Obama on Trade

Today I voted for Obama for president, but I did so with some reticence. On balance, I feel that he is a much more acceptable candidate than McCain, but this does not make him above reproach. One columnist for The Times of India channels some of my concern:

McCain is one of the few American politicians in either party with the courage and conviction to stand up to protectionist populism. By contrast, Obama embodies protectionism.

Look at the accompanying chart. It shows that McCain has voted 88% of the time against bills creating trade barriers, and 90% of the time against export subsidies for US producers. Few other senators have such a splendid record.

Obama has served a much shorter time in the Senate, and avoided voting on many key issues. He has voted against trade barriers only 36% of the time. He supported export subsidies on the two occasions on which he voted, a 100% protectionist record in this regard. ...

Unlike Obama, McCain voted against imposing trade sanctions on China for supposedly undervaluing its currency to keep exports booming and accumulate large forex reserves. India has followed a similar policy, though with less export success than China. But if indeed India achieves big success in the future, it could be similarly targeted by US legislators and, will need people like McCain to resist.

Obama favours extensive subsidies for US farmers, hitting Third World exporters like India. This has been one of the issues on which the Doha Round of WTO is gridlocked. McCain could open the gridlock, Obama will strengthen it.

Obama also favours subsidies for converting maize to ethanol. The massive diversion of maize from food to ethanol has sent global food and fertiliser prices skyrocketing, hitting countries like India. But McCain has always opposed subsidies for both US agriculture and ethanol. While campaigning, he had the courage to oppose such subsidies even in Iowa, an agricultural state he badly needs to win if he is to become president.

There is more at the link, but this commentator isn't the first to express concern over Obama's protectionist leanings. Indeed, some have gone so far as to argue that Obama is actually lying, and if elected would actually follow in W.J. Clinton's footsteps on trade. Austan Goolsbee, one of Obama's chief economic advisors, intimated as much to representatives of the Canadian government after one NAFTA-bashing session earlier in the campaign. Perhaps. But Obama's voting record and rhetoric argue against the idea. One of the many major policy mistakes of the Great Depression was the institution of the Smoot-Hawley Tariff. A similar move at this juncture might be similarly disastrous. In my view, this is a strictly non-partisan issue; regardless of who we personally support for president, we should hope that if Obama is elected he will have learned from history.

Airlines, Recession and Going Bust

So far this year, about 30 airlines have gone bust around the world, including ATA, Aloha, Skybus, Sterling, and Frontier Airlines, all relatively small airlines with mostly regional coverage. However, these small carriers declaring bankruptcy does not bode well for an aviation industry staring down a global recession, tight credit, and decreasing demand. These bankruptcies have produced ripple effects throughout the aviation sector and have left tens of thousands of travelers stranded in airports around the world. Will we continue to see more bankruptcies? Will we see consolidation in the airline industry much like we've started to see in the banking industry?

Last month, Willie Walsh, CEO of British Airways predicted that by the end of this year, 30 more airlines will declare bankruptcy as a result of the current economic climate, causing more headaches and stranding more passengers worldwide. Furthermore, analysts are predicting consolidation within the aviation industry in order to take advantage of economies of scale. 

Today, the Justice Department approved the merger between Delta Airlines and Northwest Airlines, after a six-month investigation as to the impact of the merger on consumers. This deal will create the largest airline in the world. Also today, Lufthansa, the German carrier, came to terms to purchase BMI, the British airline, and is also seeking to purchase major stakes in Austrian Airlines and Alitalia. Major carriers like British Airways, Air France-KLM, and Virgin are also positioning themselves to buyout smaller carriers and expand their networks.

However, most analysts are overlooking one important obstacle to airline consolidation, especially on a global scale. The main obstacle to airline industry consolidation globally is that it is illegal, and has been since 1938, for foreigners to own US based air carriers. The United States caps foreign ownership of domestic carriers at 25%, thus ensuring that the only consolidation in the US market can come from within. We will most likely see less consolidation than most are predicting, and the consolidation that we do see, will be a wave of "intra-market" mergers, especially within the US and the EU.

Because the sources of continued financing and merger are limited to "intra-market" transactions, especially in the US but also in Europe, our wave of consolidation may be much smaller in scope and not sufficient enough to ensure that the airline industry continues to function at its current capacity. In the short run, as a result of tighter credit, decreased consumption of aviation industry services and a global recession, we may see further bankruptcies and more headaches for travelers because airlines will not be allowed to merge across borders and take advantage of economies of scale. In the long run, none of this matters b/c we're all either dead or won't need airlines. (Hopefully someone invents Star Trek style teleportation!)

