Wednesday, May 28, 2008
Speaking of karma....
Appropos of my last post, it's worth remembering that five years ago western investors were fretting about the implosion of China's financial sector.
In the here and now, you have this sort of gleeful comeuppance as reported by the FT's Jamil Anderlini:
Western governments must strengthen their oversight of financial markets and improve cross-border regulatory co-operation if they are to avoid future global financial crises, a senior Chinese banking regulator told the Financial Times on Tuesday.
Monday, May 19, 2008
Because it's been a while since this blog really angered feminists....
In the worlds of science, engineering and technology, it seems, the past is still very much present.Just to muck up that straightforward conclusion, however, the Boston Globe's Elaine McArdle reports on some alternative explanations:
[T]wo new studies by economists and social scientists have reached a perhaps startling conclusion: An important part of the explanation for the gender gap, they are finding, are the preferences of women themselves. When it comes to certain math- and science-related jobs, substantial numbers of women - highly qualified for the work - stay out of those careers because they would simply rather do something else.I don't think this is an either-or issue -- sexism and self-selection can be mutually reinforcing narratives.
Incidentally, the most awful sexist anecdote I read today came from Jodi Kantor's front pager in the New York Times:
Ms. [Elaine] Kamarck, 57, the Harvard professor and a longtime adviser to Democratic candidates, said she was still incredulous about the time her colleagues on Walter F. Mondale’s presidential campaign, all men, left for lunch without inviting her — because, she later discovered, they were headed to a strip club.
Thursday, May 15, 2008
My first take on sovereign wealth funds
I have an article in the latest issue of The American entitled, "The Sovereigns Are Coming!" The main point:
No question, the growth of SWFs puts advocates of open capital markets in a quandary. During debates over what to do with the Social Security trust fund a few years ago, there was deep resistance to the idea of having a U.S. government fund pick winners in the stock market. Why should foreign governments get to play?Go check it out.
Tuesday, April 29, 2008
What did GDP ever do to deserve this?
One of the more invidious comparisons analysts like to make is to compare the size of something with a country's gross domestic product. An old warhorse of political economy/anti-corporate types, for example, is to say that the sales of multinational corporations exceeds many countries GDP. This is true but irrelevant -- GDP measures the value-added that an economy generates per year, so the proper and correct comparison is between a firm's profits and GDP. When using that metric, corporations suddenly don't look so big.
I bring this up because there have been a passel of press reports about this Global Indight study of sovereign wealth funds:
Sovereign Wealth Funds have grown a remarkable 24% annually, and now exceed some $3.5 trillion. If growth rates remain constant, they will surpass the entire current economic output of the United States by 2015, and Europe by 2016. Their importance already rivals that of hedge funds and private funds combined.This statement is
a) Likely true;Sovereign wealth funds deserve some scrutiny, but this kind of headline-seeking comparison seems designed to do littledoesn't contribute much to the debate.
Thursday, March 6, 2008
That's an.... interesting interpretation of recent economic history
Robert Lighthizer has an op-ed in today's New York Times that essentially argues that conservatives have a long tradition of trade protectionism that John McCain should embrace:
Free trade has long been popular with liberals, and it remains so with liberal elites today. The editorial pages of major newspapers consistently support free trade. Ted Kennedy supported the advance of free trade. President Bill Clinton fought hard to win approval of the North American Free Trade Agreement. Despite some of his campaign rhetoric, Barack Obama is careful to express qualified support for free trade, even when stumping in the industrial Midwest.OK, this kind of argument requires a few mental gymnastics, but there is a patina of plausibility to this narrative. It's not the whole truth, mind you, but truth is contained in those paragraphs.
Then we get to these paragraphs:
President Reagan often broke with free-trade dogma. He arranged for voluntary restraint agreements to limit imports of automobiles and steel (an industry whose interests, by the way, I have represented). He provided temporary import relief for Harley-Davidson. He limited imports of sugar and textiles. His administration pushed for the “Plaza accord” of 1985, an agreement that made Japanese imports more expensive by raising the value of the yen.Um.... wow, where to begin:
1) On what planet can voluntary export restraints be described as "working"? I mean, they certainly did work... in the sense that they encouraged Toyota and Honda to create luxury car divisions like Acura and Lexis in order to boost profits -- and make even further inroads into Detroit's market share. Most trade experts I know consider the VERs to be the single dumbest trade policy deployed in the last thirty years.The latter did not directly cause the former, of course -- robust economic growth is what alleviates public fears about trade. But if Lighthizer can make mendacious claims on the New York Times op-ed page (seriously, who fact-checked this piece of garbage?), then I get to do it on my blog.
Wednesday, February 27, 2008
NAFTA is not responsible for Ohio
Perhaps an unanticipated benefit of Clinton and Obama outbidding each other to see who could savage NAFTA more is that the mainstream media will actually point out that NAFTA is not responsible for the rust belt's economic woes.
The first problem with what the candidates have been saying is that Ohio’s troubles haven’t really been caused by trade agreements. When Nafta took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.Leonhardt also raises an obvious point that has, curiously, not been aired all that often:
[W]hen you read [Clinton's] plan, or Mr. Obama’s trade agenda, you discover none of it is particularly radical. Neither candidate calls for a repeal of Nafta, or anything close to it. Both instead want to tinker with the bureaucratic innards of the agreement. They want stronger “labor and environmental standards” and better “enforcement mechanisms.”Repeat after me: attaching labor and environmental standards to trade agreements will have no appreciable effect on trade flows. Anyone who tells you differently is selling you something.
UPDATE: Simon Lester does make a valid point: "Demanding that labor and environmental provisions be included could scuttle some trade deals, and that would have an impact on trade flows." Of course, that's not really an argument in favor of inserting them. Denying market access to poor countries doesn't make them richer, and poor countries tend not to care about labor and environmental standards.
Tuesday, February 19, 2008
Best title for an economics paper.... ever
Peter T. Leeson, "An-arrgh-chy: The Law and Economics of Pirate Organization," Journal of Political Economy, vol. 115, no. 6 (December 2007): 1049-1094.
Here's the abstract:
This article investigates the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates. To effectively organize their banditry, pirates required mechanisms to prevent internal predation, minimize crew conflict, and maximize piratical profit. Pirates devised two institutions for this purpose. First, I analyze the system of piratical checks and balances crews used to constrain captain predation. Second, I examine how pirates used democratic constitutions to minimize conflict and create piratical law and order. Pirate governance created sufficient order and cooperation to make pirates one of the most sophisticated and successful criminal organizations in history.
Monday, February 18, 2008
With my deepest apologies to Abraham Lincoln....
My latest commentary for Marketplace concerns whether the penny should be abolished. In light of plagiarism accusations currently running rampant, I should acknowledge that I was "inspired" by a previously published work. Here's how it opens:
Four score and nineteen years ago, our national mint brought forth on this country a new coin, conceived to honor Abraham Lincoln, dedicated to the proposition that all coins bearing his image would be worth exactly one penny.You know it just gets worse from there.
Click here to listen to it... we were going for stentorian.
Sunday, February 3, 2008
Why I'm screwed in the book publishing biz
Rachel Donadio's essay in the New York Times Book Review asks a very good question: why, in this age of digitized publication, does it still take friggin' forever for a completed book manuscript to actually become a book?
Donadio's answer -- marketing a book is essentially like marketing a movie:
The three-martini lunch and the primacy of the Book-of-the-Month Club may be things of the past, but publishing still relies on a time-honored, time-consuming sales strategy: word of mouth.Read the whole thing. One part of the essay surprised me, however:
Like movie studios jockeying over opening dates to score huge first-weekend box office numbers, publishers often change publication dates to avoid competition for reader attention and marketing buzz....Actually, for books on more arcane topics -- like sushi in the global economy -- I would have thought the reverse to be true. If two or more books on a similar subject come out at the same time, well that's a trend. This means they're more likely to earn reviews at high-profile places, and other sections of the newspaper might even start writing about the trend.
It's dead-wrong instincts like that one which might explain why I'm not in the book publishing industry.
Hat tip: Megan McArdle.
Friday, January 25, 2008
How about some reciprocal gratitude?
A follow-upon my last post on sovereign wealth funds (SWFs).
I quoted the head of the Norway's fund saying, ""It seems you don't like us, but you need our money." It strikes me that one could flip that around. Not for norway, but for most of the countries now sprouting SWFs, the line should read: ""It seems you don't like us, but you need to invest your money with us."
Countries are developing sovereign wealth funds for a number of reasons:
1) They're accruing massive current account surpluses because of commodity booms or misaligned currenciesThere is no question that, right now, western financial markets could use the money. However, it's also worth pointing out that there are not a lot of non-OECD markets receptive to large-scale SWF investments. Indeed, the very countries ginning up sovereign wealth funds at the moment are the most protectionist when it comes to foreign direct investment. A Russian SWF is not going to find a receptive audience in China -- and vice versa.
Am I missing anything?
Thursday, January 24, 2008
Summers on sovereign wealth funds
Like the rest of the known universe, I've been reading up on sovereign wealth funds as of late. And, to be blunt, I have yet to find much to get exercised about in terms of economic vulnerability to the United States or the west more generally. Basically, in order for a sovereign wealth fund to play politics, they have to shoot themselves in the foot financially.
Reporting from Davos, however, Daniel Gross relays Larry Summers' areas of concern. Summers is pretty smart, so let's review his objections:
1. Corporate governance. SWFs may protect the management of poorly run companies: "SWFs are some people's model investors, and other people's version of 1-800-ENTRENCH. What could be better for not entirely secure management than a long-term, nonvoting shareholder?"Concern #1 is interesting, but strikes me as ephemeral. If a sovereign wealth fund is interested in maximizing its value, then it's not going to want to keep around incompetent management.
Concern #2 is a possibility, but the more pernicious possibilities seem like straight anti-trust issues rather than problems unique to sovereign wealth funds.
Concern #3 is a massive rationalization. It boils down to, "we're not saying sovereign wealth funds are evil, but other, less cosmopolitan folks are saying that, and they have pitchforks."
There are some foreign policy reasons to be concerned about some sovereign wealth funds -- but I don't see any economic motivation to get all riled up about them. This holds with particular force at the present moment. As the head of Norway's fund put it at the panel: "It seems you don't like us, but you need our money."
Question to readers -- can anyone add an additional reason to believe sovereign wealth funds are bad for the U.S. economy?
UPDATE: For those curious about the official U.S.position on sovereign wealth funds, go read Deputy Treasury Secretary Robert Kimmitt's Foreign Affairs essay:
Tuesday, January 22, 2008
The Fed ain't f&%$ing around.... and neither are the markets
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.The question is whether this move will forestall further panic in global and domestic markets or merely exacerbate them.
Wednesday, January 16, 2008
Radio, print, web -- it's a media whoredom triple play!!
My latest commentary for Marketplace is now available online. It's about the fallibility of political prediction markets.
Monday, December 24, 2007
Your unambiguously good news of the day
In South Korea, once one of Asia’s most rigidly patriarchal societies, a centuries-old preference for baby boys is fast receding. And that has led to what seems to be a decrease in the number of abortions performed after ultrasounds that reveal the sex of a fetus.Choe Sang-Hun, "Where Boys Were Kings, a Shift Toward Baby Girls," New York Times, December 23, 2007.
Tuesday, December 4, 2007
Should you fear the sovereign wealth fund?
Over at Foreign Policy, economist Anders Åslund says that sovereign wealth funds pose greater problems to home countries than host countries:
[S]uch funds are nothing for Americans or Europeans to fear. If anyone should worry about them, it’s the people whose governments are amassing them. That’s because governments tend to be terrible at managing money that is best left in the hands of private citizens. And locking away billions of dollars in wealth can have pernicious economic side effects. Maybe that’s why sovereign wealth funds are popular with dictators and semi-authoritarian regimes, which don’t have to answer for the consequences when they make poor economic gambles....
Why have oil prices gone up?
In the wake of the latest NIE suggesting that Iran's nuclear program has been frozen in carbonite since 2003, I would have expected oil prices to have fallen. After all, the obvious fallout from the estimate is that neither military nor enhanced economic sanctions will be imposed on Iran anytime soon. If one reason oil prices have spiked is increased political uncertainty, then surely the inteligence finding should have ameliorated these fears.
Imagine my surprise, then, to see that oil prices rose yesterday. Furthermore, the AP report has no mention of the Iran situation, discussing OPEC machinations instead.
This could mean one of four things is true:
1) Oil traders are slower at working through geopolitical ramifications than your humble blogger;I'm 99.99% sure the answer is not #1 or #2, and I'm 90% sure the answer isn't #4. But #3 seems inadequate to me.
Readers are encouraged to proffer their own answers.
Monday, December 3, 2007
Your bigthink quote of the day
One great test of our era will be whether creative destruction can flourish alongside public order and political liberty. If not, we're in big trouble. But if so — and I'm an optimist on the point — the results could be a marvel.From Brad DeLong's review of a Schmpeter biography in the Chronicle of Higher Education.
Tyler Cowen favors a different selection from the same review.
Saturday, November 3, 2007
I'll second Dani Rodrik's nomination
The first winner of the the Albert O. Hirschman Prize speaks the truth about Hirschman's intellectual legacy:
I think Hirschman's contributions have been greatly under-appreciated within economics, and that goes a long way to explain why he has not won a Nobel. If the Nobel was given for impact on social sciences more broadly, Hirschman would have clearly won a long time ago. But who know, there is still some time...Let the record show that the hardworking staff here at danieldrezner.com has been calling for this move for two years now.
Wednesday, October 31, 2007posted by Dan at 01:21 PM | Comments (1) | Trackbacks (0)
Friday, September 7, 2007
The political demand for crackpot economics
There's a raging debate among The Atlantic's bloggers about crackpot versions of supply-side economics and to what extent GOP politicians embrace them (the contemporary Democrat version of this, by the way, is that a protectionist approach towards China will be a net benefit to the U.S. economy and U.S. employment).
[A] more fruitful question which I'd like to see Yglesias, Chait and others grapple with is why discredited, crackpot ideas can become central elements of a winning political party in the world's most important democracy. Explain the demand side and give us your policy prescriptions.I don't really have an answer to this question that can be fit into a blog post, but I can link to this disquisition by Alan Blinder.
Sunday, September 2, 2007
An out-of-date top 100 list
An e-mail alerted me to this "list of the top 100 blogs dealing with economics."
Your humble blogger is included, with the following description: "The author has a deep academic background and provides economic insights founded in solid economic theory."
Curiously, I tried the "deep academic background" line while in graduate school. Readers should not be surprised that it never worked for me in bars.
What's really amusing about the list is that in the span of a week it's already out of date. Megan McArdle has already moved onto the Atlantic site, and Max Sawicky announced that he's hanging up his blogging spurs.
Saturday, September 1, 2007
Why isn't there a scandal market?
In thinking about the fall of Larry Craig, I went back and re-read Dan Popkey's Idaho Statesman story from last week. Popkey's story makes it clear that rumors had been dogging Craig on this question for years, of not decades.
Craig is clearly not the only politico that carried around the whiff of scandal before it actually hit. My Louisiana contacts tell me the same thing was true of David Vitters. And, Lord knows, everyone knew Bill Clinton had a problem before a story broke.
So here's my question to economists and political scientists. If there are prediction markets for elections, why isn't their a prediction market for politicians and scandals? Admittedly, elections have a clear end date and (hopefully) a clear winner. Still, one could devise several market outcomes on which to bet: a Washington Post story about a scandal, a Nexis count of news stories about a scandal, or even an actual resignation. Contracts could be limited to, say, 3-month or 6-month time windows.
This sort of thing could have the potential to be a useful indicator (admittedly, it would also be ripe for manipulation by mischief-makers; but so are election markets) for media and politicos -- it could create a metric for off-the-record, on-the-qt-and-very-hush-hush kind of information.
My question to Tyler Cowen: is there are markets in everything, why isn't their a Scandal Pool?
Friday, August 17, 2007
Open market thread
Comment away on the financial markets' latest gyrations. Some background reading: 1) The Fed's statement announcing a lowering of the discount rate. This came with a FOMC statement that said:
Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.This has made the Dow Jones very happy.
Keith Bradsher and Jeremy Peters report that 2007 might create the inverse of what happened in 1997:
In the past, when economic growth has stalled in the rest of the world, the United States has usually been there to pick up the slack. Now that dynamic is reversed.At the same time, Brad Setser observes the paradox of the current liquidity crisis -- despite the fact that it started in the United States, the dollar is still viewed as a safe haven.
Meanwhile, French president Nikolas Sarkozy wants greater G-7 involvement.... which gives me hives for some reason.
UPDATE: The Volokh Conspiracy is on this like white on rice.
Thursday, August 9, 2007
The advisor or the candidate?
[T]hese guys may be liberal by conventional political definitions, but they are hardly men of the left. [Max] finds this dispiriting; I find it reassuring. It means there is a chance that the Democrats may nominate someone I might possibly be able to vote for. I don't know Goolsbee, but he has an excellent reputation among economists. I know Bob and Gene and would anticipate that if they have anything to say about it, the next Democratic presidency will be a rerun of the Clinton Administration on economics--free trade oriented, fiscally conservative, pragmatic.All well and good, but then we get to what the Democratic candidates themselves are saying. Over at Capital Commerce, James Pethokoukis summarizes the more inane comments that were made at Monday's debate. Let's just say I'm not as reassured as Bartlett.
Now, as Ezra Klein points out, the Republicans are hardly immune to uttering economic inanities. Nonetheless, the disconnect between who politicians get as advisors and what they say themselves prompts a question: when picking a presidential candidate, should you go by what they say or what their advisors think?
Thursday, August 2, 2007
How price controls favor the few
Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.There's nothing really new here, except the depressing way in which government efforts to impose price controls favors those connected to the government:
Ordinary citizens initially greeted the price cuts with a euphoric — and short-lived — shopping spree, since they had been unable to buy even basic necessities because of hyperinflation. Yet merchants and the government’s many critics say that much of the cut-rate merchandise has not been snapped up by ordinary citizens, but by the police, soldiers and members of Mr. Mugabe’s governing party who have been tipped off to the price inspectors’ rounds.
