Sunday, September 30, 2007

Car Imports, Gas Prices, and Counter-productive Protectionism

. Sunday, September 30, 2007
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Americans are again buying lots of imported cars. The graphic on the right suggests that Americans care more about the fuel efficiency of the cars they buy when gas prices rise (gee, who would have thought?).

Two additional facts of interest. One, the first figure (which excludes imports from Canada and Mexico) reflects increased imports from Japan and South Korea. Two, the cars that Japan and Korea produce and export from home are smaller and more fuel efficient (think Prius) than the cars and trucks they produce inside the U.S.

Conclusion? Americans have responded to higher gas prices by shifting away from large gas guzzling cars and trucks that happen to be produced in the U.S. toward small and more fuel efficient cars that happen to be produced overseas. The solution for American auto producers would thus seem to be, shift production to the small fuel efficient cars that Americans now want to buy.

Yet, in a non sequitur of massive proportions, "Senator Carl Levin, a Michigan Democrat, is...vexed," because this trade imbalance reflects a lack of market openness in Asia. "Citing Census Bureau data and his staff’s calculations, Mr. Levin argues that “immense barriers” erected by Japan and South Korea keep down vehicle exports from the United States to those countries. Car, truck and parts imports from Japan, for example, reached $60.2 billion last year, he said, while similar exports to Japan from the United States were a tiny $2.3 billion. He put the Korean imbalance at $12.4 billion versus $751 million."

Does anybody who does not represent Michigan in Congress really think that the desire of Japanese consumers to drive Hummers, Suburbans, and Excursions through Tokyo is being foiled by trade barriers? That is, do we really expect Asian consumers to behave differently than Americans when it comes to buying cars? And with Americans less eager to buy large gas guzzling American cars, wouldn't one think that Asians would also be less eager?

The broader concern is the following: Levin and other congressional trade skeptics focus on this imbalance in auto trade as reason to oppose the FTA with So. Korea. Yet, free trade with Korea (and Japan, for that matter) would, by reducing the cost of more fuel efficient cars, promote environmental objectives that Democrats favor. Restricting this trade would thus increase emissions relative to what is possible. Hence, more trade is also good for the environment (though to be sure one would have to compare the extra emissions generated by shipping from Asia to the emissions saved via the shift to more fuel efficient cars).

Restricting trade in autos, therefore, is not only bad trade policy, it is also bad environmental policy given the Dems' stated environmental goals.

Thursday, September 27, 2007

Doha Update

. Thursday, September 27, 2007
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Negotiations are again underway in Geneva. The most recent summary contains optimistic news, as the U.S. has indicated a willingness to accept a lower-than-previously-stated binding on trade-distorting agricultural subsidies.

"US agriculture negotiator Joe Glauber suggested that Washington could accept capping its trade-distorting farm payments at between $13 and 16.4 billion dollars, the range for a potential deal outlined in July by the chair of the WTO agriculture talks."

There is also less encouraging news concerning the congressional constraint:

"An even more formidable obstacle than finding consensus on a Doha tariff and subsidy package might be getting it through the US Congress in the foreseeable future.

House agriculture committee chair Collin Peterson (Democrat-Minnesota) has vowed to oppose deeper farm subsidy cuts barring dramatically expanded market access elsewhere, despite the soaring value of US agricultural exports. The Democratic leadership is loath to risk fragile support in newly-won rural districts by pushing farm reform. Extra cuts to cotton subsidies appear to be an especially hard sell.

(Maybe a WTO agreement requires proportional representation and a parliamentary system in the United States.)

The Financial Times suggests that the current view on much of Capitol Hill is that between the Bush administration's diminished political capital and Democrats' scepticism about economic globalisation, the Doha Round will have to wait until a new administration takes control of the White House in 2009."

That last statement seems a bit of a non sequitur: Put a Democrat in the White House as well as the majority party and the Dems become more enthusiastic about globalization? I don't understand that logic.

Wednesday, September 26, 2007

Puzzling Commentary on the Dollar's Decline

. Wednesday, September 26, 2007
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Stephen S. Roach, chairman of Morgan Stanley Asia, wrote yesterday on the dollar's depreciation . "The dollar, relative to the currencies of most of America’s trading partners, is off about 20 percent from its early 2002 peak. Recently it has hit new lows against the euro and a high-flying Canadian currency." (Maybe we need to stop calling it the looney and start calling it the "goose").

I have always had a lot of respect for Roach's commentary, but two things about this particular article struck me as a bit odd:

1. Roach calls the dollar depreciation " the functional equivalent of a tax hike on consumers." Except, it isn't functionally equivalent to a tax increase. A tax increase would generate revenue that the government could spend on services (or investment). Why not instead simply call it what it really is, a reduction in real income. The fall won't be 20 percent, but it will be real.

2. Roach then asserts that a Chinese revaluation constitutes a tax increase: "{Pressuring China to revalue] would...be an egregious policy blunder ... but it would also amount to Washington taxing one of America’s major foreign lenders." Except, this isn't a tax either--if a devaluation reduces US income, doesn't a revaluation raise China's income?

I guess he is trying to say that a revaluation would reduce the yuan-denominated return on the dollar-denominated assets China currently holds. But again, that's not a tax, it's a reduction of income and a loss of wealth (the yuan value of the 1 trillion + China currently holds would also fall). But, that loss would be offset by the income gains from improved terms of trade. Hence, goods and foreign assets will cost less in real terms in the future. Moreover, I suspect that as the dollar falls the rate of return needed to attract foreign capital rises; hence, an initial negative wealth shock may well be at least partially offset by cheaper assets and higher returns.