Meaningful Announcements

If lowering the Fed funds rate doesn't matter much at present, it doesn't mean that institutions don't have an important role in the financial crisis. Today the IMF announced a new short-term lending facility for emerging markets, which will provide quick liquidity with "no conditions attached once a loan has been approved". And the Fed announced temporary lending to four EMs: South Korea, Mexico, Brazil, and Singapore. It remains to be seen whether these actions will be sufficient, but they were necessary and are a step in the right direction.

Even better, these organizations were able to quickly enact these new policies because they are not constrained by domestic politics. Contrast that to the drawn-out legislative wrangling required before the modified Paulson plan was passed in the U.S. Congress. The resulting bill was a bloated, bastardized mess. The IMF and Fed, however, are able to move swiftly and relatively cleanly when they deem intervention necessary. International institutions are often criticized because their leaders are not democratically elected and so a lack of accountability exists. In normal times this criticism carries some weight. In crisis situations, however, it is unclear whether the circumvention of politics is a bug or a feature. There is some trade-off between transparency and flexibility, and in a crisis the appropriate margin may skew towards greater flexibility.

(ht: Dani Rodrik)

Global Electoral College

If the world could vote in the American presidential election, who would win?

The Economist has a very fun global electoral college map which allows citizens of every country to vote for either McCain or Obama. Is it surprising that Obama is winning with 9,120 electoral votes compared to McCain's 252 electoral votes? At least McCain's winning Iraq, Angola, Namibia, the Congo and Sudan.

Check it out and have some fun!

Pushing On a String

The Fed cuts the funds rate by 50 basis points, down to 1%. But at this point who really cares? This is becoming akin to a zen koan, or a Douglas Adams novel:

Q. I know the normal effect of monetary policy in normal times, but what effect does monetary policy have in the context of a massive TED spread, nationalized banking systems in the most liberal economies in the world, and rapidly-expanding currency crises throughout the emerging world?

A. 42

I mean, I guess a cut couldn't hurt, but it still seems like a non sequitur. Oh well. Don't panic, and don't forget to bring your towel.

The Coming IMF Controversy

The IMF is suddenly relevant again, having already agreed to a loan for the Ukraine while similar loans to Hungary and Iceland are on the way. So it should be expected that criticisms of the agency will also come back to the fore. While everyone hopes and prays that the agency learned some lessons from its missteps in Russia and Asia in the 1990s, it also worth recalling Kenneth Rogoff's response to Joseph Stiglitz's criticisms of the IMF in Globalization and Its Discontents:

Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn't this a little like observing that where there are epidemics, one tends to find more doctors?

The whole thing is worth reading, if only because policy disagreements are rarely so theatrical. But there are also serious arguments here. As described by Rogoff, Stiglitz is essentially advocating a Keynesian response to currency crises: stimulate aggregate demand through fiscal and monetary policy, and expect that to bring the economy back to full employment which will in turn stabilize the currency. Indeed, Stiglitz expressed this sort of pure-Keynesianism in an article this week. Rogoff is saying that that response is either insufficient or has already been tried and has failed. If you inject more cash through stimulus or debt-spending, the result will likely be more inflation, a less-valuable currency, and further shattering of confidence. It's bad to introduce that trifecta when an economy is performing well; when an economy is in free-fall, it can be disastrous.

The IMF response has traditionally been to propose a bitter pill: slash government spending and raise interest rates in exchange for a bail-out. As critics of the IMF are quick to point out, this spreads the virus which is already plaguing a local economy. Proponents of the IMF note that the chances of the economy healing itself without such actions are virtually non-existent, so it's better to get pain over with all at once in the hopes of speeding up the recovery. IMF critics see IMF prescriptions as a disease; IMF proponents see the same policies as an antibiotic.

There's one more aspect to this which may be familiar to students of social science: often a needed policy may be difficult or impossible to enact because of domestic political constraints. So a policy-maker may intentionally choose to cede decision-making power to an outside institution as an end-around maneuver. In this way, the veto points in the system may be bypassed, and the political consequences of making an unpopular decision are mitigated, all while the needed policy is carried out. IMF actions aren't always explained by this model of course, but the theory is still worth considering.