Wednesday, August 1, 2007
At least the Club for Growth is realistic
The Washington Post reports that Congress is preparing to pass a really stupid, counterprouctive bill to punish China.
In the meanwhile, over a thousand economists have signed the following:
We, the undersigned, have serious concerns about the recent protectionist sentiments coming from Congress, especially with regards to China.This also appears in an ad today in the Wall Street Journal.
Monday, July 30, 2007
The power of a bad airport
In the Financial Times, Christopher Adams reports on British concerns about a badly functioning airport:
London’s status as one of the world’s leading financial centres risks being undermined by excessive delays at Heathrow and the airport’s sprawling layout, the new City minister warns on Monday.I understand Ussher's concerns, but if a bad airport really drove away that much business, the city of Miami would desolate wasteland.
Still, this prompts a question to readers -- in terms of lines and general disorganization, what's the worst airport you've ever experienced? Has an airport been so bad that you actually altered your future tavel to bypass it?
Thursday, July 12, 2007
A whole-assed effort on a half-assed policy measure
In response to this post blasting the Baucus-Grassley-Schumer-Graham China bill -- and the presidential candidates who endorse it -- I received the following e-mail from a Hill staffer who shall remain very, very anonymous:
Over the next few months, our committee is going to be considering trade legislation on China, including the currency issue. I've read with interest your recent blog about your concerns with the Baucus-Grassley-Schumer-Graham bill. If we accept that something needs to happen legislatively (for political, if not substantive reasons) on currency, do you have any thoughts on what a sensible piece of legislation would look like?So, the problem is that a political imperative exists to do something, but even the staffers know that the something proposed is bad, bad, bad.
The task, therefore, is to devise a bill that is perceived as doing something about China but in point of fact does not seriously rupture either the bilateral economic relationship or the U.S. economy. A bonus if the policy were to actually achieve the desired end -- a slow appreciation of the yuan.
Faced with this assignment, and after pleading numerous times to just do nothing, I'd offer four recommendations that might make this kind of thing look sensible:
1) Give China 18 to 24 months to achieve a quantifiable degree of appreciation (no, I'm not going to provide a number) before any measures are enacted. This kicks the can down the road for a while, and with some luck Beijing will head in that direction anyway.Please excuse me so I can wash my hands until they're clean.
Wednesday, July 11, 2007
What motivates economic journalists?
At least once a year, journalists who cover economics like to use the trope of "the dominant market-friendly paradigm is being challenged, changing economics as we understand it." It's safe to say that Patricia Cohen's New York Times story from yesterday fits that bill:
For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.The story conflates a bunch of things (adopting interventionist policy positions, deviating from formal methods, behavioral economics, heterodox economics) together. Alex Tabarrok has a nice takedown (and see also Greg Mankiw). Even Dani Rodrik (cited in the piece) thinks the article "does overstate it quite a bit."
What's of interest to me is that this kind of scattershot critique of standard economic theory -- in which a whole bunch of disparate, even contradictory critiques are lumped together -- seems to be a common trope among journalists. My question is, why?
There's a Freakonomics-style question to be asked here -- are journalists who wash out of Ph.D. programs more or less likely to do this? What about journalists with overt ideological biases? And why the hell hasn't The New Republic written its standard, contrarian, "the neoclassical model does better than you think" kind of piece?
Tuesday, July 10, 2007
Clinton and Obama officially scare the crap out of me
About a month ago I was talking with a big-name economist who was advising a couple of presidential campaigns. I've differed with this person on a few policy issues, but I'd be very comfortable with this person in a position of authority.
I asked him which candidates on the Democratic side would be able to pursue a responsible trade policy, and he replied, without hesitation, "Clinton and Obama."
After reading Eoin Callan's Financial Times story, I'm afraid I can't believe that anymore:
Hillary Clinton and Barack Obama, the frontrunners for the Democratic presidential nomination, have agreed to co-sponsor legislation that would levy punitive duties on Chinese goods to cajole Beijing into revaluing its currency, according to aides....Brad DeLong makes the point better than I:
Of course, then the candidates will be attacking US consumers (who will pay higher prices for imports), workers in the construction industry, US borrowers (who will then pay higher interest rates to domestic and foreign creditors), and US homeowners (who will see the higher interest rates push down housing prices and reduce their equity). The net short-run effect is surely a minus--it's not as though we desperately need to swap construction jobs for manufacturing jobs right now, and we surely don't need a more-rapid decline in housing prices right now.This prompts Matt Yglesias to ask the following:
Now where I tend to lose the plot is this. If mainstream economists like Brad think it's a bad idea to use threats of tariffs to push China into changing its exchange-rate policies, how come the economics mainstream seems to have so few complaints about the fact that it's completely normal for US trade negotiators to use exactly this sort of leverage to try to get other countries to change the intellectual properties policies or to privatize their water systems or what have you? Why is the threat to shoot ourselves in the foot okay when made on behalf of pharmaceutical companies and movie studios, but not when made on behalf of import-competing manufacturers? Often when I see this argument made, I feel like the point is -- aha! hypocrites! you should support our China bill after all! -- but I really do think Brad's right, this is a bad bill. But by the same token, the people who complain about this sort of thing ought to complain about the other sort of thing as well.To answer Matt's question to the best of my ability, you have to realize the following:
1) All trade sanctions, when imposed, are welfare-reducing. The hope in deploying them is that they will be sufficiently painful to the targeted country that its government will acquiesce in a prompt manner -- i.e., before they really bite.Clinton and Obama are willing to screw over the American consumer for a self-defeating measure. Both of them should know better.
UPDATE: Dani Rodrik blogs an intriguing proposal on how to remedy China's undervalued currency. That is to say, it would be intriguing if the policy could be executed in a vacuum with zero political externalities. I don't think it can actually be implemented.
ANOTHER UPDATE: Several commentators have suggested that a) Clinton and Obama are merely posturing; and b) Republicans are just as bad.
My response to (a) is that it stops being posturing when you're co-sponsoring legislation that has a decent chance of passing. My response to (b) is a free round of tu quoque for everyone.
Saturday, July 7, 2007
Happy Live Earth Day!!!
As the Live Earth concerts proceed today, the chairman of the House Energy and Commerce Committee appears to join Greg Mankiw's Pigou Club on how to tackle global warming. "Apears" is stressed because John Dingell might have different motives than Mankiw. The New York Times' Edmund L. Andrews explains:
A powerful House Democrat said on Friday that he planned to propose a steep new “carbon tax” that would raise the cost of burning oil, gas and coal, in a move that could shake up the political debate on global warming.Dingell's gambit has irritated environmentalists. Let's go to BlueClimate for a reaction:
Congressman Dingell understands that most people do not understand what cap and trade is but that they do understand a tax. By using the easier-to-understand carbon tax to impute a cost associated with climate change legislation, Dingell hopes the American people will rise up and block the plans of House Speaker Nancy Pelosi and others Democrats who favor taking stong action on climate change.Well of course that's what Dingell wants.
But BlueClimate's objection raises a big-ass warning flag for those of us in the squishy middle who are genuinely concerned about global warming but are also concerned about the overall costs of dealing with it (not to mention the distribution of those costs). If Dingell is downplaying the benefits of reducing global warming, to what extent are environmentalists like BlueClimate downplaying the costs of reducing greenhouse gas emissions? As far as I can figure, cap and trade systems differ from tax systems in that they are a) less effective; and b) more opaque in distributing the costs. Sure, Dingell is playing politics, but from the tenor of BlueClimate's post, he's not doing it differently from environmentalists.
I believe it was Daniel Patrick Moynihan who posited that broad-based reforms cannot be enacted without the consent of two-thirds of the American public. Until environmentalists realize that earning that consent will require a) being transparent about the costs and benefits of reducing greenhouse gases; and b) convincing Republicans, then there will be no progress on how to address global warming beyond some nice music concerts.
UPDATE: Mankiw frets that Dingell's ploy will destroy the Pigou Club.
Monday, July 2, 2007
Sign #453 that GM is not a well-run company
The Associated Press, "GM Hopes Film Will Transform Sales," July 2, 2007.
Posters outside theaters across the country list Jon Voight, Shia LaBeouf, Josh Duhamel and Megan Fox as the stars of the summer action flick "Transformers."
Tuesday, June 19, 2007
Outsourcing to Jonathan Rauch on immigration
Your humble blogger has been mute about the immigration bill that is either dead or not dead -- I can't rememberwhich iteration we are at right now.
In the interest of economy, and in improving the debate on this subject, I will simply outsource my position on this to the National Journal's Jonathan Rauch:
[T]he Senate bill was worse than it needed to be. On the legal side of the immigration equation, there are easy trade-ups to be had. In fact, even a National Journal columnist with no apparent qualifications could write a better bill.Hat tip: Virginia Postrel.
Friday, June 15, 2007
This is my brain when it's cranky
Matthew Rojansky has a post at Across the Aisle on energy independence that caused me to bang my head against the wall in sheer frustration for a few moments.
Rojansky reacts to a DC panel on energy, the environment and national security at a Center for American Progress/Century Foundation conference. After all of the panelists politely point out that the goal of energy independence is neither possible not worthwhile. Rojansky replies:
Alright, I see their point. It’s not immediately clear that even the optimal combination of conservation and alternative energy technologies can keep pace with growing demands for energy, meaning we will continue to need energy imports to fuel the US economy. Cutting off foreign energy sources would, by that reasoning, make us less competitive, and more “isolated” in a negative sense.OK, to put this as simply as possible -- trading energy commodities creates value in the same way that trading any other kind of good creates value. The reason we import energy from other countries is that, as Rojansky observes, "is both cheaper to extract and transport than it would be to generate here at home." As a society, the U.S. gains value by having the market take resources that might have (inefficiently) gone into energy extraction and reallocating them into producing goods and services in which the United States has a comparative advantage (indeed, one of those goods and services might be, you know, a new innovative technique to more efficiently extract energy resources). Trade, in this sense, has the same effect as a technological innovation -- it widens the variety of efficient means through which a society can obtain goods.
Trading energy is not a zero sum game.
This doesn't mean policymakers should necessarily let the market operate in an unfettered manner. There are clear non-economic reasons to intervene (Rojansky argues that foreign suppliers might decide one day not to sell their energy to the U.S. That's a red herring, because any move in that direction hurts them more than us). Efforts to reduce greenhouse gas emissions will likely require investment in alternative forms of energy. The political externalities of high energy prices are also undesirable. However, even factoring in the political externalities, the U.S. should not aim for energy independence. Why waste resources on eliminating that last drop of imported oil, when perfectly stable and friendly economies like Canada, Mexico, Norway, and Great Britain are willing to seel their energy to us?
Rjansky closes his post with the following critique:
The experts I cited above object to the energy independence slogan only because they perceive it as a red herring. They would argue it is a distraction from broader conservationist goals that will, in reality, have the same important impact in reducing our dependence on foreign oil, while combating global climate change by reducing carbon emissions. Certainly, climate change is very important, and a preoccupation with energy independence for security’s sake alone might lead us to transition to US-sourced fossil fuels, like coal and oil from ANWRA, that produce just as much harmful carbon as Middle Eastern oil and gas. But to call energy independence a bad idea destroys the only common ground in this debate, and hence the best chance for meaningful progress on both national security and climate change.Policymaking is also a bit about being trapped by slogans. The slogan on this issue should be energy diversification, not energy independence. The former is both economically feasible and politically desirable. The latter is neither.
Thursday, June 14, 2007
A pop quiz for Senators Baucus, Graham, Grassley, and Schumer
The Financial Times' Eoin Callan, Krishna Guha, and Richard McGregor report on a bipartisan effort to introduce a bill aimed at punishing China for currency manipulation:
China came under increased pressure to revalue its currency on Wednesday as a bipartisan group of US senators introduced legislation designed to push the Bush administration towards a full-blown trade dispute with Beijing.Meanwhile, Chris Nelson reports on how hearings on the Korea-U.S. Free Trade Agreement went earlier this week. Nelson is usually respectful in his language, so this passage is particularly telling:
Deputy USTR Karan Bhatia and [Assistant Secretary of State] Chris Hill spent the morning being whipped, insulted, and generally abused, on a bipartisan basis, by the House Foreign Affairs' subcommittee on trade and terrorism - an interesting combination of jurisdictions.Clearly, Congress is upset about U.S. trade policy. And when congressmen are upset, stupid policies usally follow.
Here's a multiple-choice question to the proposers of the new China bill:
The American economy is experiencing rising interest rates and worries about rising inflation. Neither of these trends bodes well for average Americans.I'm sure Chuck Schumer, eminent economist, will figure out the correct answer.
Friday, June 8, 2007
Bad productivity numbers, or just bad numbers?
Last onh I blogged about the puzzling housing sector -- despite output slowing to a crawl, employment in that sector had not abated. Indeed, I made the following half-assed suggestion:
This seems like a peculiar inverse of what was happening in the economy circa 2002-3 -- astounding productivity gains that were not matched by wage or employment growth. One wonders if this means that, for the next year, the U.S. economy will observe the obverse of marginal productivity increases but robust wage and employment growth.Economically, this makes little sense, but it did seem to be happening.
In today's FT, Krishna Guha looks a little closer at this puzzle:
A conundrum in construction lies at the heart of a US jobs market puzzle that continues to baffle economists – including officials at the Federal Reserve.
Tuesday, May 29, 2007
An incentive puzzle on education
College graduates earn more than high-school graduates, and that premium is a lot bigger than it was 20 years ago. There are numerous reasons but one might be that after rising for most of the postwar period, the share of the work force with college degrees stopped growing, constricting supply just as demand for highly skilled workers took off.The failure to respond to incentives is, well, puzzling.
It could just be a statistical hiccup. Another possible half-assed blog explanation, drawn strictly from casual empiricism: the decline is due to a greater number of high school graduates taking a year off before entering college. There is a swath of upper middle-class kids who are either working or backpacking for a year instead of heading straight to school. But I have no idea about the magnitude of this trend.
Alternatives are solicited from readers.
Thursday, May 3, 2007
Housing and the productivity slowdown
Labor productivity growth in the United States has declined every year since 2002. In the first quarter of this year it fell below the symbolic 2% barrier, evoking bad memories of the stagflation-era economy.
[M]any economists were concerned when productivity came in at just 1.6 percent last year. Was America returning to its old low-productivity ways? If so, that was a much bigger problem than the housing slowdown. But it looks like the housing slowdown itself has been making strong productivity look bad. Here is what the econ team at Goldman Sachs recently said on the topic:This seems like a peculiar inverse of what was happening in the economy circa 2002-3 -- astounding productivity gains that were not matched by wage or employment growth. One wonders if this means that, for the next year, the U.S. economy will observe the obverse of marginal productivity increases but robust wage and employment growth. Profit margins have been sufficiently high to allow this to happen -- though I confess I fail to see why firms would have an economic incentive to act in this fashion."We believe there is a straightforward explanation for slower productivity growth—the housing downturn. The sharp drop in homebuilding activity has not yet led to a significant decline in employment, so productivity in this sector is falling rapidly. Productivity growth in the rest of the nonfarm sector remains at a healthy 2.5 percent pace. Housing productivity should begin to improve within the year. Two factors—seasonal hiring patterns and the lag between the slowdown in home sales and the slowdown in home construction—have delayed the employment adjustment, but we expect declining residential housing employment to pull nonfarm payroll growth below 100,000 jobs per month in the spring and early summer."Dale Jorgensen, productivity guru and Harvard economics professor, told me a similar story in a chat today.
Friday, April 27, 2007
The greatest threat this blog has ever faced
I see that Dani Rodrik has now set up his own blog.
Great. Just great. Back in the day, I use to have the monopoly on blogging about the global political economy. Now Rodrik -- and his fancy-pants Albert Hirschman Prize -- comes along to make the competition more difficult. It's not enough that the man is responsible for Jaghdish Bhagwati's jeremiad against yours truly.
In all seriousness, Rodrik is a smart economist who can speak to non-economists -- so it's a very good thing that he's joined the blogosphere. And while we have some overlap in interest, his take is quite different from mine. So, in fact, everyone wins!
Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change. Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information.... In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness....I don't disagree with Rodrik's political argument here per se -- but I do have a few quibbles about it's generalizability:
1) Let's change the redistribution to the following:I suspect Rodrik's procedural concerns affect how attitudes about trade. But the simple act of redistribution across borders -- regardless of the reasons -- matters even more.a) Tom is 30 cents richer;That's actually a more accurate picture of trade's effects. In focusing striictly on the employment effects, however, Rodrik elides the biggest gain from trade -- lower prices. He's correct that this is weak beer politically, but it's still worth remembering.
Thursday, April 19, 2007
Who are the go-to economists for the 2008 campaign?
For the 2008 campaign, the six leading campaigns have each signed up their first-string economic policy teams. These advisers don’t hold the sway that the political aides do, but they can ultimately have a bigger effect on the world. If the next president is going to reform health care, attack climate change or address middle-class anxiety, the solution is going to be shaped by these policy advisers. As Douglas Holtz-Eakin, John McCain’s director of economic policy, says, “If you’re specific about what you want to do and you win, you have a mandate.”Read the whole thing to see who's advising who. I'm relieved to see that Obama is getting decent economic advice -- his chief economic advisor is University of Chicago professor Austan Goolsbee.
Leonhardt's conclusion emphasized a point I've made here in the past: The truth is that if you put the economic advisers, from both parties, in a room and told them to hammer out solutions to the country’s big economic problems, they would find a lot of common ground. They could agree that doctors and patients need better incentives to choose effective medical care. They would probably hit upon education policies along similar lines, requiring that schools be held more accountable for what their students are, and are not, learning. They might suggest a carbon tax — a favorite idea of Mr. Mankiw — to deal with global warming. And they would shore up Social Security by reducing benefits for high earners, as Mr. Hubbard has suggested.
Not all of these ideas are politically feasible at this point, but presidential campaigns can change what’s feasible. Here’s hoping that this year’s crop of economic advisers has the courage of their convictions.
Wednesday, April 11, 2007
How does Jeffrey Sachs think about politics?
