Wednesday, December 31, 2008

All Is Full of Growth Potential

. Wednesday, December 31, 2008

It isn't all that often that avant-garde pop music and investment banking can be mentioned in the same breath, but this was probably inevitable: Bjork is on a mission to save the Icelandic economy, and she's doing it in typically weird fashion:

As a million bankers flee the plunging markets, one brave Icelandic singer – known for coos, shrieks and a swan dress – is proudly taking their place. Björk has turned venture capitalist, with a new fund that aims to revive Iceland's economy.

Björk is working with Audur Capital, a Reykjavik-based investment company founded and managed by women. Audur Capital will oversee the fund's day-to-day dealings, directing an initial investment of 100m Icelandic krona (£575,000) toward sustainable, environmentally-friendly businesses. ...

Björk's fund will be called, er ... Björk. ...

Though Audur Capital has not divulged the material investment of Björk the singer in Björk the fund, knowing her work we imagine it is something along the lines of one heron feather, five regrets and 16 baby teeth.

(ht: Blattman)

Monday, December 29, 2008

... And Out Come the Wolves

. Monday, December 29, 2008

We're about to witness the greatest rent-seeking moment of all time: the 2009 Economic Stimulus Package. It's gonna make the Farm Bill look like nothing at all.

How Has India Avoided the Financial Crisis?


Lots of regulation:

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

But different norms also may have played a role:

Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”

Other factors played a role too, including interest rates as high as 20%, a banking system that is 70% nationalized, and stronger regulators. Perhaps India has sacrificed some growth potential in their financial markets, but they've also created one of the most stable banking industries in the world.

The End of the United States of America


Fun article posted online by the WSJ today:

For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media.
The Russian professor even has a map where he predicts that the US will break up into six entities (map can be found at the bottom of the article): 1) The Texas Republic (influenced by or under direct control of Mexico), 2) Atlantic America (influenced by or under direct control of the EU), 3) The Central-North American Republic (influenced by or under direct control of Canada), 4) The Californian Republic (influenced by or under direct control of China), 5) Alaska (which will go to Russia...of course it will), and 6) Hawaii (which will go to either Japan or China). 

Two problems: 1) There is no way in hell that South Carolina, West Virginia and Tennessee will peacefully join the European Union. 2) Texas joining Mexico - I don't think so.

Mexican Beauty Drug Trafficker?!


Laura Zuniga, a beautiful young woman that was recently crowned Miss Hispanic America, was arrested last week outside of Guadalajara, Mexico and is in jail pending charges of engaging in racketeering, drug trafficking, and money laundering. At the time of her arrest (along with seven other upstanding Mexican citizens), Ms. Zuniga was packing various 9 mm pistols, semi-automatic rifles and $53,000 in cash and was riding around in an armored SUV. 

Newspapers plastered their front pages with images of Zuniga in bikinis and high heels. All seemed to be competing for the wittiest headlines. "Miss Narco," blared the tabloid El Metro. "Miss Sinaloa and the Seven Narcos," said the normally high brow El Universal. 
But beneath the media frolics, the tale of the fallen beauty queen highlights the dark side of how sprawling crime syndicates have penetrated so many areas of Mexican life. With the cartels estimated to make $30 billion from smuggling narcotics, the U.S. Treasury has named dozens of Mexican companies, from dairy farms to clothing chains, as money launderers. In November, the owner of a third division football club, the Mapaches of Michoacan state, was charged with drug trafficking. Crime kingpins are also alleged to finance popular Mexican singers, who croon about the gangsters' exploits.
Illicit drug trafficking in Mexico is now worth roughly $10 billion and is quickly expanding. 92% of cocaine entering the US comes through the Southwest US border, which has come to be labeled the "drug corridor." Furthermore, most of the marijuana and heroin entering the US also flows across the US-Mexico border. Drug traffickers are going to all new levels to ensure the speedy and secure transit of their products into the lucrative US market. Looks like recruiting beauty queens to handle some of the merchandise is just another way of doing business in the Mexican drug trade.

