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.

“I feel the western consensus on the relation between the market and the government should be reviewed,” said Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission....

The majority of China’s financial sector is still owned by the state, and the government retains tight control over many aspects of the industry, including senior personnel decisions at the country’s largest banks, insurers and brokerages.

Thanks to China’s lack of integration with global financial markets as well as the cautious regulatory approach of the CBRC, Chinese banks have emerged relatively unscathed from the global credit crisis, which so far has caused nearly $380bn of losses at western financial institutions.


posted by Dan at 09:29 AM | Comments (0) | Trackbacks (0)



Monday, May 19, 2008

Because it's been a while since this blog really angered feminists....

Matt Yglesias approvingly links to this New York Times story by Lisa Belkin from a few days ago arguing that women ae shut out of science and engineering because of rampant sexism:

In the worlds of science, engineering and technology, it seems, the past is still very much present.

“It’s almost a time warp,” said Sylvia Ann Hewlett, the founder of the Center for Work-Life Policy, a nonprofit organization that studies women and work. “All the predatory and demeaning and discriminatory stuff that went on in workplaces 20, 30 years ago is alive and well in these professions.”

That is the conclusion of the center’s latest study, which will be published in the Harvard Business Review in June.

Based on data from 2,493 workers (1,493 women and 1,000 men) polled from March 2006 through October 2007 and hundreds more interviewed in focus groups, the report paints a portrait of a macho culture where women are very much outsiders, and where those who do enter are likely to eventually leave.

The study was conceived in response to the highly criticized assertion three years ago, by the then-president of Harvard, that women were not well represented in the science because they lacked what it took to excel there.

The purpose of the work-life center’s survey was to measure the size of the gender gap and to decipher why women leave the science, engineering and technology professions in disproportionate numbers.

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.

One study of information-technology workers found that women's own preferences are the single most important factor in that field's dramatic gender imbalance. Another study followed 5,000 mathematically gifted students and found that qualified women are significantly more likely to avoid physics and the other "hard" sciences in favor of work in medicine and biosciences....

Rosenbloom surveyed hundreds of professionals in information technology, a career in which women are significantly underrepresented. He also surveyed hundreds in comparable careers more evenly balanced between men and women. The study examined work and family history, educational background, and vocational interests.

The results were striking. The lower numbers of women in IT careers weren't explained by work-family pressures, since the study found computer careers made no greater time demands than those in the control group. Ability wasn't the reason, since the women in both groups had substantial math backgrounds. There was, however, a significant difference in one area: what the men and women valued in their work.

Rosenbloom and his colleagues used a standard personality-inventory test to measure people's preferences for different kinds of work. In general, Rosenbloom's study found, men and women who enjoyed the explicit manipulation of tools or machines were more likely to choose IT careers - and it was mostly men who scored high in this area. Meanwhile, people who enjoyed working with others were less likely to choose IT careers. Women, on average, were more likely to score high in this arena.

Personal preference, Rosenbloom and his group concluded, was the single largest determinative factor in whether women went into IT. They calculated that preference accounted for about two-thirds of the gender imbalance in the field. The study was published in November in the Journal of Economic Psychology....

Starting more than 30 years ago, the Study of Mathematically Precocious Youth began following nearly 2,000 mathematically gifted adolescents, boys and girls, tracking their education and careers in ensuing decades. (It has since been expanded to 5,000 participants, many from more recent graduating classes.) Both men and women in the study achieved advanced credentials in about the same numbers. But when it came to their career paths, there was a striking divergence.

Math-precocious men were much more likely to go into engineering or physical sciences than women. Math-precocious women, by contrast, were more likely to go into careers in medicine, biological sciences, humanities, and social sciences. Both sexes scored high on the math SAT, and the data showed the women weren't discouraged from certain career paths.

The survey data showed a notable disparity on one point: That men, relative to women, prefer to work with inorganic materials; women, in general, prefer to work with organic or living things. This gender disparity was apparent very early in life, and it continued to hold steady over the course of the participants' careers.

Benbow and Lubinski also found something else intriguing: Women who are mathematically gifted are more likely than men to have strong verbal abilities as well; men who excel in math, by contrast, don't do nearly as well in verbal skills. As a result, the career choices for math-precocious women are wider than for their male counterparts. They can become scientists, but can succeed just as well as lawyers or teachers. With this range of choice, their data show, highly qualified women may opt out of certain technical or scientific jobs simply because they can.

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.

posted by Dan at 10:16 AM | Comments (0) | Trackbacks (0)



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?

Sovereign wealth funds do present concerns on the near and far horizons, but the predominant reaction at this point should be what is emblazoned on the cover of The Hitchhiker’s Guide to the Galaxy: “DON’T PANIC.” To date, SWFs have acted responsibly, and there is no sign that their behavior will change soon.

A mixture of voluntary standards and additional surveillance by the salient authorities should deal with current concerns. With luck, they will also cause policymakers to focus on the bigger picture. SWFs are merely a small symptom of two bigger problems: the absence of proactive energy and exchange rate policies in this country.

Go check it out.

posted by Dan at 02:00 PM | Comments (0) | Trackbacks (0)



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;

b) Not a new fact -- these projections have been around for the past year or so;

c) An even more invidious comparison than the one comparing firm sales to GDP. In this case, Global Insight is comparing assets to revenue streams.

Sovereign wealth funds deserve some scrutiny, but this kind of headline-seeking comparison seems designed to do littledoesn't contribute much to the debate.

posted by Dan at 09:03 AM | Comments (0) | Trackbacks (0)



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.

Moreover, many American conservatives have opposed free trade. Jesse Helms, the most outspoken conservative in the Senate for three decades, was no free trader. Neither was Alexander Hamilton, who could be considered the founder of American conservatism.

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.

Each of these measures prompted vociferous criticism from free traders. But they worked. By the early 1990s, doubts about Americans’ ability to compete had been impressively reduced.

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.

2) Which free traders opposed the "Plaza" agreement? Why would this agreement be seen as protectionist? Seriously, I want names. There was a general consensus in 1985 that the dollar was overvalued -- just like there is general consensus now that the yuan is overvalued (what to do about overvaluations is often a more contested issue).

3) On what basis can Lighthizer plausible claim that "By the early 1990s, doubts about Americans’ ability to compete had been impressively reduced"??!!! The early nineties was the peak of anti-Japan hysteria (go and read Rising Sun if you don't believe me).

Indeed, doubts about American competiiveness did not subside until the mid-to-late nineties -- after NAFTA and the Uruguay round of the GATT had been ratified.

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.

posted by Dan at 08:17 AM | Comments (2) | Trackbacks (0)



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.

David Leonhardt makes this point in his New York Times column today:

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.

It’s hard to look at this history and conclude Nafta is the villain. In fact, Nafta did little to reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth economist. Those tariffs were already low before the agreement was signed.

A more important cause of Ohio’s jobs exodus is the rise of China, India and the old Soviet bloc, which has brought hundreds of millions of workers into the global economy. New technology and better transportation have then made it easier for jobs to be done in those places and elsewhere. To put it in concrete terms, your credit card’s customer service center isn’t in Ireland because of a new trade deal.

All this global competition has brought some big benefits, too. Consider that cars, furniture, clothing, computers and televisions — which are all subject to global competition — have become more affordable, relative to everything else. Medical care, movie tickets and college tuition — all protected from such competition — have become more expensive.

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.”

It’s a bit of an odd situation. They call the country’s trade policy a disaster, and yet their plan to fix it starts with, um, cracking down on Mexican pollution.

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.


posted by Dan at 08:47 AM | Comments (8) | Trackbacks (0)



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.


posted by Dan at 10:58 AM | Comments (3) | Trackbacks (0)



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.

Now we are engaged in a great spike in the price of zinc and copper, testing whether this nation, frankly, can afford the penny any longer.....

You know it just gets worse from there.

Click here to listen to it... we were going for stentorian.

posted by Dan at 08:01 PM | Comments (6) | Trackbacks (0)



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.

“It’s not only buzz, it’s a product introduction — but with nothing like the advertising or marketing budget that a piece of soap would have,” said David Rosenthal, the publisher of Simon & Schuster. With the Internet and blogs, word of mouth travels more quickly today, but there’s a glut of information. To help a book break through the static, publishers have to plan months in advance....

As soon as a literary agent has sold a publisher a book, and even before it’s edited, copy-edited, proofread and indexed, the publicity wheels start turning. While writers bite their nails, the book editor tries to persuade the in-house sales representatives to get excited about the book, the sales representatives try to persuade retail buyers to get excited, and the retail buyers decide how many copies to buy and whether to feature the book in a prominent front-of-the-store display, for which publishers pay dearly. In the meantime, the publisher’s publicity department tries to persuade magazine editors and television producers to feature the book or its author around the publication date, often giving elaborate lunches and parties months in advance to drum up interest.

Chain stores like Barnes & Noble and Borders generally buy books at least six months before the publication date and know about particular titles even farther in advance. Much to the anxiety of midlist writers clamoring for attention, chain stores determine how many copies of a title to buy based on the expected media attention and the author’s previous sales record. Which is why publishers say it’s easier to sell an untested but often hyped first-time author than a second or a third novel. “It’s one of the anomalies of our business that you have to reinvent the wheel with every title, virtually,” said Laurence Kirshbaum, a literary agent and former chairman of the Time Warner Book Group.

Although digitization has made the printing and typesetting process much faster, distribution still takes time, especially in a country as big as America. (In Britain, with its smaller size and more insular literary culture, things move faster.) But once a book hits the market, the product has to move. “For all the weeks and months that go into the gestation of the book, we’re up against the so-called lettuce test once we get into the stores,” Kirshbaum said. “If we don’t get sales fast, the book wilts.”

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....

[T]wo books on sushi — “The Sushi Economy,” by Sasha Issenberg (Gotham), and “The Zen of Fish,” by Trevor Corson (HarperCollins) — appeared nearly simultaneously. “You never want to get in a horse race with another book on the same subject,” said William Shinker, the president and publisher of Gotham.

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.

posted by Dan at 11:53 AM | Comments (5) | Trackbacks (0)



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 currencies

2) They can't reinvest most of these surpluses domestically, because of concerns about sterilization, inflation, the Dutch disease, etc.

3) Holding these assets simply as reserves is not terribly profitable.

4) Therefore, they need to find a place to invest. Places with capital markets large and deep enough to absorb the gargantuan levels of investment without distortion. In other words, the United States and the European Union.

There 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?

posted by Dan at 08:47 AM | Comments (3) | Trackbacks (0)



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?"

2. Multiple-motive issues. "It's the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country, perhaps we want the bank to do extensive business in the country, suppose we want suppliers in our country to be sourced, perhaps we want some disablement of a competitor for our country's national champion. When there's no assurance that value maximization is not being pursued, there is a potential question."

3. General politicization. He provided two examples. "First, suppose that a country ran an active trading operation, and say it was a very inspired one, and found itself in an investment much like George Soros' short position in the pound. Would we be comfortable with the concept that the nation of X had decided that nation of Y's currency was overvalued and launched an attack? There should be some kind of understanding that that won't happen. Also, the SWF of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?"

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:

posted by Dan at 03:10 PM | Comments (6) | Trackbacks (0)



Tuesday, January 22, 2008

The Fed ain't f&%$ing around.... and neither are the markets

From the Federal Reserve this morning:

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 Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

The question is whether this move will forestall further panic in global and domestic markets or merely exacerbate them.

UPDATE: Uh-oh.

posted by Dan at 08:55 AM | Comments (4) | Trackbacks (0)



Wednesday, January 16, 2008

Radio, print, web -- it's a media whoredom triple play!!

Sure, I have a Newsweek column and a bloggingheads appearance in the past 24 hours, but what have I done for my dear readers lately?

My latest commentary for Marketplace is now available online. It's about the fallibility of political prediction markets.

I'm very grateful to Columbia's Andrew Gelman for this blog post and this blog post, which crystallize the state of play regarding these markets.

posted by Dan at 07:29 PM | Comments (0) | Trackbacks (0)



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.

According to a study released by the World Bank in October, South Korea is the first of several Asian countries with large sex imbalances at birth to reverse the trend, moving toward greater parity between the sexes. Last year, the ratio was 107.4 boys born for every 100 girls, still above what is considered normal, but down from a peak of 116.5 boys born for every 100 girls in 1990.

The most important factor in changing attitudes toward girls was the radical shift in the country’s economy that opened the doors to women in the work force as never before and dismantled long-held traditions, which so devalued daughters that mothers would often apologize for giving birth to a girl.

Choe Sang-Hun, "Where Boys Were Kings, a Shift Toward Baby Girls," New York Times, December 23, 2007.


posted by Dan at 12:09 AM | Comments (2) | Trackbacks (0)



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....

Consider Abu Dhabi and Kuwait, which wanted to save their oil endowment for future generations, an admirable goal. But today these two bureaucratized emirates look like poor cousins in comparison with freewheeling Dubai, which has much less oil. Because the rulers of Abu Dhabi and Kuwait centralized their nations’ wealth in the hands of the state, their state sectors stifled their economies. Abu Dhabi’s fund may be impressive, but the entrepreneurial emir of Dubai has done a far better job of putting sustainable wealth in the hands of his citizens....

In short, sovereign wealth funds are often a lousy bargain for the countries that have them. That may explain why they have been developed mostly by authoritarian regimes in semi-developed countries, where citizens don’t have a chance to demand smarter economic policies. Take Singapore, whose economy depends on trade rather than a declining resource such as oil, and yet has locked up billions of dollars of its wealth in a fund since 1960. The government there has exceptionally managed to maintain its authoritarianism after the country became wealthy, but authoritarian regimes are more vulnerable to economic downturns than democratic systems. Singapore’s unelected rulers need a reserve to pay off dissatisfied subjects to maintain power when economic times get tough.

In democracies, the politics work differently. The only democratic country with a large sovereign wealth fund is Norway. Since the Norwegian fund was established in 1990, every incumbent government has lost elections because the opposition has promised all kinds of popular expenditures from the abundant fund. Democratically, it is difficult to defend an excessive public reserve fund.

Certain international reserves are always needed, and exporters of commodities with highly fluctuating prices require larger reserves as a safety net. However, sovereign wealth funds are something different. They reflect a paternalistic—and economically illiterate—notion that the ruler knows best while citizens are so irresponsible that they cannot be entrusted with their own savings. It would be more economical and democratic to cut taxes and let citizens save and invest themselves.




posted by Dan at 10:30 PM | Comments (2) | Trackbacks (0)




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;

2) Oil traders are so smart that they already knew Iran's nuclear weapons program had been frozen, and had therefore already priced in expectations that the U.S. would eventually discover this fact.

3) Political factors are not as important in influencing oil prices as some commentators believe.

4) The NIE will have zero effect on the expected probability of the Bush administration's decision to use force.

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.

posted by Dan at 12:27 AM | Comments (18) | Trackbacks (0)



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.

posted by Dan at 08:08 PM | Comments (0) | Trackbacks (0)



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.

posted by Dan at 09:18 AM | Comments (0) | Trackbacks (0)



Wednesday, October 31, 2007
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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).

Alex Tabarrok weighs in with the following question:

[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.

posted by Dan at 09:08 AM | Comments (8) | Trackbacks (0)



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.

posted by Dan at 09:42 PM | Comments (2) | Trackbacks (0)



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?

posted by Dan at 02:48 PM | Comments (2) | Trackbacks (0)



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.

Sound policy or moral hazard? The New York Times today suggests the former, since there were no fundamental changes (though, to me, this story ain't chopped liver).

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.

With stock markets plunging around the world on financial worries clearly marked “made in U.S.A.,” and with growing concerns about a possible American economic slowdown, a booming global economy could help contain the damage and even assist the United States in absorbing the shock of the collapsing housing bubble and a credit squeeze.

“We’re no longer in a world where the United States sneezes and the rest of the world catches a cold,” said Nariman Behravesh, chief economist with Global Insight, an economics research firm in Waltham, Mass. “You’ve got strong growth overseas, and it’s been kind of like a lifeline to the United States from the rest of the world.”

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.

posted by Dan at 09:55 AM | Comments (1) | Trackbacks (0)



Thursday, August 9, 2007

The advisor or the candidate?

Max Sawicky complains that the economists who were at YearlyKos -- and advising presidential candidates -- were not progressive enough. This fact makes Bruce Bartlett sleep easier at night:

[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.

Frankly, this sounds good to me. I think we need a few years of sober economic management that is grounded in the real world. This used to be what the Republican Party stood for.

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?

posted by Dan at 01:25 PM | Comments (5) | Trackbacks (0)



Thursday, August 2, 2007

How price controls favor the few

Today the New York Times has a front-page story by Michael Wines on the economic disaster that is Zimbabwe:

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.

Manufacturing has slowed to a crawl because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.

The chaos, however, seems to have done little to undermine Mr. Mugabe’s authority. To the contrary, the government is moving steadily toward a takeover of major sectors of the economy that have not already been nationalized.

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.

In Plumtree, near Zimbabwe’s border with Botswana, a line of shoppers gathered outside a shoe store last week even before opening hours, said Moses Mzila, who represents the area in Parliament. As the store opened, government inspectors appeared — and the throng followed them in, buying up stock as it was marked down.

“It’s theft, outright theft,” Mr. Mzila said. “Some of them had big cars, shiny, sparkling double-cabs, and they filled them up with shoes and just drove away.”


posted by Dan at 08:46 AM | Comments (2) | Trackbacks (0)



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.

By the end of this year, China will most likely be the United States' second largest trading partner. Over the past six years, total trade between the two countries has soared, growing from $116 billion in 2000 to almost $343 billion in 2006. That's an average growth rate of almost 20% a year.

This marvelous growth has led to more affordable goods, higher productivity, strong job growth, and a higher standard of living for both countries. These economic benefits were made possible in large part because both China and the United States embraced freer trade.

As economists, we understand the vital and beneficial role that free trade plays in the world economy. Conversely, we believe that barriers to free trade destroy wealth and benefit no one in the long run. Because of these fundamental economic principles, we sign this letter to advise Congress against imposing retaliatory trade measures against China.

There is no foundation in economics that supports punitive tariffs. China currently supplies American consumers with inexpensive goods and low-interest rate loans. Retaliatory tariffs on China are tantamount to taxing ourselves as a punishment. Worse, such a move will likely encourage China to impose its own tariffs, increasing the possibility of a futile and harmful trade war. American consumers and businesses would pay the price for this senseless war through higher prices, worse jobs, and reduced economic growth.

We urge Congress to discard any plans for increased protectionism, and instead urge lawmakers to work towards fostering stronger global economic ties through free trade.

This also appears in an ad today in the Wall Street Journal.

As Greg Mankiw sadly observes, petitions like this have very little political effect. Indeed, by linking to this older petition, the Club for Growth recognizes this as well.

posted by Dan at 08:27 AM | Comments (6) | Trackbacks (0)



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.

In her first interview in the role, Kitty Ussher has told the Financial Times that the government shares business concerns about queues at passport control, the effect of security measures and the airport’s set-up.

Calling herself an “advocate” for business in government, she spoke of the unhappiness felt by executives at the so-called “Heathrow hassle” and the miserable experiences they have suffered.

In frank criticism that reflects mounting government concern, she voiced fears that multinational companies could question the rationale for holding annual or other important meetings in London. “I want multinational companies to feel really confident about housing their annual general meetings here,” she said.

“They often have it in a different financial centre every year, or board meetings, that kind of thing. I don’t want their New York or Dubai executives saying ‘Oh God, I don’t want to go through Heathrow’. I don’t want that to be an issue.”

She said of the airport: “You spend so much time being processed. That’s the issue... passports, security, just the layout of the buildings which makes it more difficult.”

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?

posted by Dan at 09:00 AM | Comments (34) | Trackbacks (0)



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.

2) Since a tariff will result in a) higher consumer prices and b) higher interest rates if China retaliates or acquiesces, have the bill suspend any punitive action unless the inflation rate is below 4.5% and/or the Federal funds rate is below 5.5%.

3) Demand that the Treasury Department investigate sovereign wealth funds, akin to their investigations of currency manipulation.

4) Screw trying to punish China for currency manipulation and focus on consumer health and safety instead. This gets at the issue sideways, but Beijing is clearly vulnerable on this point, no matter how many ex-regulators they execute. This is also an an issue where, for reasons I've elaborated at length elsewhere, Beijing is more vulnerable.

Please excuse me so I can wash my hands until they're clean.

posted by Dan at 05:04 PM | Comments (7) | Trackbacks (0)



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.

But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession’s most cherished ideas about not interfering in the economy.

“There is much too much ideology,” said Alan S. Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is “often a triumph of theory over fact.” Mr. Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad. Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.

“What I’ve learned is anyone who says anything even obliquely that sounds hostile to free trade is treated as an apostate,” Mr. Blinder said.

And free trade is not the only sacred subject, Mr. Blinder and other like-minded economists say. Most efforts to intervene in the markets — like setting a minimum wage, instituting industrial policy or regulating prices — are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.

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?

posted by Dan at 05:29 PM | Comments (4) | Trackbacks (0)



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....

Brian Pomper, a former Democratic adviser, said China was becoming a proxy for US political anxiety about globalisation and that sponsorship of the bill was the most combative position yet taken towards Beijing by the two candidates.

Sandra Polaski, a trade analyst at the Carnegie Endowment, said US politicians were making China a scapegoat in the face of widespread economic insecurity among voters. “Opinion polls consistently show the American public has a balanced view of China. It is campaigning politicians who are turning the heat on Beijing,” she said.

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.