Via Greg Mankiw, I read with interest Chris Giles' Financial Times interview with Jeffrey Sachs. This part stood out in particular:
We move on to talk about a specific project Sachs is currently involved in, Millennium Villages, where his ideas on fertilisers, malarial bed-nets and the like are tried on the ground. My less-than-ecstatic reaction to his reports of their success is clearly the same as that of many aid agencies. It instantly raises his hackles. I suggest there are many examples where success in pilots does not translate into something that can be replicated on a large scale, and that you don’t necessarily need to try something to know it won’t work. ”I’m sorry,” he is almost shouting now. ”That, I disagree with completely. That’s preposterous.”Every once in a blue moon, politics works like Sachs decribes in the last paragraph. Most of the time, however, politics bears no relationship whatsoever to this kind of model. And the belief that this is how politics works is a problem that seems to plague really bright economists.
Monday, April 2, 2007
Two steps forward, one step back on trade
The two steps forward are that the United States and South Korea signed a free trade deal just before the deadline of having it approved under President Bush's Trade Promotion Authority. The New York Times' Choe Sang Hun explains:
United States and South Korean negotiators struck the world’s largest bilateral free-trade agreement today, giving the United States a badly needed lift to its foreign trade policy at home and South Korea a chance to reinvigorate its export economy.The step back comes from the Bush administration's weekend decision to slap tariffs on Chinese paper. Steven Weisman explains in the NYT:
The Bush administration, in a major escalation of trade pressure on China, said Friday that it would reverse more than 20 years of American policy and impose potentially steep tariffs on Chinese manufactured goods on the ground that China is illegally subsidizing some of its exports.[U.S. trade with China far exceeds trade with South Korea. Why is this only a step back compared to KORUS?--ed.] Two reasons. First, much as I despite countervailing duties, this policy shift seems to make sense within the context of what those duties are supposed to accomplish. As Weisman explains:
American law allows the United States to impose what are called antidumping duties when imports are sold in the United States at prices below what it costs to produce them.Second, I'm willing to bet that this case will end the same way the steel case ended. If the complainants are basing their argument on China's currency valuation, then the WTO ain't going to uphold this action. In which case, three years from now, we know how this wll end -- unless it gets settled in the bilateral Strategic Economic Dialogue between now and then.
UPDATE: they're not basing it on the currency valuation. Never mind. Meanwhile, Trade Diversion is skeptical of Commerce's ability to assess the magnitude of the direct subsidy.
Thursday, March 29, 2007
Latest trade tidbits
1) Remember the hints of a trade deal that came out earlier this week? Over at US News and World Report's Capital Commerce blog, James Pethokoukis has more juicy details about the how this may or may not play out. As a general rule, if Dave Sirota is this exercised about it, then it must be a good thing for trade liberalization.
2) A point in the Democrats' favor -- a new WorldPublicOpinion.org Survey about trade and regulatory standards:
Strong majorities in developing nations around the world support requiring countries that sign trade agreements to meet minimum labor and environmental standards, a multinational poll finds. Nine in 10 Americans also support such protections.Sounds good, but the survey question seems awfully vague ("Overall, do you think that countries that are part of international trade agreements should or should not be required to maintain minimum standards for working conditions?")
Which is the greatest threat to globalisation: the protesters on the streets every time the International Monetary Fund or the World Trade Organisation meets, or globalisation's cheerleaders, who push for continued market opening while denying that the troubles surrounding globalisation are rooted in the policies they advocate? A good case can be made that the latter camp presents the greater menace. Anti-globalisers are marginalised. But cheerleaders in Washington, London and the elite universities of north America and Europe shape the intellectual climate. If they get their way, they are more likely to put globalisation at risk than the protesters they condemn for ignorance of sound economics.I'm unpersuaded There are two huge difference between the 19th century version of globalization and the cuurrent era: there was much more labor mobility back then, but the size of government -- and welfare policies in particular -- were vastly smaller. As much as peopole like to fret about their disappearance, at best the growth of these measures are slowing. As Tyler Cowen implicitly points out here, the growth of markets has led to a corresponding growth in government. So even if I accepted Rodrik's premise, I think we're a long way from where he thinks we are.
4) DeLong also links to a Wall Street Journal front-pager from yesterday about Alan Blinder's fears about offshoring:
Mr. Blinder... remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says....DeLong believes that Blinder "has very smart things to see about 'outsourcing.'" I think Blinder is unbelievably smart, but if he's basing his numbers on the same logic he applied in his Foreign Affairs essay, then with all due respect I don't think he has very smart things to say about outsourcing. In the FA essay, Blinder assumed that any job that could be done over the electronic transom:
a) Will be done electronically;Yeah, I got problems with just about all of these assumptions. Greg Mankiw, on the other hand, simply believes that Alan Blinder has been turned by the dark side of the force... which converts Greg into Luke Skywalker.
UPDATE: Tyler Cowen's take on Blinder: "When our economists start preaching that we should look to economists and higher educators to predict the new, growing economic sectors, I again think that the Chinese are not the major problem."
Thursday, March 22, 2007
Gender and low-wage jobs
Matt Yglesias links to a Washington Post op-ed by NYU political scientist Lawrence Mead on the withdrawal of low-income men from the workforce:
Why are low-skilled men withdrawing from work just when unskilled jobs appear plentiful and immigrants are flooding into the country to take them? One reason might be that the wages these men could earn have fallen, so, the thinking goes, why work for chump change? Yet these men failed to work more even in the 1990s, when wages for low-skilled jobs rose. It's more likely that male work discipline has deteriorated. Poor men want to work and succeed, yet many cannot endure the slights and disappointments that work involves. That's why poor men usually can obtain jobs yet seldom keep them.Yglesias goes to town with this paragraph:
Frankly, one has to sympathize with this. Presumably NYU political science professors like Mead don't need to put up with the sort of slights experienced by people doing unskilled labor.I can't shake the feeling that something else is going on here. Yes, low wage jobs can be humiliating and hard work.... but wasn't this also true in the past? Indeed, globally, one of the reasons so many people flock to so-called "sweatshop" jobs is because they still seem like a step up from the back-breaking tasks involved in agricultural labor.
What, then, explains the growing disaffection of male workers in this country? It might be that the composition of low-wage jobs has shifted from tasks that were commonly associated with men to tasks that have historically been associated as women's work. Low-wage jobs in the agricultural and manufactiuring sector involve the use of significant amounts of muscle far removed from the final customer. Low-wage jobs in the service sector often require the employee to wear nametags that say, "Hi! My name is ________!" while being as courteous as possible to the customer. My hunch is that a large swath of low-income men can deal with being dog-tired from moving around heavy things, but can't deal with the petty humiliations required to stay in the good graces of an obnoxious shopper. [So you're saying that women enjoy humiliation more?--ed. No, I'm saying that because many of these low-paying service-sector jobs were traditionally viewed as female, there's some path dependence at work here.]
This is just blog speculaion -- I have no idea if there's any empirical evidence to confirm if this is true. Commenters should feel free to shoot this down.
UPDATE: The Economist's Free Exchange has more on this point.
Sunday, March 11, 2007
There's lazy reporting and then there's lazy Sunday analysis
Over the past few years, the Boston Globe Ideas section has generally been considered one of the best treats of theirs or any Sunday paper. Which is why I was surprised when I read this Matt Steinglass article on the intellectual trendiness among economists of preaching capital controls:
When the Shanghai stock index dropped 9 percent on Feb. 27, touching off sharp slides in markets across the globe, many were quick to recall the Asian financial crisis of 1997. That crisis was triggered not by a drop in stock prices, but by a collapse in the value of the Thai baht, brought on by currency speculators. But the reason the crash of '97 spread from one country to the next, savaging the economies of Indonesia, South Korea, the Philippines, and ultimately non-Asian countries like Russia, was a broad loss of investor confidence in such so-called "emerging markets."Now, the bolded sentence is clearly supposed to be the takeaway point of the piece, so I was curious which economist or economists Steinglass found to echo Stiglitz's views on capital controls. It turns out that the economist Steinglass found was.... Joe Stiglitz:
In the decade since the crisis, many economists have come to share these views -- including some within the IMF itself. "In 2003 their chief economist came to the conclusion that the empirical evidence did not show that capital market liberalization worked," Stiglitz says. "It did not lead to more growth, it did not lead to more stability. They still believe it's true, but what they now say is they can't prove it." In some cases, the IMF is actually telling countries that "soft" capital controls, such as tax measures and banking regulations, may be a good idea.Stiglitz might be correct in his assertion, although in 2003 at least one chief IMF economist was pretty disparaging of capital controls.
Still, that's not the point. If Steinglass' assertion is correct, one should expect to see a quote from at least one other economist. Hell, Steinglass probably could have raided Brad DeLong's archives and probably found something useful.
We don't get either of those things, however. Instead, we get Stiglitz and more Stiglitz. This is insufficient for the assertion that's made in the essay.
Bad Ideas section. Bad, bad, bad.
Tuesday, February 27, 2007
James Galbraith confuses me
The facts are clear: NAFTA is a done deal, and China is a success story we have to live with. Progressives need a trade narrative that moves past these two issues. Broadly, this means accepting manufactured imports and dropping the idea that we can control--or that it matters much--who assembles television sets or stitches shirts. Standards to guard against flagrant abuses such as child and prison labor are fine, but it's an illusion to think they will, or should, dent the flow of goods from China. A progressive trade agenda should focus, instead, on building stronger world markets for our exports, and in ways that do not trample on the needs and rights of poor people in poor countries. That should provide plenty of room for future fights with free-trade absolutists.Um... actually, no, Galbraith's formulation doesn't leave a lot of room for future fights -- not that there's anything wrong with that!! I wish all progressives shared the Galbraith position.
The problem is that there is plenty of room for division within Galbraith's forumlation of the progressive trade agenda: "building stronger world markets for our exports, and in ways that do not trample on the needs and rights of poor people in poor countries." The former requires enforcing intellectual property rights, because they are at the root of much of what the United States currently exports. Progressives, however, would no doubt argue that the latter requires dropping IPR enforcement altogether.
Given the current standards of trade discourse, however, I should shut up and just encourage all progressives to read Galbraith.
Thursday, February 8, 2007
Your inequality readings for today
Brad DeLong posts a preliminary bibliography of what he thinks are salient readings about economic inequality in the United States.
Over at Cato Unbound, Alan Reynolds tangles with his critics over his assertion that inequality has not increased substantially since 1988.
Go forth and read.
Wednesday, January 31, 2007
I want more prizes
David Leonhardt has a near-excellent column in the New York Times today on why prizes are 1) A great way to foster innovation, but; 2) far less popular than grants or other compensation schemes:
in the 1700s, prizes were a fairly common way to reward innovation. Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea. Dava Sobel’s best-selling 1995 book “Longitude” told the story of the competition that ensued, and Mr. Hastings mentioned the longitude prize as a model at that meeting back in March.A much smarter approach than Leonhardt's smarter approach would simply be for the government to simply offer large prizes -- we're talking in the billions -- for innovations that would reduce global warming. In return, the innovator would have to relinquish all intellectual property rights for the invention.
Beyond global warming, this approach should be used far more frequently for health care as well. Indeed, this is one of those tasks where government intervention might improve upon the market -- because the government has sufficient resources to withstand the inherent budgetary uncertainty that comes with the prospect of awarding prizes in the billions or tens of billions.
If the federal government can offer $25 million for capturing Osama bin Laden, why can't it offer a $10 billion prize for an AIDS vaccine?
I look forward to readers explain why I'm wrong.
Monday, January 29, 2007
Remembering Milton Friedman
Only 20 minutes left for Milton Friedman day, so here are a few salient links:
1) At Open U., Richard Stern reports on the memorial service at the University of Chicago:
Tuesday, January 23, 2007
The generation gap on jobs
Deputy Secretary of the Treasury Bob Kimmitt has an interesting op-ed in the Washington Post on the growth in job churn, and why it's a good thing:
More than 55 million Americans, or four out of every 10 workers, left their jobs in 2005. And this is good news, because there were over 57 million new hires that same year.Now I suspect that many blog readers will heap scorn and outrage upon this trend, because they are nostalgic for the days of company men.
I also wonder, however, whether there is a generation gap in the reaction to this trend. My hunch is that the younger workers Kimmitt identifies in the piece already have accepted this new status quo, and will find objections to it puzzling.
Thursday, January 18, 2007
Um.... isn't this how incentives work?
Fiona Harvey, the Financial Times' environment correspondent, reports that environmentalists are irked about the way carbon emissions trading is working out:
Factories in China and carbon traders are exploiting a loophole in climate change regulations that allows them to make big profits from greenhouse gas emissions trading.Now this is a story that the Wall Street Journal and the New York Times have also carried this story, and each time I read it I'm confused. Reading the articles, I get that CO2 and methane are the big contributors to global warming in the aggregate -- but I also get that per unit of emission, HFC is far, far worse, and far cheaper to correct. Doesn't it make sense that a market mechanism would focus on the low-hanging, cheapest fruit first?
The implication in these articles is that the carbon market is not working to reduce greenhouse gases, but from what I'm reading, it's working pretty well (though Chinese firms are reaping a large windfall). Greg Mankiw or someone else in the Pigou Club needs to explain all the hubbub to me. I understand if environmentalists want to increase incentives to cut greenhouse gas emissions even further; I don't understand why they think the current focus on HFC emission should be dealt with through direct regulation instead of the current set of arrangements.
It should benoted that there are other ways that the carbon trading scheme is imperfect. The focus on HFC can, perversely, undercut the Montreal Protocol's efforts to reduce CFC emissions (click here for more on that). The primary thrust of these articles, however, is that the market is not working -- and I don't see that.
Tuesday, January 16, 2007
A question that will haunt protectionists and free traders alike
The Financial Times' Richard McGregor notes that China is making somewhat louder noises about continued appreciation of the renminbi:
The Chinese ministry responsible for promoting exports has backed a further appreciation of the renminbi, removing one of the last remaining institutional lobbies in Beijing against a stronger currency.Six percent is not a lot, but clearly it's trending in the right direction. Which leads to an interesting thought -- if the renminbi continues to appreciate, but the bilateral deficit is not seriously affected, what does this mean for trade politics in this country?
Protectionists will be robbed of the easy crutch that the U.S. runs a large trade deficit because of China's unfair trading practices.
But free traders will be robbed of the argument that letting exchange rates float maes it easier to correct for current and capital account imbalances (see this Brad Setser post for more on the oddities of current global investment trends).
Monday, January 15, 2007
The blog wheel has turned
Between 2002 and 2006, I noticed a meta-narrative that appeared in the blogosphere every so often:
1) Policy X is promulgated;I bring this up because, once the Democrats took power in Congress, I had a hunch that we might see the inverse of this passion play in the blogosphere: Republicans bashing Dems for bad policy, and Dems responding by pointing out that some Republicans embrace the policy as well.
For Exhibit A, see this Mark Thoma post about protectionist Republicans. His basic point:
There has been attempt after attempt to portray the trade issue as an area where Democrats are deeply divided, and there has been much written about how Democrats will stifle trade and hurt the economy now that they are in power.Read the whole thing. Thoma is correct about protectionist Republicans (though I think they're more significant on immigraton than trade). That said, he overlooks the fact that if the Democrats hold majorities in both houses of Congress, then it is appropriate that they shoulder the majority of criticism for their protectionist wing.
Wednesday, January 10, 2007
The energy follies, continued
I might need to create a new category for the blog: file under Utterly Stupid Moves by Energy-Abundant Regimes.
First, there's Venezuela. Simon Romero and Clifford Krauss explain in the New York Times:
Investors reacted with alarm here and in markets in the United States and throughout Latin America on Tuesday as they measured the impact of the plan by Mr. Chávez to nationalize crucial areas of the economy. Memories of past nationalizations during another turbulent era, in places like Cuba and Chile, helped drive down the Caracas stock exchange’s main index by almost 19 percent....Then there is Russia. [For forcing Belarus to pay higher prices for energy?--ed.] No, and let's be clear about this -- as with Ukraine last year, Russia is perfectly justified in switching to market rates for their energy exports. It's the way in which they go about trying to do this that's so wrong-footed. In the International Herald-Tribune, Judy Dempsey and Dan Bilefsky explain why Europe is so ticked off:
Chancellor Angela Merkel on Tuesday publicly rebuked Russia for not consulting its European partners before suspending oil shipments destined for Poland and Germany in a dispute with Belarus.I don't understand the lack of consultation on this one. It's not like the European Union is going to be upset about squeezing the Belarusian leadership -- and with sufficient preparation, this could have been handled much more smoothly. Why not consult?
Finally, we have Iran. As the United States ratchets up its own sanctions, the Iranian leadership seems surprised that, like, they have alienated a lot of countries. In the Financial Times, Daniel Dombey and Gareth Smyth explain the confusion in Tehran:
[T]he new UN regime - which took months to negotiate in New York - appears to have surprised parts of Iran's leadership, with differences emerging on how best to respond. After a period in which Iran saw its regional influence increase at relatively little cost, Tehran now faces greater isolation....Even the Nelson Report observes that, "there’s no question that, along with the EU, Washington and Beijing are simultaneously taking a tough line on Iran. And the implicit 'message' of the arrival in China of Israeli Prime Minister Olmert, today, is clear to all concerned."
Tuesday, January 2, 2007
How protectionism causes bad traffic
My Fletcher colleague John Curtis Perry, with Scott Borgerson and Rockford Weitz, have an op-ed in today's New York Times that explores America's decline as a maritime shipping nation. Apparently, it has something to do with protectionism:
In 1948, more than a third of the world’s merchant fleet flew the stars and stripes; today that figure is down to 2 percent. Half a century ago, America built more ships than any other nation, and New York City could boast that it was the world’s busiest seaport. Sliding from the top since the 1980s, New York now barely ranks among the top 20.UPDATE: Tyler Cowen unearths this great Walt Whitman quote about protectionism:
The profits of "protection" go altogether to a few score select persons--who, by favors of Congress, State legislatures, the banks, and other special advantages, are forming a vulgar aristocracy full as bad as anything in the British and European castes, of blood, or the dynasties there of the past
Sunday, December 31, 2006
Let's end the year talking about trade
How to close out 2006? How about a post about trade? [Yeah, because you never write about that!!--ed.]:
1) In the lastest issue of Foreign Affairs, Rawi Abdelal and Adam Segal suggest that the tide has turned for globalization:
Has the current age of globalization already started to come to a close? Will the process of integration continue, or will it grind to a halt?This sounds about right to me -- provided there is no major shock to the system (cough, dollar crisis, cough).