Saturday, December 27, 2008

That's Great, It Starts With an Earthquake

. Saturday, December 27, 2008

Daniel Drezner interviewed by Megan McArdle on the consequences of the financial crisis on international politics, including the prisoner's dilemma game involving economic stimulus, and why it might lead to increased protectionism.

R.I.P. Samuel P. Huntington


Samuel P. Huntington died on Christmas Eve. He gave us one of the more interesting recent grand theories, even if he didn't turn out to be quite the prophet that many thought he was. His earlier thesis that transitions from authoritarianism to liberalism should be undertaken gradually is more relevant now than ever. I am not a fan of his work on immigration but that does not diminish his other contributions.

Wikipedia here. An Atlantic article from 2001 by Robert Kaplan here.



Icelandic charities are busier than usual.

Japan, the 2nd-largest economy in the world, may be in much much worse shape than the U.S. (and note: fiscal stimulus has had very little positive effect in Japan, and they've been trying it since 1997).

Russia is concerned about civil unrest, and is devaluing the rouble at record rates in hopes of boosting exports.

Latvia is the new Argentina.

U.S. and U.K. retailers are expecting the worst.

Some government officials in China want the government to take a more intrusive role in the economy.

Oh, and Christmas carries huge deadweight losses.

Happy Holidays.

Sunday, December 21, 2008

The Break-Up of Chimerica

. Sunday, December 21, 2008

Niall Ferguson, with all kinds of good stuff:

We are living through a challenge to a phenomenon Moritz Schularick and I have christened “Chimerica.”1 In this view, the most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years.

For a time, it was a symbiotic relationship that seemed like a marriage made in heaven. Put simply, one half did the saving, the other half the spending. Comparing net national savings as a proportion of Gross National Income, American savings declined from above 5 percent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 percent to nearly 45 percent. This divergence in saving patterns allowed a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money than would otherwise have been the case.

Of course that "arrangement" is unraveling, as the Great Adjustment progresses. There is more:

Among the other developed economies, both the Eurozone and Japan are already officially in recession, ahead of the United States. The European situation is especially precarious because, contrary to popular belief, European banks are in worse shape than their American counterparts. Average bank leverage in the United States is around 12:1. In Germany the figure is 52:1. Short-term bank liabilities are equivalent to 15 percent of U.S. GDP; the British figure is 156 percent. Indeed, the United Kingdom runs a real risk of being Greater Iceland—an economy crushed by a super-sized financial sector.

Emerging markets, too, have been hammered harder by the crisis than the “decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks. These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

The financial crisis is especially bad news for energy exporters: not only belligerent Russia, whose leaders yearn for a reconstituted Soviet empire, but also those other thorns in the side of the United States, Iran and Venezuela. Any oil price below $94 a barrel is bad news for Venezuela’s fragile finances; any price below $55 spells trouble for Iran.

What does it mean? The U.S. is actually remarkably well-positioned to ride out this storm compared almost every other country; whether developed or emerging, more or less regulated, net importer or exporter. Remember that when you hear that
The American Century is over, or capitalism is dead, or any other similar sentiment.

Saturday, December 20, 2008

Detroit Gets Their Bailout (kind of)

. Saturday, December 20, 2008

The bailout is contingent upon the Big 3 fixing themselves in three months: "The new deal threatens only to call back existing loans if the companies fail to demonstrate viability by March 31."

Anybody think there is a nonzero probability of this happening? Wanna bet? These companies haven't been viable in 25 years, as McArdle reminds us in her excellent look back at the last 50 years of the Detroit auto industry.

This statement by Bush sums up my feelings on the matter:

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay, and I would not favor intervening to prevent the auto makers from going out of business," the president said. "But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."

He's buying time, punting to Obama, and hoping to do so in a way that doesn't cost the government much money, if any at all. I think this is probably the correct action given the present economic circumstances, and by that I'm referring to workers in Detroit but also those outside of Detroit: to the thousands of small businesses and hundreds of thousands of workers throughout the country who depends on orders from Detroit to stay alive.

