Tourism Trouble in the Caribbean?

Expectations are that President-Elect Obama will begin to engage in diplomatic and economic relations with some of the United States' traditional enemies over the next four years. 

Interesting story in today's Financial Times detailing the possible impact on the Caribbean economy if the United States eliminates restrictions on travel and waters down the nearly fifty year old trade embargo on Cuba, the Western Hemisphere's sole Communist (not really) nation. 

"If American tourists, the Caribbean’s biggest group of visitors, were granted unrestricted access to what is potentially the region’s largest tourism destination, a “seismic shift” could hit the region, said Rafael Romeu, an IMF economist who has studied the issue. [...] While Cuba has suffered from strict trade barriers for the past half-century, the rest of the region has benefited as a result. [...] Now, however, they will need to act quickly to prepare themselves for a large loss in what amounts to implicit trade preferences – or suffer the consequences, said Mr Romeu."

Paging Naomi Klein

Ahem:

The idea of turning the auto industry’s crisis into a chance to enact changes with energy and environmental benefits is one that Mr. Emanuel has promoted in Congress. But he said that Mr. Obama had yet to settle on his proposals or whether he would announce them before he was sworn in.

“Rule one: Never allow a crisis to go to waste,” Mr. Emanuel said in an interview on Sunday. “They are opportunities to do big things.”

(bold added)

Does this mean that Rahm Emanuel is a Friedmanite?

(ht: Julian Sanchez)

Gulliver and the Lilliputians

Unreality characterizes the EU in the run up to this weekend's Washington DC summit. To wit, three comments on Sarkozy and the EU approach.

1. "Mr Sarkozy ... signalled a growing assertiveness by Europe in its dealings with Washington. The French leader, holder of the rotating EU presidency, suggested that the US had a special obligation when he told a European summit on Friday: “This is a global crisis and we have to remember where it started.”
"France believes that Washington’s decision to let Lehman Brothers fail aggravated the global crisis and that Europe, following Britain’s lead in recapitalising its banks, had shown leadership in preventing a meltdown."

Talk about short-term memory loss.

2. Mr Sarkozy told the Brussels summit: “The time when we had a single currency [the dollar], one line to be followed, that era is over and came to an end on September 18 when responsibility was taken, without our opinion being asked, with the failure of a major banking institution and the consequences that followed.”

Parsed, this means: we are unhappy to have been forced to bear some of the negative consequences arising from the US-generated financial crisis. Yet, the fact that they are forced to bear these costs and now want the US to accept big regulatory changes refutes the claim advanced.

3. "The EU [seeks a number of] reforms, including “supervisory colleges” to regulate the 30 biggest banks and rules on the operation of credit rating agencies. It also wants to strengthen the International Monetary Fund’s role in monitoring cross-border risk and issuing early warnings as well as new accounting standards and increased transparency."

We have not posted much about the regulatory changes needed; but the primary question is, what does the EU do if the US refuses to play along? (See point 2 above).

Thus, the whole affair has a certain "Gulliver in Lilliput" quality. Sure, the rest of the world fears unfettered US finance and wants to tie it down. But what do they do when they realize the US won't let them? Just hope the giant has a gentle disposition?

"The Box": The New Pencil

A classic essay for political economy students is "I, Pencil," an account of the creation of a common pencil that illustrates the power of division of labor and increasing returns from open trade. The BBC has offered us a 21st-century update of the story: they're following a shipping container for a year (via GPS) as a way to tell the story of modern globalization. The container is currently in Shanghai, having just dropped off a bunch of Scotch whisky from the U.K. and picked up clothing on its way to the U.S.

New Macroeconomics: Same As Old Macroeconomics

Alex's post below cited Sachs' op-ed, which is essentially a re-iteration of traditional Keynesianism. He proposes a gradual tax increase, but only on the rich, in order to increase the government's share of the pie. In his view, this will allow us to balance the budget, massively increase foreign aid, massively increase infrastructure investment, shore up the safety net, and reduce income inequality. Sounds great.

The only problem is that making the tax code more progressive has diminishing returns. Two things happen as you focus more and more tax incidence on a smaller and smaller number of people: those people find ways to opt out, and you become more susceptible to budget problems when a recession hits. This is especially true when the wealthy are disproportionately located in one sector of the economy, and the recession is focused on that sector. When the incomes of the top earners decline, then government revenues decline as well. This, of course, is the situation we presently find ourselves in: the wealthy are disproportionately located in the service sector, which has borne the brunt of the current contraction. Their incomes are dropping, so tax revenues are dropping.

A case study is illustrative. Public works in New York City have long been financed largely by the financial industry, and the outlook for the City is not good: they are being forced to cut public services in response to the financial crisis. Property values are down, which means property tax receipts are down. NYC put their eggs in the financial industry's basket, and now they are feeling the pain. Of course we see the same across the country; universities are cutting budgets, state and local governments are slashing spending to balance budgets.