2) One step forward, one step back on U.S. trade policy. Stepping forward, Cato's Dan Ikenson rejoices in a mundane, yet positive change in how the Commerce department calculates anti-dumping rates. If the policy change takes place, it would be a welcome falsification of Daniel Kono's powerful hypothesis about how democracies obfuscate their protectionist policies (see also: "hypocritical liberalization").
Stepping back, the Detroit News' Gordon Trowbridge reports on the Labor Department's willful negligence in implementing the Trade Adjustment Assistance program:
[I]n a series of sometimes harshly worded opinions, the federal court that hears appeals of application decisions has criticized the Labor Department's administration of the program, accusing officials of shoddy investigations and blatant misreading of the law.Your humble blogger is quoted later in the story. Let's just say it takes a unique kind of incompetence to get me to agree with Sander Levin on anything.
3) Greg Mankiw cues me to a Washington Post op-ed by Senator Byron Dorgan and Senator-elect Sherrod Brown, "How Free Trade Hurts", in which a.... well, let's call it imaginative economic and historical analysis is put forward. Here's an excerpt:
At the turn of the 20th century, child labor was common; working conditions were often abysmal; there were no enforced workplace health, safety or environmental requirements; no unemployment insurance; and no workers' compensation. Workers were attacked and killed for the sole reason that they wanted to form a union; there was no 40-hour week, minimum wage, job security, overtime pay or virtually any other limit on the exploitation of employees.Oh, wow -- compared to these guys, suddenly James Webb looks like Cordell Hull.
I've written previously about the dubious nature of the race to the bottom hypothesis. Indeed, I had updated and extended these arguments in the first draft of All Politics Is Global. Ironically, this section got cut from the final manuscript -- because the academic consensus is that the race to the bottom is so easy to refute, there was no point in devoting half a chapter to it.
After reading Brown and Dorgan's op-ed, however, this chapter fragment seems worth resuscitating. So, for those people who still really, really believe that globalization leads to a race to the bottom -- click here. And for those Congressmen reading this -- go click over to this Greg Mankiw post and make the recommended resolutions.
Thursday, December 21, 2006
My governor-elect needs some economics tutors... badly.
Tuesday, December 19, 2006
So how are the capital controls going?
Note to self: if I ever instigate a coup in a Pacific Rim country, do not attempt to impose capital controls three months later:
Thailand was forced into an astonishing retreat from its controversial move to impose controls on equity investment by foreign investors after Bangkok shares suffered their steepest one-day plunge since 1990.
Friday, December 1, 2006
Macroeconomics 101 in two paragraphs
Not really -- but this Brad DeLong essay contains two paragraphs that do an excellent job of explaining the complex interplay between what John Maynard Keynes and Milton Friedman believed:
From one perspective, Friedman was the star pupil of, successor to, and completer of Keynes’s work. Keynes, in his General Theory of Employment, Interest and Money, set out the framework that nearly all macroeconomists use today. That framework is based on spending and demand, the determinants of the components of spending, the liquidity-preference theory of short-run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and manic excess. As Friedman said, “We are all Keynesians now.”Hat tip: Greg Mankiw.
Thursday, November 30, 2006
Who's getting their Malthus on?
In the New York Times yesterday, Thomas F. Homer-Dixon got his Malthus on:
Mr. [Paul] Ehrlich and his colleagues may have the last (grim) laugh. The debate about limits to growth is coming back with a vengeance. The world’s supply of cheap energy is tightening, and humankind’s enormous output of greenhouse gases is disrupting the earth’s climate. Together, these two constraints could eventually hobble global economic growth and cap the size of the global economy.Homer-Dixon has carved out an impressive career detailing the ways in which resource scarcity and ecological catastrophe will spell doom for the global political economy (Robert D. Kaplan's "The Coming Anarchy" was in many ways a popularization of Homer-Dixon's early work). However, methinks that he's only focusing on one side of the energy question -- the rising cost of supply provision. This is certainly an issue, but it doesn't address a compensating phenomenon -- that the energy-to-GDP ratio is rising even faster.
The McKinsey Global Institute just released an interesting paper that takes a look at this very issue. From the executive summary:
To date, the global debate about energy has focused too narrowly on curbing demand. We argue that, rather than seeking to reduce end-user demand, and thereby the choice, comfort, convenience, and economic welfare desired by consumers, the best way to meet the challenge of growing global energy demand is to focus on energy productivity—how to use energy more productively—which reconciles both demand abatement and energy-efficiency.I'm concerned about energy scarcity, but I'm not getting my Mathus on by any stretch of the imagination.
Monday, November 27, 2006
Living and breeding in sin in Europe
The European Union just released 2004 data on ferility rates for the EU 25 countries. Here's the interesting chart:
As you can see, there appears to be a positive correlation between higher birth rates and the percentage of births outside of wedlock.
Is this driving the results? Not necessarily. In a 2004 Journal of Population Economics paper, Alicia Adsera provided another explanation for the variation in birth rates: the structure of labor markets:
During the last two decades fertility rates have decreased and have become positively correlated with female participation rates across OECD countries. I use a panel of 23 OECD nations to study how different labor market arrangements shaped these trends. High unemployment and unstable contracts, common in Southern Europe, depress fertility, particularly of younger women. To increase lifetime income though early skill-acquisition and minimize unemployment risk, young women postpone (or abandon) childbearing. Further, both a large share of public employment, by providing employment stability, and generous maternity benefits linked to previous employment, such as those in Scandinavia, boost fertility of the 25–29 and 30–34 year old women.To read a draft of the whole thing, click here.
Saturday, November 25, 2006
Does China have a slack labor market?
There are many questions that flummox me about China's economy (when will the central bank diversify its holdings? Are nonperforming loans a real problem or not? Why has Chinese saving increased just when Beijing took steps to boost consumption? Just how efficient is foreign and domestic Chinese investment?) In the Washington Post, Edward Cody suggests a new empirical puzzle -- how can I reconcile reports about the dearth of skilled labor in China with this one from Cody?
An open-ended rise in living standards, particularly for the educated middle class, has been part of an unspoken pact under which the party retains a monopoly on political power despite the country's turn away from socialism.The article suggests that a slackening economy is the culprit. Another possible explanation is that as labor productivity increases from the high rate of investment in capital stock, job growth in China will no longer keep pace with growth in GDP. Another, more quirky hypothesis is that the market for English students -- who disproportionately show up in western press reports -- is particularly bad.
But I'd be curious to hear other hypotheses.
Tuesday, November 21, 2006
Greed and envy are good
This New York Times story by Katie Hafner seems pretty upfront in making this point:
Envy may be a sin in some books, but it is a powerful driving force in Silicon Valley, where technical achievements are admired but financial payoffs are the ultimate form of recognition. And now that the YouTube purchase has amplified talk of a second dot-com boom, many high-tech entrepreneurs — successful and not so successful — are examining their lives as measured against upstarts who have made it bigger....
Monday, November 20, 2006
In honor of Milton Friedman, I'd like to see....
Milton Friedman's significance to the world has been revealed in the bevy of obits that we've all read in the past week. Much of the effort has been focused on those aspects of Friedman's ouvre that have become accepted wisdom -- the importance of monetary policy, the
Here's an open invitation to readers -- which of Friedman's policy proposals that have not become accepted wisdom would you like to see implemented?
My choice is not a difficult one -- it's a policy proposal that would manage to address U.S. foreign policy, economic development, the rule of law, crime, and race relations in one fell swoop.....
If the United States were to legalize (and tax) illegal narcotics in the same manner that legal narcotics, like alcohol and tobacco, are treated, consider the effects on:
U.S. foreign policy: Because of current policies regarding narcotics, the United States is stymied in promoting the rule of law in Afghanistan and several Latin American countries because farmers in those countries keep harvesting products that American cunsumers demand. Because this activity is crminalized, the bulk of the revenues from this activity enriches criminal syndicates and terrorist networks. All for a supply-side policy that does nothing but act as a price support for producers.There are other benefits as well -- such as eliminating the racial bias that exists within drug sentencing guidelines at the federal level.
There are two potential downsides to this move. First, actual drug use would likely increase -- but this can be dealt with via larger treatment budgets. Second, once this genie is out of the bottle, I suspect there's no going back. (For an extended argument against legalization, check out this Theodore Dalrymple essay from City Journal).
Thursday, November 16, 2006
Milton Friedman, R.I.P. (1912-2006)
Milton Friedman died today at the age of 94.
Here's the Cato Institute's obituary. And here's the New York Times obit. The best quote in that one comes from Ben Bernanke: "His thinking has so permeated modern macroeconomics that the worst pitfall in reading him today is to fail to appreciate the originality and even revolutionary character of his ideas."
The obit aso contains these surprising (to me) facts:
In his first economic-theory class at Chicago, he was the beneficiary of another accident — the fact that his last name began with an “F.” The class was seated alphabetically, and he was placed next to Rose Director, a master’s-degree candidate from Portland, Ore. That seating arrangement shaped his whole life, he said. He married Ms. Director six years later. And she, after becoming an important economist in her own right, helped Mr. Friedman form his ideas and maintain his intellectual rigor.
Why do foreigners overpay for US brands?
Daniel Gross asks this question in Slate with regard to foreign purchases of American conumer companies in the U.S. His answer:
It's not that dim foreign owners are screwing up the healthy American brands they acquire. Rather, they are buying brands that are already on a downward trajectory. To foreigners, these companies may seem like iconic, big brands. IBM did invent the PC. Reebok is a pioneer in fitness. And Pier 1 is the biggest independent home furnishings chain—as of February 2006, it had more than 1,100 stores in the United States (plus 43 Pier 1 Kids stores) and $1.78 billion in annual sales. Foreign companies like these brands not because they're global icons, although Reebok and IBM have international presences, but because of their domestic cachet. It would take immense sums of money to build such brands in the United States from scratch....Of course, sometimes American companies overpay for foreign assets too.
Tuesday, November 14, 2006
What deep capital markets you have!!
A common lament among financial market analysts in the U.S. is that the onerous provisions of Sarbanes-Oxley (SOX) are costing American equity markets lost listing oppotunities, threatening a sector that's vital to the United States. These people find unlikely allies in Nancy Pelosi and Barney Frank.
I certainly support making SOX compliance easier for new start-ups, but it should be noted that I don't see the U.S. losing its primacy in equity markets anytime soon. For those doubters out there, click over to this Foreign Policy list of candidates to supplant the New York Stock Exchange.... in a century or two. The most important sentence in the piece is the first one: "The New York Stock Exchange dominates global trading. At nearly $23 trillion, its market capitalization—the value of the stocks it lists—is more than four times that of its closest competitor."
Monday, November 13, 2006
Assignments for the Economist blog
I'm pleased to see that the Economist has entered the blogging age, with its Free Exchange blog. As per the Economist's rules for its print magazine, there is no identification of the authorship of individual posts, but I have it on good authority that Megan McArdle is using her invisible hands to guide its development.
As I am knee-deep in day-job activities, I would like to welcome Free Exchange into the blogosphere by requesting that it comment on two memes currently making their way through the blogosphere:
1) Over at Crooked Timber, Chris Bertram asks a pointed question to libertarians -- what kinds of inequality matter?[T]he crux of Tyler [Cowen]’s argument has been that Europe’s ageing population matters because it will lead to lower growth rates and that the compounding effect of these will be that Europe’s position relative to the US (and China, and India) will decline, and that that’s a bad thing for Europeans. Whilst Tyler insists that these global relativities matter enormously, Will [Wilkinon] suggests that domestic relativities between individuals matter hardly at all. Since I think of Will and Tyler as occupying similar ideological space to one another, I find the contrast to be a striking one, and all the more so because I think that something like the exact opposite is true. That is to say, I think that domestic relativities matter quite a lot, and that global ones ought to matter a good deal less (if at all) just so long as the states concerned can ensure for all their citizens a certain threshold level of the key capabilities.UPDATE: Drezner gets results from Free Exchange!!
Wednesday, November 8, 2006
Nancy Pelosi's impact on the global economy
It would seem that the markets ain't thrilled with the midterm elections:
Global finance markets have wobbled on fears that a Democrat victory in the US Congressional elections could prompt less market-friendly policies in the world's biggest economy.It will be interesting to see how U.S. markets respond.
UPDATE: Kevin Drum labels this kind of story, "Idiotic Conventional Wisdom Watch." He might be right -- but that conventional wisdom seems pretty widespread in the business press. Consider Neil Dennis, "Stock markets stall after Democrats win House," Financial Times:
The win was seen as negative for equity markets, particularly if the Democratic Party also takes control of the Senate – a result which still hangs in the balance.Or Wayne Arnold, "Asians wary of U.S. trade shift," International Herald-Tribune:
The victory by the Democratic party in U.S. congressional elections appears to have left President George W. Bush hampered in his efforts to push through free-trade agreements being negotiated with several Asian nations and facing an antagonistic legislature bent on placing its own stamp on policies from trade to defense to stem- cell research - all with potential ramifications for Asia and the rest of the world....Jacob Weisberg, "The Lou Dobbs Democrats," Slate:
Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.This Reuters report is downbeat on the U.S. stock market -- though the actual market decline seems pretty picayune to me.
On the other hand, this Forbes report attributes the equity market downturns to profit-taking rather than the Democratic takeover.
I agree that the reaction of equity markets is probably nothing -- but the effects on trade policy are nothing to be sneezed at.
UPDATE: Kevin Drum renews his ire at this kind of press coverage here -- he's got a decent case.
Thursday, October 26, 2006
How bad off is Generation Debt?
Earlier this year I blogged about whether twentysomething were genuinely facing tougher economic times than their predecessors -- or whether they were just whiners (click here for the latest example).
There's been a few reports issued this month that touch on this issue... and the evidence ranges from mixed to favorable.
This report on asset accumulation and savings among young Americans by Christopher Thornberg and Jon Haveman suggest a worrisome trend -- Generation Y doesn't save as much as prior generations:
In 1985, about 65 percent of Americans aged 25 to 34 owned some form of savings instrument... including traditional savings, money market accounts, certificates of deposit, and other financial investments, such as stocks and bonds, Keogh, IRA, and 401(k) accounts. Between 1985 and 2000, the proportion of this population that owned one or another of these savings instruments fell from 65 percent to 59 percent, a decline of just under 6 percentage points. Between 2000 and 2004, the decline accelerated, when it fell another 4 percentage points, a pace two and a half times faster than in the previous 15 years.Sounds bad. However, Thornberg and Haveman dig into the reasons why young Americans aren't saving as much, and comes up with some interesting partial answers:
Contributing to the decline in median net worth are changes in demographic patterns among these young individuals. In particular, there are significant changes in three categories that are highly correlated with median net worth. Between 1985 and 2004, the proportion of the population aged 25-34 that was married declined by 8 percentage points, the proportion of whites declined by 17 percentage points, and the proportion with education beyond high school increased by 13 percentage points (Table 4). The decline in marriage rates and the increasing share of the population made up of people of color have contributed to the declines in net worth while increasing levels of education offset these declines. Taken together, these demographic shifts are responsible for just over one-quarter of the change in median net worth among young Americans.Assets are only one side of the equation, however -- what about debt? Here the answer is more positive. The MacArthur Foundation has funded a study of Generation Y debt by Ngina Chiteji that suggests the Anya Kamenetz/Generation Debt thesis doesn't hold up:
Ngina Chiteji in her chapter in The Price of Independence takes a careful look at debt in young adulthood, finding that, contrary to popular perception, most of today’s young adults are not carrying an unusual or excessive amount of debt, at least not by historical standards or given their time in life, just starting out. The fraction of indebted young adult households age 25 to 34 has barely changed in 40 years, and while, in general, young households carry more debt than the population at large, this is consistent with the predictions of economic theory and most young adults appear to have manageable debt loads....Given that the data suggests --
a) More young Americans are buying homes;-- I confess to remaining unpreturbed about the state of Generation Y's finances.
Question for Gen Y readers -- which report better conforms to you personal experiences and those of your cohort?
Wednesday, October 25, 2006
The trade implications of the midterm elections
I received the following in an e-mail today:
Given your vast knowledge of international and domestic politics, I am shocked that you have not blogged on the possible repercussions on future free trade agreements as a result of this election. In this election, in the battleground states (Rhode Island, even Ohio, Montana, Missouri, and Virginia) the Republican incumbent in each state has a very good/ excellent record on free trade, while the Democratic challenger is advocating protectionist policies. Senator DeWine in Ohio is likely to lose in part because of his past support of trade agreements. Unfortunately in these states and in general, free trade has almost no constituency while the anti-trade movement has a large number of volunteers....The e-mailer has a point. Over at NRO, Jonathan Martin has a column about the trade implications of the midterms:
Democrats only need six seats to gain a majority in the Senate, but the election of five new Democrats and one independent in particular would have even greater ramifications. Should seats currently held by free-traders in Ohio, Vermont, Pennsylvania, Virginia, Rhode Island, and Missouri go to “fair traders” — and should the sour environment for Republicans prevent them from gaining any seats from Democrats — the bipartisan commitment to free trade in the Senate would almost certainly end, torpedoing the prospects for any significant legislation in President Bush’s final two years and perhaps longer while fundamentally altering the character of the upper chamber.After the midterms it's likely that both chambers of Congress will likely be more protectionist. This should matter to those crucial swing-libertarian voters.
Here's the thing, though -- it's not clear to me that it matters. Doha is at a standstill, and the FTAA has been in a coma for years. The only promising bilateral trade agreement is with South Korea, but I suspect that it's a dead letter as well -- because there's no chance in hell that the U.S. will accept goods from Kaesŏng. The president's Trade Promotion Authority is expiring in June of next year, and I don't think the president is willing to invest whatever political capital he's got left to have it renewed. Regardless of what happens in the Senate, I can't see Nancy Pelosi agreeing to anything that gives the executive branch more authority in Bush's final two years.