In the long run of three to five years, yes: The renminbi needs to become worth a lot more (primarily for China's sake). Pressure on China to adopt better policies is helpful (provided we don't shoot ourselves in the foot). But this strikes me as a classic threat to shoot ourselves in the foot: it is not a good policy move on either Obama's or Rodham Clinton's part.

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.

2) The kind of sanctions that Matt discusses -- "leverage to try to get other countries to change the intellectual properties policies or to privatize their water systems or what have you" -- have actually worked pretty well. Even better, they've worked at the threat stage, so the costs of sanctions imposition have not been incurred. They've worked remarkably well when the WTO authorizes them, which they do if a dispute resolution panel decides that a country is imposing a protectionist measure. So Clinton and Obama aren't completely crazy to think this tactic could be applied towards China.

3) On the whole, this tactic has worked because the U.S. has a really big market, and the countries we've targeted for sanctions have been much smaler, highly dependent upon the U.S. market, and don't have more than a trillion dollars in U.S. debt lying around.

4) China is a pretty big economy, and they do have that trillion dollars. If the regime is facing any domestic pressure, it's a nationilist impulse to say "f#@k you" to the United States. Furthermore, we're asking them to do something far more significant than enforce intellectual property rights in some sectors. We're asking them to f$%k with what's been their primary engine for growth for the past two years. DeLong is correct that this engine is unsustainable in the long run, but -- and this is the key point -- they're not going to acquiesce to this threat anytime soon. If anything, nationalist sentiment will make it less likely that Beijing would acquiesce after sanctions were imposed than at the present moment.

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.

posted by Dan at 03:06 PM | Comments (15) | Trackbacks (0)



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.

The proposal came from Representative John D. Dingell of Michigan, chairman of the House Energy and Commerce Committee, and it runs directly counter to the view of most Democrats that any tax on energy would be a politically disastrous approach to slowing global warming.

But Mr. Dingell, in an interview to be broadcast Sunday on C-Span, suggested that his goal was to show that Americans are not willing to face the real cost of reducing carbon dioxide emissions. His message appeared to be that Democratic leaders were setting unrealistic legislative goals.

“I sincerely doubt that the American people will be willing to pay what this is really going to cost them,” said Mr. Dingell, whose committee will be drafting a broad bill on climate change this fall.

“I will be introducing in the next little bit a carbon tax bill, just to sort of see how people think about this,” he continued. “When you see the criticism I get, I think you’ll see the answer to your question.”

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.

Informing people about the cost of climate change legislation is good as long as it is done honestly and people are informed at the same time about the dangers we face if we do not act to drastically reduce our emissions of greenhouse gases....

So what about the carbon tax on the merits? Is it a good idea? There are a number of sincere proponents of a carbon tax. They believe that it is easier to administer than a cap and trade program. On that point they are probably right. However I am afraid it has a fatal flaw that has nothing to do with the technical arguments of a carbon tax versus a cap and trade approach.

I have favored the cap and trade approach because I felt that a carbon tax would be too vulnerable to political attack. I am afraid that the necessity of addressing global warming will be in great danger of being lost in the noise if a carbon tax is the centerpiece of climate change legislation.

If Dingell introduces his carbon tax we may soon find out if congress will be able to discuss it in a reasonable and rationale fashion or whether the debate descends into raw bumper sticker politics. My bet is the latter. Dingell's carbon tax has the potential to derail climate change legislation in the House. Maybe that is what he wants.

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.

posted by Dan at 09:26 AM | Comments (10) | Trackbacks (0)



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."

But in the labs and cubicles where General Motors Corp. workers design and market new cars, the true leads are the Chevrolet Camaro, Pontiac Solstice, GMC TopKick and Hummer H2.

"You're going to see these cars as the heroes. You're not going to see the other actors," said Dino Bernacchi, GM's associate director of branded entertainment. "These cars are the stars, literally, in the movie."

GM, which long has sought to reach younger car buyers to so-so results, is hoping to draw the 18-to-34 set to its showrooms thanks to the company's oversized presence in the film and in the accompanying toys and video games.

The Detroit auto giant is spending millions to promote and market its "Transformers" tie-ins, but wouldn't give a figure. With a shrinking U.S. automotive market and amid stiff competition from overseas rivals, GM is banking on the exposure translating into sales.

"This is hopefully a discovery point for maybe some of those who didn't know the great design, the great-looking vehicles that we have out today," Bernacchi said. "I find it really difficult to believe that a global blockbuster movie like this that has so many merchandising components to it that we're not going to get incremental exposure."


posted by Dan at 02:42 PM | Comments (4) | Trackbacks (0)



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.

And what might that look like? Glad you asked.

  • First, raise the number of legal immigrants by about 50 percent, to about 1.8 million a year. That meets the economy's demonstrated demand for workers.

  • Second, provide pathways to permanence. Bring in these 1.8 million people on temporary visas, say for three to five years, with the promise of permanent legal residency (a green card) if they stay out of trouble, pose no security risk, and work or get a college degree.

  • Third, don't micromanage who gets in. Allocate visas using a simple three-way formula that gives about equal weight to family, work, and education: 600,000 family visas for close relatives of citizens and green-card holders; 600,000 work visas for people who are sponsored by an employer and have less than a bachelor's degree; 600,000 education visas for people who hold a bachelor's degree or higher, with first call going to those who also have employer sponsorships or family ties.
  • There is no chance, at the moment, that this plan will be adopted. But there is some chance that making the case for it might help clarify what the country should be shopping for in an immigration reform measure.

    The most basic decision any immigration bill needs to make is this: How many immigrants does the country need and want? Bizarrely, this was the one question that the debate over the Senate bill did not seem to concern itself with. Even finding estimates for total immigration under the Senate reform proved dauntingly difficult until the Congressional Budget Office published some projections last week.

    Hat tip: Virginia Postrel.

    posted by Dan at 07:57 AM | Comments (10) | Trackbacks (0)



    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.

    But there’s another side to that coin.

    Energy is a zero sum game. Unlike trading technologies or other complex goods, trading energy commodities does not create value. In fact, the immutable laws of physics dictate that transmission of oil, gas or any other store of potential energy costs more energy the farther it has to travel. At some point, in fact, you could expend more energy to transmit a gallon of gas than you could ever get out of that gallon, resulting in a net energy loss.

    Thus, importing energy from abroad only works as long as that energy is both cheaper to extract and transport than it would be to generate here at home, and–here’s the real key–as long as the governments that control the resources are willing to sell them to us.

    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 10% reasoned argument and 90% political compromise, as I’ve been very recently reminded, and I am surprised that such an impressive group of Washington insiders would be so short-sighted about our national interest.

    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.

    posted by Dan at 08:16 AM | Comments (3) | Trackbacks (0)



    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.

    The bill would send exchange rate disputes to the World Trade Organisation by treating them as unfair export subsidies and includes a range of sanctions. The move will increase pressure on the White House to toughen its stance on Beijing.

    Lawmakers say China’s fixed exchange rate subsidises its exports and has contributed to a record annual bilateral US trade deficit of $233bn (£118bn)....

    The legislation has gathered momentum in the Senate and would allow US companies to appeal for anti-dumping duties on Chinese goods based on the distorted value of the currency.

    The bill was introduced by Max Baucus, chairman of the Senate finance committee, and co-sponsored by Charles Grassley, ranking Republican on the committee. It is also backed by Charles Schumer and Lindsey Graham, who previously proposed a unilateral 27.5 per cent US tariff on Chinese goods that would have violated WTO rules. A tougher version of the bill is being prepared by a bipartisan group in the House of Representatives.

    Mr Schumer said: “This breakthrough proposal is like nothing else because it’s tough, wide-reaching and WTO-compliant. The previous legislation got China’s attention; the purpose of this legislation is to force change.”

    David Christy, a lawyer at Miller and Chevalier, said any attempt by the US to apply anti-dumping duties against Chinese goods based on the value of the country’s currency could fall foul of WTO rules.

    The US Treasury, meanwhile, again shied away from branding Beijing a currency manipulator in its semi-annual currency report to Congress.

    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.

    If this trend continues, and if the Administration cannot organize a fact-based presentation which manages to offset the emotional, fundamentally fact-bereft bombs being thrown, KORUS is a dead letter....

    The Members came armed to the teeth with attack questions prepared by the Auto Caucus, and Chairman Brad Sherman let them make their opening statements unedited for the first 47 minutes.

    Bhatia and Hill were then given 5 minutes - timed to the milisecond - to summarize their testimonies. So absurdly out of balance was the process that Sherman actually banged his gavel to interrupt Bhatia's testimony as it sought to answer the key auto questions already thrown at him.

    Hill had on the table with him a copy of the book "The Power of Faith and Fantasy", and one suspects it took all his diplomatic gravitas to refrain from flinging it at Manzullo, when he was bitterly insulted for the sin of helping Chrysler organize a display of certain products on his embassy residence's lawn, while serving as US Ambassador in Seoul....

    The impassioned speeches also offered brilliant insights such that the Administration's claims for good jobs being created by FTA's could not possibly be true, because when you have a trade deficit, that means there has to be a big job loss.

    We're not making this up. In fact, on one level, this hearing was an insult to the intelligence of Congres.

    However, on the political level, this hearing was serious as a heart-attack, as it shows that until or unless the US business interests which would benefit from KORUS get organized and step foward - services, banking and investments, etc. - that the Auto Caucus can win by bullying and the Big Lie.

    And in fairness to the Members who unwittingly embarrassed themselves this morning, they are at least honestly reflecting the pervasive angst over globalization which political America is wrestling with these days.

    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.

    What's the best way for Congress to exacerbate this trend?

    A) Subpoenaing White House aides.

    B) Getting mired down over earmark reform.

    C) Fret about Congress' low standing in public opinion.

    D) Raise the price and increase uncertainty of import flows?

    I'm sure Chuck Schumer, eminent economist, will figure out the correct answer.

    Meanwhile, James Pethokoukis worries that Congress is partying like it's 1929.

    posted by Dan at 08:54 AM | Comments (8) | Trackbacks (0)



    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.

    After a year of sub-par growth unemployment is a mere 4.5 per cent. With jobs growth strong but output growth weak, productivity looks very poor....

    The Bureau of Labor Statistics payroll survey shows total construction employment and residential construction employment down just 2 per cent year on year in May, the latest month for which figures are available.

    The absence of the expected drain of net job losses in construction is the single biggest reason why overall job gains remain so strong – 157,000 in May – and unemployment remains so low....

    There are a number of possible explanations.

    One is that companies are hoarding labour in expectation of a rapid rebound in the housing market. This looks increasingly implausible as the housing correction drags on.

    Another is that there is a time lag in construction and big job losses are just around the corner.

    There may be some truth to this. But the slowdown has already been under way for a long time.

    New home starts peaked in May 2005. The 12-month rolling average (new starts over the preceding 12 months) peaked at 2.1m in March 2006 and has since fallen to 1.6m.

    If it all fails to add up, the answer may be that the official statistics are not accurately capturing what is taking place in an industry that employs both a large number of small subcontractors and a large number of illegal immigrants. Specialty trade contractors – who work for small subcontracting firms – account for nearly two-thirds of all construction jobs. These workers tend to belong to small, often informal businesses.

    The payroll survey is likely to understate the extent to which these workers have switched from the residential sector to fast-growing commercial construction....

    The separate BLS household survey does show a 300,000 increase in the number of people working part-time for economic reasons over the past year.

    The labour market statistics may also be missing a big decline in work by illegal migrants, who make up perhaps 20 per cent of the construction workforce.


    posted by Dan at 06:20 AM | Comments (5) | Trackbacks (0)



    Tuesday, May 29, 2007

    An incentive puzzle on education

    Via Brad DeLong comes this puzzling Washington Wire post from Wall Street Journal economics reporter extraordinaire Greg Ip:

    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.

    Earlier this decade, there were signs of a shift. Responding perhaps to both the college wage premium and the weak job market, the proportion of high-school students who enrolled in college the fall after they graduated rose from 61.7% in 2001 to 68.6% in 2005, the highest since data began in 1959. To be sure, many of those enrollees never finished college but on balance it suggested the supply of college graduates was about to head higher.

    But last fall, the college enrollment rate dropped back to 65.8%, the Bureau of Labor Statistics reported this week.

    Exactly why is unclear. The tighter labor market ought to have encouraged some kids to take jobs instead of go to college. But the report showed just 46% of high-school graduates were working last fall, down from 49.3% the prior year. The proportion unemployed but looking for work rose to 13.7% from 11.4%, and the proportion neither working, looking for work nor in college also rose, to 12.3% from 9.9%.

    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.

    posted by Dan at 11:45 PM | Comments (7) | Trackbacks (0)



    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.

    Over at Capital Commerce, James Pethokoukis argues that the slowdown should not be a cause for concern:

    [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:
    "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.
    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.

    Developing....

    posted by Dan at 09:03 AM | Comments (6) | Trackbacks (0)



    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!

    For example, I have to take issue with the central argument of this Rodrik post:

    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....

    Yet when we teach comparative advantage and explain the gains from trade, we typically overlook this important conclusion. We expect our students to focus on the net gain triangles and disregard the rectangles of redistribution. In particular, we do not ask whether the trade opportunity involves an exchange that most people would consider unacceptable if it took place at home. So it is immaterial to our story if the gains from trade are created, say, by a company shutting down its factory at home and setting up a new one abroad using child labor. (By the way, I chose $3 and $2 in my example as these values are commensurate with the relative magnitudes that come out of trade models under reasonable elasticities.)

    The thought experiment clarifies, I think, why the archetypal man on the street reacts differently to trade-induced changes in distribution than to technology-induced changes (i.e., to technological progress). Both increase the size of the economic pie, while often causing large income transfers. But a redistribution that takes place because home firms are undercut by competitors who employ deplorable labor practices, use production methods that are harmful to the environment, or enjoy government support is procedurally different than one that takes place because an innovator has come up with a better product through hard work or ingenuity. Trade and technological progress can have very different implications for procedural fairness. This is a point that most people instinctively grasp, but economists often miss.

    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:
    a) Tom is 30 cents richer;
    b) Jerry is two dollars poorer;
    c) 135 people are two 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.

    2) If the redistribution takes place because of regulatory races to the bottom like Rodrik claims, then he's got a point. What if, however, the redistribution takes place because of honest-to-God wage differentials? There will still be political objections even if Rodrik's provedural fainess critreria are met. How often does Rodrik's story happen as opposed to a standard wage story? As I've said before [Yes, several times--ed.], races to the bottom are pretty rare [UPDATE: for a counterargument that supports Rodrik, check out this Steven Pearlstein column in the Washington Post.]

    3) Finally, it's worth pointing out that national identities matter more that questions of procedural fairness. When the the U.S. textile industry moves from the Northeast to the South to take advantage of cost differentials, there is less complaint than when the industry moves from South Carolina to China.

    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.

    posted by Dan at 09:13 AM | Comments (10) | Trackbacks (0)



    Thursday, April 19, 2007

    Who are the go-to economists for the 2008 campaign?

    David Leonhardt provides the answer in the New York Times:

    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.

    posted by Dan at 11:01 AM | Comments (7) | Trackbacks (0)



    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.”

    I realise I have exaggerated for effect, and counter that it is equally preposterous to insist they will work. ”I know,” he says, ”but how do you actually do something in life? Do you list all the things that may go wrong and then decide we won’t do it, or do you actually try?”

    We talk about global warming. It’s easily solvable, Sachs insists, because the costs of doing something about carbon emissions are exaggerated - so people will soon realise that they can cut carbon emissions without much pain. We talk about global trade - all the US has to do is offer an aid, trade and climate change deal to the rest of the world and a solution is within reach. We talk about US healthcare - within a few years, people will see sense and the uninsured will be covered, he predicts.

    As coffee arrives, I wonder aloud whether economics really can solve these big global challenges. In Sachs’s world, problems aren’t really problems because there is always an easy solution. I suggest vested interests, national differences and the fact that reforms tend to throw up winners and losers make issues rather more intractable than he believes. Bringing the subject full circle back to his lectures, he says: ”The key word of all of these lectures is ’choice’. A generation has a choice, and we have choices we make collectively... We have some absolutely terrific opportunities... but we miss opportunities all the time. That’s why it is really important to understand what these choices are - and that is what I’m trying to explain in these lectures.”

    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.

    posted by Dan at 10:22 AM | Comments (6) | Trackbacks (0)



    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.

    Negotiators announced the agreement, reached after 10 months of negotiations, just in time to comply with a legislative deadline in the United States, after which President Bush’s “fast-track” authority to negotiate foreign trade deals without amendments from Congress would expire.

    “This is a strong deal for America’s farmers and ranchers who will gain substantial new access to Korea’s large and prosperous market of 48 million people,” Karan Bhatia , the deputy United States trade representative, said in Seoul today.

    “Neither side obtained everything it sought,” she added.

    If ratified, the trade deal will eliminate tariffs on more than 90 percent of the product categories traded between the two countries. South Korea agreed to lift trade barriers to iconic American products like cars and beef, while the United States abandoned a longstanding demand that Seoul eliminate subsidies on South Korean rice....

    The breakthrough came when both sides compromised on the most sensitive, deal-breaking issues. Washington dropped its demand that the South Korean government stop protecting its politically powerful rice farmers, and Seoul agreed to resume imports of American beef, halted three years ago over fears of mad cow disease, if, as expected, the World Organization on Animal Health declares United States meat safe in a ruling scheduled in May.

    South Korea also agreed to phase out the 40 percent tariff on American beef over 15 years. It will remove an 8 percent duty on cars and revise a domestic vehicle tax system that United States officials say discriminates against American cars with bigger engines.

    The United States will eliminate the 2.5 percent tariff on South Korean cars with engines smaller than 3,000 cubic centimeters, phase out the 25 percent duty on trucks over 10 years, and remove tariffs, which average 8.9 percent, on 61 percent of South Korean textiles.

    The deal “will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States,” President Bush said in a letter notifying Congress of his intention to sign the accord.

    President Bush said the trade pact would strengthen ties between the two countries — an assessment shared by analysts who had repeatedly warned that the alliance, forged during the Korean War, has frayed during the terms of President Bush and President Roh Moo Hyun of South Korea, largely over policy toward North Korea.

    The deal is the biggest of its kind for the United States since the North American Free Trade Agreement in 1994 with Canada and Mexico. It is Washington’s first bilateral trade pact with a major Asian economy.

    Studies have estimated that the accord will add $20 billion to bilateral trade, estimated last year at $78 billion. Potential gains to the United States economy range from $17 billion to $43 billion, according to Usha Haley, director of the Global Business Center at the University of New Haven. South Korea’s exports to the United States are expected to rise in the first year by 12 percent, or 5.4 billion....

    Consumers in both countries are the deal’s biggest winners. Hyundai cars and Samsung flat-panel TV sets, as well as Korean-made clothing, will become significantly cheaper in the United States.

    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.

    The action, announced by Commerce Secretary Carlos M. Gutierrez, signaled a tougher approach to China at a time when the administration’s campaign of quiet diplomacy by Treasury Secretary Henry M. Paulson Jr. has produced few results.

    The step also reflected the shift in trade politics since Democrats took control of Congress. The widening American trade deficit with China, which reached a record $232.5 billion last year, or about a third of the entire trade gap, has been seized upon by Democrats as a symbol of past policy failures that have led to the loss of hundreds of thousands of jobs.

    Mr. Gutierrez’s announcement has the immediate effect of imposing duties on two Chinese makers of high-gloss paper, one at 10.9 percent and the other 20.4 percent, calculated by adding up the supposedly illegal subsidies.

    But trade and industry officials say future actions based on the department’s new policy could lead to duties on imports of Chinese steel, plastics, machinery, textiles and many other products sold in the United States, if as expected those industries seek relief and the department finds that they are harmed by illegal subsidies.

    [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.

    But these antidumping duties tend to be small compared with duties imposed for illegal subsidies when they are employed by trading partners with free market economies. Since the 1980s, the United States has barred antisubsidy duties in Communist or nonmarket economies.

    The rationale has been that it is impossible to determine what a subsidy is in a state-controlled economy, and that government-run businesses in China did not make marketing decisions based on their subsidies because they were merely told what to do by the authorities.

    Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower with sophisticated marketing and manufacturing techniques and a determination to find jobs for hundreds of millions of poor Chinese.

    “The China of today is not the China of years ago,” Mr. Gutierrez said. “Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly.”

    Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But the administration’s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization.

    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.


    posted by Dan at 12:40 PM | Comments (7) | Trackbacks (0)



    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?")

    3) Brad DeLong links to subscriber-only stories about heterodox economic takes on trade, so I don't have to. First, there's Dani Rodrik's Financial Times op-ed:

    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.

    That is because the greatest obstacle to sustaining a healthy, globalised economy is no longer insufficient openness. Markets are freer from government interference than they have ever been.... [N]o country's growth prospects are significantly constrained by a lack of openness in the international economy. Even if the Doha trade round fails, poor countries will have enough access to rich country markets to achieve what countries such as China, Vietnam and India have been able to do....

    Globalisation's soft underbelly is the imbalance between the national scope of governments and the global nature of markets. A healthy economic system necessitates a delicate compromise between these two. Go too much in one direction and you have protectionism and autarky. Go too much in the other and you have an unstable world economy with little social and political support from those it is supposed to help. If there is one lesson from the collapse of the 19th century version of globalisation, it is that we cannot leave national governments powerless to respond to their citizens. The genius of the Bretton Woods system, which lasted for about three decades after the second world war, was that it achieved such a compromise. Some of the most egregious restrictions on trade flows were removed, while allowing governments freedom to run independent macroeconomic policies and erect their own versions of the welfare state. Developing countries were free to pursue their own growth strategies with limited external restraint. The world economy prospered like never before.

    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....