How that all of this nets out--increased real value of wages, salary, and interest income minus the reduced nominal interest income and the wealth shock of current dollar-denominated asset holdings--is more complicated than I can figure out, but I doubt it is negative.

More broadly, I wish Roach had taken advantage of his opportunity to explain in clear and direct terms what is happening to the dollar, why it is happening, and what the consequences will be. The piece he did write does more to confuse than clarify.

Wednesday, September 19, 2007

Greenspan on Greenspan

. Wednesday, September 19, 2007
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Alan Greenspan appeared on the NPR interview program "Fresh Air" yesterday. He defends his decisions as Fed Chairman against charges that the low-rate policy caused the current sub-prime mortgage problem and discusses other things concerning central banking. The interview is about 40 minutes long.

Perhaps the most interesting part (IMHO) comes about 33 minutes in when Terry Gross queries him about how a libertarian can assume the most powerful economic position in government. He answers by arguing that contemporary central banking is essentially about trying to replicate the functioning of the gold standard.

Tuesday, September 18, 2007

Words to Live By?

. Tuesday, September 18, 2007
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As the Fed considers whether and how much to cut rates today, here is Ben Bernanke reflecting on the lessons to be learned from the Great Depression in an interview he gave in 2005:

Are there any lessons from the Great Depression that need to be relearned?

...The two main lessons which I think have been learned to a large extent, but always can be re-emphasized, are first that a central bank’s primary responsibility is the maintenance of price stability, to provide low and stable inflation in the medium term, to avoid sharp inflations or deflations and particularly to avoid the instability of expectations associated with an unanchored price level. The second lesson is that the financial industry is a special industry in terms of its role in macroeconomic stability. Major upheavals in the financial system can be extremely disruptive to the economy as a whole and therefore the central bank and other government institutions have a particular obligation to make sure that financial stability is preserved. (pages 65-66).

Hat tip to Mankiw.

Monday, September 17, 2007

How Fragile We Are

. Monday, September 17, 2007
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One might have hoped that after the weekend pause saner heads might prevail. But, the run on Northern Rock continues into the new week. The Telegraph had some interesting coverage over the weekend, providing a glimpse of the underlying mentality of the "panickers": As one man standing in line said, "It's my life savings," he said. "I think the risk is pretty low but you never know." Right, when a long line forms at your bank, the safe thing to do is join.

What I find most puzzling is that the amounts that people claim to have deposited with Northern Rock are invariably less than the maximum deposit the British government insures. Hence, even if NR is insolvent,depositors don't lose. We are not talking about huge investments being pulled from uninsured hedge funds, after all, but thousands of pounds being withdrawn from fully-insured institution. At worst depositors are moderately inconvenienced (become illiquid until the government check arrives). So, does this rush to withdraw mean that they don't trust the British state to make good on its promises either?

I guess this shows how rapidly people cease acting rationally. Especially when financial institutions that hold their life savings seem about to fail. Makes you wonder how bad things can get if we lose collective confidence in those parts of the financial system that are not federally insured. As Hayek once said, in commenting upon the 1929 crash and its ugly aftermath, "we did not know just how fragile our society was."

Friday, September 14, 2007

Panic on the Streets of London?

. Friday, September 14, 2007
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Customers line up to enter a branch of Northern Rock in southeast London. Extra credit if you can name the band that inspires the post title...

Another Outbreak of Foot in Mouth Disease

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As long as I am poking fun at central bankers, did anyone else notice the following?

On Wednesday, Mervyn King, Governor of the Bank of England was all self righteous about his bank's steadfast refusal to inject additional liquidity into the market. "Unless the economy was in danger an injection of funds to encourage banks to lend to each other would reward reckless behaviour. Mervyn King said the closure of the money markets was the result of the mis-pricing of risk in the financial system rather than the state of the economy, though he warned that the supply of credit to households and businesses may tighten and borrowing costs would rise." So, a governor who actually admits in public to belief in moral hazard.

And then I awake today to the following news: "The Bank of England Thursday provided extra short-term funds to the money market through its weekly open market operation and sharply widened its reserve-requirement range for banks' accounts at the BOE." They followed this up on Friday by "rescuing [a] mortgage lender by providing emergency funds after Northern Rock was unable to finance its operations in the money markets." Can anyone say bailout?

Maybe the BOE bailed out Northern Rock at penalty rates, I haven't seen the details. Even so, it remains a pretty big about face in two days. And while it is tempting to make fun of pompous central bankers, one must also wonder, what did Mervyn learn that caused the 180? Should we be worried?

Update: "
The Bank of England emphasized Friday that its lending to Northern Rock would be conducted at a premium to market interest rates."

Wednesday, September 12, 2007

Every Breath You Take

. Wednesday, September 12, 2007
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Not many postings lately. Sorry about that, but I am getting married in five weeks and find that I have many, many details to attend to.

In the meantime, here is an amusing spoof of one of my all-time favorite songs. Glenn Hubbard, Dean of the Columbia Business School (CBS) and runner-up in the competition to be appointed Chairperson of the Federal Reserve Board, promises to stalk Ben Bernanke. Funny, and just a little bit creepy...

Thanks Jonathan.

International Political Economy at the University of North Carolina: September 2007
 

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