In other words, I'd rather not see the Senate go protectionist -- but a trade-friendly Senate will have only a marginal effect on U.S. trade policy over the next two years.
Thursday, October 19, 2006
It's my virtual idea!! Mine!! Mine!!
It's been quite the week for news coverage of virtual world. Today the New York Times dogpiles on, with this story by Richard Siklos about how corporations are making their presence known in Second Life:
This parallel universe, an online service called Second Life that allows computer users to create a new and improved digital version of themselves, began in 1999 as a kind of online video game.If corporations are moving into virtual worlds, it's just a matter of time before there are virtal anti-corporate protestors. And when that happens, well, then there's an opportunity for virtal professors of global political economy to enter the scene!!
Fletcher had better watch out. If I'm offered a virtual endowed chair, with the ability to mutate into any animal on earth, and a virtual Salma Hayek catering to my every whim... [You're going to the bad place again--ed.]
Somewhat more seriously, the growth of virtual worlds suggests an entirely new testing arena for social scientists. For example, the highlighted section suggests an intriguing experiment for a marketing professor: what is the power of branding independent of economies of scale?
An even more interesting meta-question -- does the virtual nature of the world remove ethical constraints that exist in real-world testing? Could someone run a virtual version of the Milgram study?
Question to international relations scholars who know something about these virtual worlds -- what IR hypotheses, if any, could be tested in these virtual worlds?
UPDATE: In related virtual news, the Joint Economic Committee has fired a warning show across the bow of the IRS on the question of taxing virtual profits. In related real news, further progress has been made towards an invisibility cloak.
Monday, October 16, 2006
The economics of worlds colliding
However, for some reason I'm in the middle of one of those punctuated equilibrium in which I become inundated with information about a phenomenon that I was only dimly aware of before the equilibrium was achieved.
So I'm going to inflict all these links on you.
Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day, and these virtual economies are beginning to draw the attention of real-world authorities.2) Indiana University's Joshua Fairfield and Edward Castronova have a draft paper entitled, "Dragon Kill Points: A Summary Whitepaper.":
This piece briefly describes the self-enforcing and non-pecuniary resource allocation system used by players in virtual worlds to allocate goods produced by a combination of player effort (the effort required to organize a group and overcome challenges) and the game itself (which “generates the good” – the input here is the time of the design staff).3) Finally, I stumbled upon the South Park take on the whole World of Warcraft phenomenon. I got to see the entire episode before it was deleted for copyright reasons. This clip provides a nice precis of the show, however: That is all.
Tuesday, October 10, 2006
China, China... what to do about China?
Cfr.org is hosting a debate between Stephen Roach and Desmond Lachman on "Is China Growing at the United States' Expense?" The (somewhat hyperbolic) overview:
The Chinese economic boom could change the global order and lift Beijing above Washington in economic might and influence. The United States is worried about China's tactic of undervaluing its currency to boost exports, but Beijing has resisted repeated calls to raise the yuan's value. The result has been a boost for U.S. consumers buying low-cost Chinese goods, as well as what some say is a severe trade imbalance. In addition, the overheating of the Chinese economy would have worldwide repercussions. The U.S. Congress has entertained threats of trade retaliation, but administration policymakers have adopted a more cautious approach.Go check it out.
Sunday, October 8, 2006
What is the utility of price stability?
In the Detroit Free Press, Alejandro Bodipo-Memba has an odd story about OPEC's declining influence over oil prices -- and why this might be a bad thing:
But as the price of crude oil -- the feedstock for gasoline -- creeps back up on news that several members of the Organization of the Petroleum Exporting Countries plan production cuts, it's clear that the cartel no longer wields the power over fuel costs that it once did.This is an odd story for a few reasons.
First, the claim that "OPEC's use of production controls... often benefited U.S. consumers" is certainly an interesting one. Saudi Arabia was certainly responsible for whatever downward pressure there was on oil prices during this period -- but claiming that OPEC kept oil prices low during this period is certainly an interesting one.
Second, if you look at the OPEC statement cited in the story, it becomes clear that OPEC's motives might differ somewhat from what Bodipo-Memba ascribes to them:
The reasons for this protracted volatility are, by now, familiar to OPEC Bulletin readers and relate to an unusual convergence of factors: the exceptionally strong world economic growth and, in turn, oil demand growth, especially in developing countries; the slow-down in non-OPEC supply growth, although this is picking-up again; tightness in the downstream sectors of major consumer countries; geopolitical concerns; major natural disasters; and heightened levels of speculative behaviour....This assessment has some truth.... but it's also a way for OPEC to say, "Don't blame us for the high prices that are enriching our members."
Finally, Bodipo-Memba overlooks the obvious angle for why Michiganders would benefit from price stability, even if the price of oil is relatively high -- it provides a set of stable expectations for car manufacturers as they plan production for the future.
This raises a few interesting questions:
1) For which commodities is price stability a particular virtue?
Sunday, October 1, 2006
The CPI bias at work in Burger King
For the past six weeks or so there' been an egaging, intermittent blog debate about CPI bias. That is, to what extent has technological innovation improved standards of living so much that the effects are understated in measuring year-to-year or decade-to-decade comparisons of the U.S. economy -- and whether, concomitantly, inflation measures lke the Consumer Price Index are overstated.
The debate is less about whether CPI bias exists, but how big it is, whether its effect diffuses across all income strata within the economy, and its political implications. See this Megan McArdle post for the libertarian take, and this Brad DeLong post for the social democratic take.
My take is similar to Megan's, but I haven't blogged about it because it can be very difficult to articulate the extent to which technology has converted what used to be luxury goods into normal goods.
And the I opened my son's BK Kids Meal....
The toy in my son's meal was an Open Season-themed radio. Not just an ordinary radio, but one that hooked around the ear, making it look like a kids version of a cell phone earpiece. The battery is included. You can take a gander at it by clicking here and then clicking on "Toys".
Thirty years ago, when I was a child, this would have been a $20 ($68.71 in 2006 dollars) birthday gift that would have made me the coolest kid on the block. It is now an afterthought, a free, promotional gift as part of a $4.00 kids meal that is affordable to 99% of all American households.
If that seems hard to grasp, here's another way of looking at it -- I predict that by the time my son is my age, Burger King will include the equivalent of an IPod Nano in every kids meal.
Does the CPI incorporate some of the effects discussed in this parable? Certainly it does, in the form of the declining cost of radios. Does it incorporate all of them? No -- the increasing sophistication of the toys contained within kids meals is not included.
Readers are invited to submit other examples on a par with my son's kids meal as examples of how previously exotic technologies have become practically throwaway commodities.
Tuesday, September 26, 2006
The dog that is not barking in financial markets
Amaranth blows up following a trading strategy that either had no method at all to it or was a failed attempt to corner next spring's natural gas market.
Sunday, September 24, 2006
The blogosphere as a labor saving device
Alex Tabarrok deconstructs how the mainstream media covers Wal-Mart's drug initiative -- so I don't have to.
Friday, August 25, 2006
Who's afraid of peak oil?
With ever-growing attention to the peak oil question, it's worth observing yet again that the U.S. economy has been astonishingly resilient to the high price of oil. Indeed, if I'm reading this chart correctly, the real price of oil has tripled in the last four years -- easily the highest percentage increase in such a short span of time. Last year I wondered if $70 a barrel for oil would have stagflationary effects -- and the answer so far appears to be no.
Raphael Minder reports in the Financial Times that the global economy could be just as resilient:
The world economy will not face a serious inflation problem even if there is a further significant increase in the price of oil, the governor of the Reserve Bank of Australia said on Thursday.
Wednesday, August 23, 2006
So much for the single-payer utopia
I've said repeatedly on this blog that health care policy puts me to sleep most of the time. I usually stay awake long enough, however, to hear many left-of-center colleagues praise the Canadian single-payer system to no end.
Which is why I bring up this New York Times story by Christopher Mason:
A doctor who operates Canada’s largest private hospital in violation of Canadian law was elected Tuesday to become president of the Canadian Medical Association. The move gives an influential platform to a prominent advocate of increasing privatization of Canada’s troubled taxpayer-financed medical system.Before I doze off, do check out Megan McArdle's recent health care post as well.
That said, I should also acknowledge that this is hardly the uniform view of left-of-center policy analysts. For critiques of the Canadian system from Democrats, see this post by Ezra Klein.
Tuesday, August 22, 2006
There's more than one way to measure economic prosperity
Following up on recent posts about economic inequality and Wal-Mart, it should be noted that Virginia Postrel has a great column in Forbes about how government figures likely underestimate the welfare gains among the bottom half of the income ladder:
Nowadays, candid and intelligent people--not to mention partisans--tell us that the average American's standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.Which brings us to Wal-Mart:
Price indexes also haven't kept up with changes in what consumers buy and when and where they shop. Wal-Mart's share of the U.S. grocery market is more than a fifth and is growing. Wal-Mart and other superstores charge up to 27% less for food than traditional supermarkets, estimate economists Jerry Hausman of MIT and Ephraim Leibtag of the Department of Agriculture. But the BLS doesn't factor those lower prices into its inflation estimates. It simply assumes that Wal-Mart's price reflects worse service, and ignores the savings.
Blog debate on government policy and income inequality
Let me recap the blog debate over the extent to which government policy is responsible for increases in income inequality in recent decades, set off by this Paul Krugman column from last week.
Sunday, August 13, 2006
Why the academy needs a South Side fellowship
In the pages of the Boston Globe, Harvard Law professor David Barron looks at how the city of Chicago is treating big box retailers and believes it to be a good thing:
On July 25, the Chicago Board of Aldermen passed an ordinance requiring big-box retailers-those with $1 billion in sales and 90,000 square feet of shopping space in their stores-to give their employees a living wage. By 2010, the stores would have to pay workers $10 an hour and provide an additional $3 in benefits.As I've said before about this case two years ago, Chicago is acting recklessly. Erecting significant barriers against big box retailers moving into the inner city does little more to hurt the poor.
Barron seems to assume that without Wal-Mart, the whole of Chicago is this nirvana of small, quaint shopkeepers who provide a diversity of goods and services with a smile and a fair price. Having lived close to the area where Wal-Mart was planning on putting its South Side location, I can assert that Barron doesn't know what he's talking about. There are very few, "small family-run establishments" to displace. The absence of any big-box retailer between Roosevelt Rd. and 85th St. makes it fantastically difficult for the poorest members of the city of Chicago to buy low-priced goods. Barron's focus on unions and small merchants at the expense of, well, everyone else is more than a bit disconcerting.
[He's right about abstaining from tax breaks and the like, though, right?--ed. There's a valid point to be made about putting a halt to cities throwing tax breaks around like candy in a vain effort to attract corporate headquarters, manufacturing plants and the like. However, Barron's implicit economic assumption is that because cities have considerable market power, they can use it to advance the cause of good. The trouble with that argument is that anyone who has ever chatted with a Chicago alderman knows full well that good has very little to do with urban plicy.]
It might behoove some foundation to create a fellowship for enthusiasts of urban reform to spend a year on the South Side in order to get a taste of what it's actually like to live in the inner city before pontificating about policy [Would this apply to free-marketers as well?--ed. Sure.]
UPDATE: Barron responds on his blog. Key section:
I was not arguing that Chicago should pass the ordinance but rather that Chicago should have the legal power to make the policy judgment for itself. Drezner, an economist, skipped right over that distinction. (If I need a fellowship to take me to the South Side, as he suggests, then maybe he needs one to take him to law school.) Actually, though, Drezner is on to something interesting and important. He emphasizes rightly that not all city neighborhoods are the same. It might be that the city would be wise to permit bix box retail in some neighborhoods within the city on more favorable terms than others. The mayor has suggested as much, proposing that each ward be able to decide the matter for itself. It's a complex policy question, however, whether such neighborhood-based tailoring is a good idea or a bad one, and it depends a lot on the particularities of the retail market in the Chicago area. I am skeptical it is a good idea, but open to being persuaded otherwise. But, for me, the key point for now is that a city could not tailor its policy in this neighborhood-focused manner even it was a good idea for it to do so unless it had the legal power to enact such living wage ordinances at all. And that's part of the reason why I think the Chicago ordinance, if enacted, should be upheld against the home rule, equal protection, and ERISA-preemption challenges that are sure to follow.Question to readers: should a city have the right to mandate a living wage and apply that mandate asymmetrically to businesses? I suspect that for most people this depends on whether you believe a living wage is sensible policy. One could adopt a process-based position that says regardless of the stupidity of such an approach, an elected council has the right to enact such a policy. At the local level, however, on measures that impose asymmetrical barriers to entry, I strongly lean towards a combination of a public choice perspective, which is skeptical that any city-wide ordinance would actually represent something approximating the general will, and a classical liberal perspective, which would be profoundly skeptical of the city imposing property rights constraints.
Popping the bubble
The subtitle of Bubble Man symbolizes the many flaws in Peter Hartcher's jeremiad against Alan Greenspan and the dot-com hysteria that the former Federal Reserve chairman allegedly abetted. The "Missing 7 Trillion Dollars" refers to the losses that stockholders incurred in the three years after the late-1990s stock market bubble collapsed. Throughout the book, Hartcher argues that Greenspan is to blame for those losses -- until the epilogue, in which Hartcher acknowledges that in the three years after those three years, a market upswing recovered "nine dollars out of every ten lost." As Gilda Radner's Emily Litella famously put it, "Never mind."....It was difficult, in the space alloted, to list all the reasons I thought this book sucked eggs. For those who really care, do check out Steven Mufson's lengthier critique in The Washington Monthly.
Saturday, August 12, 2006
The political economy of NOCs
The Economist runs a good backgrounder (subscriber only) on national oil companies (NOCs) and their various organizational pathologies. In particular, the article identifies the central peculiarity of nationalized energy companies -- inefficiences now give them greater market leverage in the future.
If nothing else, the story places "big oil" in the proper perspective:
Exxon Mobil is the world's most valuable listed company, with a market capitalisation of $412 billion. But if you compare oil companies by how much they have left in the ground, the American giant ranks a lowly fourteenth. All 13 of the oil firms that outshadow it are national oil companies (NOCs): partially or wholly state-owned firms through which governments retain the profits from oil production.
Wednesday, August 9, 2006
The trouble with obsessing about exports
Adam Posen has a very good column in the Financial Times today (alas, subscriber only) about the folly that is focusing on export competitiveness. The highlights:
If governments want to increase their economies’ share of global production in high-value-added sectors or, better still, create new such products and sectors, then the policy goal should be to increase competitive pressure upon an economy’s own businesses. In spite of the frequently cited examples of export-led growth for some developing countries, there is mounting evidence that the benefits to growth of countries’ engagement in trade are attributable to openness. These include: the direct benefits of importing lower prices and greater variety; the efficiency gains from challenging (rather than protecting) domestic businesses; and policy choices that contribute to a broadly liberal and market-orientated framework across the economy. Exports taken on their own, the usual narrower target of competitiveness policy, are not correlated with average per capita income growth.This ties into a key political problem in reviving Doha -- the trade rounds are organized in such a way as to magnify the economic importance of exports. Edward M. Graham explained this in a op-ed last month that's worth highlighting:
[T]he notion that benefits come mostly from increased exports while increased imports are a "cost" that trade negotiators must try to minimize remains a lie. Rather, what is true is that the most immediate public benefits from a successful trade negotiation are actually created by import expansion. Such an expansion thus should be treated as a benefit—not a cost. It is via lower import prices and greater product variety that consumers benefit from trade expansion. In fact, the $287 billion of calculable benefits from the Doha Round as noted above come mostly from price reductions of imports. Indeed, almost two-thirds of this figure would result from lower prices of agricultural goods and elimination of efficiency-distorting subsidies to farmers. Much of the rest comes from lower prices of clothing. But to achieve this benefit, the trade negotiators and politicians behind them must be ready to take on the farmers and textile interests who oppose these negotiations. Moreover, the main reason the negotiations are failing is simply that trade negotiators from key "players"—the European Union, the United States, Japan, Korea, and others—are placing the interests of local farmers and textile producers over those of the general public. Farmers worldwide threaten to make noise if agricultural protection and subsidies are reduced. But the public at large seems indifferent to the possibility that a successful negotiation could lead to lower bills at the food store. Moreover, reform of trade in agricultural and textile-based goods could stimulate the export industries of some of the poorest countries.UPDATE: Mark Thoma has further thoughts.
Thursday, July 27, 2006
The healthy automotive sector in the United States
No doubt, the title to this post must sound odd. After all, according to one recent report, foreign automakers now command a majority of the U.S. auto market for the first time ever.
However, Daniel Griswold and Daniel Ikenson argue otherwise in a Cato policy brief that looks at the U.S. automotive sector. Their argument is unsurprising for anyone familiar with Cato:
The financial woes of a few companies operating in a healthy, competitive market do not justify intervention by Washington policymakers but are the market's way of providing feedback about the decisions of those firms. It is not the role of the government to rescue companies that have made relatively bad decisions. Healthy competition ensures that best practices are emulated, leads to gains in productivity and innovation, and provides American automobile consumers with greater choice, better quality, and more competitive pricing.This argument is unsurprising coming from Cato -- but they do have the advantage of marshalling useful facts to buttress their argument:
Although complaints about unfair competition from abroad are less shrill than in the 1980s, foreign producers have not escaped criticism. The chief executive officers of General Motors and Chrysler recently complained that an allegedly undervalued yen gives vehicles imported from Japan an unfair price advantage of as much as $3,000 per vehicle. Sen. Carl Levin, a Democrat from Michigan, charged at a hearing in February that Detroit-based automakers face unfair foreign competition. "They are competing with currency manipulation by other countries, including China, Japan and Korea, which gives their vehicles and other products an unfair price advantage in our market," Levin said in a statement. And the United Auto Workers union, which represents workers at GM, Ford, Chrysler, and several parts' producers, has called for a federal "Marshall Plan" to aid those companies....Amen.