For more, see this from Megan McArdle, and Dani Rodrik advocating strong and swift action from the IMF.

There go the Emerging Markets

We talked in class today about Sweden's need to raise overnight lending rates to ridiculous levels in its attempt to defend the kroner in the fall of 1992. I read tonight that Romania has a current account deficit of 14 percent of GDP and has pushed overnight rates to 900 percent to defend its peg against the euro.

As was the case with Sweden, this is likely insufficient. "Merrill Lynch has advised its clients to take "short" positions against the leu. "The fundamental picture suggests that Romania may face a currency crisis in the near term, similar to what Hungary has gone through over the last week," it said. The bank also warned that Turkey and the Philippines are vulnerable."

Things look pretty grim for emerging markets and western Europe. "Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash .. threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.:

• "Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia."
• Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain.
  
• Spanish banks have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn). Hence the growing doubts about the health of Spain’s financial system as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
• The US figure is just 4pc.

IMF Rising

Another phase of the global credit crisis has begun; developing nations are running to the IMF for emergency aid.   And finance ministers across the world don't see many other options for how to survive a crisis created by developed credit markets.  Capital flight, wide-swinging currency fluctuations, tightening private market credit - we've seen this all before.  

Now the IMF has begun talks to increase their lending capabilities to as much as $1 trillon.  Considering the bank has $200 million in collateral, they'll need quite a bit of supplemental cash.  Perhaps most telling of how weak the US economy is, the IMF has failed to even approach the Fed for support.  Instead, the bank is in talks with Japan and oil-producing companies.

So, is the IMF poised for a renaissance?  Gordon Brown certainly hopes so (interesting that Brown chaired the IMF's policymaking committee for several years).  The IMF's leader, Dominique Strauss-Kahn, stresses that the Fund will eliminate many of the loan conditions that made leaders such as Hosni Mubarak of Egypt refer to the IMF as the International Misery Fund.  However, new conditions have not yet been outlined and a recent study in the Harvard Medical Review found that IMF lending in the post-communist European Bloc directly led to decreased health conditions in recipient nations.  

Check out this map of Eastern European Countries and their debt load (source: www.economist.com):

The Politics of Farm Subsidies

In honor of tomorrow's exam in POLI 442, I bring you a segment from last week's 20/20 with John Stossel on Agricultural subsidies. He's a libertarian, and does not pretend to be unbiased.



My favorite quote (by a legislator): "I would say to you, then, you don't want to push us." It comes right at the end.

Live by the crude, die by the crude

The NY Times has a nice article on how collapsing oil prices are starting to affect the ambitions of Hugo Chavez, Mahmoud Ahmadinejiad, and Vladimir Putin. As oil prices sky-rocketed, these leaders found plenty of cash for building international alliances and shoring up domestic support through lavish social spending programs. This domestic support in turn provided these leaders with the flexibility to pursue more aggressive foreign policies with the hopes of expanding their international influence, particularly in opposition to the U.S. But it now appears that they may have over-reached: inflation is over 30% in both Venezuela and Iran, and the Russian stock market has dropped by two-thirds in recent months. Meanwhile oil prices, and thus revenues, continue to decline. If the trend continues, these leaders may have to start making hard choices between populist domestic social programs and expansionary foreign policy.

Even so, there are still some signs that the relative economic power of the U.S. may be in decline. European leaders have been at the forefront of the response to the financial crisis, and some of the U.S. government's actions are partially explained by international concerns (e.g. the Fannie/Freddie conservatorship was necessary because of heavy Chinese investment; the AIG bailout had major international implications). And does anyone remember the strong words the U.S. had for China regarding currency manipulations? There've been crickets coming from that corner for awhile.

Still, as Daniel Drezner notes, it doesn't appear that any other country is quite ready to fill the U.S.'s shoes:

However, this interdependence cuts both ways. Because of its slowing growth, China has no choice but to continue purchasing dollar-denominated debt in order to goose its export earnings. As for Russia, $500 billion in reserves has not prevented the crash of its own equity markets.

The bottom line seems to be this: the U.S. may be incapable of continuing to run the international finance system entirely on its own as it has done since the end of WWII, but the rest of the world is incapable of controlling the system without the U.S. So the story may not be de-coupling, as some had thought; Indeed, we may see more interdependence rather than less in the near future.