    Mr. Blinder's job-loss estimates in particular are electrifying Democratic candidates searching for ways to address angst about trade. "Alan, because of his stature, provided a degree of legitimacy to what many of us had come to feel anecdotally -- that the anxiety over outsourcing and offshoring was a far larger phenomenon than traditional economic analysis was showing," says Gene Sperling, an adviser to President Clinton and, now, to Hillary Clinton. Her rival, Barack Obama, spent an hour with Mr. Blinder earlier in this year....

    Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans. At a Princeton dinner, a Wall Street executive told Mr. Blinder how pleased her company was with the securities analysts it had hired in India. From New York Times' columnist Thomas Friedman's 2005 book, "The World is Flat," he found anecdotes about competition to U.S. workers "in walks of life I didn't know about."....

    At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" published last year in Foreign Affairs. "The old assumption that if you cannot put it in a box, you cannot trade it is hopelessly obsolete," he wrote. "The cheap and easy flow of information around the globe...will require vast and unsettling adjustments in the way Americans and residents of other developed countries work, live and educate their children."... In that paper, he made a "guesstimate" that between 42 million and 56 million jobs were "potentially offshorable." Since then he has been refining those estimates, by painstakingly ranking 817 occupations, as described by the Bureau of Labor Statistics, to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable.

    He says the most important divide is not, as commonly argued, between jobs that require a lot of education and those that don't. It's not simply that skilled jobs stay in the US and lesser-skilled jobs go to India or China. The important distinction is between services that must be done in the U.S. and those that can -- or will someday -- be delivered electronically with little degradation in quality. The more personal work of divorce lawyers isn't likely to go overseas, for instance, while some of the work of tax lawyers could be. Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be.

    Mr. Blinder's warnings, and his numbers, are now firmly planted in the political debate over trade.

    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;

    b) Will be done electronically by someone living outside the United States;

    c) This job shift will happen incredibly quickly;

    d) The U.S. economy will fail to create new jobs or job categories in response.

    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."

    posted by Dan at 04:12 PM | Comments (14) | Trackbacks (0)



    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.

    posted by Dan at 09:16 AM | Comments (8) | Trackbacks (0)



    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."

    Investors were excited by these economies' high growth rates, but suspicious of regulatory environments that were far from transparent and governments prone to corruption. As they lost confidence in the countries' currencies and securities, investors pulled their money out en masse. Last week, there were concerns that a dramatic drop in Asian stock values might provoke a similar loss of confidence and capital flight....

    [Unlike the Wall Street Journal editorial page,] many economists drew precisely the opposite lessons [from the Asian financial crisis]: That open capital markets sometimes behave like irrational mobs, and that government-imposed capital controls can be essential tools for developing countries to preserve stability.

    The most famous exponent of this view is the Nobel Prize-winner Joseph Stiglitz, former chairman of President Bill Clinton's Council of Economic Advisors, who was the World Bank's chief economist during the crisis. Interviewed last week on the risks to Asian markets today, Stiglitz said capital controls are widespread in emerging markets, and in many cases, that's a good thing....

    [D]espite the persistence of these laissez-faire views, a quiet shift may be taking place. Economists and financial analysts today are more likely than they were 10 years ago to accept the need for certain capital controls. Some are even willing to admit it. (emphasis added)

    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.

    posted by Dan at 11:33 AM | Comments (6) | Trackbacks (0)



    Tuesday, February 27, 2007

    James Galbraith confuses me

    Greg Mankiw alerts me to a James Galbraith essay in The Nation that claims to take on Hamilton Project Democrats. Galbraith focuses on trade policy first, and comes to the following conclusion:

    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.

    posted by Dan at 10:57 AM | Comments (8) | Trackbacks (0)



    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.

    posted by Dan at 09:23 AM | Comments (3) | Trackbacks (0)



    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.

    Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

    But grants also became popular for a less worthy reason: they made life easier for the government bureaucrats who oversaw them and for the scientists who received them. Robin Hanson, an economist at George Mason University who has studied the history of prizes, points out that they create a lot of uncertainty — about who will receive money and when a government will have to pay it. Grants, on the other hand, allow a patron (and the scientists advising that patron) to choose who gets the money. “Bureaucracies like a steady flow of money, not uncertainty,” said Mr. Hanson, who worked as a physicist at NASA before becoming an economist. “But prizes are often more effective if what you want is scientific progress.”....

    [There] are the two essential advantages of prizes. They pay for nothing but performance, and they ensure that anyone with a good idea — not just the usual experts — can take a crack at a tough problem. Much to the horror of the leading astronomers of the day, a clockmaker ultimately claimed the longitude prize.

    Grants are still crucial. (Someone has to be paying those computer scientists while they’re trying to win the Netflix prize.) But it seems pretty clear that our research system doesn’t pay for results often enough.

    Just look at how both political parties have so far tried to deal with global warming. They have handed out grants and subsidies for various alternative energy sources like ethanol, even though nobody knows what the best sources will ultimately be. A much smarter approach would be to mandate that the economy use less carbon. This would effectively set up a multibillion-dollar prize — in the form of new customers — for whichever companies came up with efficient energy sources.

    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.

    UPDATE: Robin Hanson --cited in the above article -- elaborates on the historical switch from prizes to grants here.

    posted by Dan at 07:48 AM | Comments (2) | Trackbacks (1)



    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:

    2) Paul Krugman offers his take on Friedman in the New York Review of Books:

    [A]lthough this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man.

    Milton Friedman played three roles in the intellectual life of the twentieth century. There was Friedman the economist's economist, who wrote technical, more or less apolitical analyses of consumer behavior and inflation. There was Friedman the policy entrepreneur, who spent decades campaigning on behalf of the policy known as monetarism—finally seeing the Federal Reserve and the Bank of England adopt his doctrine at the end of the 1970s, only to abandon it as unworkable a few years later. Finally, there was Friedman the ideologue, the great popularizer of free-market doctrine.

    Did the same man play all these roles? Yes and no. All three roles were informed by Friedman's faith in the classical verities of free-market economics. Moreover, Friedman's effectiveness as a popularizer and propagandist rested in part on his well-deserved reputation as a profound economic theorist. But there's an important difference between the rigor of his work as a professional economist and the looser, sometimes questionable logic of his pronouncements as a public intellectual. While Friedman's theoretical work is universally admired by professional economists, there's much more ambivalence about his policy pronouncements and especially his popularizing. And it must be said that there were some serious questions about his intellectual honesty when he was speaking to the mass public.

    It should be pointed out that Krugman has also played all three roles in his career -- I'll be intrigued to see whether he gets accused of similar flaws down the road.

    3) Virginia Postrel has a nice round-up of links.

    4) The Economist's Free Exchange offers an assessment of how far Friedman pushed policymakers:

    And though he may not have achieved the low-government paradise he sought, he wrought a crucial change in the way that we expect government to serve us. Before Milton Friedman, progressives pursuing an idealised version of technocratic government bureaucrats running a vast government apparatus that would take over more and more of the functions of the economy. Milton Friedman's revolutionary idea was that, to the extent that government should help people, it should do so by giving them money, and the freedom to choose what was best for them. America's Earned Income Tax Credit, which has proven wildly successful at helping the poor into the workforce, is the most prominent programme along these lines, but by no means the only one.

    posted by Dan at 06:51 PM | Comments (3) | Trackbacks (0)



    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.

    These statistics illustrate a recent and growing trend of dynamism in our job market, especially among younger workers. Data on labor demand in the United States, gathered for the Job Openings and Labor Turnover Survey (JOLTS), show that the 12 months ending in November had the highest average of labor turnover since the U.S. government began tracking this information in 2000. But the data also show that our economy has maintained a consistently strong ratio of new hires to separations. Over the year ending in November, new hires in America exceeded employee separations by an average of 364,000 per month....

    In fact, our workers lead the international marketplace in this trend. Job tenure averages 6.6 years for Americans, compared with an average of 8.2 years for Britons, 10.6 years for Germans, 11.2 years for the French and 12.2 years for the Japanese. Even more striking is that, on average, workers in the United States will have 10 different employers between ages 18 and 38.

    This dynamism of our labor force strengthens the U.S. economy because each move to a new employer can involve greater responsibility, greater pay or both. And the time workers spend in search of employment is decreasing. In December, the average duration of a job search was the shortest in more than four years.

    Unfortunately, what usually makes headlines is a big company's layoff of workers. What gets less coverage is the 40 months of job growth we have recently enjoyed, the historically low unemployment rate (4.5 percent), record tax revenue and an acceleration in real wage growth over the past year. This is good news for the generation preparing to graduate from high school and college. Unlike their grandparents, who built careers around companies rather than opportunities, members of the class of 2007 will enter the workforce with an understanding that change may be the only constant in their professional careers.

    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.

    posted by Dan at 08:59 PM | Comments (6) | Trackbacks (0)



    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.

    Chemical plants that reduce the amount of polluting HFC gases they release into the atmosphere receive “carbon credits” in return. Such credits can fetch $5 to $15 on the international carbon market.

    The equipment, known as “scrubbers”, to reduce HFC gases is cheap to install, at $10m-$30m (£5m-£15m) for a typical factory, according to industry estimates. Installing such equipment can generate millions of carbon credits, because HFC-23 is a greenhouse gas many times more potent than carbon dioxide.

    Mark Woodall is chief executive of Climate Change Capital, which has a portfolio of about 50m certified emission reductions, or carbon credits,worth up to $750m, derived from Chinese HFC projects. He said: “They were deals that could be done relatively quickly and did not need a large amount of capital. These projects have a good track record of delivering the credits because of the low methodology and low technology risk.”

    The practice is perfectly legal but effectively allows the factories and the companies through which they trade carbon credits to make big profits. The eventual buyers of the credits are governments in developed countries that have agreed to cut their greenhouse gas output under the Kyoto protocol....

    But some carbon specialists are uneasy that the use of credits generated by HFC reductions is distorting the market. Tristan Fischer, chief executive of Camco International,a carbon trader, told the Financial Times: “HFCs are controversial.”

    He said regulations to force factories to fund HFC reduction from profits might work better than allowing them to benefit from the carbon markets, or “perhaps the World Bank should fund the installation of scrubbers”.

    About 60 per cent of “certified emissions reductions” issued under the Kyoto protocol are estimated to be from HFC reduction projects, although the gas makes up a small fraction of industrial greenhouse gas emissions.

    Mitchell Feierstein, head of emissions products at Cheyne Capital Management UK, the fund management company, said: “Carbon dioxide and methane clearly represent the majority of the problem. We believe a proportional amount of investment should be focused on technologies...to curb emissions.”

    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.

    posted by Dan at 08:48 AM | Comments (11) | Trackbacks (0)



    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.

    A think-tank attached to the commerce ministry said that an “appropriate or modest” appreciation of the renminbi would benefit China’s economy and trade “in the long run”.

    “In the near term, a 3 per cent appreciation of the renminbi every year will not have an obvious or apparent influence on the overall increase of China’s trade,” said the report, which was posted on the ministry’s website.

    The ministry said previously a 3 per cent appreciation would wipe out the profits of many exporters because of the razor-thin margins under which businesses operate. However, the ministry’s position has become increasingly untenable, with the trade surplus soaring during the past 18 months, a period in which the renminbi appreciated by more than 6 per cent against the US dollar. (emphasis added)

    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).

    Developing....

    posted by Dan at 10:40 PM | Comments (1) | Trackbacks (0)



    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;

    2) Policy X is generally acknowledged to be bad by policy wonks across the ideological spectrum;

    3) The left half of the policy-wonk blogosphere blames Republicans for being responsible for implementing said idiotic policy;

    4) The right half of the political blogosphere responds by pointing out the complicity of several Democrats in getting political approval of the policy;

    5) The left half responds that this is besides the point, because the Republicans hold all the levers of power, so they're the ones who are to blame

    6) Raucus name-calling debate ensues.

    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.

    But the split is not unique to Democrats. As with immigration, Republicans are no less divided on this issue....

    The point here is not to answer all the questions that surround the trade issue, but simply to emphasize that the divisions that exist are not confined to a particular party no matter what some pundits would have you believe.

    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.

    posted by Dan at 02:15 PM | Comments (1) | Trackbacks (0)



    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....

    Owners of Venezuelan steel, banking, cement and hotel companies — even the cable car operator that takes tourists to the top of the Ávila mountain here — could be affected by the push toward nationalization, analysts said.

    “Chávez is deepening his revolution, but in doing so will he follow the law and compensate the companies whose assets will be nationalized?” said Miguel Octavio, executive director of BBO Servicios Financieros, a brokerage firm, who calculated the costs of taking over companies in the telecommunications, electricity and oil industries, as well assuming their debts, at more than $15 billion.

    “It doesn’t seem like the government has thought this project out yet,” Mr. Octavio said.

    Tony Snow, a White House spokesman, said on Tuesday, “Nationalization has a long and inglorious history of failure around the world. We support the Venezuelan people and think this is an unhappy day for them.”

    Mr. Chávez further intensified worries with his request for vastly enhanced presidential authority from his Congress. If successful, those new powers would allow him to decree measures into law for one year, bypassing any debate in the legislature, where in any case all 167 deputies are his supporters. On top of that, he made a request to abolish the autonomy of Venezuela’s central bank. The Venezuelan government did not immediately contact the American companies, which declined to discuss details.

    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.

    "It is unacceptable when there are no consultations over these actions," Merkel said during a joint news conference with the European Commission president, José Manuel Barroso, in Berlin. "That hurts trust and it makes it difficult to build a cooperative relationship based on trust."

    Russia on Monday halted shipments to Belarus after Minsk imposed a tariff on Russian oil in retaliation for an increase in the price of Russian oil exports to Belarus. Belarus, one of Russia's main routes for piping its oil to Europe, admitted that it had siphoned off some oil destined for European customers after Russia cut the shipments through the Druzhba, or Friendship, pipeline.

    Barroso said it was "not acceptable for suppliers or transit countries to take measures without consultation," adding, "Of course this is a matter for concern."

    Germany depends on Russia for a third of its natural gas and a fifth of its oil. Russia supplies a quarter of the EU's gas and about a fifth of its oil.

    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....

    A regime insider told the FT last week there was no chance Iran would accept the resolution within the 60-day deadline, and would go ahead with plans to extend the number of centrifuges - devices for enriching uranium - in the research plant at Natanz.

    But pragmatists in Tehran have become bolder in pronouncements, because of their concern at the scope of the UN resolution and because of the reverse suffered by President Mahmoud Ahmadi-Nejad last month in elections for local councils and for a top clerical body. "The mood has shifted but not yet policy," the insider said. "There may well be changes in the leadership's approach, but not immediately."....

    Iran's Fars news agency yesterday ran a long interview with Hossein Mousavian, a former nuclear negotiator close to former president Akbar Hashemi Rafsanjani, in which he described the UN Security Council as the "highest international legislative authority" and criticised the government of Mr Ahmadi-Nejad for attacking the council's resolution as "illegal".

    But yesterday, Ayatollah Ali Khamenei, Iran's supreme leader, reiterated that nuclear energy was "a source of pride for the Iranian nation and Islamic world" and that Iran would not give up its "right".

    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."

    Developing....


    posted by Dan at 08:47 AM | Comments (2) | Trackbacks (0)



    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.

    The only American port now on the top-10 list is Los Angeles-Long Beach, an indication of how much maritime trade has shifted from the North Atlantic to the North Pacific.

    A major factor in the decline of American shipping has been an antiquated law that prevents American coastal shippers from buying ships made in other countries. By amending this law and, at the same time, encouraging the development of domestic coastal shipping, Congress could help restore America’s status as a great and proud maritime nation....

    Shipping has always been the most economically efficient way to carry goods from place to place; it requires no investment in highways or rails, and thanks to the relatively frictionless ease with which ships move across water, fuel costs per ton are low. The arrival of containerized shipping pushed transport costs even lower, swelling world trade and expanding global wealth....

    The export-driven economies of Pacific Asia built much of their enormous success upon the new maritime technologies. The United States did not. The Merchant Marine Acts of the 1920s and ’30s are one reason why.

    Intended to protect the domestic shipbuilding industry, the acts decreed that the only ships allowed to call on two or more consecutive American ports would be those built in the United States, owned by American companies, flying the American flag and operated by American crews.

    At the time, the United States still had a large merchant marine. But the acts’ restrictions handicapped coastal shipping within American waters, opening the way for the growth of the trucking and freight-rail industries.

    To revive the maritime trade, Congress should give shipping companies as much choice in buying ships as their land-based rivals have when buying trucks and train cars.

    Freed from the restraints of the Merchant Marine Acts, commercial shippers could not only begin to resume their position in global trade but also handle much more of the freight that moves within our borders. Before railroads and highways were developed, a network of water transportation routes connected America’s port cities and towns. Today coastal shipping handles only 2 percent of domestic freight, even though coastal counties hold more than half of the nation’s population.

    The trucks that carry nearly a third of our cargo clog the highways. That is one reason why Americans now lose at least 3.7 billion hours and 2.3 billion gallons of fuel each year sitting in traffic. Ships could take on a larger share of this freight — and even some of the passengers now traveling by highway and rail — and carry it at lower cost....

    Americans are rightfully concerned about security, but part of protecting the nation is generating a strong economy. Revitalized coastal shipping could shorten our morning commutes as it begins to rejuvenate America’s wider maritime economy.

    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

    posted by Dan at 08:38 AM | Comments (12) | Trackbacks (0)



    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?

    The paradoxical answer is neither of these scenarios. The technological revolution that has driven the current wave of globalization will continue. Communication will become still cheaper and easier, allowing corporations to spread their operations -- research and development, design, and manufacturing -- around the planet. Companies will exploit scientific talent in other countries to spark a new wave of technological innovation.

    At the same time, certain barriers will start to rise. The institutional foundations of globalization -- such as the rules that oblige governments to keep their markets open and the domestic and international politics that allow policymakers to liberalize their economies -- have weakened considerably in the past few years. Politicians and their constituents in the United States, Europe, and China have grown increasingly nervous about letting capital, goods, and people move freely across their borders. And energy -- the most globalized of products -- has once more become the object of intense resource nationalism, as governments in resource-rich countries assert greater control and ownership over those assets.

    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.

    "This is no longer people criticizing the Department of Labor for one or two cases. This is a systemwide problem," said Howard Rosen, a former congressional staffer who now heads an organization calling for changes in the trade adjustment program.

    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.

    America was split dramatically between the haves and have-nots. It was a harsh work world for many: nasty, brutish and, too often, short.

    Worker activism, new laws and court decisions changed all that during the past century....

    The new mobility of capital and technology, coupled with the revolution in information technology, makes production of goods possible throughout much of the world. But much of the world at the beginning of the 21st century looks a lot like the United States did 100 years ago: Workers are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day, six or seven days a week, for only a few dollars a day.

    The result has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights. U.S. trade agreements paved the way for this race: While rejecting protections for workers or the environment, they protected investors and corporate interests....

    We must insist that all trade agreements have labor, environmental and other protections so that American workers can compete on a level playing field. Trade agreements must also be reciprocal. The American market is the most desirable in the world. Every country wants access to it. That gives us a great deal of leverage, if only we'd use it. Barriers to U.S. products overseas should not be tolerated.

    Free-trade agreements have protected drug companies, international investors and Hollywood films, yet failed to protect our communities, our workers and our environment.

    We believe there is a better way. Fair trade is not the enemy of more trade. It's how we expand international trade without reversing U.S. economic progress.

    Oh, wow -- compared to these guys, suddenly James Webb looks like Cordell Hull.

    Mankiw addresses the historical questions, and a lot of other free trade bloggers pick at the remaining carrion.

    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.

    posted by Dan at 11:01 PM | Comments (12) | Trackbacks (1)



    Thursday, December 21, 2006

    My governor-elect needs some economics tutors... badly.

    Greg Mankiw explains.

    posted by Dan at 06:27 PM | Comments (7) | Trackbacks (0)



    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.

    Just a day after introducing the controls, a rattled Thai government announced on Tuesday that it would exempt equities from the measures, although it would still maintain curbs for bonds and other debt instruments.

    The sudden reverse followed crisis talks between the central bank, government and stock market officials after Thai shares tumbled by as much as 19 per cent at one point as shocked investors rushed to dump stocks. The sell-off forced the Bangkok Stock Exchange to impose its first suspension of trading before shares eventually closed down 15 per cent.

    Other equity markets in the region fell in sympathy, providing investors with a catalyst to take profits after recent sharp gains. Mumbai fell by 2.5 per cent, Jakarta by 2.8 per cent and Singapore by 2.2 per cent.

    However, foreign investors played down the prospect of contagion to other countries, saying the sell-off was driven by dismay over a move that was unlikely to be repeated elsewhere.

    “The Thai authorities seem intent on committing financial hara-kiri,” said Christopher Wood, chief strategist at CLSA.

    Mark Williams, manager of the F&C Pacific Growth Fund, said Tuesday’s share-price falls were overdone and that he expected a strong bounce on Wednesday.

    But he said Thailand’s “macro mismanagement” would leave lasting damage on the country’s credibility with international investors.

    posted by Dan at 04:03 PM | Comments (0) | Trackbacks (0)



    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.”

    But Keynes’s theory was incomplete: his was a theory of employment, interest, and money. It was not a theory of prices. To Keynes’s framework, Friedman added a theory of prices and inflation, based on the idea of the natural rate of unemployment and the limits of government policy in stabilising the economy around its long-run growth trend — limits beyond which intervention would trigger uncontrollable and destructive inflation.

    Hat tip: Greg Mankiw.

    posted by Dan at 09:30 AM | Comments (0) | Trackbacks (0)



    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.