One small caveat to their argument -- these percentages could change as demand for hybrid vehicles go up. The Toyota Prius, for example, are manufactured in Japan.
Thursday, July 20, 2006
What are general equilibrium models good for?
The Economist has a long story on the relative value of Big Economic Models -- the kind of general equilibrium monsters that are used to calculate how much the world benefits from a completed Doha round,or how much the global economy suffers from high oil prices.
The story does a good job of highlighting the sensitivity of these models to first assumptions -- while also pointing out their signal virtue:
[Leon] Walras was adamant that one could not explain anything in an economy until one had explained everything. Each market—for goods, labour and capital—was connected to every other, however remotely. This interdependence is apparent whenever faster car sales in Texas result in an increase in grocery shopping in Detroit, the home of America's “big three” carmakers. Or when steep prices for oil lead, curiously enough, to lower American interest rates, because the money the Saudis and the Russians make from crude is spent on American Treasury bonds. This fundamental insight moved one economist to quote the poetry of Francis Thompson: “Thou canst not stir a flower/Without troubling of a star.”The more surprising argument in the article is that these models are politically powerful:
These models were, for example, a weapon of choice in the battles over the 1994 North American Free-Trade Agreement (NAFTA). The pact's opponents had the best lines in the debate—Ross Perot, a presidential candidate in 1992, told Americans to listen out for the “giant sucking sound” as their jobs disappeared over the border. But the deal's supporters had the best numbers. More often than not, those with numbers prevail over those without. As Jean-Philippe Cotis, chief economist of the OECD, has put it, “orders of magnitude are useful tools of persuasion.”[You do realize that the title of this post is worthy of an entry to Crooked Timber's contest for off-putting titles--ed. It's my special talent.]
Thursday, July 6, 2006
The pipe dream of energy independence
The Wall Street Journal's John Fialka does an excellent job of bulls**t detection by probing the feasibility of "energy independence":
The U.S. may be addicted to oil, but many of its politicians are addicted to "energy independence" -- which may be among the least realistic political slogans in American history....Read the whole thing.
Monday, June 26, 2006
Nationalism comes from behind!!
Ah, just as Europe takes a step to reject economic nationalism, we turn back to Latin America.
The Financial Times' Andy Webb-Vidal reports that the U.S. Southern Command is worried about "resource nationalism" in the region:
Future supplies of oil from Latin America are at risk because of the spread of resource nationalism, a study by the US military that reflects growing concerns in the US administration over energy security has found.
Sunday, June 25, 2006
Capitalism 1, Nationalism 0
One of the great things about capitalism is that when there is enough money at stake, national prejudices fall by the wayside.
Which brings us to Mittal Steel's latest acquisition. Heather Timmons and Anand Giridharadas explain in the New York Times:
A new steel giant is being created out of a bitter battle, after Arcelor agreed today to a merger with its rival Mittal Steel in a deal valued at 26.8 billion euros, or $33.5 billion.Timmons and Giridharadas also raise The Big Question in the closing paragraphs:
The fight for Arcelor was closely watched around the world, as it evolved into a clash between two major forces shaping the world economy: the ascendancy of India and China as sources of new business models and ambitious new companies, and a rising tide of protectionism in the West, fueled by anxiety that new competition will erode a way of life.
Friday, June 23, 2006
A libertarian move by the Bush administration.... really, I'm not kidding
Reuters reports that President Bush has decided that the federal government won't take advantage of the Kelo ruling. Reuters' Jeremy Pelofsky explains:
President George W. Bush issued an executive order on Friday to limit the U.S. government from taking private property only for the benefit of other private interests, like corporations.Here's a link to the actual executive order.
Happy as I am about this, two aspects of this move puzzle me:
1) Why did it take a whole year?UPDATE: Ilya Somin is not impressed:
Read carefully, the order does not in fact bar condemnations that transfer property to other private parties for economic development. Instead, it permits them to continue so long as they are "for the purpose of benefiting the general public and not merely for the purpose of advancing the economic interest of private parties to be given ownership or use of the property taken."
Sunday, June 18, 2006
Wacky government incentives
In moving to Massachusetts, the Drezner family needs to buy a second car, and we're thinking about a Prius (like Virginia Postrel, I like the styling as well as the gas mileage).
This caused us to stumble onto one of the odder tax credit schemes I've seen, the 2005 Energy Policy Act's credit for qualified hyrbid vehicles. The credit is based in part on the fuel-efficiency of the hybrid vehicle, which makes sense... sort of (why someone should get a tax credit of over $1,500 for a Lexus GS 450h when its gas mileage is below a lot of non-hybrid cars on this list is beyond me).
What makes no sense to me at all is the tax credit's half-life. Here's the IRS's explanation:
Consumers seeking the credit may want to buy early because the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.Unless it was designed to reduce the fiscal impact of the tax credit, this makes no sense to me. All it does is give people an incentive to buy cars in the first half of the year. If anything, the incentive penalizes brands and models that perform well -- since they would hit their cap quicker than less appealing brands.
Knowledgable readers are implored to comment on any rational reason for puting a quantity cap on the tax credit.
It should be stressed, however, that this is not the most bizarre government incentive scheme in recent years. No, you're going to have to click here to read about the government incentive scheme that generated the most bizarre, disturbing -- and yet thoroughly predictable -- response.
Thursday, June 15, 2006
How to make people read about economic concepts
Megan McArdle has two posts today on economics that are worth checking out -- both for their substantive content and for the excellent way in which she lures readers who might be put off by economic jargon into perusing them anyway.
For example, in this post on comparing the U.S. macroeconomic situation to the developing world, there is this great passage:
It is common, and silly, for people worrying about America's current account deficit to make statements like this:Check out this post on stagflation as well. It's a moment of convergence between Megan and Kevin Drum.If the US were a developing nation, it would have been IMFed by now.And if I were Anna Nicole Smith, I would have absolutely ENORMOUS . . . vacation homes. This is not very relevant to my current summer plans.
Wednesday, June 14, 2006
Fewer Americans are going postal
Frances Williams reports in the Financial Times about some interesting trends in workplace violence in the developed world:
Physical and psychological violence in the workplace is on the rise worldwide and has reached “epidemic levels” in many industrialised countries, according to a study published on Wednesday by the International Labour Organisation.Here's a link to the ILO press release, as well as the introductory chapter. I wouldn't describe the data cited in the report as "patchy" so much as "completely incommensurate between countries."
Putting that caveat aside for a moment, would any readers like to posit why workplace violence appears to be on the decline in the Anglosphere but on the rise elsewhere?
Tuesday, May 30, 2006
Will the new Treasury Secretary make a difference?
President George W. Bush on Tuesday named Hank Paulson as his new treasury secretary, pending approval from the Senate.Greg Mankiw takes the opportunity to have some fun at Daniel Gross' expense. Gross, in a classy move, acknowledges that, "contrary to the argument I made in April, Bush has been able to find a Class A Wall Street type willing to take the job."
Question to readers: will Paulson hae a seat at the policymaking table, or is he merely going to be a much better salesman than Snow?
Saturday, May 27, 2006
Why limit the free trade rule to economists?
I'll believe that this is all about altruism when I see an open letter from economists demanding that we scrap the complicated H1B visa system and instead allow unrestricted immigration of foreign college professors without all these requirements about prevailing wages, work conditions, non-displacement, good-faith recruitment of natives, etc. Obviously, there are many foreign born professors in the United States, but there could be many more, wages for academics could be lower, and college tuitions could be significantly lower. If there's really no difference between "us" and "them" economists should be leading the charge to disassemble the system of employment protections they enjoy.To which Brad DeLong replies:
I'll pick up the gauntlet:Greg Mankiw is on board as well.
Yglesias wanted only economists to respond, but both Alex's letter and Brad's rule applied to other academics as well. So I'm in too. Bring it on!!
UPDATE: Comments on this thread and others devoted to this topic suggest that tenure needs to be abolished for this to work properly. There is an intuitive logic to this, since this is all about increasing flexibility in labor markets. That said, I find this connection intriguing, since a) tenure is not a government-imposed restriction on the academic marketplace; and b) the commenters seem to assume that if tenure were abolished as a norm it would disappear from the face of the earth.
In actuality, ceteris paribus, the elimination of tenure could just as easily raise faculty salaries as lower them. Furthermore, I suspect that the institution of tenure would be replaced by an..... institution that looks an awful lot like tenure. Universities will still compete after top talent, and one of the ways to keep such talent would be to lock them in with long-term contracts. This institution would probably have a more limited domain than what exists now, but it would exist.
Thursday, May 25, 2006
Are American CEOs lazy?
In U.S. News and World Report, Rick Newman writes about some survey results suggesting that Asian CEOs don't whine as much as American CEOs:
Development Dimensions International, the human-resources firm, recently did a survey of business leaders in the United States and in China. Some provocative findings:I don't find this to be much of a puzzle at all -- American CEOs have greater leisure opportunities than Asian bosses. Neither do I suspect it's quite the dilemma that Newman suggests -- my strong suspicion is that American bosses can devote greater hours to work and personal life than Asian bosses -- because U.S. hours devoted to non-renumerative work have likely declined faster than in Asia.Americans aren't lazy. We all know people who work a full day and bring work home for evenings and weekends. And many parents do that while juggling kids. But Americans have developed expectations that border on unreasonable: prosperity, leisure, and fulfillment, all at once, plus we have a mentality that leads us to believe we're entitled to these things....
There's no puzzle for an obvious reason (which Newman recognizes) -- Americans are much better situated to maximize their utili
Tuesday, May 23, 2006
The White House goes Vizzini on Treasury
The staff here at danieldrezner.com defines "going Vizzini" when a person or institution repeatedly uses a word or concept differently that everyone else defines it.
The White House seems to view the Treasury Secretary as a salesman's job, as opposed to a position where that requires any requisite policy knowledge, expertise, or anything of that nature. At least, that's what I divined from this Financial Times story by Demetri Sevastopulo, Stephanie Kirchgaessner and Caroline Daniel:
Robert Zoellick, the US deputy secretary of state, is preparing to leave the Bush administration and has held talks with Wall Street investment banks on job options, according to people close to the administration.The truly scary thing about that last paragraph is the White House's belief that one can find a Treasury Secretary who would be a salesman while still commanding respect in the markets. To my knowledge, the only value-added John Snow has brought to the Treasury position has been his willingness to be the Bush administration's salesman -- and I'm pretty sure the markets don't respect him all that much.
Sunday, May 7, 2006
Do tax cuts starve or stoke the government beast?
Kevin Drum links to a Jonathan Rauch column in the Atlantic Monthly (non-subscribers can click here to read the whole thing), which summarizes William Niskanen's finding that starving the government of tax revenue doesn't starve the beast of government spending -- if anything, the trend is the exact opposite. From Rauch's story:
Even during the Reagan years, Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.Without necessarily endorsing the "starve the beast" theory of political economy, my first reaction is to ask about lagged effects. As I've understood it, the starve the beast idea does not say that government spending will immediatekly go down as deficits rise; it argues that eventually the increase in deficits creates market and political pressure to cut government spending. My guess is that if you lagged taxes by five years you might get a different result.
I see that this paper made the blog rounds a few years ago -- but it does not appear to have been published. Furthermore, the link to the original conference paper is not not working.
Still, the argument is provocative enough for readers to chew on.
Tuesday, May 2, 2006
Pay no attention to those men with the guns!
Edna Fernandes provides my laugh for today after reading her coverage of Evo Morales' latest move as President of Bolivia in the Times of London:
President Evo Morales of Bolivia has ordered the military to seize 56 foreign-owned oil and gas fields in a nationalisation move that hit shares of companies operating in the Latin American country today.UPDATE: The Financial Times reports on the international fallout. The Bolivian move has the greatest impact on... the socialst governments of Spain and Brazil:
Spain on Tuesday warned Bolivia that nationalisation of its energy sector would have “consequences [for] the bilateral relationship”, a threat that could lead to the ending of debt relief.
Wednesday, April 26, 2006
What is so special about gas prices?
Brad DeLong provides the most concise and correct analysis of the political economy of gas prices I've ever seen:
Democrats are (because of the environmentalist wing of the party) generally in favor of higher gasoline taxes and higher gasoline prices--except when gasoline prices are high). Republicans are in favor of letting oil markets "work"--except when gasoline prices are high.The interesting question is why this is true. As Nick Shultz points out in Forbes, energy is an increasingly less important component to the American consumer (link via Glenn Reynolds):
According to the Bureau of Economic Affairs (see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every 16. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it was then.Furthermore, as Virginia Postrel pointed out ten years ago, when the price of other commodities spike up, no one talks about it being a crisis:
The government interventions that distorted energy markets in the 1970s, and put drivers through hell, have disappeared.So, here's my question to readers... why is a spike in gas prices considered such a political crisis?
[You're the political scientist... why don't you have an explanation?--ed.] I have one, but it's a bit loopy: gasoline is a unique commodity in three ways. First, it's tied into the politics of the Middle East, which allows media coverage to always give it that extra political twist... though during the Cold War, the only sources for platinum were the Soviet Union and South Africa, but no one fretted about the political implications.
Second, oil is one of the few commodities that's subjected to a supplier cartel... though I don't hear anyone besides myself complain about, say, the diamond cartel.
Third (and by far the loopiest), gasoline is the one commodity in which Americans of both genders possess close to full information. It's therefore the one commodity that might mobilize the mass public into seeking a political solution.
I place very little confidence in my explanation, however: readers are welcomed to chime in.
UPDATE: Megan McArdle weighs in with her thoughts, which match the commentators' point about the short-term price inelasticity of demand. While true, it avoids the point Schultz makes, which is that as a percentage of income, the current price spike is less traumatic than what happened thirty years ago.
So why the immediate political response? The best answer might be that whatever is being proposed now is still less intervenionist than what happened in the seventies (even/odd days, anyone).
Monday, April 17, 2006
The exaggerated externalities of illegal immigration
Via Kevin Drum, I see that Eduardo Porter has a myth-busting piece in the New York Times on the effects that illegal immigration has had on the wages of the least educated Americans. Here's how it opens:
California may seem the best place to study the impact of illegal immigration on the prospects of American workers. Hordes of immigrants rushed into the state in the last 25 years, competing for jobs with the least educated among the native population. The wages of high school dropouts in California fell 17 percent from 1980 to 2004.And here's how it closes:
"If you're a native high school dropout in this economy, you've got a slew of problems of which immigrant competition is but one, and a lesser one at that," said Jared Bernstein of the Economic Policy Institute, a liberal research group.Read the whole thing. Illegal immigration poses significant policy problems -- but those problems have little to do with economics.
Sunday, April 16, 2006
What to read about economics for this week
Barry Eichengreen, "Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor, and the Standard Analysis," Journal of Policy Modeling, forthcoming. Here's how it concludes:
This paper has reviewed four perspectives on global imbalances. The standard analysis suggests that the U.S. current account deficit cannot be sustained at current levels. It suggests that there will have to be significant adjustments in asset prices to compress U.S. spending and significant changes in relative prices to crowd in net exports. At the same time, nonstandard analyses, focusing on the profitability of investment in the United States, the profitability of U.S. foreign investment, and the differential returns on U.S. foreign assets and liabilities suggest that U.S. current account deficits may be easier to sustain than implied by the standard analysis.While I've been travelling, I see that Greg Mankiw -- Harvard economist, former Chairman of the Council on Economic Advisors, and probably some other title I've forgotten -- now has a blog. It's worth checking out.
Mankiw is an honest broker -- he highlights a Dallas Federal Reserve study on globalization and governance, which finds that countries that are open to globalization are also among the best governed. However, Mankiw correctly points out that these are merely correlations -- globalization does not necessarily cause good governance (the other problem with the study is that it relies on A.T. Kearney's measure of globalization, which conflates a few causes an effects).
Tuesday, April 4, 2006
What's the upside of a guest worker program?
It's considered a truism that the United States has been far more successful at integrating immigrants than Western Europe. Fareed Zakaria's column in yesterday's Washington Post elegently explains why:
Seven years ago, when I was visiting Germany, I met with an official who explained to me that the country had a foolproof solution to its economic woes. Watching the U.S. economy soar during the 1990s, the Germans had decided that they, too, needed to go the high-technology route. But how? In the late '90s, the answer seemed obvious: Indians. After all, Indian entrepreneurs accounted for one of every three Silicon Valley start-ups. So the German government decided that it would lure Indians to Germany just as America does: by offering green cards. Officials created something called the German Green Card and announced that they would issue 20,000 in the first year. Naturally, they expected that tens of thousands more Indians would soon be begging to come, and perhaps the quotas would have to be increased. But the program was a flop. A year later barely half of the 20,000 cards had been issued. After a few extensions, the program was abolished.While we're on the topic, be sure to check out Carl Bialik's Wall Street Journal column to see how the number of illegal immigrants are measured.
Monday, March 27, 2006
Why are American firms doing so well?
Sebastian Mallaby has a fascinating column in the Washington Post about why U.S. firms have been outperforming other global firms over the past decade:
Despite all the nostalgia for the era when GM dominated the world's car industry, the heyday of American business may actually be now.
Sunday, March 26, 2006
The trouble with job retraining
Louis Uchitelle has a must-read excerpt from his forthcoming book The Disposable American: Layoffs and Their Consequences in the Business section of the Sunday New York Times. The article covers the fallout of union militancy at a United repair shop in Indianapolis, and what happens when United started outsourcing the work to non-union shops elsewhere in the United States.
Read the whole thing, but here's one section that might give readers some pause:
[J]ob training is central to employment policy. It has been since 1982, when Congress passed the Job Training Partnership Act at the urging of President Ronald Reagan. President Bill Clinton took job training even further, making it available to higher-income workers — including the aircraft mechanics in Indianapolis.As Mark Thoma points out, "the article is more successful at identifying the problems than it is at finding a recipe for solving the displaced worker problem."
Wednesday, March 22, 2006
The U.S. hedges its bets on the Doha round
Until 2006, the Bush administration's policy of "competitive liberalization" in trade had been pretty much symbolic. FTA's with Bahrain, Morocco, or even the CAFTA countries were economically insignificant. Neither the EU nor India was going to feel compelled to move on Doha because of CAFTA.
