Economist 2/19/15

  1. The study, by Stephen Cecchetti and Enisse Kharroubi, is a follow-up to a 2012 paperwhich outlined the negative link between the finance sector and growth, after a certain point.The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.
  2. HOLLYWOOD’s biggest box-office successes are usually splashy, expensive films packed with slick special effects that appeal to audiences the world over. But these popular spectacles are unlikely to carry off with an Oscar for the best picture.The eight nominees for this year’s prize were cheap by Hollywood’s standards: their average production budget was $21m, against $153m for the eight highest-grossing films of 2014, according to our calculations.
  3. Last year E.L. James’s delighted publishers, Vintage, announced that 100m copies of“Fifty Shades of Grey” had been sold worldwide—45m in America alone—and that the erotic tale of a billionaire’s S&M seduction of a college virgin could be bought in over 50 languages.Over its opening weekend, worldwide, the film took $248m—in Britain it took more money than any previous 18-certificate picture.Firstly, although it is likely that heterosexual women will make up the vast majority of the film’s viewers, far more is seen of the body of Anastasia Steele (played by Dakota Johnson) than that of Mr Grey (Jamie Dornan).This brings us to the second problem with the franchise’s sexy selling point: what viewers are being shown is not sex but violent abuse.Perhaps, in the end, the moral of “Fifty Shades” is that it isn’t sex but fantasies that sell.
  4. Greece’s parliament is due to vote today on a series of social reforms, some of which may not be liked by its EU partners.The crisis has raised a wide range of issues, from the rights of creditors and debtors, the (in)effectiveness of eurozone austerity, the political impact of the suffering of the Greek population (and its implications for other EU nations), the need to reform Europe’s ageing economy (7% of the world’s population, 25% of its GDP and 50% of its social costs, as Angela Merkel has remarked), and so on.Since 1945, a country that is struggling to refinance its debts can ask for money from the IMF, but this comes with conditions attached. Such conditions override the wishes of voters.Countries can simply default on their debts; this may cut them off from international finance for a while but eventually lenders forgive.The Greeks neither want to default, nor to borrow money from the EU on the terms currently on offer (initially they seemed to reject the idea of monitoring their adherence to any changed conditions as well).If the EU were a true nation like the US then these issues could be debated in a national parliament and aid could be sent to Greece rather as fiscal spending is diverted to Louisiana or Mississippi. But that would mean a very real loss of local control for Greek voters, who would have a very small weight in an EU electorate; it would probably mean an EU-wide retirement age, benefits system, tax collection agency and the rest.
  5. The four biggest British supermarket chains all offer some form of price-match guarantee, promising that their customers could not save any money by shopping elsewhere. On the face of it, they seem like a good thing: a sign that fierce competition is lowering prices. But economists have long been suspicious of such promises, which can leave consumers worse off.Suppose a car dealership worries about a rival undercutting its prices and stealing customers. Even if the dealership can respond by cutting its prices too, it might lose sales in the interim. A price-match guarantee offers a pre-emptive defence. By promising to match any discounts, the dealership can persuade its customers that they need not shop around: they will always pay the lowest price available.As a result, cutting prices no longer wins the competitor new business; buyers stay loyal and invoke the guarantee instead of switching. All that price cuts achieve for the competitor is the erosion of profits on existing sales. It will probably conclude that prices—and margins—are better left high. The result is “tacit collusion”: the maintenance of high prices, without any explicit communication between firms. Consumers end up suffering due to a guarantee that at first glance seems good for them.

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