    The most important resource to consider in this situation is energy, because it is our economy’s “master resource” — the one ingredient essential for every economic activity. Sure, the price of a barrel of oil has dropped sharply from its peak of $78 last summer, but that’s probably just a fluctuation in a longer upward trend in the cost of oil — and of energy more generally. In any case, the day-to-day price of oil isn’t a particularly good indicator of changes in energy’s underlying cost, because it’s influenced by everything from Middle East politics to fears of hurricanes.

    A better measure of the cost of oil, or any energy source, is the amount of energy required to produce it. Just as we evaluate a financial investment by comparing the size of the return with the size of the original expenditure, we can evaluate any project that generates energy by dividing the amount of energy the project produces by the amount it consumes.

    Economists and physicists call this quantity the “energy return on investment” or E.R.O.I....

    Cutler Cleveland, an energy scientist at Boston University who helped developed the concept of E.R.O.I. two decades ago, calculates that from the early 1970s to today the return on investment of oil and natural gas extraction in the United States fell from about 25 to 1 to about 15 to 1.

    This basic trend can be seen around the globe with many energy sources. We’ve most likely already found and tapped the biggest, most accessible and highest-E.R.O.I. oil and gas fields, just as we’ve already exploited the best rivers for hydropower. Now, as we’re extracting new oil and gas in more extreme environments — in deep water far offshore, for example — and as we’re turning to energy alternatives like nuclear power and converting tar sands to gasoline, we’re spending steadily more energy to get energy....

    Without a doubt, mankind can find ways to push back these constraints on global growth with market-driven innovation on energy supply, efficient use of energy and pollution cleanup. But we probably can’t push them back indefinitely, because our species’ capacity to innovate, and to deliver the fruits of that innovation when and where they’re needed, isn’t infinite.

    Sometimes even the best scientific minds can’t crack a technical problem quickly (take, for instance, the painfully slow evolution of battery technology in recent decades), sometimes market prices give entrepreneurs poor price signals (gasoline today is still far too cheap to encourage quick innovation in fuel-efficient vehicles) and, most important, sometimes there just isn’t the political will to back the institutional and technological changes needed.

    We can see glaring examples of such failures of innovation even in the United States — home to the world’s most dynamic economy. Despite decades of increasingly dire warnings about the risks of dependence on foreign energy, the country now imports two-thirds of its oil; and during the last 20 years, despite increasingly clear scientific evidence regarding the dangers of climate change, the country’s output of carbon dioxide has increased by a fifth.

    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.

    According to McKinsey Global Institute (MGI) research, global energy demand will grow more quickly over the next 15 years than it has in the last 15. Demand will grow at a rate of 2.2 per cent per year in our base-case scenario, boosted by developing countries and consumer-driven segments of developed economies. This acceleration in demand growth—particularly problematic amidst escalating world-wide concerns about the growing costs of energy, global dependence on volatile oil-producing regions, and harmful global climate change—will take place despite global energy productivity continuing to improve by 1.0 percent a year.

    MGI’s in-depth case studies indicate that there are substantial and economically viable opportunities to boost energy productivity that have not been captured—an estimated 150 QBTUs1, which could represent a 15 to 25 percent cut in the end-use energy demand by 2020. This would translate into a deceleration of global energy-demand growth to less than 1 percent a year, compared with the 2.2 percent anticipated in our base-case scenario—without impacting economic growth prospects or consumer well-being.

    I'm concerned about energy scarcity, but I'm not getting my Mathus on by any stretch of the imagination.

    posted by Dan at 02:28 PM | Comments (7) | Trackbacks (0)



    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:

    eurobirths.gif
    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.

    posted by Dan at 03:48 PM | Comments (1) | Trackbacks (0)



    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.

    So far, the party has delivered on its part of the bargain: The economy has grown by more than 9 percent a year recently, and the main beneficiaries have been educated urbanites. Content to claim their share in the prosperity, most students have shown little interest in politics since the Tiananmen Square protests of 1989.

    But a large pool of unemployed or underemployed university graduates, some analysts have suggested, could become a new breeding ground for opposition. An educated opposition, they said, would have far more organizational and ideological ability -- and present a greater threat to the government -- than the left-behind farmers who have been the main source of unrest in recent years.

    The Labor and Social Security Ministry estimated recently that as many as 4.9 million youths will graduate from universities by the end of 2007, up by nearly 20 percent over 2006. Another 49.5 million will graduate from high school, also a 20 percent increase. The sharp climb in graduation rates represents a dramatic improvement in the lives of many Chinese, made possible by the economic transformation that has taken place here over the past quarter-century.

    But indications have emerged that, booming as it is, the economy may not be able to absorb that many degree-holders into the jobs for which they are being trained. "The fact is that it's very hard for college students to get the right job these days," said Zhang Xuxin, a Zhengzhou student with close-cropped hair and plastic-rimmed glasses who plans to pursue postgraduate studies next year. "You may have a job, but it's very hard to have an ideal one."

    A waitress in a German restaurant near Beijing's Ritan Park, for instance, said she has been looking for work in the computer industry since graduating last summer, but in the meantime, she has to serve sausages and beer to pay the rent because nothing is available in her field.

    Tian Chengping, the labor and social security minister, predicted that about 1.2 million of the 2007 university graduates will have similar trouble finding employment. As a result, his ministry announced Tuesday, colleges will be forced to restrict admissions into study programs with low postgraduate employment rates. At a conference in Beijing, ministry officials said they also are seeking to improve employment counseling for high school graduates who do not plan to attend college.

    Tensions over employment after graduation have exploded repeatedly in recent months, betraying the pressure students say they feel. Students at Shengda Economics, Trade and Management College, affiliated with Zhengzhou University, rioted in June when they discovered that their diplomas would not be the same as those from the university itself, putting them at a disadvantage in job hunting. A similar riot erupted last month at the Ganjiang Vocational and Technical Institute in Jiangxi province south of here. The Hong Kong-based Information Center for Human Rights and Democracy has recorded 10 such disturbances since summer.

    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.

    posted by Dan at 02:46 PM | Comments (7) | Trackbacks (0)



    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....

    Seven or eight years ago, when it seemed that anyone with a business plan could get rich, the finger of fortune was generous — and democratic. By the time it occurred to people to be envious, it seemed, they were rich, too — at least on paper. It was in Silicon Valley, after all, that the term “sudden wealth syndrome” entered the clinical vocabulary.

    In the end, of course, much of the paper wealth turned worthless. But now, in the wake of successes like YouTube and MySpace, which was sold last year to the News Corporation for $580 million, some people believe that the foundations for more solid success are now in place. For one thing, the viability of online advertising is no longer in doubt, as Google and others have proved.

    And the success of a YouTube can produce not only envy but also serious motivation — in Silicon Valley and beyond.

    “Over all, I think things like YouTube make people reconsider the possibilities,” said Bart Selman, a professor of computer science at Cornell. In 1999, at the tail end of the dot-com boom, Professor Selman had a start-up called Expertology, which used a Web-based system that tapped collective expertise to generate legal referrals. The business failed. “After the dot-com bust, people were thinking, ‘Maybe this is all just hype,’ ” he said.

    Now, Professor Selman said, he has seen several start-ups, like Hoovers.com and LinkedIn, successfully pursuing ideas along the lines of Expertology’s mission. “But of course, timing is everything,” he said.

    And while he says he thinks the YouTube deal was “a little insane,” Professor Selman, who has watched several colleagues become highly wealthy after joining Google, is considering trying his start-up luck again, with a variant on the Expertology idea.

    “Maybe there’s more to the economic model than we realized five years ago,” he said. “Maybe the new wave is a little more solid.”

    Professor Selman, 47, said that while he was careful not to “overhype” the new wave, he routinely tells his students that they have a good chance of starting the next Google or YouTube. “I believe there are still many opportunities out there that we cannot even conceive of at this point,” he said.

    With rewards of that scale on the horizon, the pressure to make a fortune can be enormous, and people have different ways of coping with it. Some find inspiration in others’ success, while some spend tremendous amounts of psychic energy worrying about how rich their friends are.

    posted by Dan at 08:46 AM | Comments (1) | Trackbacks (0)



    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 negative income tax Earned Income Tax Credit, etc.

    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.....

    Drug legalization

    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.

    Crime: What percentage of the criminal justice and penal systems are devoted to drug-related offenses (click here for some answers)? Even if the sums of money that were spent on drug enforcement activities were instead devoted to treatment, I have to think it would be money better spent.

    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).

    That said, I think Friedman was right -- legalization is the best policy to implement. For more on Friedman's thoughts on the matter, click here, here and here.

    posted by Dan at 09:30 AM | Comments (8) | Trackbacks (0)



    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.

    After he became something of a celebrity, Mr. Friedman said, many people became reluctant to challenge him directly. “They can’t come right out and say something stinks,” he said. “Rose can.”

    During the first two years of World War II, Mr. Friedman was an economist in the Treasury Department’s division of taxation. “Rose has never forgiven me for the part I played in devising and developing withholding for the income tax,” he said. “There is no doubt that it would not have been possible to collect the amount of taxes imposed during World War II without withholding taxes at the source.

    “But it is also true,” he went on, “that the existence of withholding has made it possible for taxes to be higher after the war than they otherwise could have been. So I have a good deal of sympathy for the view that, however necessary withholding may have been for wartime purposes, its existence has had some negative effects in the postwar period.”

    posted by Dan at 02:03 PM | Comments (1) | Trackbacks (0)




    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....

    But iconic American brands only tend to come up for sale when they're damaged. IBM may have invented the PC in 1981. But by 2005, its parent regarded PCs as a low-margin business, one in which it didn't want to compete with Dell and HP. Reebok was facing tough competition from much-larger companies such as Nike and Adidas in the trendy footwear and athletic-apparel business. Pier 1 has simply been unable to compete with Target, Wal-Mart, and Lowe's.

    Foreign buyers tend to get a look at such brands only after legions of domestic buyers have passed. The U.S. has an extremely lively market for corporate control—publicly held companies, activist shareholders such as Carl Icahn, private equity funds such as the Blackstone Group, and hedge funds spend their days and nights seeking takeover candidates. Any time an asset with any trace of value comes on the market, it inspires a frenzy of due diligence and meetings. With their deep pockets and willingness to use leverage, these players rarely get outbid. For six months, U.S. investors have had an opportunity to check out the aisles of Pier 1. None found it worthy of purchase.

    So, it's no surprise foreign buyers of iconic companies find themselves losing dollars and customers. They've generally had to overpay for a damaged brand. The short-term prospects for these deals do indeed look grim. Anybody expecting Pier 1's fortune to revive quickly is hopelessly optimistic. For Jacobsen and other foreign investors, the opportunity lies in a tactic American financiers and entrepreneurs have pioneered: turning around castoff broken-down companies that have a viable core business. But those turnarounds don't happen quickly, and sometimes they don't happen at all.

    Of course, sometimes American companies overpay for foreign assets too.

    posted by Dan at 01:08 PM | Comments (3) | Trackbacks (0)



    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."

    posted by Dan at 08:34 AM | Comments (7) | Trackbacks (0)



    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!!

    2) The left half of the blogosphere is praising to the high heavens an article by Christopher Hayes from In These Times about the "neoclassical indoctrination" that allegedly takes place in introductory economics classes:

    As taught by Sanderson, economics is a satisfyingly neat machine: complicated enough to warrant curiosity and discovery, but not so complicated as to bewilder ..., and once you’ve got the basics of the model down, everything seems to make sense. As the weeks go by, ... I come to love the class. The more reading I do, the more sense the op-eds in the Wall Street Journal make. The NPR program “Marketplace” becomes interesting. I even know what exactly the Fed rate is. A part of the world that was blurry and obscure begins to come into focus. My classmates seem to feel the same way. “I never thought I’d be interested in economics,” one sophomore told me. “Sanderson convinced me I was.”

    The simple models have an explanatory power that is thrilling. Once you’ve grasped the aggregate supply/aggregate demand model, you understand why stimulating demand may lead, in the short run, to growth, but will also produce inflation. But the content of that understanding turns out to be a bit thin. Inflation happens because, well, that’s where the lines intersect. “A little economics can be a dangerous thing,” a friend working on her Ph.D in public policy at the U. of C. told me. “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.”

    The problem cited in the last graph is the exact reverse of how I remember my own Econ 101 class. In that course, we were first introduced to perfect competition, and then we were exposed to the ways in which the real world deviates from perfect competition -- monopolistic competition,oligopoly, monopoly, and, most important, the problem of externalities. We then learned that the best way to solve many of the problems of externalities was to use market mechanisms (i.e., taxes) rather than direct controls. The end result of the course was an appreciation of how technocrats can use incentives to improve social outcomes in the economy.

    Fair enough. But it was not until graduate school that I saw anything resembling the public choice approach to economics, which calls into question the ability of the government to act as a Platonic Guardian in the world of regulation.

    To be fair, Hayes wrote his piece after taking a macroeconomics course, where many of these issues would not have arisen. From my experience, however, after Econ 101 students probably have a greater appreciation for how markets work, but also develop a new enthusiasm for the ways in which the government can influence market outcomes.

    I'd be curious whether others who took Econ 101 had my experience or Hayes' experience.

    posted by Dan at 11:04 AM | Comments (10) | Trackbacks (1)



    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.

    Investors watched nervously as jubilant Democrats seized power in the US House of Representatives for the first time since 1994 and edged closer to taking the Senate, pushing European and Asian equities lower and weighing also on the dollar.

    European indices eased off fresh five-year highs struck the previous day, while Japanese shares tumbled by more than one percent, as investors also feared that a split in power in Washington would create legislative gridlock.

    "The European market started slipping lower (on Wednesday) with the Democrats taking power from the Republicans, traditionally thought of as more business friendly," said Michael Davies, an analyst with the Sucden brokerage firm in London.

    London's FTSE 100 index of leading shares slid 0.53 percent to 6,211.00 points, Frankfurt's DAX 30 index dipped 0.44 percent to 6,334.20 points and in Paris the CAC 40 index shed 0.47 percent to 5,412.18.

    The DJ Euro Stoxx 50 index of top eurozone shares lost 0.41 percent to 4,055.98 points.

    The US dollar meanwhile staged a slight retreat against the euro and the yen.

    "Although the outcome of US elections is unlikely to have a huge effect on the greenback, there are many that argue that if the Democrats win control of the House of Representatives, this will lead to a rise in protectionist policies or to political deadlock that could slow reforms," Davies added.

    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.

    “A [overall] win for the Democrats would be considered negative for stocks as it would likely result in a less business friendly environment,” said Matt Buckland, a trader at CMC Markets.

    US oil and drugs companies are expected to become subject to windfall taxes if the Democrats were to take control of the Senate, while companies are also likely to feel the pinch of a forecast rise in the minimum hourly wage.

    “Unless we see an improvement in sentiment this could be the trigger to start booking some of the profits we’ve seen accrued since late September,” he added.

    Meanwhile, the dollar remained mired at a six week low against the euro as uncertainty over control of the Senate led to cautious trade.

    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....

    But analysts, diplomats and economists in Asia said that the vote could have much greater consequences for the region, as they appeared to herald a further turn inward for the United States, away from globalization and engagement with Asia.

    "The message to the politicians is that we really don't want to get involved in foreign intrigues," said Tim Condon, an economist at ING Financial Markets in Singapore. "It reinforces this kind of populist thinking that there's only a downside to globalization."

    The turn in his party's fortunes will undoubtedly weigh heavily on Bush during his trip planned for this month to attend the Asia Pacific Economic Cooperation summit in Hanoi. Analysts said a preoccupation in Washington with domestic issues was likely to play into the hands of China, which has been boosting its own diplomatic profile in Asia and the developing world.

    Analysts said one of the clearest casualties of the Democratic victory was likely to be the Bush administration's trade policy.

    Concerns that Congress will get tougher on China's trade surplus by pushing it to revalue the yuan are likely to push the dollar down in global markets, they said, on expectations that China and other Asian exporters will allow their currencies to rise to deflect such criticism.

    "Democrats are seen as a bit more protectionist on that end," said Chua Hak Bin, an economist at Citigroup in Singapore. "Markets will expect a lot of these pressures to show up."

    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.

    posted by Dan at 08:10 AM | Comments (29) | Trackbacks (1)



    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.

    This is consistent with a declining emphasis on savings within this group.... Table 2 indicates a decline in the use of regular interest-bearing savings accounts. At the same time the proportion of the population invested in stocks and bonds increased from 13.6 percent in 1985 to 14.7 in 2000, but dropped to just 12.8 percent in 2004. Those owning non-pension retirement accounts stayed roughly constant at just over 25 percent.

    It is plausible that young Americans were more inclined to invest in the stock market between 1985 and 2000 because of the large returns that were available. However, this same logic would suggest a return to the safety provided by savings accounts in the early part of this decade, when the returns were not as good. Quite the opposite happened; the movement away from savings accounts continued.

    An alternative explanation is a shift to other forms of asset accumulation, such as home ownership, real estate, or private business. Between 1985 and 2004, the rate of home ownership among these individuals increased from 37 percent to 39 percent, but ownership rates of other real estate and private businesses declined substantially.

    Therefore, the explanation most consistent with observed declines in ownership of savings instruments is an overall reduced emphasis on saving....

    The mean net worth for individuals between the ages of 25 and 34 increased by 4 percent between 1985 and 2004, much more slowly than income levels for this group. This is the exact opposite situation for the U.S. economy which has seen assets grow at a faster rate than income.

    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....

    Because viewing debt levels or borrowing behavior in isolation may provide an inaccurate picture of the extent of the problem, Chiteji also asks not whether debt per se is a problem but whether there are young adults whose overall financial position is weak. About 17.5% of young adults could not meet three months’ worth of their existing debt repayment obligations with their current savings (if financial assets are used to gauge a household's savings). The comparable figure is about 16.5% if using net worth to measure household savings. Approximately 8.5% of young adults have no financial assets. Moreover, this group with no savings (or zero or negative net worth) owes almost $24,800 (on average), with an average monthly payment of $381. The median values are a bit lower—$14,650 and $300, respectively. However, these levels could still be considered troublesome given that these are households with no savings to cushion them should they lose a job or other sources of income.

    As a whole, are young adults in trouble? On average, young adults use only 19% of their monthly income to service their debt. Typically, only households that need 40% or more of their monthly income to pay debts are considered to have burdensome debt levels (and to be experiencing "financial distress"). About 9.3% of young households are in financial distress, slightly lower than the 11% for U.S. households overall. Therefore, as a group, today’s young adults do not appear to have an unusually fragile or problematic financial situation. Young adult households are not remarkably different from other families in the nation. However, the research also finds that there are some young adult households whose financial situations appear troublesome. Policymakers and others certainly might want to direct their attention to these households.

    Given that the data suggests --
    a) More young Americans are buying homes;
    b) More young Americans are going to college; and
    c) "Young adults do not appear to have an unusually fragile or problematic financial situation."
    -- 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?

    posted by Dan at 12:59 PM | Comments (12) | Trackbacks (0)



    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....

    At this rate, there are going to be few politicians of any party promoting free trade. Why would Republicans or politicians of any stripe want to support these agreements if they are getting little credit and much condemnation for doing so?

    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.

    posted by Dan at 10:50 PM | Comments (7) | Trackbacks (0)



    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.

    But now, the budding fake world is not only attracting a lot more people, it is taking on a real world twist: big business interests are intruding on digital utopia. The Second Life online service is fast becoming a three-dimensional test bed for corporate marketers, including Sony BMG Music Entertainment, Sun Microsystems, Nissan, Adidas/Reebok, Toyota and Starwood Hotels.

    The sudden rush of real companies into so-called virtual worlds mirrors the evolution of the Internet itself, which moved beyond an educational and research network in the 1990’s to become a commercial proposition — but not without complaints from some quarters that the medium’s purity would be lost....

    Philip Rosedale, the chief executive of Linden Labs, the San Francisco company that operates Second Life, said that until a few months ago only one or two real world companies had dipped their toes in the synthetic water. Now, more than 30 companies are working on projects there, and dozens more are considering them. “It’s taken off in a way that is kind of surreal,” Mr. Rosedale said, with no trace of irony.

    Beginning a promotional venture in a virtual world is still a relatively inexpensive proposition compared with the millions spent on other media. In Second Life, a company like Nissan or its advertising agency could buy an “island” for a one-time fee of $1,250 and a monthly rate of $195 a month. For its new campaign built around its Sentra car, the company then needed to hire some computer programmers to create a gigantic driving course and design digital cars that people “in world” could actually drive, as well as some billboards and other promotional spots throughout the virtual world that would encourage people to visit Nissan Island....

    Entering Second Life, people’s digital alter-egos — known as avatars — are able to move around and do everything they do in the physical world, but without such bothers as the laws of physics. “When you are at Amazon.com you are actually there with 10,000 concurrent other people, but you cannot see them or talk to them,” Mr. Rosedale said. “At Second Life, everything you experience is inherently experienced with others.”

    Second Life is the largest and best known of several virtual worlds created to attract a crowd. The cable TV network MTV, for example, just began Virtual Laguna Beach, where fans of its show, “Laguna Beach: The Real O.C.,” can fashion themselves after the show’s characters and hang out in their faux settings....

    All this attention has some Second Lifers concerned that their digital paradise will never be the same, like a Wal-Mart coming to town or a Starbucks opening in the neighborhood. “The phase it is in now is just using it as a hype and marketing thing,” said Catherine A. Fitzpatrick, 50, a member of Second Life who in the real world is a Russian translator in Manhattan.