It’s always wise to have a Plan B. As the US urges progress in the “Doha round” of trade talks, it is also chasing bilateral trade deals across east Asia. These proposed pacts, which include South Korea, Malaysia and Thailand, will act as insurance for a disappointing round. They also put down a marker for future US influence in the region.The $64 billion dollar question is whether these propoed FTAs will convince the EU to relent on ag subsidies and India and Brazil to relent on non-agricultural market access.
Developing.... at least until TPA expires.
Sunday, March 19, 2006
The Economist surveys Chicago
This week's Economist has its first survey of Chicago since 1980. As John Grimond writes, there have been a few changes during those years:
Appearances often deceive, but, in one respect at least, the visitor's first impression of Chicago is likely to be correct: this is a city buzzing with life, humming with prosperity, sparkling with new buildings, new sculptures, new parks, and generally exuding vitality. The Loop, the central area defined by a ring of overhead railway tracks, has not gone the way of so many other big cities' business districts—soulless by day and deserted at night. It bustles with shoppers as well as office workers. Students live there. So, increasingly, do gays, young couples and older ones whose children have grown up and fled the nest. Farther north, and south, old warehouses and factories have become home to artists, professionals and trendy young families. Not far to the east locals and tourists alike throng Michigan Avenue's Magnificent Mile, a stretch of shops as swanky as any to be found on Fifth Avenue in New York or Rodeo Drive in Beverly Hills. Chicago is undoubtedly back.The survey suggests four reasons for Chicago's rebirth:
1) Geographical advantages unique to Chicago (Lake Michigan, being the largest city in the Midwest);Go check it out. Grimond makes way too much of Chicago's success at landing corporate eadquarters' like Boeing -- and I was surprised he never mentioned Ed Glaeser's work on the economics of Northern cities. Still, it's interesting reading.
Wednesday, March 15, 2006
A follow-up on income inequality
A quick follow-up to a post on income inequality from earlier this month.
Part of the concern that some bloggers/economists have voiced about the rise in inequality is that it's a secular trend that shows no sign of stopping. Which brings us to an interesting fact -- in recent years, income inequality in the United States has been falling. Geoffrey Colvin explains in Fortune:
Rising income inequality has settled comfortably into America's big economic picture as a reliable--and much lamented--megatrend. Starting around the late 1960s, U.S. incomes started to become more disparate. The trend was remarkably steady. Recessions might slow it down or briefly reverse it, but mostly it just marched on....What explains this? Colvin proposes... wait for it... offshore outsourcing:
What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually declined 5.2 percent, while those of high school graduates, strangely enough, rose 1.6 percent.Now, this would certainly be a reversal of course. Most economists allow that trade is responsible for a small increase in income inequality (though it's not all that important compared to other factors).
I'm pretty dubious of this assertion, since it's my understanding that IT salaries have been increasing again ever since demand for IT went up. So mu hunch is that Colvin is over-extrapolating from the reduction in income inequality that came with the brief 2001 recession.
Still, I eagerly await my reader's reaction to the offshoring hypothesis.
Tuesday, March 14, 2006
When conservatives populate the earth....
What's the difference between Seattle and Salt Lake City? There are many differences, of course, but here's one you might not know. In Seattle, there are nearly 45% more dogs than children. In Salt Lake City, there are nearly 19% more kids than dogs.This is one of those arguments that sounds ineluctable when first proposed... but then I begin to wonder whether it will hold as strongly as Longman believes. Other factors beyond politics affect fertility rates. Labor market institutions still have a powerful effect as well.
Assuming Longman is correct, gowever, the interesting question is, why is this phenomenon taking place? Longman implicit assumption is that it's because of the waning of patriarchy among liberals:
Throughout the broad sweep of human history, there are many examples of people, or classes of people, who chose to avoid the costs of parenthood. Indeed, falling fertility is a recurring tendency of human civilization. Why then did humans not become extinct long ago? The short answer is patriarchy.Developing... over many generations.
UPDATE: Kieran Healy takes the time and effort I lacked to demonstrate why Longman's hypothesis is likely wrong.
Saturday, March 11, 2006
The dumbest economic policy of the year
Longtime readers of danieldrezner.com might believe that, given my rantings on the scuttled ports deal, that I would say this is the stupidest economic policy implemented this year.
You would be wrong.
No, when it comes to ass-backward economics, I'm afraid that not even the United States Congress can compete with Argentinian president Nestor Kirchner. Patrick McDonnell explains in the Los Angeles Times:
Argentine President Nestor Kirchner has a plan to fight rising inflation and escalating food prices: Let them eat beef.What will the effects of an export ban be? McDonnell summarizes this nicely:
[C]attlemen said Kirchner's move would kill the golden calf. Beef exports earn vital foreign exchange for Argentina and amounted to a record $1.4 billion last year. Foreign sales rose 24%.Kirchner will lower beef prices -- in the most damaging, inefficient way possible.
Tuesday, February 28, 2006
Where's the income beef?
Brad DeLong has a post up about the dizzyingly unequal distribution of income in the United States. He quotes Paul Krugman:
So who are the winners from rising inequality? It's not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that. A new research paper by Ian Dew-Becker and Robert Gordon of Northwestern University, "Where Did the Productivity Growth Go?," gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint.I'll confess those numbers even give me some pause -- and I've historically been unfazed by income inequality. And yet, there is surprisingly little grumbling about this within the mainstream political discourse about this, with the partial exception of rising protectionist sentiment. Why?
I'd offer three possible reasons -- all of which could be at work:
1) Those on the bottom of the income spectrum are increasingly tuning out politics -- call this the Hacker-Pierson thesis;I'll be happy to entertain other hypotheses.
UPDATE: One additional hypothesis that is clearly emerging from the comments is that the growth in income inequality does not generate resentment because of the changing sources of that income. The rich are no longer rich because of inheritances, but because of their own effort. To explain, let me quote from Rajan and Zingales, Saving Capitalism from the Capitalists, page 92 yet again:
One statistic best sums up the changes that have taken place: in 1929, 70 percent of the income of the top .01 percent of income earners in the United States came from holding of capital -- income such as dividends, interest, and rents. The rich were truly the idle rich. In 1998, wages and entrepreneurial income made up 80 percent of the income of the top .01 percent of income earners in the United States, and only 20 percent came from capital. Seen another way, in the 1890s the richest 10 percent of the population worked fewer hours than the poorest 10 percent. Today, the reverse is true. The idle rich have become the working rich!ANOTHER UPDATE: James Joyner still wants someone to show him the money.
Thursday, February 16, 2006
The GAO on TAA
The Government Accountability Office has a new survey of workers at five plant who lost their jobs due to trade competition -- the clear losers of trade liberalization. The survey was designed to see the extent to which Trade Adjustment Assistance -- a program born in the 1974 Trade Act and reformed as recently as 2002 -- was reaching the people it's supposed to.
Here are the key results:
At the time GAO conducted its survey, most of the workers had either found a new job or retired. At three sites, over 60 percent of the workers were reemployed. At another site, only about 40 percent were reemployed, but another third had retired. And at the final site, about a third were reemployed, but this site had the highest proportion of workers who entered training and most of them were likely still in training. The majority of reemployed workers at four of five sites earned less than they had previously—replacing about 80 percent or more of their prior wages—but at one site over half the reemployed workers matched their prior wages.
Monday, February 13, 2006
William Easterly trashes Angelina Jolie!!
William Easterly -- the anti-Jeff Sachs -- has an op-ed in today's Washington Post about Africa. He's upset at the do-gooding of Angelina Jolie and those of her ilk [Her ilk? You mean really attractive actresses? Is he upset at Salma, too?--ed. No, I'm talking about those who wish to "save" Africa.]:
Jeffrey Sachs and Angelina Jolie toured the continent on behalf of MTV, with Jolie asking how we can stand by and let it be destroyed. The world's leaders gathered at the United Nations in September to further discuss ending poverty in Africa, apparently unfazed by yet another voluminous U.N. report highlighting the failure of the grand plans (the "Millennium Development Goals") to make any progress. They repeated a familiar refrain: If aid efforts aren't producing the desired results, then redouble those efforts. The year closed with the rock star Bono being named Time magazine's person of the year (along with the rather more constructive Bill and Melinda Gates) for his efforts to save Africa....The hard-working staff here at danieldrezner.com takes great pride in its stout defense of American celebrities. So we feel compelled to point out to raise the possibility that Easterly is just ticked off because he didn't get to go on safari with the lovely and talented Ms. Jolie. But I doubt it.
Read the whole thing.
Saturday, February 11, 2006
The intriguing rise of Shanghai Tang
When I was in Hong Kong in December, the one store I was told I had to go to was a place called Shanghai Tang; other bloggers have apparently received a similar message.. The people telling me to do this were right -- I'm not much into clothes stores, but even I was impressed by the quality and style of their merchandise. I wound up buying lots of nice things for my wife, which almost -- but not quite -- made up for me leaving her alone with the kids for nine days. Rest assured, Americans do not need to jet to Hong Kong to sample the store -- there's both an online catalog, and a store in Manhattan.
I bring this up because Shanghai Tang is the topic of Linda Tischler's cover story in this week's Fast Company. The story strongly suggests that China will be moving up the global supply chain to luxury goods very soon:
If, as global market watchers from Wall Street to Tokyo have claimed, this is the China Century, then Shanghai Tang may just turn out to be that century's banner--China's first global, upscale brand.As you read a bit more into the story, however, you begin to wonder just how you would categorize the nationality of the firm. First, you discover that Shanghai Tang is majority-owned by Richemont, a Swiss-based luxury-brands holding company. Then you discover the background of the top people at the firm:
It's no surprise, says le Masne de Chermont, that the company's principals have been recruited from the carpetbagging global creative class. The brand's founder, British-educated David Tang, is from Hong Kong, that most Western of Chinese cities. [creative director Joanne] Ooi is American; Camilla Hammar, the marketing director, is Swedish. [CEO Raphael] Le Masne de Chermont, who is French, honed his luxury branding skills at Piaget before being deployed by Richemont, whose portfolio also includes Mont Blanc, Chloe, Dunhill, and Cartier, to fix its ailing Shanghai Tang brand.What's most interesting are the firm's expansion plans:
While the privately held Richemont is cagey about divulging numbers, le Masne de Chermont says that the Madison Avenue's store's revenue is up 50% in 2005. Overall, Tang grew 40% last year, mostly in Asia, home to 70% of its stores. And it's profitable, though not quite yet in the United States.So even though Tischler's story is titled, "The Gucci Killers," this is less about the rise of a global competitor than the mergence of a Gucci-type brand -- created by Asians, Europeans, and Americans -- that can penetrate the Asian market.
A final note: I'm genuinely surprised the New York store is not yet profitable -- to my admittedly uncouth eye, the clothes and accessories are world-class and, compared to other luxury brands, very reasonably priced.
UPDATE: Reena Jana did a story on Shanghai Tang for Business Week last December that's worth checking out as well.
Thursday, February 9, 2006
"the biggest winners are consumers in the United States"
This is David Barboza's conclusion in the New York Times after looking at shifts in the global supply chain:
Hundreds of workers at a sprawling Japanese-owned Hitachi factory here are fashioning plates of glass and aluminum into shiny computer disks, wrapping them in foil. The products are destined for the United States, where they will arrive like billions of other items, labeled "made in China."Read the whole thing. One fact genuinely surprised me:
Asian exports to the United States have actually slipped over the last 15 years....
The good news about cancer
Denise Grady has one of those stories in the New York Times that's worth emphasizing because the news is so good:
The number of cancer deaths in the United States has dropped slightly, the first decline in more than 70 years, the American Cancer Society is reporting today.Here's a link to the American Cancer Society's press release. Among other things, they open with, "The American Cancer Society's annual estimate of cancer deaths says 2006 will see a slight decline in the projected number of cancer deaths compared to estimates made for 2005."
Tuesday, February 7, 2006
What is the future of GMOs?
Edward Alden, Jeremy Grant and Raphael Minder report in the Financial Times that the WTO has just issued a ruling on genetically modified foods:
The World Trade Organisation ruled yesterday that European restrictions on the introduction of genetically-modified foods violated international trade rules, finding there was no scientific justification for Europe’s failure to allow use of new varieties of corn, soybeans and cotton.I cut and paste from the FT a fair amount, so et me help them out and post what the practical effect will be on the various players:
1) The effect on the EU is pretty much nil. They'll appeal, and probably lose their appeal, and then face punitive sanctions from the US, Canada, and Argentina. Just as with hormone-treated beef, the EU will suffer the sanctions rather than comply, given public attitudes about GM foods in Europe.[Sounds like you support the EU position--ed. Oh, no, I think the EU approach to GMOs is daft -- that, however, doesn't matter when you control a $11 trillion economy.]
Monday, February 6, 2006
Would the Scandinavian model fit the United States?
Milton Friedman gave a wide-ranging interview with New Perspectives Quarterly editor Nathan Gardels last November. One of Friedman's answers intrigued me:
NPQ | Perhaps the Scandinavian countries are a model to look at. They are high-tax but also high-employment societies. And they have freed up their labor markets much more than in Italy, France or Germany.I suspect that Amy Chua would have some issues with Friedman' last assertion, but it is an interesting hypothesis. Could it be that the liberal market economy's primary advantage over the coordinated market economy is not it's better efficiency or productivity, but the fact that it works better over a wider variation of societies?
Check out the rest of the Friedman interview as well -- the dark matter controversy comes up.
How strong is the U.S. economy?
I've got an advanced degree in economics, and I'm here to tell you that the official numbers on the U.S. economy are just plain strange.
On the one hand, in the fourth quarter of 2005, GDP growth slowed to a crawl. On the other hand, that had little effect on U.S. labor markets, since the Bureau of Labor Statistics reported on Friday that the economy has generated more than 200,000 net new jobs a month, and that unemployment is now down to 4.7%.
On the one hand, the U.S. trade deficit shows no sign of reversing itself; on the other hand, some economists insist that dark matter is not being counted.
On the one hand, European work fewer hours than Americans. On the other hand, it's possible that Americans have more leisure time than Europeans.
The latest: Time frets on it's cover that we may be losing our edge.
Except that Michael Mandel says on the cover of Business Week that the economy is stronger than conventional statistics indicate (link via longtime reader Don Stadler):
[W]hat if we told you that the doomsayers, while not definitively wrong, aren't seeing the whole picture? What if we told you that businesses are investing about $1 trillion a year more than the official numbers show? Or that the savings rate, far from being negative, is actually positive? Or, for that matter, that our deficit with the rest of the world is much smaller than advertised, and that gross domestic product may be growing faster than the latest gloomy numbers show? You'd be pretty surprised, wouldn't you?Read the whole thing, which gets around to the "dark matter" question as well (also click here to see the Boston Fed paper upon which Mandel got most of his info).
Mandel's story does offer an explanation about the fourth quarter numbers:
[T]he conventional numbers may be understating the strength of the economy today. The BEA announced on Jan. 27 that growth in the fourth quarter of 2005 was only 1.1%. In part that was because of a smaller-than-expected increase in business capital spending. However, employment at design and management-consulting firms is up sharply in the quarter, suggesting that businesses may be spending on intangibles instead. Indeed, the consumer confidence number for January zoomed to the highest level since 2002, as Americans became more optimistic about finding jobs.In fairness, as Stadler pointed out in the e-mail that triggered this post, it is possible that redefining investment would also make the 2001 downturn look more serious that conventional GDP data suggested -- because there was such a fall-off in R&D spending at the time.
So, maybe the economy is much more robust than commonly thought. But there are three caveats to this that I can't quite shake. First, I very much want this to be true, which means that I might be accepting Mandel's suppositions too quickly.
Second, I still remember this Stephen Roach op-ed from 2003, which also pointed out the screwiness with existing data -- except that Roach thought the metrics under discussion were being too optimistic about labor productivity gains. Roach and Mandel are focusing on the same productivity figures -- but Mandel thinks it shows that other numbers are screwy, while Roach thinks the productivity figure is inflated. I'm not sure Roach is right either -- but it's worth bearing in mind that inaccuate data can cut both ways in trying to figure out the current economy.
Third, even if we're exporting knowledge capital in the form of FDI, we're also importing significant amounts of knowledge capital -- in the form of science and engineering Ph.D. students. What happens when those figures are thrown into the mix?
Saturday, February 4, 2006
Work, leisure, and productivity
Last Sunday, the Boston Globe's Christopher Shea wrote a counterintuitive article about how well Europe compares with the United States:
In the face of rampant Europessimism, some contrarian scholars insist that European countries can thrive without embracing American-style labor markets (where most people can be fired at will) and relatively lean social programs.Sounds plausible.... until you get to this week's Economist. At which point you discover something very interesting... leisure time in the United States is on the increase:
A pair of economists have looked closely at how Americans actually spend their time. Mark Aguiar (at the Federal Reserve Bank of Boston) and Erik Hurst (at the University of Chicago's Graduate School of Business) constructed four different measures of leisure. The narrowest includes only activities that nearly everyone considers relaxing or fun; the broadest counts anything that is not related to a paying job, housework or errands as “leisure”. No matter how the two economists slice the data, Americans seem to have much more free time than before.This trend ties into the biggest productivity advantage the United States has over the rest of the advanced industriaized world -- the retail and wholesale sectors. Increases on productivity in those arenas don't only benefit producers -- they lead to significant benefits for consumers, in the form of fewer time and resources devoted to essential household tasks, like shopping for groceries.
In the paper cited by the Economist, Aguiar and Hurst observe that:
The present study focuses exclusively on the United States.... to our knowledge, there are no studies using European data that perform a time-series analysis similar to the one below. This remains an important area for future research.That would be some interesting research. It is possible that heightened U.S. efficiency in the retail and wholesale sectors -- and maybe, come to think of it, the housing sector as well, though economists tend to think about housing productivity in terms of construction as opposed to usage -- means that Americans work more and play more than Europeans.