If you give tax cuts and/or other stimulus to the middle class, as Obama has proposed and Sachs supports, then at best an increased tax on the upper class will be revenue neutral. But it won't provide new money for more services. This is especially true in the U.S.'s current situation: massive budget deficits, declining revenue, and growing entitlement responsibilities will make it impossible to increase public services without broadly increasing the tax burden on the whole polity. Something's got to give: either taxes go up for a larger part of the population than Obama and Sachs have proposed, or some programs will have to be cut or abandoned. (My guess? The first initiatives to be cast aside will be increased foreign aid, environmental programs, and universal health care.)

Sachs is a Keynesian, so calling for countercyclical fiscal policy is expected from him. But in order to be successful, countercyclical policies have to be pursued in expansions as well as contractions. That means increased spending now, but a tightening of the fiscal belt when the economy turns around. Sachs (and many other economists) have criticized the Bush tax cuts and fiscal expansionism of the past few years along these lines, and rightly so. But will they be similarly critical of President Obama if he doesn't scale back government expenditures after the economy recovers?

Jeffrey Sachs on a New Macroeconomics

Jeffrey Sachs provides some advice to President-elect Barack Obama and details his vision for a new era in American political economy; one that he argues is needed in order to revitalize and reinvigorate the American macroeconomy.

"More gimmicks such as one-off rebate checks or zero interest rates at the Fed, as some now propose, will not suffice. The government needs a clear medium-term strategy, to reinvigorate private investment spending, and it will need increased budget revenues in the years ahead for urgent public investments and long-term restructuring. Short-term recovery will be promoted by clarity on the long-term direction of economic change."

It is an incredibly interesting argument and one that goes against most of what the United States has become famous for over the past three decades.

Recession's Biggest Winner: Walmart?!

Analysts are predicting a Wal-Mart Christmas this year as the retail giant is expected to outperform its rivals and other retail and speciality stores during the crucial Christmas shopping season. Wal-Mart is slated to not only outperform its rivals, but grow its sales and remain profitable in the face of recession and declining consumption.

"Sales at department stores and specialty retailers are in free fall. They are cutting staff, discounting merchandise and closing stores to survive. But even as the financial turmoil strangles discretionary spending at many stores, it is sending struggling consumers into the arms of Wal-Mart — and is leaving the world’s largest retailer, poised for a blockbuster Christmas."

As the article mentions, other discount, wholesale retailers like BJ's and Costco may also see better than expected sales numbers during the coming months. Looks like in America, price and value are still king. 

The Election

What he said (here for analysis other than silly media drivel). The bottom line: "The red/blue map was not redrawn; it was more of a national partisan swing."
Or, as Krugman puts it, "basically there was a national wave against Republicans, suggesting that we don’t need a complex narrative."

None of which diminishes in any way the fundamental historic importance of this election.

Exit Polls:
Which one of these five issues is the most important facing the country?
63% economy
10% war in Iraq (apparently the war in Afghanistan is so insignificant to warrant any attention)
9% terrorism
9% health care
7% energy policy

What do you think the condition of the nation's economy is?
93% not so good or poor
6% good or excellent

How worried are you that the current economic crisis will harm your family's finances over the next year?
81% worried
19% not worried

It's the Economy, Stupid (Really, it is)

UPDATE: How did the model perform? By my calculation (based on reports at noon today), McCain captured 47% of the popular vote; the Fair model predicted he would win 48%.

Ray Fair, a Yale economist, provides a simple statistical model to predict the vote share of today's presidential and House elections. Click here to see the last pre-election predictions. My sophisticated experiments (i.e., plugging in different values for 2008 growth rates) indicate that we needed at least a 3.15% growth rate for a McCain victory and there is no feasible rate of growth that would deliver a Republican House majority. All the more reason to stay home.

HT to Mankiw.

Compute Vote Predictions: Input Values
The equation to predict the 2008 presidential election is
VOTEP = 46.61 + .680*GROWTH - .657*INFLATION + 1.075*GOODNEWS
The equation to predict the 2008 House election is
VOTEC = 43.37 + .397*GROWTH - .384*INFLATION + .628*GOODNEWS

Values to be computed:
?	Republican share of the two-party presidential vote in 2008 (V0TEP)
?	Republican share of the two-party House vote in 2008 (V0TEC)

Vote at Your Own Risk

As a political scientist, I am expected to tell my readers to go vote.

As a political economist, I am encouraged to tell you not to bother because the probability that you get into an accident on the way to the polling place is greater than the probability that you cast the decisive vote.

Now I learn that the probability of being involved in a car accident spikes on presidential election days. "Research revealed an 18 percent increase in motor vehicle deaths on voting day. "This equaled about 24 people [deaths] per election." Moreover, "800 more people suffered disabling injuries as a result of the crashes. These injuries and deaths far outnumber those reported during times associated with an increase in drinking and driving, such as Super Bowl Sunday and New Year's Eve."

Drive safely, people.