    In her second life, Ms. Fitzpatrick’s digital alter-ego is a figure well-known to other participants called Prokofy Neva, who runs a business renting “real estate” to other players. “The next phase,” she said, “will be they try to compete with other domestic products — the people who made sneakers in the world are now in danger of being crushed by Adidas.”

    Mr. Rosedale says such concerns are overstated, because there are no advantages from economies of scale for big corporations in Second Life, and people can avoid places like Nissan Island as easily as they can avoid going to Nissan’s Web site. There is no limit to what can be built in Second Life, just as there is no limit to how many Web sites populate the Internet.

    Linden Labs makes most of its money leasing “land” to tenants, Mr. Rosedale said, at an average of roughly $20 per month per “acre” or $195 a month for a private “island.” The land mass of Second Life is growing about 8 percent a month, a spokeswoman said, and now totals “60,000 acres,” the equivalent of about 95 square miles in the physical world. Linden Labs, a private company, does not disclose its revenue.

    Despite the surge of outside business activity in Second Life, Linden Labs said corporate interests still owned less than 5 percent of the virtual world’s real estate. (emphasis added)

    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.

    posted by Dan at 08:37 AM | Comments (7) | Trackbacks (0)



    Monday, October 16, 2006

    The economics of worlds colliding

    I have never played World of Warcraft, Second Life, or any other simulated online game -- the closest I've come was my year-long semi-addiction to Civilization II.

    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.

    1) Reuters' Adam Pasick reports that the market for virtual goods is beginning to draw the attention of real-world tax authorities (hat tip: Greg Mankiw):

    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.

    "Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise -- taxes, barter exchanges, property and wealth," said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress.

    The increasing size and public profile of virtual economies, the largest of which have millions of users and gross domestic products that rival those of small countries, have made them increasingly difficult for lawmakers and regulators to ignore.

    Second Life, for example, was specifically designed by San Francisco-based Linden Lab to have a free-flowing market economy. Its internal currency, the Linden dollar, can be converted into U.S. dollars through an open currency exchange, making it effectively "real" money.

    Inside Second Life, users can buy and sell virtual objects from T-shirts to helicopters, develop virtual real estate, or hire out services ranging from architecture to exotic dancing. Up to $500,000 in user-to-user transactions take place every day, and the Second Life economy is growing by 10 to 15 percent a month....

    The rapid emergence of virtual economies has outstripped current tax law in many areas, but there are some clear-cut guidelines that already apply. For example, people who cash out of virtual economies by converting their assets into real-world currencies are required to report their incomes to the U.S. Internal Revenue Service or the tax authority where they live in the real world.

    It is less clear how to deal with income and capital gains that never leave the virtual economy, income and capital gains that in the real world would be subject to taxes.

    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.
    posted by Dan at 10:39 AM | Comments (8) | Trackbacks (0)



    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.

    Stephen Roach, chief economist and director of global economic analysis at Morgan Stanley, and Desmond Lachman of the American Enterprise Institute debate the seriousness of the challenge posed by China and appropriate steps to respond to its rise.

    Go check it out.

    posted by Dan at 10:52 PM | Comments (0) | Trackbacks (0)



    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.

    For instance, recent announcements by OPEC members Nigeria and Venezuela that they plan to cut their combined production by 170,000 barrels a day in order to push oil prices back above $60 a barrel did not alter the per-barrel price.

    For Michiganders, the diminishing power of OPEC has two key implications.

    "In some sense, this is a good thing in that you are taking power away from an oligopoly like OPEC and lessening the influence the group has had on U.S. foreign policy," said Sudip Datta, finance professor and chairman of the T. Norris Hitchman Endowment at the Wayne State University School of Business Administration.

    On the other hand, with no consensus among the world's leading oil producers, supplies fluctuate and domestic fuel prices are adversely affected.

    Oil prices more than tripled from an average of $21.84 a barrel in 2001 to a record high of $78.40 in July. Meanwhile, pump prices in Michigan more than doubled to $3.11 a gallon this summer, as OPEC continued to cede its power to speculators in the petroleum market. Barring a major supply disruption because of a hurricane or an accident this fall, gas prices are expected to stay at $2 to $2.25 a gallon, according to the Energy Information Administration in Washington, D.C.

    Part of OPEC's stated mission is to "coordinate and unify" global petroleum policies and "ensure the stabilization of oil prices" to provide a steady supply of product at a fair price.

    The 11-member oil cartel said on its Web site that oil prices were "out of line" with supply and demand fundamentals. It also acknowledged that its influence over petroleum pricing was increasingly limited....

    From 1975 to 1990 and the start of the Persian Gulf War, the price of imported oil rarely got above $32 a barrel and Michigan gas prices hovered between 50 cents and $1, in large part because of OPEC's use of production controls that often benefited U.S. consumers.

    Today, hedge funds, pension fund managers and investment bankers are placing huge bets that oil prices will keep going up because political unrest in some OPEC countries and the emergence of China and India as major consumers of petroleum will continue to make oil a rare commodity.

    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....

    OPEC is very much aware that the more prices are out of line with demand and supply fundamentals, the more likely they are to lead to increased volatility, and this can be damaging to all the players in the market.

    However, the impact of OPEC’s measures varies according to the market conditions. Throughout the present volatile conditions, OPEC has ensured that the market has remained well-supplied with crude, as well as accelerating plans to increase production capacity, so as to help cater for the continued rise in demand forecast for the coming years. But, since other factors have been primarily responsible for the recent price rises, OPEC’s influence has been limited.

    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?

    2) What is the acceptable premium for keeping a price stable over prices that are lower on average but with greater volatility?

    posted by Dan at 02:42 PM | Comments (3) | Trackbacks (0)



    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.

    posted by Dan at 02:12 PM | Comments (10) | Trackbacks (0)



    Tuesday, September 26, 2006

    The dog that is not barking in financial markets

    Brad DeLong makes a good point in highlighting one positive sign from the Amaranth collapse:

    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.

    Yet there is not a sign of disturbance to the markets. Amaranth's investors have lost what is now said to be $6 billion. Some other people have the $6 billion--if they can, in turn, unwind their positions. But the system cruises on with no worries about liquidity or solvency and no changes in risk premiums.

    Reassuring, I think.


    posted by Dan at 02:42 PM | Comments (5) | Trackbacks (0)



    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.

    posted by Dan at 10:57 PM | Comments (0) | Trackbacks (0)



    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.

    Ian Macfarlane, whose 10-year tenure makes him one of the world’s longest serving central bank chiefs, said in an interview with the Financial Times that he expected inflation to remain under control even if oil rose above its recent peak of nearly $80 a barrel.

    “There is of course a lot of anxiety about oil and a lot of attention given to the issue worldwide. But what I find most relevant is that we have been able to absorb the increase in oil prices reasonably well, in a way nobody would have predicted two or three years ago.”

    “We have got from $20 to $77, so if we were to go to $90, and people are saying that then all hell is going to break loose, I really doubt it,” said Mr Macfarlane, who steps down next month.

    posted by Dan at 12:14 AM | Comments (19) | Trackbacks (0)



    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.

    The new president-elect, Dr. Brian Day, has openly run his private hospital in Vancouver even though it accepts money from patients for procedures that are available through the public system, which is illegal.

    Dr. Day, who will assume the presidency in August next year, advocates a hybrid health care system similar to those in many European countries....

    opposition to private health care has diminished in Canada, in part because waiting times have more than doubled for certain procedures during the last 13 years, according to the Fraser Institute, a conservative research group.

    Debate has been especially heated since a ruling by the Supreme Court in June 2005 gave residents of Quebec the right to pursue private treatment if the province could not provide services in a reasonable time.

    Since then, Quebec’s premier and the leaders of British Columbia and Alberta have expressed a willingness to consider solutions that include privately paid medical services, in part because of the court decision but also because of the rising cost of providing free health care. On average, provinces spend nearly 45 percent of their budgets on health care.

    In the meantime, private health clinics are opening at an average rate of one a week in Canada.

    “The Canadian health system is at a point in history right now where it’s going to be reformed in the wake of the Supreme Court decision,” Dr. Day said Tuesday in a telephone interview. “The concept that the status quo is something that we should maintain is wearing thin, with frustrated doctors and frustrated patients.”

    Since its formation in the 1960’s, Canada’s publicly financed health insurance system has been at the core of the national identity.

    But in recent years, with waiting times growing and costs skyrocketing, the merits of a larger private component to the health care system has not been the taboo topic it once was.

    Before I doze off, do check out Megan McArdle's recent health care post as well.

    UPDATE: Many commenters -- and Ezra Klein -- have (justifiably) asked where there is praise for the Canadian single-payer system on the left. So, click here, here, here, here, here, and here.

    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.

    posted by Dan at 01:27 PM | Comments (25) | Trackbacks (0)



    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.

    And today's gloom peddlers can claim to have scientific data on their side. According to the U.S. Census Bureau, the median real income of a full-time working male rose only 4% between 1981 and 2001, from $44,000 to $45,900 in today's dollars.

    If so, you have to wonder who's buying all those flat-screen TVs, serving precooked rotisserie chicken for dinner or organizing their closets with Elfa systems. "Anybody who thinks things are getting worse should go to Best Buy and notice the type of people who go to Best Buy," says economist Robert J. Gordon of Northwestern University.

    Gordon is the author of a much-cited study showing that from 1966 to 2001 real income kept up with productivity gains for only the top 10% of earners. What the pessimists who tout his study don't say is that, while Gordon does find that inequality is increasing, he's convinced that the picture of middle-class stagnation is false.

    "The median person has had steadily improving standards of living," he says. But real incomes have been understated. The problem lies in how the U.S. Bureau of Labor Statistics calculates the cost of living.

    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.

    Government statisticians, Hausman complains, "want to act like accountants, and they don't want to take economics into account at all."

    Using ACNielsen data from 61,500 households, Hausman and Leibtag calculate that grocery shoppers are 20% better off--not the full 27%--with a superstore shopping trip. "So some of the food isn't quite as good or the diversity isn't quite as good," says Hausman. "But you still get a huge boost."

    Since groceries make up 12% of household spending and as much as 25% for low-income Americans, this distortion significantly understates real incomes, especially at the bottom.

    posted by Dan at 12:59 PM | Comments (24) | Trackbacks (0)




    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.

    No, that would take to long. Let me just link to this Brad DeLong post and this Tyler Cowen post and strongly recommend that you click through.

    posted by Dan at 08:39 AM | Comments (3) | Trackbacks (0)



    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.

    Despite strong support from local unions and merchants, and concerns that an influx of low-paying big-box retail jobs could do more harm than good, the mayor has threatened to veto the measure, and some are talking about asking the courts to strike it down if it's enacted. They say the new law is not only unfair but also bad policy. It would, they argue, deprive the city of sales taxes, force consumers to pay higher prices, take jobs from poor people, and push new development to the suburbs.

    But whatever one thinks of the merits of this debate, the fact that Chicago is even having it is important. Other cities, including Boston, are already thinking about following the aldermen's lead: As Wal-Mart contemplates its first store in Boston, city councilors Chuck Turner and Felix Arroyo have said they plan to explore an ordinance similar to Chicago's. This surge of interest in regulating big-box retail shows that, at last, America's cities are beginning to think of themselves as choosers rather than beggars. They have emerged from decades of decline with newfound financial strength, and they are now beginning to assert their public powers to decide the kind of cities they want to be....

    And so, with demand for urban locations higher, cities-as free marketers should be the first to realize-are no longer willing to sell themselves at any price. The Chicago Sun-Times, in the process of condemning the aldermen's action, hit on just this point: ``[They] think the dense Chicago market is too attractive for the retailers to pass up, especially since most suburban areas already are saturated. They're taking a risk that Wal-Mart and Target are bluffing." Exactly right. The aldermen are betting that big-box retailers will build even if the ordinance becomes law, but it's a safer bet than the Sun-Times allows. After all, the new measure does not bar big-box retailers from doing business in the city. It just requires that they provide employees high enough wages and benefits so that the city won't have to make up the difference through the social services it provides....

    Like new office buildings, big-box retailers also bring burdens along with benefits. Some studies show they may depress wages in related businesses or threaten small, usually family-owned retailers. In many cities, including Chicago, it is the growing immigrant neighborhoods, chock-full of such small family-run establishments, that are re-knitting the urban fabric and producing significant amounts of social capital. A law restricting big-box companies from using low wages to support price cuts that might force these important community retailers to close is arguably a tailored response to a reasonable concern. Certainly it's hard to say that Chicago is acting recklessly.

    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.

    posted by Dan at 09:49 PM | Comments (10) | Trackbacks (0)




    Popping the bubble

    I have a review of Peter Hartcher's Bubble Man: Alan Greenspan and the Missing $7 Trillion in today's Washington Post. The opening and closing:

    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."....

    By the end of the book, Hartcher seems determined to throw as much mud at Greenspan as possible. Some of this is amusing (Greenspan was a recipient of the Enron Award for Public Service), but most of the time he overreaches. After all, blaming Greenspan for all day traders is like blaming Bill Clinton for all adulterers.

    A central irony of Bubble Man is that it is Greenspan's aura as the master of markets that gives Hartcher's accusations any resonance at all. Greenspan was so adroit at handling so many aspects of his job that it seems plausible that he should have handled the dot-com hysteria as well. Greenspan is not perfect, but he's no bubble man.

    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.

    posted by Dan at 09:06 AM | Comments (4) | Trackbacks (0)



    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.

    posted by Dan at 11:03 PM | Comments (5) | Trackbacks (0)



    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.

    A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country’s currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-a-vis trading partners, thus cutting real incomes and domestic demand; subsidising or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses....

    No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. In fact, the very parts of the German economy that are most protected by over-regulation, publicly subsidised financing and unaccountable corporate governance – the much vaunted Mittelstand – use the export success of some of their companies to justify those protections. Yet, for all their exports, the resulting lack of consolidation or technical change in these sectors drives down productivity growth and returns to capital throughout the German economy.

    Consequently, Germany’s successful export industries remain largely the same ones as 40 years ago, while global technological progress means these sectors have moved down the value chain. The dysfunctions of Germany’s corporate sector also mean almost no German companies have emerged in today’s growing high-technology and service sectors. By focusing on export totals rather than productivity growth, the country has brought about arrested development in its corporate sector.

    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.

    Alas, in this round, there seems to be no export sector, at least not in the jurisdictions of the "big players," that is prepared to play the role of counterweight to the farmers and other import-competing sectors. So what can be done to reverse this situation? One possibility is that the time has come to end the lie, however useful it might have been historically, and simply tell the public what is really on the line: They stand to lose money because they will not see the lower prices of imports that could be achieved.

    UPDATE: Mark Thoma has further thoughts.

    posted by Dan at 11:04 AM | Comments (3) | Trackbacks (0)



    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....

    In 2004, 16.9 million light vehicles were sold in the United States, of which 2.4 million, or 14 percent, were imported from Asia, while 3.5 million, or 21 percent, were Asian nameplates produced in the United States.5 Of the nearly 1.7 million Toyotas sold in the U.S. market in 2004, nearly 3 of every 4 were produced in the United States, which was a greater share than in the previous year. Over 81 percent of the nearly 1 million Hondas sold in 2004 were produced in the United States, which was an increase from the 78 percent rate attained in 2003. Nissan's U.S.-produced vehicles accounted for 86 percent of its U.S. sales in 2004, which was a big shift from the 66 percent rate of the previous year.

    In fact, each of the top 10 selling cars and top 10 selling trucks (pickups, SUVs, and minivans) in the first half of 2006 is produced at facilities in the United States.7 Toyota Camry, Honda Accord, Chevy Impala (GM), Ford Taurus, Nissan Altima, Ford Explorer, Chrysler Town & Country, and the other models that round off the most popular 20, regardless of the location of company headquarters, are produced in U.S. plants by American workers who contribute to the local, state, and national economies through their employment, expenditures, and taxes....

    Domestic output of motor vehicles and parts has actually enjoyed a healthy increase since 1993 even if employment has not. In 2005, U.S. factories were manufacturing 68 percent more motor vehicles and parts in volume terms than in 1993. That compares with a 56 percent increase in U.S. manufacturing output overall during the same period. The number of workers employed domestically in the production of motor vehicles and parts was 1,098,200 in 2005, down from a peak of 1,313,600 in 2000 but still above average employment levels in the early 1990s. In light of increasing output, any decline in employment in the domestic automobile industry has been because of rising productivity and efficiency in the industry, not because of an overall decline in the industry's fortunes.

    The biggest beneficiaries of a globally competitive U.S. automobile industry have been U.S. auto-buying consumers.

    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.

    posted by Dan at 01:47 PM | Comments (13) | Trackbacks (0)



    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.”

    Such thinking now comes naturally to economists. But it still escapes many politicians, who blindly uproot flowers, ignorant of the celestial commotion that may ensue. They slap tariffs on steel imports, for example, to save jobs in Pittsburgh, only to find this costs more jobs in the domestic industries that use the metal. Or they help to keep zombie companies alive—rolling over their loans, and preserving their employees on the payroll—only to discover they have starved new firms of manpower and credit. Big models, which span all the markets in an economy, can make policymakers think twice about the knock-on effects of their decisions.

    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.”

    But how plausible were the numbers? Twelve years on, economists have shown little inclination to go back and check. One exception is Timothy Kehoe, an economist at the University of Minnesota. In a paper published last year, he argued that the models “drastically underestimated” NAFTA's impact on trade flows (if not on jobs). The modellers assumed the trade pact would allow people to buy more of the goods for which they had already shown some appetite. In fact, the agreement set off an explosion in the exports of many products Mexico had scarcely traded before. Cars, for example, amounted to less than 1% of Mexico's exports to Canada before the agreement. By 1999, however, they accounted for more than 15%. The only comfort economists can draw from their efforts, Mr Kehoe writes, is that their predictions fared better than Mr Perot's. A low bar indeed.

    Dubious computations also helped to usher the Uruguay round of global trade talks to a belated conclusion in 1994. Peter Sutherland, head of the General Agreement on Tariffs and Trade, the ancestor of the World Trade Organisation (WTO), urged negotiators to close the deal lest they miss out on gains as great as $500 billion a year for the world economy. This figure came, of course, from a big model.

    Even staunch free-traders, such as Arvind Panagariya, an economist now at Columbia University, thought these claims “extravagant” and “overblown”. They escaped scrutiny, he argued in 1999, because they emanated from “gigantic” models, which were opaque even to other economists. Why then did these models thrive? Supply and demand. “Given the appetite of the press and politicians for numerical estimates and the publicity they readily offer researchers, these models are here to stay,” Mr Panagariya concluded.

    [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.]

    posted by Dan at 09:17 AM | Comments (8) | Trackbacks (0)



    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....

    "Energy independence is an emotionally compelling concept," says Jason Grumet, executive director of the National Commission on Energy Policy, a bipartisan, nonprofit group financed by private foundations, "but it's a vestige of a world that no longer exists."

    Indeed, the U.S. is moving rapidly away from energy independence: Oil imports made up 35% of the nation's petroleum supplies in 1973 and 59% in the first four months of 2006, according to the Department of Energy. Moreover, 66% of the oil consumed in the U.S. is used in the transportation sector, where Americans, with their penchant for hefty cars with big engines, are by far the planet's biggest consumers of oil.

    The allure of energy independence is easy to see. It reinforces the belief that Americans can control their own economic destiny and appeals to a "deep-seated cultural feeling that we are Fortress America and we will not be vulnerable to unstable regimes," says David Jhirad, a former Clinton administration energy official who is vice president at World Resources Institute, an environmental-research group.

    In fact, experts say, America's energy fortunes are inextricably linked to those of other countries. Global oil markets are interconnected, with oil prices set internationally. That means supply disruptions anywhere in the world will continue to have an almost instantaneous effect on the pump price of gasoline in the U.S.

    "The real metric on this is not imported oil, but how much oil we use, period," says Jerry Taylor, senior fellow at the libertarian Cato Institute who dismisses calls for energy independence as "rhetorical nonsense that transcends party affiliation."

    Mr. Grumet's energy commission is trying to get experts to agree that the term "energy independence" should be dropped. He wants policy makers to focus on curbing oil consumption -- specifically the amount to produce each $1,000 of gross domestic product. The nation already is making some headway on that goal, he says, and the idea, while it may not fit on a bumper sticker, is beginning to resonate.

    Read the whole thing.

    posted by Dan at 09:07 AM | Comments (27) | Trackbacks (0)



    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.

    An internal report prepared by the US military’s Southern Command and obtained by the Financial Times follows a recent US congressional investigation that warned of the US’s vulnerability to Venezuelan President Hugo Chávez’s repeated threats to “cut off” oil shipments to the US.

    The Southern Command analysis cautions that the extension of state control over energy production in several countries is deterring investment essential to increase and sustain oil output in the long term.

    “A re-emergence of state control in the energy sector will likely increase inefficiencies and, beyond an increase in short-term profits, will hamper efforts to increase long-term supplies and production,” the report said. So far this year, Venezuela has moved to double the level of taxes levied on oil production units operated by multinationals, Bolivia has nationalised its oil and gas fields, and Ecuador has seized several oilfields from Occidental Petroleum, the largest foreign oil company in the country.

    The report also noted that oil production in Mexico, which faces elections next weekend, is stagnating be-cause of constitutional re-strictions on foreign investment.

    Latin America accounts for 8.4 per cent of daily world oil output, according to the US Energy Information Administration, but energy supplies from the region make up 30 per cent of US energy imports, or about 4m barrels a day....

    That the US Southern Command, which oversees military relations with Latin America, has embarked on a detailed study of the subject underscores the view that energy has become a key facet of US national security.

    “It is incumbent upon the command to contemplate beyond strictly military matters,” said Colonel Joe Nuñez, professor of strategy at the US Army War College in Carlisle, Pennsylvania.

