aristocratic system. Absolute monarchy is assumed not to have any influential technocratic institution i.e. aristocracy. (Saudi Arabia and Morocco) whereas the constitutional monarchist nations have an influential parliament (E.g. Arab Emirates). All indirect democratic countries hold both Aristocracy = Technocratic Legislature and Democracy. They are still democratic but not the pure direct democracy. Only the nation seen to be a pure direct democratic is Switzerland in this analysis. Thus, the binary variable representing Monarchy is zero, the binary variable representing Aristocracy is 1, and the binary variable representing Democracy is 1.
**************** An important note ****************
The binary variables are usually 0 or 1, but there are some exceptions.
-> All the British Commonwealth nations have the binary variable denoting "Monarchy" that is 0.3 instead of either 0 or 1. These nations technically have a monarchy but s/he is not their own monarchy living in their countries, and his/her influence is not that strong as much as those nations having their own monarchy like Britain and Japan.
-> The "transient" democratic nations have the binary variable denoting "Democracy" that is 0.5 instead of either 0 or 1. It is still democratic but not a stable democracy. So, the effect of the variable "Democracy" is considered to be marginal.
**************** ***************** ****************
In addition, the Happy Planet Index (HPI) used as the dependent variable in this regression analysis is highly affected by the "natural climate" in these nations. Some nations in a certain latitude mark a significantly higher HPI than the others. Therefore, the absolute value of nation's latitude and its squared value, as the exogenous explanatory variables, are regressed on the HPI as same as the previously mentioned binary variables. The reason why the binomial function of Latitude, instead of a single variable (The linear function), is to demonstrate the parabolic function. The linear model (Regressing only on |Latitude|) only express either the right middle of equator or the North pole and the South pole are the happiest place to live. But, the HPI certainly shows that the optimum latitude to maximise the happiness is somewhere not far away from equator but not the zero latitude point.
All in all, the formula for the regression analysis is as follows:
*** The dependent variable is the natural log of the Happiness Planet Index (HPI) ***
The binomial function showing the climate effect (Latitude) is "the absolute value of Latitude + The squared value of Latitude".
In addition, there are the three binary variables. There are three binary variables showing the pure effect. The first one describes the pure effect of Monarchy. The second one describes the pure effect of Aristocracy. Then, the third one describes the pure effect of democracy.
The rest of variables are the binary variable denoting the interactive effect by two or three variables together. The interaction effect by "Monarchy" and "Democracy" is not assessed because there is no country having both monarchy and democracy without an aristocracy=technocratic executive branch.
The coefficients and their significance is as follows:
The coefficients of the variables showing the climate effect are 0.02256 for the coefficient of the absolute value of Latitude and -0.0004 for the squared variable of the latitude. Then, the formula shapes an upward parabola shown in the picture below.
Therefore, the place where the latitude is either +31 or -31 maximises the happiness of people living.
All the three binary variables denoting the single effect have a significant and positive coefficient. Both the interaction of Monarchy and Aristocracy and the interaction of Aristocracy and Democracy have a significant and negative coefficient. The coefficient of the interaction of all three variables is non-significant, so that the half of the coefficient value is used. The HPI derived from each different political structure is as follows:
This is a bar graph showing the policy effect on the H.P.I.:
These trends can be roughly visualised in a picture graph like this:
A nation with the direct democracy (Monarchy = 0, Aristocracy = 0, Democracy = 1 ) produces the highest HIP. But, Switzerland is the only nation with such a system in the world. So, it is not sure if it is still significant number of the sample to prove its superiority.
The absolute monarchist nations, (Monarchy = 1, Aristocracy = 0, Democracy = 0 ) is the second best. But, there are only Saudi Arabia and Morocco as the examples. Furthermore, all the other monarchist nations without any democratic structure (Monarchy = 1, Aristocracy = 1, Democracy = 0 ) showed the lowest HPI. Thus, it can be seen that, in general, monarchism without any degree of democracy is more likely to cause unhappiness rather than happiness.
The nations with one party system mark the second lowest HPI. Even though these nations are more efficient to be stablised than those lowest developed nations, the transient democratic nations, and any non-democratic monarchist nations. Nonetheless, they seem to sacrifice happiness for their stability.
Some of the constitutional monarchist nations with democracy seem to be happier than democratic republic nations. But, majority of the constitutional monarchist nations are less happier than democratic republic nations.
The democratic republic nations, though their democracy is indirect, such as the United States of America and France are the happiest nations next to Switzerland, the direct democratic nation.
All in all, Democratic Republican nations at the latitude of 31 or -31 seem to be the happiest ones. It also looks like that we can try to establish another Direct Democratic country because it looks like maxminising the happiness of individuals in a nation. Nonetheless, only the sample is Switzerland and it is never known if the similar model is applicable to increase the happiness in another country in reality. The democratic republic nations perform well among all. The performance of the constitutional monarchist nations with an indirect democracy varies.
Hence, this econometric analysis seems to be able to assist Jeremy Bentham having argued that, if monarchy start causing disutility rather than utility, then it is time for revolution! Perhaps, we have never known that there will be a revolution for the cause of Direct Democracy, the unknown ideal, in the near future? The Direct Democracy seems to maximise individuals' happiness at the optimum level (Though there is not enough number of the sample to prove in reality) by means of this statistic inference.
* It was difficult to find if the model creates heteroscedasticity: Some tests said no, but the other said yes. But, this analysis was mainly composed of the binary variables, and the dependent variable used in this analysis is not a precisely scientifically accurate variable. So, the aim of test should not be strict as much as the other econometric analyses.
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