Friday, February 3, 2006
Welcome to the Fed, Mr. Bernanke
As Ben Bernanke took over from Alan Greenspan this week at the Fed -- and let's hear it for financial markets for not freaking out that much about Greenspan's departure -- it seems only fitting to link to Adam Posen's Institute for International Economics brief about what central banks should do when there's an asset price bubble.
Basically, they should do nothing:
Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system’s structure and stability—in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source.
Wednesday, January 25, 2006
Legalizing domestic surveillance
Mike Allen repots at Time.com that the Bush administration is looking to gain Congressional approval of its warrantless wiretapping
Even as the White House launches a media blitz to portray its controversial wiretapping program as a perfectly legal weapon in the war on terror, administration officials have begun dropping subtle hints—without explicitly saying so—that President Bush could go to Congress to seek more specific authority to listen in on U.S. citizens who are suspected of entanglement with terrorists. Attorney General Alberto Gonzales added to such speculation Tuesday by asserting during a series of television interviews that the law setting up an apparatus requiring warrants for such eavesdropping—the Foreign Intelligence Surveillance Act, or FISA—might be outmoded. "I think we all realize that since 1978, when FISA was passed, there have been tremendous changes in technology," he said on CBS's "The Early Show." "We are engaged in a debate now, a conversation with Congress about FISA and about these authorities."Three thoughts on this:
1) If I were a Bush political advisor, I'd advise him to ask for congressional approval. It's the smart political move, because it engages in political jujitsu -- it ends the debate about the legalit of what happened in the fall of 2001 and refocuses attention on the merits of amending FISA. The liberal bloggers I read have allowed that amending FISA to allow what the NSA is currently doing might be appropriate. Like the House vote on Murtha's withdrawal proposal a few months ago, this kind of vote forces Bush critics to put up or shut up.UPDATE: The initial title to this post was a misnomer -- apologies.
Tuesday, January 24, 2006
No more "buy American"
What with Ford planning to lay off a few people over the next few years, there's going to be a lot of navel-gazing this week about the state of the U.S. auto sector.
Rick Popely and Deborah Horan have a story in today's Chicago Tribune that points out one big problem GM and Ford have -- the "Buy American" campaign doesn't work at crunch time anymore:
When domestic automakers had their backs to the wall 25 years ago, they could count on a "Buy American" sentiment to keep some customers from defecting to fuel-efficient foreign cars.It's not only price that matters, though, as the story points out later:
Though domestic brands get on the shopping lists of two-thirds of car buyers, Spinella said 20 percent of those people wind up buying an import because of better styling, a lower price or a unique feature.
Tuesday, January 17, 2006
The Chivas Regal of board games?
Major in economics in college, and you'll likely hear the story about Chivas Regal, a brand that was struggling back in the seventies and hired a consultant to diagnose its ills. The consultants came back with two recommendations: change the label, and raise the price of a bottle of whiskey by 20%. The logic was that consumers would take the higher price as a signal of higher quality, and demonstrate a willingness to pay. Sure enough, the strategy worked.
I bring this up because Mary Umberger has a front-page story in the Chicago Tribune about a new board game that makes the Chivas Regal price change look miniscule:
"OK, everybody, grab a rat," announced an organizer who had brought a dozen aspiring property magnates together.So, is the game worth the coin? I haven't played it, so I can't say for sure. Snippets from the Tribune story make me skeptical, however:
Cashflow also departs from routine games through the detailed accounting each player must do. The object of the game, like Monopoly, is to make money through investments. But players must keep meticulous financial statements, updating them constantly as they flip apartment buildings, negotiate complicated partnerships and juggle debt....For the past five years -- the period of Kiyosaki's fame -- real estate investment was a pretty shrewd move. However, anyone who banks their retirement income on property in Belize is much more comfortable with risk than I am.
To be fair, if you root arounf Kiyosaki's web site, he's quite aware of the real estate bubble. However, this letter suggests to me that his financial success seems based on the Chivas Regal argument:
Presently, although Kim and I are still buying real estate, we are also selling our "junk" real estate. Eight months ago, Kim put on the market a small apartment house valued at $1 million, for $1.4 million. People complained and no one bought it. So four weeks ago, she raised the price to $2.0 million and it sold in one day for full price.Hmmmm.... maybe my belief in the power of incentives is misplaced, but I just don't buy this. I can accept that the Chivas Regal effect works for... Chivas Regal. Maybe I can accept the idea that it works for an overpriced board game. But the idea that someone was able to sell a piece of real estate only after jacking the price up by $600,000 doesn't pass my smell test.
For anyone curious about Kiyosaki's current investment strategy:
I am getting rid of my U.S. dollars. As you may know, the U.S. dollar has lost nearly 40% of its value against other currencies in the last four years. That means if you have $10,000 in savings in the year 2000, it is worth about $6,000 in purchasing power. Rather than holding cash in the bank, Kim and I have been holding our excess cash in gold and silver bars. Why? Because you will know that the dollar is falling because the price of gold and especially silver will begin to rise. When silver goes higher than $8.50 an ounce and gold reaches $500 an ounce, you will know the end is near. When the crash comes, the currency of many countries will go down in purchasing power as the price of these two precious metals rise in value.
Friday, January 13, 2006
Why are Americans better at FDI?
Matthew Higgins, Thomas Klitgaard, and Cédric Tille have an article in the Federal Reserve Bank of New York's December 2005 edition of Current Issues in Economics and Finance on net flows in international investment income. Given the fact that foreigners currently have a net claim on $2.5 trillion in U.S. assets, onme would expect the U.S. to be paying out a lot more in interest, dividends, and profits to foreigners than Americans would receive from their investments.
The weird thing is that, so far, this hasn't been true. Last year the U.S. earned $36 billion more on their foreign investments than foreigners earned in the United States. The question is, why?
Higgins et al have a simple answer and a more complex answer. The simple answer is that foreigners are investing heavily in fixed-income, interest-bearing assets, while Americans concentrate their outflows in riskier but more rewarding areas -- foreign direct investment and foreign portfolio investment. This result is actually consistent with a point I was trying to make before about the comparative advantage Americans hold in risk attitudes.
What really intrigues me, however, is this fact -- even if one limits the discussion to FDI, Americans do better abroad than foreigners do here:
[T]he rate of return on U.S.FDI assets has consistently been higher than that on FDI liabilities (Chart 4). Since 1982, the rate of return on FDI assets has, on average, exceeded that on FDI liabilities by 5.6 percentage points, and not once during this period has the differential dropped below 3.2 percentage points. Surprisingly, perhaps, there is no consensus about the reason for this large and persistent difference in rates of return....This puzzle is pretty damn important. The gap in returns is significant enough so that Harvard economists Ricardo Hausmann and Federico Sturzenegger talking about this as "dark matter", explaining why the U.S. has been able to run a persistent current account deficit without any decline in the U.S. surplus on investment income.
Higgins et al proffer some possible explanations -- tax differentials, less experienced foreign investors, U.S. firms are better governed and more efficient, or the U.S. market is just more competitive and so profits will be lower here. Only the last argument persuades me much.
Higgins et al also don't think this situation will persist. Haussman and Sturzenegger, on the other hand, push the argument that US has a comparative advantage in FDI very hard:
Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA [Bureau of Economic Analysis] would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter. It explains why the US can earn more on its assets than it pays on its liabilities and why foreigners cannot do the same. We would say that the US exported 300 million in dark matter and is making a 5 percent return on it. The point is that in the accounting of FDI, the know-how than makes investments particularly productive is poorly accounted for....They might be right -- but they don't have any evidence that this is true beyond the persistence in the gap between U.S. and foreign rates of return in FDI.
This is a really, really interesting puzzle, however -- and I'm very surprised some B-school professor hasn't written something so definitive on the topic that the book is a must-read. Maybe I'm out of it, but I haven't seen any book like this.
In lieu of a tome, commenters are free to figure out and post on this puzzle for themselves.
Monday, January 9, 2006
Those young, whiny whippersnappers
I'm roughly the same age as Daniel Gross, and I'm not surprised to see that I had roughly the same reaction as he had in Slate to the latest Generation Y laments about how hard it is to find a financially rewarding job:
The economic jeremiad written by a twentysomething is a cyclical phenomenon. People who graduate into a recessionary/post-bubble economy inevitably find the going tough, which compounds the usual postgraduate angst. And with their limited life experience and high expectations, they tend to extrapolate a lifetime from a couple of years. I know. Back in the early 1990s, when my cohort and I were making our way into the workforce in a recessionary, post-bubble environment, I wrote an article on precisely the same topic for Swing, the lamentable, deservedly short-lived David Lauren twentysomething magazine. If memory serves, the headline was something like "Generation Debt."....Lest one think Gross is being overly Panglossian about the economy, click on his blog. [But you're Panglossia about life in your thirties, right?--ed. No, families and potentially higher incomes do not come without their tradeoffs.] His larger point, however, is that people -- particularly educated people who try to write books in their twenties -- tend to make a significant move up the income chain when they hit their thirties.
UPDATE: Check out Gross' e-mail exchange with Kamenetz on the latter's blog. Kamenetz thinks she can "declare victory," after the exchange, but I don't find her response either persuasive or elegant.
One last point -- the crux of the issue appears to be the rising cost of college education. There is no doubt that the retail price of a 4-year college education at a private university has drastically risen over the past two decades. However, that overlooks a few key questions:
1) What percentage of college students pay the retail price? To what extent does student aid reduce the burden, even if there's been a shift towards "more loans and fewer grants"?
Friday, January 6, 2006
And the dollar watch starts for 2006
The Financial Times has two reports that provide contradictory signals on what the Pacific Rim economies will be doing about the dollar.
China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.Here's a link to China's State Administration of Foreign Exchange, but damn if I can find the announcement in question.
On the other hand, Song Jung-a reports that South Korea is moving in exactly the opposite direction:
South Korea’s finance ministry said on Friday it would mobilise all possible means to curb the won’s recent sharp appreciation against the US dollar.China's dollar position is more significant than South Korea's, but my bet is that Beijing will move as slowly as possible in its diversification -- which means that South Korea's move in the opposite direction could leave the dollar pretty much where it is now.
This, by the way, is the dream scenario for China -- it can comply with U.S. requests, diversify away from an asset that will fall in the future, and still have the dollar be relatively strong against the yuan in the short term.
Wednesday, December 28, 2005
It is with a hard head but a heavy heart that I relay this Financial Times report from Leslie Crawford:
Spain’s Socialist government on Tuesday officially abolished the siesta, the extended lunch break.While I suspect the 8% figure is an exaggeration, it seems hard to dispute the notion that the siesta is a thoroughly inefficient way of inserting break times into the working day. So the economist in me accepts this as wise policy.
At the same time, the Burkean conservative in me mourns a loss. The siesta is such a lovely conceit for lazy people like myself -- who have a strong belief in the restorative and stimulating powers of the long lunch -- that it will be hard to imagine its disappearance from its country of origin.
Sunday, December 25, 2005
The University of Chicago flunks George W. Bush
The Chicago Tribune asked three economists linked to the University of Chicago -- Ed Snyder, Michael Mussa, and Austin Goolsbee -- to grade various aspects of the Bush administration's economic performance for the past calendar year. The results aren't pretty:
While conservative economists like Mussa and Snyder say the president's tax cuts and stimulus package helped lay the foundation for the current economic expansion, they tend to join [former Kerry advisor] Goolsbee in lamenting that the administration's lack of spending discipline is mortgaging the nation's future....Read the whole thing -- here's the report card in brief:
Saturday, December 24, 2005
So much for the market clearing price
On this last half-day of the holiday shopping season, I gazed upon my son with horror as he broke the spine of The Essential Calvin and Hobbes. This has symbolized my reaction to my son's recent interest in my paperback Calvin and Hobbes collections -- joy at watching him read combined with a mild dose of horror at the way he's treating the books. [Dude, he's only five--ed. I didn't say I blamed him -- I said I watched him, mute and helples, as it happened.]
However, I decided to take this as a sign to go online and buy The Complete Calvin and Hobbes from Amazon.com. They were listing used & new from $149.99 with the following note:
Due to the number of copies printed, The Complete Calvin and Hobbes is currently unavailable. The publisher is planning to reprint this title in April 2006 and copies will become available soon afterward.On a lark, I checked to see if Barnes and Noble had it. Not only were they carrying it, but at bn.com it was marked down to $105.
I confess to being surprised that there was this much of a price and quantity spread between Amazon and Barnes and Noble. It does make one wonder if the Economist is correct to crow about the advantages of being number two in a business.
Readers are hereby encouraged to post the greatest price spreads they've ecountered in their shopping activities among established online merchants.
UPDATE: Thanks to Rhett in the comments section for offering a plausible explanation for the discrepancy in prices.
Tuesday, December 13, 2005
Ag subsidies revealed!!!
We know that a sticking point in the WTO negotiations is the resistance by the developed world to reduce their agricultural subsidies. Within that simple statement, however, the nature of ag subsidies is incredibly opaque. If you read Arvind Panagariya's Foreign Affairs essay, you discover that there are different "boxes" of subsidies. You also discover -- according to Cato's Daniel A.Sumner -- that many of these subsidies could soon be ruled as in violation of existing U.S. commitments to the WTO.
For now, however, these subsidies are here -- but who, exactly, gets them?
For that answer, I encourage you to check out the Environmental Working Group's Farm Subsidy Database. Through many, many FOIA requests, they have produced. an interactive website chock full of interesting facts. For example:
EWG also has an interesting proposal to reallocate the ag money away from subsidies but towards rural areas where farmers actually generate high value-added goods already.
[Yes, we know U.S. subsidies are bad. What about EU ag subsidies?--ed.] Until recently, the EU's Common Agricultural Policy was way more opaque in terms of its allocation of funds. However, there's a new website called FarmSubsidy.org, which provides as much info on CAP subsidies as is available (shockingly, countries like France have ignored an EU directive and refused to make their subsidy records available to the public).
Among the more useful tidbits of info:
Go check it all out.
Monday, December 12, 2005
What happens at a WTO Ministerial -- day one
One would assume that a minister-level meeting of a big international governmental organization like the WTO would consist of a lot of big plenary sessions combined with backroom, smoke-filled, coffee-laden negotiations. This is probably true, but in the era of NGOs and mass media coverage, there's a new wrinkle to these kind of meetings -- all of the NGO-related public panels designed to attract NGO reps and reporters who cannot attend the back-room sessions.
The result is a weird amalgamation of quasi-academic workshop and floating press conference. NGOs supply a bevy of panels, roundtables, and speeches -- the goal being to attract as much press coverage as possible (see Victor Mallet and Justine Lau's story in the Financial Times for more on this). The conundrum is that the substance of trade issues are so mind-numbingly boring that just uttering the word "modalities" sends most reporters into a coma.
The result is that the events that capture the most attention are the ones with the greatest celebrity or the greatest divergence of views. Yesterday, for example, OxFam attracted a great deal of press coverage for its handoff of a petition to WTO Director General Pascal Lamy. Part of this was because Mexican actor Gael Garcia Bernal was there as official OxFam presenter (Bernal also succeeded in generating a fair amount of swooning from many of the female attendants and not a small number of male ones).
For an example of divergence of views, there is the debate that I'm sitting in as I type this, between WTO official Alejandro Jara (he's fer trade) vs. director of Focus on the Global South Walden Bello (he's agin' it). At this debate, the press outnumbers the attendants 4 to 1.
The trick at these sort of meetings is to separate the wheat from the chaff -- most of the time, these meetings are an exercise in repeating talking points. Occasionally, someone will say something edifying. In this case, the only illuminating statement was made by Jara, who pointed out that despite the image of horsetrading among member countries during the Doha round, there have been no new commitments to liberalize for the Doha round -- just a commitment to lock in prior, autonomous, unilateral moves towards liberalization. This does not bode well for these meetings -- because without some horse trading, nothing's gonna happen.
There was a defender of ag subsidies at the meeting, however. A U.S. soybean farmer piped up halfway through, arguing that international competition ruins the small family farmer. This has a grain of truth to it in the developed world, but I don't see why agriculture is so special -- last I checked, there are no subsidies for hunter-gatherers being proposed. The farmer's cure for this was "supply management," which as near as I could discern was a polite term for.... government support for family farms.
Thursday, December 8, 2005
Our comparative advantage in risk
Paul Blustein frets in the Washington Post that many developing countries are heading for another financial bubble:
International money managers are pouring funds at a record pace into the emerging markets of Latin America, Asia, Eastern Europe and Africa. Cash is gushing into mutual funds that specialize in emerging markets, and billions of dollars more are flowing into such countries from giant insurance companies and pension funds.Lachman's article is mostly about Latin America -- but this paragraph captures his jitters pretty well:
What is also surprising is how little attention Latin American investors seem to be paying to the gathering storm clouds over the global economy. How long do they think that global economic growth can be sustained at its recent pace with international oil prices likely to remain at their currently heady levels? Or how long do they think that international commodity prices will remain well bid in a world in which the Chinese economy slows under the weight of its deep macro-economic imbalances and in which Europe stagnates at a time of internal dissension and policy paralysis?There appears to be an enormous irony in the pattern of global investment flows right now. As Alan Greenspan recently noted, there has been a decline in the home bias of investment:
The decline in home bias is reflected in savers increasingly reaching across national borders to invest in foreign assets. The rise in U.S. productivity growth attracted much of those savings toward investments in the United States. The greater rates of productivity growth in the United States, compared with still-subdued rates abroad, have apparently engendered corresponding differences in risk-adjusted expected rates of return and hence in the demand for U.S.-based assets....The irony is that this home bias is affecting U.S. investors as well -- the Blustein article demonstrates that even as massive sums of savings from the developing world are making their way to the safe haven of the United States, institutional investors in this country are channeling more funds to the developng world.
Does this make any sense? Most people would instinctively say no, and Blustein's implication in his article is that this crazy. My hunch is that it makes a fair amount of sense, because U.S. capital markets and financial institutions possess both a comparative and absolute advantage in coping with risk. This allows them to place large bets in developing country equity markets and earn a higher rate of return than those investing in the U.S.
Then again, I don't have large sums of money invested in the Turkish stock market. Large, wealthy investors are heartily encouraged to post comments on how sanguine they feel about global equity markets.