    An exception to the trend, the Southern Command study noted, is Trinidad & Tobago, whose policy of opening its doors to foreign investment has allowed it to become the top supplier of Liquefied Natural Gas to the US. Analysts have warned that, while the wave of resource nationalism in Latin America is allowing governments to grab a greater share of the energy price boom, tighter control will curb output in the future if, or when, oil prices fall.

    “Pending any favourable changes to the investment climate,” the Southern Command study concluded, “the prospects for long-term energy production in Venezuela, Ecuador and Mexico are currently at risk.”

    posted by Dan at 02:18 PM | Comments (13) | Trackbacks (0)



    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.

    The merger combines Arcelor — a symbol of successful, pan-European cooperation and economic revival, with operations that span Belgium, France, Luxembourg and Spain — with a fast-growing conglomerate founded by the India-born Lakshmi Mittal, who built a fortune turning around troubled steel plants in expanding markets from Trinidad to Kazakhstan.

    The deal is the latest sign that shareholder activism is reaching into the once staid boardrooms of Europe. The agreement to pair with Mittal caps a wrenching turnaround for Arcelor's board and its management, who once dismissed the idea of a merger with a "company of Indians" but were forced to backtrack after shareholders threatened to revolt.

    It has also silenced politicians in Europe who once criticized Mittal, raising hope that protectionist barriers may be softening in Europe....

    In the end, Arcelor's foot-dragging has led to expensive concessions from Mr. Mittal. The agreed offer is nearly 40 percent higher than his initial offer in January, which was 27 percent higher than Arcelor's stock price at the time. The sale price also represents a hefty premium to Mr. Mittal's last offer of about 36 euros a share, and to Arcelor's last trading price of 35.02 euros a share.

    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.

    "These are all tremors of the fact that the world system, which has been maintained by the United States and Europe, has suddenly got to adjust to the rise of China and India, and it ain't going to be easy," said Kishore Mahbubani, a former Singaporean ambassador to the United Nations.

    Business leaders have watched the deal closely as a bellwether for emerging-market companies seeking to acquire their slower-growing Western counterparts. Once this deal is completed, analysts expect a surge of acquisitions attempts by multinationals rooted in the developing world.

    "The emerging markets are running the big surpluses, they are accumulating capital and they will be spending abroad," said Daniel Gros, director of the Center for European Policy Studies in Brussels.

    The situation also spotlighted changing standards of corporate governance in Europe, where boards and management are being forced to pay attention to a growing number of activist shareholders, after decades of running companies as they pleased.

    The deal will "make a very powerful statement that no matter what the games, shenanigans and interventions, at the end of the day if you're determined enough the best price will prevail," Mr. Ross said. "That is a message that has not always been clear" in European deal-making, he said.


    posted by Dan at 05:16 PM | Comments (9) | Trackbacks (0)



    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.

    The order came exactly a year after a divided Supreme Court ruled a city could take a person's home or business for a development project to revitalize a depressed local economy, a practice known as eminent domain.

    "The federal government is going to limit its own use of eminent domain so that it won't be used for purely economic development purposes," White House spokeswoman Dana Perino said.

    She said more than 20 states had already enacted laws that prohibit the use of eminent domain for purely economic development purposes and four states have proposed constitutional amendments on November election ballots.

    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?

    2) Why release this news on a Friday afternoon in the summer? That's normally the time a White House would dump out garbage it didn't want to receive a lot of press coverage. Maybe my libertarianism is clouding my judgment, but I don't see this move as prompting much of a backlash.

    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."

    Unfortunately, this language validates virtually any economic development condemnation that the feds might want to pursue.


    posted by Dan at 08:09 PM | Comments (6) | Trackbacks (0)



    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.

    posted by Dan at 09:26 AM | Comments (14) | Trackbacks (0)



    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:
    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.
    Check out this post on stagflation as well. It's a moment of convergence between Megan and Kevin Drum.


    posted by Dan at 03:43 PM | Comments (5) | Trackbacks (0)



    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.

    The study says violence at work, including bullying, sexual harassment and physical assault, may be costing anywhere between 0.5 and 3.5 per cent of countries’ gross national products in absenteeism, sick leave and lower productivity....

    The study says available data, though patchy, show a clear upward trend in bullying, harassment and intimidation of workers, affecting more than 10 per cent of the European workforce, for example.

    In developing countries, women, migrants and children are most vulnerable, with sexual harassment and abuse reported as a big problem in places as varied as South Africa, Malaysia and Kuwait.

    At the same time, the study notes that physical violence declined in the US and UK in recent years. In the US, the number of workplace homicides has fallen from more than 1,000 a year a decade ago to about 630 in 2003.

    In England and Wales, incidents of workplace violence dropped from 1.3m in 1995 to about 850,000 in 2002-03, according to the British Crime Survey.

    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?

    posted by Dan at 03:42 PM | Comments (7) | Trackbacks (0)



    Tuesday, May 30, 2006

    Will the new Treasury Secretary make a difference?

    The John Snow Death Watch is over:

    President George W. Bush on Tuesday named Hank Paulson as his new treasury secretary, pending approval from the Senate.

    Mr Paulson has been the chairman and chief executive of Goldman Sachs Group since 1999, having joined the firm in 1974. He replaces John Snow, who held the job for three years and was long been rumoured to be stepping down.

    The choice of the CEO came as a surprise and the dollar was mixed early Tuesday in New York on the news. [In contrast NPR reported that the markets were responding pretty well--DD.]

    Mr Bush praised his choice as having “a lifetime of business experience’’ and “an intimate knowledge of securities markets.”

    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?

    posted by Dan at 10:14 AM | Comments (20) | Trackbacks (0)



    Saturday, May 27, 2006

    Why limit the free trade rule to economists?

    I signed onto Alex Tabarrok's open letter on immigration earlier this month.

    In Tapped, Matthew Yglesias expressed skepticism about one element of the letter:

    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:

    I hereby call on all governments to allow free mobility of university professors. All universities and other institutions of higher education should be allowed to hire whoever they want to reside, teach, and do research at their universities, without let or hindrance by any government whatsoever.

    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.

    posted by Dan at 11:58 AM | Comments (27) | Trackbacks (0)



    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:
  • In China, 23 percent of business leaders complain about the amount of work they do. In the States the figure is more than twice as high: 49 percent.

  • Chinese businesspeople are more satisfied; 80 percent feel they have work-life balance. Only 69 percent of American businesspeople feel the same way.

  • Business leaders in China are gluttons for punishment, too—93 percent say they'd be willing to sacrifice more free time to get ahead in business. Only 66 percent of Americans say that.
  • 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....

    In Asia, the lifestyle issues that have formed their own industry in the West still barely register.

    "In China, India, and Singapore, they're not talking about work-life-balance issues," argues David Heenan, author of Flight Capital. "They're working like crazy and taking no prisoners." Much of that has to do with recent—and ancient—history. America has been one of the world's most prosperous nations for decades. China, like India, is just beginning to taste prosperity. We're satiated. They're still lean and hungry. Like Americans 100 or 150 years ago, the new Asian capitalists are willing to sacrifice their personal lives for the once rare opportunity to improve their lives and maybe even get rich.

    The rewards of leisure and family time, of course, are among the things that motivate people to get rich. Who doesn't want to retire at 50, wealthy enough to do little more than play golf, socialize, volunteer, and cultivate a covey of grandchildren? Well, not the Chinese, evidently. Not yet, anyway. Puzzle this one out: While 45 percent of American business leaders find their personal life more fulfilling than their work life, only 3 percent of Chinese business leaders feel that way.

    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.

    There's no puzzle for an obvious reason (which Newman recognizes) -- Americans are much better situated to maximize their utili

    posted by Dan at 02:34 PM | Comments (18) | Trackbacks (0)



    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.

    Mr Zoellick, who also served as trade representative during George W. Bush’s first term as president, had hoped to replace John Snow, the Treasury secretary, whose departure has been the subject of constant speculation in Washington.

    A business lobbyist with ties to the White House said Mr Zoellick was leaving the administration. A friend of Mr Zoellick said he told the White House in February of his intention to leave but that his departure was delayed because of his involvement in the Darfur peace negotiations....

    The White House has been seeking to replace Mr Snow with someone who would command more respect on Wall Street, in international financial markets, on Capitol Hill and among the public.

    One influential Republican with close ties to the White House said Mr Zoellick was leaving “soon” because he was not getting the Treasury job. The Republican added that the White House wanted someone who would be a better salesman. Mr Zoellick is more widely admired for his policy knowledge. (emphasis added)

    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.


    posted by Dan at 11:42 PM | Comments (8) | Trackbacks (0)



    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.

    Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. Think of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Or they might do some of each.

    Which is it? To the naked eye, Starve the Beast looks suspiciously counterproductive. After all, spending (as a share of the gross domestic product, the standard way to measure it) went up, not down, after Reagan cut taxes in the early 1980s; it went down, not up, after the first President Bush and President Clinton raised taxes in the early 1990s; and it went up, not down, following the Bush tax cuts early in this decade.

    Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

    Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow....

    [C]onservatives who are serious about halting or reversing the dizzying Bush-era expansion of government—if there are any such conservatives, something of an open question these days—should stop defending Bush’s tax cuts. Instead, they should be talking about raising taxes to at least 19 percent of the GDP. Voters will not shrink Big Government until they feel the pinch of its true cost.

    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.

    UPDATE: Sebastian Mallaby sure seems convinced.

    posted by Dan at 09:37 PM | Comments (17) | Trackbacks (0)



    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.

    Senor Morales called on the military to occupy the fields and gave warning he would throw out foreign companies who refused to recognise the nationalisation of the country’s oil and gas fields, which are the second largest reserves in the region after Venezuela.

    The leftwing President, who came to power on a platform of re-nationalisation, warned of similar action in other sectors. "We are beginning by nationalising oil and gas. Tomorrow we will add mining, forestry and all natural resources – what our ancestors fought for," he said in a May Day speech at the San Alberto gas field in southern Bolivia.

    Foreign investors were unable to assess the full impact of the decision, as details of the nationalisation policy were not readily available. The President has given the companies 180 days to renegotiate contracts.

    The nationalisation policy would effectively downgrade the role of foreign companies from owners of the assets to simply operators. The Spanish Government swiftly declared its "profound worry" about the nationalisation, as shares in the Spanish energy group Repsol YPF took a hit.

    The Bolivian Embassy in London told Times Online the President would issue a further statement on the details of the nationalisation policy in the coming week and denied the move would undermine foreign investment in the country, as investors take fright.

    "In the end, the companies will understand these new rules help Bolivia and make it more stable. They should not be scared," said Pablo Ossio, the Charge d’Affairs at the embassy.

    Asked whether the Bolivian Government would compensate foreign companies who lose their assets, he said there would be an audit of foreign energy assets over the coming six months. "But I don’t think they’ll be compensated," he said.

    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.

    The Spanish government said it was “deeply concerned” by the nationalisation law introduced by Evo Morales, Bolivia’s leftwing president, and complained about the “way the changes were promulgated”.

    Repsol YPF, the Spanish energy group, has invested more than $1bn in Bolivian gas production, which accounts for 18 per cent of the company’s total energy reserves and 11 per cent of production. Brazil’s Petrobras is another big investor, and other international companies could be forced to write off their Bolivian gas reserves, analysts said....

    Reacting angrily to Mr Morales’ decision to seize control of gas fields using army troops and annul existing contracts, Antonio Brufau, Repsol’s chairman, told Argentine radio: “We were told there would be time for negotiations, but obviously this was not the case.”

    In Brazil, which receives half of its natural gas from Bolivia, President Luiz Inácio Lula da Silva called an emergency meeting of his cabinet and Petrobras executives, amid fears that any supply interruptions could trigger an energy crisis in South America’s largest economy. Mr da Silva intended to consult other South American leaders about how to respond to the “unfriendly” move, his spokesman said.

    Mr Brufau said Repsol the new decree “sidestepped all industrial logic that ought to govern the relations between governments and companies”.

    posted by Dan at 09:50 AM | Comments (42) | Trackbacks (0)



    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.

    This goes a long way toward explaining why even when gas prices rise this summer--higher than they were throughout the 1990s--people will still be driving more; it's much more of a value than it was a generation ago.

    What's more, so-called energy intensity is declining rapidly. That means we produce more with less energy. According to Economy.com, "The U.S. economy has undergone major structural changes over the last two decades, becoming more energy efficient, thus reducing its overall dependence on energy. … The energy intensity of the U.S. economy has declined by roughly 40% since the first oil crisis (as of 2001)."

    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.

    This crisis isn't a crisis. It's just a price increase, the sort of signal consumers adjust to every day. No hysteria is called for.

    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).

    posted by Dan at 11:59 AM | Comments (43) | Trackbacks (0)



    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.

    But before concluding that immigrants are undercutting the wages of the least fortunate Americans, perhaps one should consider Ohio. Unlike California, Ohio remains mostly free of illegal immigrants. And what happened to the wages of Ohio's high school dropouts from 1980 to 2004? They fell 31 percent.

    As Congress debates an overhaul of the nation's immigration laws, several economists and news media pundits have sounded the alarm, contending that illegal immigrants are causing harm to Americans in the competition for jobs.

    Yet a more careful examination of the economic data suggests that the argument is, at the very least, overstated. There is scant evidence that illegal immigrants have caused any significant damage to the wages of American workers.

    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.

    Mr. [Lawrence] Katz agreed that the impact was modest, and it might fall further if changes in trade flows were taken into account — specifically, that without illegal immigrants, some products now made in the United States would likely be imported. "Illegal immigration had a little bit of a role reinforcing adverse trends for the least advantaged," he said, "but there are much stronger forces operating over the last 25 years."

    Read the whole thing. Illegal immigration poses significant policy problems -- but those problems have little to do with economics.

    posted by Dan at 05:41 PM | Comments (31) | Trackbacks (0)



    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.

    As for which view is correct, only time will tell. But uncertainty about whether a disorderly correction is imminent does not justify inaction. That a Category 5 hurricane strikes only once a generation does not absolve the responsible homeowner, living in a flood plain, from putting his house on stilts or investing in flood insurance. For the United States, insuring against a disorderly correction would involve progressively tightening fiscal policy and thus gradually narrowing the gap between absorption and production. The best way for China and other East Asian countries that export to the United States to meet this deceleration in U.S. absorption growth would be by loosening fiscal policy (increasing spending on social security, health care, education, rural infrastructure and the like) and thus stimulating demand at home. With demand growth slowing in the United States and accelerating in Asia, relative prices, in the form of the dollar exchange rate, will tend to adjust. The argument for gradual adjustment starting now to limit the risk of a sharp, disruptive adjustment later is still sound even if an eventual hard landing is less than certain.

    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).

    posted by Dan at 08:17 PM | Comments (4) | Trackbacks (0)



    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.

    I told the German official at the time that I was sure the initiative would fail. It's not that I had any particular expertise in immigration policy, but I understood something about green cards, because I had one (the American version) myself.

    The German Green Card was misnamed, I argued, because it never, under any circumstances, translated into German citizenship. The U.S. green card, by contrast, is an almost automatic path to becoming American (after five years and a clean record)....

    Many Americans have become enamored of the European approach to immigration -- perhaps without realizing it. Guest workers, penalties, sanctions and deportation are all a part of Europe's mode of dealing with immigrants. The results of this approach have been on display recently in France, where rioting migrant youths again burned cars last week. Across Europe one sees disaffected, alienated immigrants, ripe for radicalism. The immigrant communities deserve their fair share of blame for this, but there's a cycle at work. European societies exclude the immigrants, who become alienated and reject their societies.

    One puzzle about post-Sept. 11 America is that it has not had a subsequent terror attack -- not even a small backpack bomb in a movie theater -- while there have been dozens in Europe. My own explanation is that American immigrant communities, even Arab and Muslim ones, are not very radicalized. (Even if such an attack does take place, the fact that 4 1/2 years have gone by without one provides some proof of this contention.) Compared with every other country in the world, America does immigration superbly. Do we really want to junk that for the French approach?

    The United States has a real problem with flows of illegal immigrants, largely from Mexico (70 percent of illegal immigrants are from that one country). But let us understand the forces at work here. "The income gap between the United States and Mexico is the largest between any two contiguous countries in the world," writes Stanford historian David Kennedy. That huge disparity is producing massive demand in the United States and massive supply from Mexico and Central America. Whenever governments try to come between these two forces -- think of drugs -- simply increasing enforcement does not work. Tighter border control is an excellent idea, but to work, it will have to be coupled with some recognition of the laws of supply and demand -- that is, it will have to include expansion of the legal immigrant pool.

    Beyond the purely economic issue, however, there is the much deeper one that defines America -- to itself, to its immigrants and to the world. How do we want to treat those who are already in this country, working and living with us? How do we want to treat those who come in on visas or guest permits? These people must have some hope, some reasonable path to becoming Americans. Otherwise we are sending a signal that there are groups of people who are somehow unfit to be Americans, that these newcomers are not really welcome and that what we want are workers, not potential citizens. And we will end up with immigrants who have similarly cold feelings about America.

    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.

    posted by Dan at 11:50 PM | Comments (26) | Trackbacks (0)



    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.

    The dawn of this heyday came in 1995. In the two preceding decades, the productivity of American workers had grown more slowly than that of Japanese and European competitors. But in the decade since 1995, U.S. labor productivity growth has outstripped foreign rivals'. Meanwhile U.S. firms' return on equity -- that is, the efficiency with which they manage the capital entrusted to them -- has pulled away from that of Japan, France and Germany, according to data provided by Standard & Poor's Compustat.

    Other measures tell a similar story.... The (British) Financial Times publishes an annual list of the world's most respected companies. In 2004 and again in 2005, no fewer than 12 of the top 15 slots were occupied by American firms.

    Or consider the database on management quality constructed by Nick Bloom and John Van Reenen of Stanford University and the London School of Economics. This duo organized a survey of 732 medium-sized American and European companies and measured their management procedures against benchmarks of best practice. The result: American firms, including the subsidiaries of American firms in Europe, are simply better managed than European rivals. In fact, superior American management accounts for more than half of the productivity gap between American and European firms....

    Competition and meritocracy cannot explain all of America's superiority, however. The U.S. economy has always had these advantages but hasn't always trounced overseas rivals. Nor is it enough to say that Americans work harder than Europeans, since the productivity numbers show that Americans are boosting what they achieve per hour. And anyone who explains America's superiority by saying that the country is more "dynamic" or "creative" is merely relabeling the mystery we're trying to solve.

    The best guess about the "X factor" is that America's business culture is peculiarly well-suited to contemporary challenges. American business is not especially good at coaxing productivity out of factory workers: The era when this was all-important was the heyday of Germany and Japan. But American business excels at managing service workers and knowledge workers: at equipping these people with technology, empowering them with the right level of independence and paying for performance. So the era of decentralized "network" businesses is the American era.

    Moreover, America's business culture is perfectly matched to globalization. American executive suites and MBA courses are full of talented immigrants, so American managers think nothing of working in multicultural firms. The immigrants have links to their home countries, so Americans have an advantage in establishing global supply chains. The elites of Asia and Latin America compete to attend U.S. universities; when they return to their countries, they are keener to join the local operation of a U.S. company than of a German or Japanese one.

    posted by Dan at 07:45 PM | Comments (23) | Trackbacks (0)



    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.

    Saying that the country should solve the skills shortage through education and training became part of nearly every politician's stump speech, an innocuous way to address the politics of unemployment without strengthening either the bargaining leverage of workers or the federal government's role in bolstering labor markets.

    But training for what? The reality, as the aircraft mechanics discovered, is painfully different from the reigning wisdom. Rather than having a shortage of skills, millions of American workers have more skills than their jobs require. That is particularly true of college-educated people, who make up 30 percent of the population today, up from 10 percent in the 1960's. They often find themselves working in sales or as office administrators, or taking jobs in hotels and restaurants, or becoming carpenters, flight attendants and word processors.

    The number of jobs that require a bachelor's degree has indeed been growing, but more slowly than the number of graduates, according to the Labor Department, and that trend is likely to continue through this decade. "The average college graduate is doing very well," said Lawrence F. Katz, a labor economist at Harvard. "But on the margin, college graduates appear to be more vulnerable than in the past."

    The Labor Department's Bureau of Labor Statistics offers a rough estimate of the imbalance in the demand for jobs as opposed to the supply. Each month since December 2000, it has surveyed the number of job vacancies across the country and compared it with the number of unemployed job seekers. On average, there were 2.6 job seekers for every job opening over the first 41 months of the survey. That ratio would have been even higher, according to the bureau, if the calculation had included the millions of people who stopped looking for work because they did not believe that they could get decent jobs.

    So the demand for jobs is considerably greater than the supply, and the supply is not what the reigning theory says it is. Most of the unfilled jobs pay low wages and require relatively little skill, often less than the jobholder has. From the spring of 2003 to the spring of 2004, for example, more than 55 percent of the hiring was at wages of $13.25 an hour or less: hotel and restaurant workers, health care employees, temporary replacements and the like.

    That trend is likely to continue. Seven of the 10 occupations expected to grow the fastest from 2002 through 2012, according to the Labor Department, pay less than $13.25 an hour, on average: retail salesclerks, customer service representatives, food service workers, cashiers, janitors, nurse's aides and hospital orderlies.

    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."

    posted by Dan at 11:15 PM | Comments (31) | Trackbacks (0)



    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.

    This year, however, there have been annoucements to negotiate FTAs with Malaysia and South Korea. Competitive liberalization has a bit more teeth to it.

    Alan Beattie points this out in the Financial Times:

    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 US has for several years pursued a policy of “competitive liberalisation”, pursuing both multilateral and bilateral liberalisation. This irks many trade experts who say bilateral deals do more to divert and complicate trade than advance it.

    But the US strategy is clear. William Rhodes, senior vice-chairman of Citigroup and chairman of the US-Korea business council, says: “Because the Doha round has been moving so slowly...there will be more of these bilateral FTAs like that being negotiated between the US and Korea.”

    The bilateral talks have a sense of urgency. The US’s “trade promotion authority” – the White House’s right to submit entire trade agreements to Congress for a Yes-No vote – expires in the middle of 2007.

    While the expiration of this authority sets a hard deadline for Doha, it will also close the window for the US to sign bilaterals. Karan Bhatia, deputy US trade representative with responsibility for Asia, says: “TPA is concentrating our focus on making sure we lock down agreements that we believe can and should be achieved before that deadline. We are pushing forward aggressively with Korea and Malaysia to try to close those before the time expires.”

    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.

    At a minimum, the European Commission is making noises about more FTAs in Asia.

    Developing.... at least until TPA expires.


    posted by Dan at 12:05 AM | Comments (2) | Trackbacks (0)



    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.

    Back, that is, from what many feared would be the scrapheap. In 1980, when The Economist last published a survey of Chicago, it found a city whose “façade of downtown prosperity” masked a creaking political machine, the erosion of its economic base and some of the most serious racial problems in America. There followed an intensely painful decade of industrial decline and political instability during which jobs, people and companies all left Chicago while politicians bickered and racial antagonisms flared or festered. Other cities with similar manufacturing economies, similar white flight and similar problems of race and class looked on in dismay. If Chicago, the capital of the Midwest, the city of big shoulders, the city that works, that toddlin' town (few places have generated so much braggadocio), were to descend into rust-bound decay, what chance was there for Pittsburgh, Cleveland, St Louis, Detroit and a score of smaller places?

    Chicago's revival should not be judged merely by the manifest sparkle of the Loop and such districts as River North, the Gold Coast and Streeterville. A more telling indicator is the growth of population recorded in the most recent (2000) census: an increase of 4.0% for the city since 1990 (compared with 3.9% for Minneapolis, and losses of 5.4% for Cleveland, 7.5% for Detroit and 9.6% for Pittsburgh). Other signs of economic vigour include the arrival of Boeing, which moved its headquarters from Seattle to Chicago in 2001, the growth of the futures and derivatives markets embodied in the Chicago Mercantile Exchange and the Board of Trade, and the decision to expand O'Hare to ensure it keeps its place as the busiest (depending on the measurement) airport in the country....

    So Chicago seems to have weathered its period of deindustrialisation and emerged looking pretty robust. Other cities still groping for life after manufacturing death and trying to restore hope to their citizens and to the benighted neighbourhoods in which they live would do well to see what they can learn from Chicago's experience. This survey will try to do the work for them. It will examine an American success story. Is it as good as it seems? How much of it depends on Chicago's peculiar circumstances? How much could be repeated elsewhere

    The survey suggests four reasons for Chicago's rebirth:
    1) Geographical advantages unique to Chicago (Lake Michigan, being the largest city in the Midwest);

    2) Immigration:

    Though Latinos are individually poorer than other Chicagoans, their collective household income of $20 billion a year makes up nearly 10% of the six-county area's total. The sales-tax revenues generated in the shops of Little Village's 26th Street are, it is said, greater than those of any other retail corridor in Chicago but Magnificent Mile. Latinos are also a driving force in the region's property market.

    Since 1990, the growth in the number of Latino workers has just about matched the growth in jobs in the region. And the numerical match has paralleled a geographical one: many Latinos go straight to the jobs, which are mostly in the suburbs, bypassing the inner city altogether. Thus one person in five in the six-county area is now a Latino, making a living, likely as not, as a gardener, labourer, office cleaner or waiter. In the 1990s, the Latino population doubled in each of the five suburban counties around Chicago.

    3) Civic-minded businessmen:
    Too much can be made of planning in Chicago: in many ways the city is a monument to the creativity of chaos. But the influence of business is hard to exaggerate. The people who run the place could, and sometimes do, fit into one room. Some are politicians; some are academics; some are heads of museums or hospitals or outfits like the Chicago Council on Foreign Relations or the MacArthur Foundation. But most are in business.

    Indeed, if you are the boss of a big business anywhere in the Chicago area, you are expected to take an active part in the civic life of the city. Accordingly, the same names appear over and over again on the boards of universities, hospitals, museums, orchestras, opera companies and local charities. More to the point, business is almost always an active participant in any public endeavour, from school reform to the creation of Millennium Park, the brand new $475m park-cum-auditorium-cum-ice-rink-cum-fountain-cum-you-name-it just north of the Art Institute.

    4) Richard Daley's focus on public housing, schools, and greenery.
    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.

    posted by Dan at 09:18 AM | Comments (8) | Trackbacks (0)



    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....

    But now it appears just possible--based on the latest research available--that the whole chain of causation is falling apart. Wait before you cheer.

    The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging. Between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20 percent of families increased while incomes of the richest 20 percent fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank. Incomes became just a little less unequal.

    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.

    That is so contrary to the conventional view of this major economic trend that it demands explanation. One possibility is that it's just a blip. Could be, but remember that 2004, when the readings started going haywire, was a year of strong economic growth, low unemployment, and rising productivity, offering no obvious reason to expect weird results.

    The other main possibility is that something unexpected and fundamental is changing in the way the U.S. economy rewards education. We don't yet have complete data, but anyone with his eyes open can see obvious possibilities. Just maybe the jobs most threatened by outsourcing are no longer those of factory workers with a high school education, as they have been for decades, but those of college-educated desk workers.

    Perhaps so many lower-skilled jobs have now left the U.S.--or have been created elsewhere to begin with--that today's high school grads are left doing jobs that cannot be easily outsourced--driving trucks, stocking shelves, building houses, and the like. So their pay is holding up.

    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.

    posted by Dan at 09:50 AM | Comments (16) | Trackbacks (0)



    Tuesday, March 14, 2006

    When conservatives populate the earth....

    Thanks to the redesigned Real Clear Politics, I see that Philip Longman has a USA Today op-ed and an essay in Foreign Policy on how conservatives tend to breed more than liberals. From the op-ed:

    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 curious fact might at first seem trivial, but it reflects a much broader and little-noticed demographic trend that has deep implications for the future of global culture and politics. It's not that people in a progressive city such as Seattle are so much fonder of dogs than are people in a conservative city such as Salt Lake City. It's that progressives are so much less likely to have children.

    It's a pattern found throughout the world, and it augers a far more conservative future — one in which patriarchy and other traditional values make a comeback, if only by default. Childlessness and small families are increasingly the norm today among progressive secularists. As a consequence, an increasing share of all children born into the world are descended from a share of the population whose conservative values have led them to raise large families.

    Today, fertility correlates strongly with a wide range of political, cultural and religious attitudes. In the USA, for example, 47% of people who attend church weekly say their ideal family size is three or more children. By contrast, 27% of those who seldom attend church want that many kids....

    Why couldn't tomorrow's Americans and Europeans, even if they are disproportionately raised in patriarchal, religiously minded households, turn out to be another generation of '68? The key difference is that during the post-World War II era, nearly all segments of society married and had children. Some had more than others, but there was much more conformity in family size between the religious and the secular. Meanwhile, thanks mostly to improvements in social conditions, there is no longer much difference in survival rates for children born into large families and those who have few if any siblings.

    Tomorrow's children, therefore, unlike members of the postwar baby boom generation, will be for the most part descendants of a comparatively narrow and culturally conservative segment of society. To be sure, some members of the rising generation may reject their parents' values, as often happens. But when they look for fellow secularists with whom to make common cause, they will find that most of their would-be fellow travelers were quite literally never born.

    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.

    Patriarchy does not simply mean that men rule. Indeed, it is a particular value system that not only requires men to marry but to marry a woman of proper station. It competes with many other male visions of the good life, and for that reason alone is prone to come in cycles. Yet before it degenerates, it is a cultural regime that serves to keep birthrates high among the affluent, while also maximizing parents’ investments in their children. No advanced civilization has yet learned how to endure without it.

    Through a process of cultural evolution, societies that adopted this particular social system—which involves far more than simple male domination—maximized their population and therefore their power, whereas those that didn’t were either overrun or absorbed. This cycle in human history may be obnoxious to the enlightened, but it is set to make a comeback....

    Patriarchy may enjoy evolutionary advantages, but nothing has ensured the survival of any particular patriarchal society. One reason is that men can grow weary of patriarchy’s demands. Roman aristocrats, for example, eventually became so reluctant to accept the burdens of heading a family that Caesar Augustus felt compelled to enact steep “bachelor taxes” and otherwise punish those who remained unwed and childless. Patriarchy may have its privileges, but they may pale in comparison to the joys of bachelorhood in a luxurious society—nights spent enjoyably at banquets with friends discussing sports, war stories, or philosophy, or with alluring mistresses, flute girls, or clever courtesans.

    Women, of course, also have reason to grow weary of patriarchy, particularly when men themselves are no longer upholding their patriarchal duties. Historian Suzanne Cross notes that during the decades of Rome’s civil wars, Roman women of all classes had to learn how to do without men for prolonged periods, and accordingly developed a new sense of individuality and independence. Few women in the upper classes would agree to a marriage to an abusive husband. Adultery and divorce became rampant.

    Often, all that sustains the patriarchal family is the idea that its members are upholding the honor of a long and noble line. Yet, once a society grows cosmopolitan, fast-paced, and filled with new ideas, new peoples, and new luxuries, this sense of honor and connection to one’s ancestors begins to fade, and with it, any sense of the necessity of reproduction. “When the ordinary thought of a highly cultivated people begins to regard ‘having children’ as a question of pro’s and con’s,” Oswald Spengler, the German historian and philosopher, once observed, “the great turning point has come.”

    Developing... over many generations.

    UPDATE: Kieran Healy takes the time and effort I lacked to demonstrate why Longman's hypothesis is likely wrong.

    posted by Dan at 11:10 PM | Comments (22) | Trackbacks (0)



    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.

    In an extraordinary decision, the government this week announced a six-month ban on most beef exports from the world's third-largest purveyor of the meat.

    In Argentina, prime beef is a cultural icon, rivaling tango, soccer and the late Eva Peron. Argentines are voracious beefeaters, consuming 143 pounds per capita annually.

    But consumers here have been grumbling about beef prices for months, and Kirchner — a left-leaning populist often at odds with big business — presented the ban as a way to protect his people from export-driven price hikes.

    The government hopes that meat targeted for overseas sale will now stay at home. Increased supplies will reduce domestic prices, which skyrocketed 20% last year, surpassing the worrisome inflation rate of more than 12%.

    "It doesn't interest us to export at the cost of hunger for the people," Kirchner declared.

    The president's edict took effect Friday. Delighted shoppers rushed to butcher shops to inquire whether prices had dropped yet from the $2 or so a pound for the prime cuts that can go for 10 times as much in the United States and Europe.

    "The president's move was absolutely necessary in the moment we are living," said Hector Polino, who heads a consumer group that is critical of rising prices.

    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%.

    Cattle farmers say the export ban will probably reduce supplies in the long term, cost them hundreds of millions of dollars and throw thousands of people out of work.

    "The plants will begin to shut down," Carlos Oliva Funes, president of Swift Armour Argentina, a large meat producer, told the conservative daily paper La Nacion.

    "This is like telling Colombia it cannot export coffee," said Javier Jayo Ordoqui, who heads a rancher's association outside Buenos Aires, the capital. "This is cattle country."

    Indeed, on Friday, prices were reported to have plunged as much as 20% at Liniers, the country's largest live cattle market. Economists predicted that modestly lower prices would eventually trickle down to consumers.

    Kirchner will lower beef prices -- in the most damaging, inefficient way possible.

    posted by Dan at 10:55 AM | Comments (17) | Trackbacks (0)



    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.

    Just to give you a sense of who we're talking about: the nonpartisan Tax Policy Center estimates that this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The center doesn't give a number for the 99.99th percentile, but it's probably well over $6 million a year.... The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story. Should we be worried about the increasingly oligarchic nature of American society?

    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;

    2) Those at the bottom of the income spectrum believe that they will eventually rise to the top of the income spectrum, and therefore see no reason to complain -- call this the David Brooks thesis;

    3) Income is not the only measure that counts in evaluating Americans' well-being, and on other factors, the distribution of gains is far more even. I can think of two economic benefits in particular:

    a) Asset prices. Americans have done well the past decade not through income gains but capital gains, in the form of their stock and housing portfolios (not to mention intergenerational wealth transfers). These gains have been impressive even given the bubble-like quality of some of the rise. While I have no hard data on this, and will gladly welcome empirical falsification, my hunch is that these gains might be more evenly distributed than rises in income;

    b) Leisure. I've blogged about this before, but Virginia Postrel has an excellent New York Times summary from last week. The key point -- the gains in leisure are particularly strong at the bottom of the income spectrum.

    c) Consumption. Inequality in consumption is not as stark as inequality in income. Furthermore, in many areas productivity gains have drastically lowered prices. Daniel Gross touches on this point in his Slate column on Chipotle and other restaurant IPOs:

    [T]he restaurant industry has done a Wal-Mart. Through tight control of sourcing, a focus on logistics, and a firm rein on labor costs, it has managed to keep a lid on inflation. Yes, a Big Mac costs more than it used to. But virtually every fast-food joint still has a 99-cent menu. And it's not just fast food that's cheap. As noted in this space in 2004, between 1982 and 2004, according to figures provided by the ever-expanding Zagat survey, the average cost at the same restaurant rose from $29.23 to $50.32, a 2.62 percent annual rate—substantially below the rate of inflation in that period.
    Even if incomes are stagnant, there is a large category of goods for which more can be purchased for less.
    Call this the Drezner thesis -- unless I'm wrong, in which case call it typical half-assed blog analysis.
    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!

    Instead of an aristocracy of the merely rich, we are moving to an aristocracy of the capable and the rich.

    ANOTHER UPDATE: James Joyner still wants someone to show him the money.

    posted by Dan at 10:12 AM | Comments (67) | Trackbacks (0)



    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.

    Few workers at each site received either the health insurance benefit or the wage insurance benefit available to some older workers. No more than 12 percent of workers at each site received the health insurance
    benefit, and at four of five sites, fewer than half the workers who visited a one-stop center were aware of it. Many workers did not use it because they had other coverage or because the cost of available health insurance was too high. No more than one in five of the older workers at each site received the wage insurance benefit, and at two sites, fewer than half the older workers who visited a center were aware of it.


    posted by Dan at 04:30 PM | Comments (2) | Trackbacks (0)



    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....

    Everyone, it seems, was invited to the "Save Africa" campaign of 2005 except for Africans. They starred only as victims: genocide casualties, child soldiers, AIDS patients and famine deaths on our 43-inch plasma screens.

    Yes, these tragedies deserve attention, but the obsessive and almost exclusive Western focus on them is less relevant to the vast majority of Africans -- the hundreds of millions not fleeing from homicidal minors, not HIV-positive, not starving to death, and not helpless wards waiting for actors and rock stars to rescue them. Angelina, the continent has problems but it is not being destroyed....

    The West's focus on sensational tragedies obscures the achievements of people such as Patrick Awuah and Robert Keter, who are succeeding even against tremendous odds. Economic development in Africa will depend -- as it has elsewhere and throughout the history of the modern world -- on the success of private-sector entrepreneurs, social entrepreneurs and African political reformers. It will not depend on the activities of patronizing, bureaucratic, unaccountable and poorly informed outsiders.

    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.

    posted by Dan at 09:08 AM | Comments (8) | Trackbacks (0)



    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.

    For this exuberant and increasingly entrepreneurial nation, it would be a natural evolution--and a stunning one. As China enters the modern economic market, it has gone from being the low-cost factory for Wal-Mart to the purchaser of big-name brands (think Lenovo's recent acquisition of ThinkPad from IBM). The third stage will be for China to create brands of its own, becoming a center of design and innovation capable of fielding products that can compete in quality, style, and prestige with anything from Paris, Milan, or New York. "The opportunity for Shanghai Tang right now is huge," says David Melancon, North American president of brand strategy firm FutureBrand. "They could be the first big luxury brand out of Asia."

    Out of Asia, yes--and in it, too. While the global luxury market is already big--$168 billion a year, according to Bain & Co.--and growing at a rate of 7% per year, "big" doesn't begin to describe the potential market for glitzy goods in China itself. A quarter of a century ago, there were no millionaires in China; by the end of 2004, there were more than 236,000, Bain says. And Patrizio Bertelli, the CEO of another fashion house that's hungrily eying the market--Prada Group--figures that China could overtake the United States as a market for luxury goods by 2020.

    In the meantime, the profits China's homegrown brands earn at home will help finance their forays into the rest of the world. Add in the cheap labor close at hand (an edge over many Western luxury labels, which are made in Europe), and the Guccis and Armanis could be facing competition like they've never seen before.

    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.

    "We're a melting pot of multicultural people who work on the same vision: a Chinese lifestyle brand that's relevant," he says. As for native Chinese, he says, they're starting to understand branding and sophistication, too. "They are so eager to learn, you cannot imagine."

    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.

    But while le Masne de Chermont has plans to roll out additional U.S. shops, he's not as obsessed as his predecessor was with making it in America. The red-hot future of his business, he points out, is in Asia. "Can you imagine 1 billion Chinese getting into capitalism?" he says with undisguised glee. "It's unstoppable!"

    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.

    posted by Dan at 11:41 AM | Comments (12) | Trackbacks (0)



    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."

    But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks.

    Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be. That kind of distortion is likely to appear again on Feb. 10, when the Commerce Department announces the American trade deficit with China. By many estimates, it swelled to a record $200 billion last year.

    It may look as if China is getting the big payoff from trade. But over all, some of the biggest winners are consumers in the United States and other advanced economies who have benefited greatly as a result of the shift in the final production of toys, clothing, electronics and other goods from elsewhere in Asia to a cheaper China....

    The real losers, it seems, are mostly low-wage workers elsewhere, like the ones at Hitachi who lost their jobs in Japan, along with workers in other parts of Asia who suffered as employers began relocating plants to China. Blue-collar workers in the United States have also lost out....

    Foreign expertise has been critical as manufacturing supply chains become increasingly complex, involving countries' each producing components that are then shipped to China for assembly. Such a system can render global trade statistics misleading, and some experts say that a more apt label would be "assembled in China."

    "The biggest beneficiary of all this is the United States," said Dong Tao, an economist at UBS in Hong Kong. "A Barbie doll costs $20, but China only gets about 35 cents of that."

    Read the whole thing. One fact genuinely surprised me:
    Asian exports to the United States have actually slipped over the last 15 years....

    The migration has left footprints in trade statistics. In 1990, Japan was the United States' dominant trading partner in the Pacific, and Asia accounted for 38 percent of all American imports. Last year, China was the dominant Asian trader. Its trade with the United States has risen some 1,200 percent since 1990, even as the Asian share of American imports slipped to 36 percent.

    What changed from 1990 to 2005 is that many goods became a lot cheaper as China took on a greater and greater role as the world's basic factory floor.

    posted by Dan at 11:42 PM | Comments (16) | Trackbacks (0)




    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.

    Much of the decrease is because of a decline in smoking and improved detection and treatment of breast, colorectal and prostate cancers, according to the society.

    The decline occurred in 2003, the latest year for which figures are available. There were 556,902 cancer deaths, 369 fewer than in 2002. Deaths fell in men by 778, but rose by 409 in women.

    "Even though it's a small number, it's a notable milestone," said Dr. Michael Thun, head of epidemiological research for the society.

    Dr. Thun (pronounced tune) said the death rate from cancer had been falling by slightly less than 1 percent a year since 1991, but even so, the actual number of deaths kept rising because the population was growing and aging.

    "The decrease from 2002 to 2003 means that the decline in death rates had become sufficiently large that it was bigger than the aging and growth of the population," Dr. Thun said.

    "You would predict this is a trend that may have a few bumps but will continue," he said.

    Dr. Robert A. Hiatt, deputy director of the Comprehensive Cancer Center at the University of California, San Francisco, said, "From the beginning of the century it's been going up and up and up, and this is the first time we've turned the corner."

    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."

    posted by Dan at 07:08 AM | Comments (7) | Trackbacks (0)



    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.

    The ruling was a victory for Washington in a long-running dispute that has pitted US faith in the benefits of the new crops against widespread consumer resistance in Europe.

    It was immediately welcomed by US farmers and the biotechnology industry, but castigated by environmental and consumer groups who charged the ruling was a blatant example of international trade rules running roughshod over democratic decisions aimed at protecting consumer health and safety.

    A US trade official, briefing reporters on the confidential decision that was released to the countries involved in the dispute late yesterday, said: “We’re please with the outcome. We’re not at the end of the road, but it’s a significant milestone.”

    The EU would not comment on the ruling, which Brussels could appeal against, after the final report is issued in a few months.

    The US, along with Canada and Argentina, launched the case in 2003 hoping that a favourable ruling by the WTO would prevent European-style restrictions on GM foods from spreading to Africa, China and other parts of the world. “One of the reasons we brought this case was because of the chilling effect the EU moratorium has had on the adoption of biotechnology,” the official said.

    The immediate practical effect of the ruling is unclear. The European Commission halted the approval of new GM varieties in 1998, but began limited approvals again in May 2004, after the US launched the WTO case. Nearly two dozen applications remain in the pipeline.

    The WTO decision also found against separate national bans established by Austria, France, Germany, Greece, Italy and Luxembourg, which have refused to allow even those GM varieties approved by Brussels. Those national restrictions have remained in place even after the moratorium was lifted in 2004.

    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.

    2) The effect on the US -- and biotech firms -- is slightly better than nil. They won't be able to crack open the EU market -- but the decision will serve as a useful precedent in dealing with the rest of the world, which does not want to be the target of WTO-approved sanctions. Countries that rely heavily on ag exports to the EU won't budge, but it could have a effect on other countries.

    3) The effect on the WTO is slightly worse than nil. Every time the WTO issues a ruling and the response is non-compliance, it takes a hit. That's what is going to happen here. [So they should have ruled the opposite way?--ed. No, they made the right call on the merits of the case-- it's just that I'm pretty sure the WTO would have preferred not to rule on this case at all. For them, it's a lose-lose situation.]

    4) The effect on environmental NGOs depends on what you believe they want. In terms of outcomes, the effect is pretty bad, because it increases the likelihood that more states will allow GMO use. In terms of process, the effect is pretty good, because they'll be able to use the WTO ruling to raise lots and lots of money.

    5) I have no idea how this will affect human-animal hybrids.

    [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.]


    posted by Dan at 07:54 PM | Comments (18) | Trackbacks (0)



    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.

    Friedman | Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with.

    What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations.

    The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences.

    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.

    posted by Dan at 10:59 AM | Comments (24) | Trackbacks (0)




    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?

    Well, don't be. Because the economy you thought you knew -- the one all those government statistics purport to measure and make rational and understandable -- actually may be on a stronger footing than you think. Then again, it could be much more volatile than before, with bigger booms and deeper busts. If true, that has major implications for policymakers -- not least Ben Bernanke, who on Feb. 1 succeeded Alan Greenspan as chairman of the Federal Reserve.

    Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation. What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas. "As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

    The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy. That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers....

    [O]ver the past seven years the economy has continued to evolve while the numbers we use to capture it have remained the same. Globalization, outsourcing, and the emphasis on innovation and creativity are forcing businesses to shift at a dramatic rate from tangible to intangible investments.

    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?

    posted by Dan at 12:17 AM | Comments (24) | Trackbacks (0)



    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.

    Two years ago, the MIT economist Olivier Blanchard made news with an article claiming that Europe was gaining on the United States. True, gross domestic product per person was only 70 percent of America's, a gap that has existed for a generation. But by the measure of output per hour of work, Europe had reached 90 percent of American levels. Europeans were simply choosing to work fewer hours, Blanchard suggested-not an obviously dumb move. They were trading income for more leisure.

    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.


    Over the past four decades, depending on which of their measures one uses, the amount of time that working-age Americans are devoting to leisure activities has risen by 4-8 hours a week. (For somebody working 40 hours a week, that is equivalent to 5-10 weeks of extra holiday a year.) Nearly every category of American has more spare time: single or married, with or without children, both men and women. The only twist is that less educated (and thus poorer) Americans have done relatively better than more educated ones (see chart). And that is not just because unemployed high-school drop-outs have more free time on their hands. Less educated Americans with jobs—the overstretched middle class of political lore—do very well....

    Messrs Aguiar and Hurst think that the hours spent at your employer's are too narrow a definition of work. Americans also spend lots of time shopping, cooking, running errands and keeping house. These chores are among the main reasons why people say they are so overstretched (especially working women with children).

    However, Messrs Aguiar and Hurst show that Americans actually spend much less time doing them than they did 40 years ago. There has been a revolution in the household economy. Appliances, home delivery, the internet, 24-hour shopping, and more varied and affordable domestic services have increased flexibility and freed up people's time.

    So women are devoting more hours to paying jobs, but have cut their housework and other burdensome tasks by twice as much. Men have picked up some of the slack at home; but thanks to technology and other advances, there is plenty of free time left over for them as well, since they have yielded some of their paid working hours to women.

    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.

    posted by Dan at 03:25 PM | Comments (10) | Trackbacks (0)



    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.

    posted by Dan at 02:14 PM | Comments (0) | Trackbacks (0)



    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 problem program:

    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."

    During a speech a few hours later at Georgetown University Law Center, Gonzales made another reference to the possible need to update the law, pointing to the authorization Congress gave Bush to pursue terrorists after the Sept. 11 attacks as part of the justification for the current program. "It is simply not the case that Congress in 1978 anticipated all the ways that the president might need to act in times of armed conflict to protect the United States," said Gonzales, who also said Bush was simply following in the footsteps of such presidents as Washington and FDR who had also used military surveillance without warrants. "FISA, by its own terms, was not intended to be the last word on these critical issues."

    No such move is imminent, a top aide stressed. But administration lawyers are said to be debating whether the President would be better off putting the monitoring on more solid footing, or whether seeking additional latitude would amount to admitting the government had not been following the law. The most likely route would be an amendment to FISA, sources said. Lawyers following the controversy perked up their ears when Gonzales said at Georgetown that the government could begin monitoring based on whether there was a "reasonable" basis to believe the subjects were linked to terrorism. Some lawyers contend that is lower than the "probable cause" standard established by FISA. Gonzales said that the "terrorist surveillance program involves intercepting the international communications of persons reasonably believed to be members or agents of al-Qaeda or affiliated terrorist organizations." But he added: "'Reasonable basis to believe' is essentially the same as the traditional Fourth Amendment probable cause standard."

    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.

    2) I still don't understand why Bush didn't include a FISA amendment in the Patriot Act when it was first passed in the fall of 2001. Can anyone explain this? Really, I blegging here.

    3) Kevin Drum has been doing some excellent blogging on this topic. I can't really disagree with his characterization of the state of play right now.

    UPDATE: The initial title to this post was a misnomer -- apologies.

    posted by Dan at 08:16 PM | Comments (33) | Trackbacks (0)



    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.

    Today, many loyal domestic vehicle owners say they would be comfortable buying an import....

    For one thing, it isn't even clear anymore what "Buy American" means when it comes to cars and trucks. Many of those new models from Toyota and others are built in places like Kentucky, Indiana and Alabama, while the Chevrolet Aveo is imported from South Korea. Meanwhile, some Dodge Ram pick-ups are built in Mexico. Dodge, of course, is a domestic brand, but it's owned by Germany-based DaimlerChrysler.

    This blurring of vehicle origin means that Ford or GM can't rely on a "Buy American" marketing campaign.

    Art Spinella, president of CNW Marketing Research, says the confusion over national origin means consumers are less likely to try to help fellow Americans by buying a domestic vehicle.

    "Basically, they throw their hands in the air and just buy what they like," Spinella said.

    The lack of stigma attached to buying a foreign product goes beyond the auto industry.

    Compared to the early 1980s, consumers face shelves stocked with foreign-made products--from televisions to running shoes. Often they don't notice the origin of what they purchase.

    When CNW surveyed shoppers coming out of Wal-Mart stores, 75 percent said they preferred to buy American, yet an inspection of their purchases found that 90 percent were made in China.

    "They don't even look to see where the stuff is made anymore. It's the price that matters," Spinella said.

    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.

    For example, when Honda got into the pick-up market last year with the Ridgeline, the truck came with a novel lockable trunk in the cargo floor that holds a 72-quart cooler or three sets of golf clubs.

    "Ford has been building pick-up trucks for a hundred years, yet no one thought to do that," Spinella said.

    The only way Ford and GM can combat their Asian rivals is with innovative features like that, or with exciting models like the Chrysler 300, which looks like a Bentley luxury sedan.

    "They just need to build some products people want to buy, something that people are excited about," Spinella said....

    Ford has such a hit with the Fusion, a new midsize sedan that attracts one-third of its buyers from Asian and European brands, according to CNW, and GM's Pontiac division is attracting attention with the stylish Solstice, a two-seat sports car.

    Ford and GM have steadily closed the quality gap with the leading Japanese brands in owner surveys like J.D. Power and Associates' initial-quality study, yet consumers are still leery.

    "You can generate interest and excitement with styling and new products, but when it comes time to purchase, people demand a higher level of confidence and security," said Alexander Edwards, chief executive of Strategic Vision, a San Diego consulting firm.

    That is one reason the Toyota Camry is America's favorite car, despite frequent criticism that it is bland. Consumers have confidence in the car and "trust in the brand," Edwards said, while domestic brands have failed to build similar trust.

    posted by Dan at 10:57 AM | Comments (26) | Trackbacks (0)



    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.

    The group, crowded around tables in a Naperville sandwich shop on a recent Saturday morning, reached for their game markers--little plastic rats--to play Cashflow 101, a board game some devotees credit with changing their lives.

    The brainchild of investment guru Robert Kiyosaki, author of the extraordinarily popular "Rich Dad, Poor Dad" books, Cashflow 101 has spawned clubs around the world.

    Members play regularly, learning the accounting principles Kiyosaki insists are key to shrewd investing, while honing their get-rich-quick fantasies....

    "I thought it was the stupidest thing I had ever heard of until I sat down to play it," said Paul Strauss of Naperville, a full-time real estate investor and a founder of the Windy City club, which isn't affiliated with Kiyosaki but whose Web site links to Kiyosaki's. "But the game teaches you how to get out of the rat race, and I did."

    The prospect of learning the secret to wealth has unlimited appeal in a culture that has embraced real estate investing as sort of a fiscal sport. Some economists tied novice speculators to as many as one-fourth of real estate transactions in 2004.

    This has led to boom times for pitchmen of books, videos, seminars, DVDs and trade shows. Among those at the top of that big heap is Kiyosaki, who preaches that schools fail to teach financial literacy.

    His solution was to create Cashflow 101.

    Though it has dice, markers and a colorful board, it's not a typical game--it's more Monopoly on steroids. For one thing, it costs $195, as opposed to the industry average of $15 to $39.

    Kiyosaki said that when he was developing the game, a consultant told him it was too complex for the public.

    "He said, `Raise your price. Make it ridiculous,'" Kiyosaki recalled. "`That would make people perceive it as a value.'"

    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....

    Financial planners complain that he scorns 401(k) plans, mutual funds and other traditional forms of saving in favor of more risky real estate and franchise endeavors.

    Critics say his books are long on platitudes and short on specific investment strategies, beyond developing passive income from real estate and stocks....

    Julie Canoura, a Naperville real estate agent, is a believer in the game. She said she's using her individual retirement account to invest in property in Belize and has learned investment strategies from other players. (emphasis added)

    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.

    posted by Dan at 08:36 AM | Comments (8) | Trackbacks (0)



    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....

    Since 2000, the U.S. rate of return on FDI has risen from 5.4 percent to 8.6 percent, an increase of 3.2 percentage points; the foreign rate of return on FDI in the United States has risen from 2.0 percent to 4.3 percent, an increase of 2.3 percentage points.Had rates of return on FDI remained at their 2000 values, U.S. net income receipts would have been $33 billion lower in 2004....

    Seeking to shed light on the puzzle, we examine FDI returns by industry and country. Unfortunately, our analysis deepens the puzzle rather than solves it: with few exceptions, the U.S. rate of return advantage holds across industries and countries. of U.S. firms at about the advanced-economy average.

    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....

    In a nut shell our story is very simple. The income generated by a country’s financial position is a good measure of the true value of its assets. Once assets are valued accordingly, the US appears to be a net creditor, not a net
    debtor and its net foreign asset position appears to have been fairly stable over the last 20 years. The bulk of the difference with the official story comes from the unaccounted export of knowhow carried out by US corporations through their investments abroad, explaining why the US appears to be a consistently smarter investor, making more money on its assets than it pays on its liabilities and why the rest of the world cannot wise up. In addition, the value of this dark matter seems to be rather stable, indicating that they are likely to continue to compensate for the measured trade deficit.

    Globalization has made the flows of dark matter a very significant part of the story and the traditional measures of current account balances paint a very distorted picture of reality. In particular, it points towards imbalances that are not really there, making analysts predict crises that, for good reason, remain elusive.

    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.

    posted by Dan at 12:16 PM | Comments (14) | Trackbacks (0)



    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."....

    Now, today's twentysomething authors are clearly onto something. College is more expensive today in real terms. There's been a shift in student aid—more loans and fewer grants. The Baby Boomers, closer to retirement, are sucking up more dollars in benefits. There's more income volatility and job insecurity than there used to be. So, why are these books—Generation Debt in particular—annoying?

    ....[M]any of the economic issues the authors identify—job insecurity, low savings rate, income volatility, the massive ongoing benefits cram-down—affect everybody, not just twentysomethings. And the people hurt most by these escalating trends aren't young people starting out. They're folks in their 50s and 60s, middle-managers at Delphi whose careers have ended, coal miners in West Virginia who face death on the job, the people at IBM who just saw their pensions frozen.

    Today's twentysomethings, by contrast, have their whole lives in front of them. Want a cheaper house? Quit Manhattan and move to Hartford, Conn. Want to make more money? Pick a different field.

    In [Anya] Kamenetz's book [Generation Debt: Why Now Is a Terrible Time To Be Young], there are plenty of poor, self-pitying upper-middle-class types, disappointed that they can't have exactly what they want when they want it. Sure, it's tough to live well as a violinist or a grad student in New York today; but the same thing held 20 years ago, and 40 years ago. To improve their lot, twentysomethings have to do the same things their parents should be doing: saving more, spending less, building skills that are marketable, and aligning aspirations with abilities. It's tough to have a bourgeois life at 26....

    Kamenetz complains that: "No employer has yet offered me a full-time job with a 401(k), a paid vacation, or any other benefits beyond the next assignment. I have a savings account but no retirement fund. I can't afford preschool fees or a mortgage anywhere near the city where I live and work." Of course, Kamenetz doesn't have kids to send to preschool. And chances are, by the time she does, she'll be able to afford preschool fees. Most people in their 20s don't realize that their incomes will rise over time (none of the people I know who have six-figure incomes today had them when they were 25), that they will marry or form a partnership with somebody else, thus increasing their income, and that they may get over having to live in the hippest possible neighborhood.

    Look. It's tough coming out of Ivy League schools to New York and making your way in the world. The notion that you can be—and have to be—the author of your own destiny is both terrifying and exhilarating. And for those without marketable skills, who lack social and intellectual capital, the odds are indeed stacked against them. But someone like Kamenetz, who graduated from Yale in 2002, doesn't have much to kvetch about. In the press materials accompanying the book, she notes that just after she finished the first draft, her boyfriend "proposed to me on a tiny, idyllic island off the coast of Sweden." She continues: "As I write this, boxes of china and flatware, engagement gifts, sit in our living room waiting to go into storage because they just won't fit in our insanely narrow galley kitchen. We spent a whole afternoon exchanging the inevitable silver candlesticks and crystal vases, heavy artifacts of an iconic married life that still seems to have nothing to do with ours." The inevitable silver candlesticks? Too much flatware to fit in the kitchen? We should all have such problems.

    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"?

    2) To what extent is tuition at a four-year competitive state institution out of the reach of middle-class America?

    3) Given the rising gap in wages between those with a college education and those without, doesn't a rising premium on college tuition make sense?

    posted by Dan at 10:04 PM | Comments (42) | Trackbacks (0)



    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.

    On the one hand, Geoff Dyer and Andrew Balls report that China is planning on diversifying its foreign reserve holdings away from the dollar -- really:

    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.

    Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback.

    In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.

    It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

    “We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."

    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.


    The statement came a day after the currency hit an eight-year high against the greenback, intensifying concern among government officials that the stronger won could hurt exports, which account for more than a third of Asia’s fourth-largest economy.

    “We’re deeply worried about moves in the foreign exchange market that can’t be seen as normal,” said Kwon Tae-shin, a vice finance minister, after chairing an emergency meeting with central bank and trade ministry officials and other regulators. “The market has seen an excessive herd mentality because of speculative forces.”

    Mr Kwon said the government would look into speculative trading forces and further ease regulations on overseas investment as part of efforts to spur dollar outflows from the country.

    The government will immediately raise the ceiling on individual overseas investment from US$3m to US$10m and double the amount that individuals can spend to buy overseas property to US$1m, with an aim to completely abolish the ceilings within this year.

    “In case the market fails to return to normal on its own, we will seek stability through cooperation with relevant government agencies,” the finance ministry said in a statement.

    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.

    Click over to Brad Setser for more dollar analysis -- but be sure to read his list of what he got wrong (and right) about the dollar last year.

    posted by Dan at 09:50 AM | Comments (8) | Trackbacks (0)



    Wednesday, December 28, 2005

    Adios, siesta

    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.

    A new law decrees that lunch breaks will be limited to one hour to allow civil servants to clock off at 6pm.

    Jordi Sevilla, minister for public administration and a father of three, said the aims of the law were to put an end to the “chaotic hours” worked in the civil service and allow Spaniards to reconcile work and family life.

    He said he hoped private sector companies would follow suit. “We are trying to set an example by rationalising the working hours of civil servants,” he said.

    “Henceforth, lunchtime will be from 12 to 1pm, like the rest of Europe, instead of between 2 and 4pm. This will allow civil servants to leave work at six, instead of eight or nine in the evening.”

    Mr Sevilla said he wanted civil servants to “achieve the same amount of work in less time”.

    The Círculo de Empresarios, a business lobby group, said it thought Spain’s long lunches were an inefficient way to break up the day.

    “This is costing the economy as much as 8 per cent of gross domestic product,” said Claudio Boada, its president.

    Spain ranks 10th in the number of hours worked per year, although productivity lags far behind countries that work fewer hours....

    Still, change will not be easy. “The lunch is the main way personal relationships are established,” says Alejandra Moore, a communications consultant.

    “I cannot imagine achieving anything meaningful over a 45-minute lunch.”

    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.

    UPDATE: Tyler Cowen has more on the economics of napping.

    posted by Dan at 10:51 AM | Comments (10) | Trackbacks (0)



    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....

    "When you grade students you grade what's on the paper," Mussa said. "It's not whether you really like the student. I'm not prepared to ignore the obvious facts."

    Read the whole thing -- here's the report card in brief:
    SUBJECT: GRADES:

    GOOLSBEE SNYDER MUSSA
    TAXES B+/C- A- B-
    SPENDING D C D
    JOB CREATION B- B C+
    DEFICIT F B- C+
    SOCIAL SECURITY Inc. A+/F B-
    HEALTH CARE C- B- C+
    TRADE A- A A-
    ENERGY C- C C
    POVERT Y D B- C
    DISASTER RECOVERY F C/Inc. B

    posted by Dan at 08:31 AM | Comments (8) | Trackbacks (0)



    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.

    posted by Dan at 12:13 PM | Comments (7) | Trackbacks (0)



    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:

  • Half of all subsidies go to only 5% of Congressional districts.

  • Four commodities—corn, wheat, rice and cotton—account for 78 percent of all ag subsidies.
  • 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:

  • More than 80 percent of CAP payments go into 20 percent of farms -- including, deliciously enough, members of European royalty. The Queen of England, for example, received over 230,000 euros a year.

  • 5 million farms recceive less than 1,250 euros in payments

  • New EU members from Eastern Europe pay more into the CAP program than they receive in subsidies.
  • Go check it all out.

    posted by Dan at 07:16 PM | Comments (11) | Trackbacks (0)



    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.

    Developing....

    posted by Dan at 10:25 PM | Comments (4) | Trackbacks (0)



    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.

    Turkey's stock market is up more than 50 percent this year; Mexico's is up more than 30 percent; Egyptian stocks have more than doubled. And investors are snapping up bonds issued by emerging-market governments with remarkable gusto.

    Therein lie the makings of future disasters, in the view of many economists, market veterans and policymakers. Having pumped large sums into emerging markets at a time of low interest rates and high prices for the commodities that many developing countries produce, investors may well bolt when conditions deteriorate, with the sudden outflow of cash devastating economies and plunging governments into default.

    "I worry that there's this perfect storm coming for emerging markets," said Kristin J. Forbes, a Massachusetts Institute of Technology economics professor who served until early this year on President Bush's Council of Economic Advisers.

    To hear professional investors tell it, their current bullishness is based on the vastly more prudent economic policies that emerging-market nations have adopted. They cite the higher ratings bestowed by credit agencies such as Moody's and Standard & Poor's on countries that only a few years ago were plagued by defaults and currency devaluations. For example, government bonds issued by Mexico, Russia and Poland now qualify as "investment grade."

    "Those ratings have come from fundamental improvements in monetary and fiscal policy," said Dario Pedrajo, senior portfolio manager at Biscayne Americas Advisors. "Deficit spending has declined considerably in emerging-market countries."

    But skeptics contend that the main reason for the boom is the paltry level of interest rates in the United States, Europe and Japan, which prompts money managers flush with cash to scour the globe for investments providing at least slightly better returns. "There's just a huge amount of money sloshing around looking for a place to go," said Desmond Lachman, an economist at the American Enterprise Institute who, as a Wall Street research analyst, was one of the first to predict doom for Argentina well before its 2001 default.

    The problem, Lachman and others said, is that the influx of cash makes the financial strength of many countries look better than it really is -- and deludes government officials into believing that their policies must be near-perfect. "Even Turkeys Fly When the Winds Are Strong" is how Lachman put it in the title of an article he published recently in the magazine International Economy.

    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....

    [S]tarting in the 1990s, home bias began to decline discernibly, the consequence of a dismantling of restrictions on capital flows and the advance of information and communication technologies that has effectively shrunk the time and distance that separate markets around the world. The vast improvements in these technologies have broadened investors' vision to the point that foreign investment appears less risky than it did in earlier times.

    Accordingly, the weighted correlation between national saving rates and domestic investment rates for countries representing four-fifths of world gross domestic product (GDP) declined from a coefficient of around 0.97 in 1992, where it had hovered since 1970, to an estimated low of 0.68 last year.

    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.

    posted by Dan at