Thursday, December 18, 2008

The Great Adjustment, or The Way Things Oughtta Be

. Thursday, December 18, 2008

Matthew Yglesias sums up:

The way this is “supposed” to work is that Chinese people, being poor but growing rapidly, consume more than they produce. The current accounts balance out because savers in rich countries should be investing money in China — building up China’s capital stock and so forth. Investments in capital-poor developing countries “should” offer a high rate of return for developed world savers, and the injection of foreign capital should speed China’s growth. And for “China” you can substitute “Mexico” or “India” or what have you. The world, however, doesn’t actually work like that. Instead, China has been running persistent surpluses. And so have various energy-rich developing countries. So money keeps getting plowed into various US investments. But the US isn’t a poor, developing, capital-poor country. And so a lot of the investment in the United States seems to be going into speculative bubbles — first dot-com stocks, then MBS. Now people are buying up no-interest treasury bonds.

and quotes Brad DeLong:

If it weren’t for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world’s importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn’t fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world’s largest private-equity fund: they lend us their money, and we then invest the money back in their economies–in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.

So an adjustment is needed, but we're not getting it. Asian central banks are continuing to buy gobs of U.S. Treasuries which keeps the value of the dollar high. And we're not investing the money back into Asian industries that demand U.S. goods and services. Instead, we're using the money to try to keep the bubble inflated, and so the adjustment is postponed.

Remember When Europe Was Going to Lead the Way?


Germany refuses to enact stimulus until after Obama is elected:

Germany will wait to launch its next fiscal stimulus until it has a clearer view of the economic plan of Barack Obama, who is to be sworn in as US president on January 20, say German officials.

Michael Glos, economy minister, said – after a meeting of government officials and business leaders on Sunday night – the government would decide late next month whether to adopt more measures to stimulate the economy, Reuters reported.

That would mean Berlin would not top up its €12bn ($16bn, £10.7bn) growth-boosting package at an extraordinary meeting of leaders of the governing coalition on January 5, as many economists and international leaders had hoped.

“We will probably know what Obama is going to sign before January 20 but I would be surprised if any decision were made on January 5,” said an official before the meeting.

All indications are that Obama plans to enact a large-scale spending program -- probably in between $700bn and $1,000bn -- to boost economic activity in the short run while improving infrastructure in the medium run. The fact that Germany refuses to move until it gets even more specifics signals that America's standing as the leader of the international financial system has not taken such a great hit after all.

Isn't It Ironic?


Wall Street Journal headline: "France Credits Deregulation for Cushioning Its Economy". Article here for subscribers.

The truth is obviously more complicated than that, and France's economy appears to be decaying just as everyone else's is, but that headline still gives me a chuckle. It's worth keeping in mind when you hear that the days of capitalism are over and gone: the story of this crisis is still being written, and the nature of the causes will be debated for decades. In any case, two things are almost certainly true: so far the crisis has not necessarily been milder for more regulated economies, and there is plenty of blame to be shared by government regulators and market "self-regulators".

Who Says IPE Is Boring?


Brawls broke out in the South Korean legislature over a proposed U.S./S. Korea trade pact:

Scuffles broke out as dozens of opposition members and their aides attempted to push their way into the office. TV footage showed people from both sides shoving, pushing and shouting in a crowded hall at the National Assembly building amid a barrage of flashing cameras.

Opponents later used a sledgehammer and other construction tools to tear open the room's wooden doors, only to find barricades of furniture set up inside as a second line of defense.

Opponents counter that it will cause pain to key sectors in both nations — agriculture in South Korea and automobiles in the United States.

Note that this "free trade" deal is causing a lot of controversy primarily because tariffs aren't the only trade-distorting regulations in the two countries. The opposition party in S. Korea is (justifiably) worried that U.S. subsidies to American farmers will make S. Korean farmers unable to compete if their protections are discarded. They may be right: U.S. agricultural policy is a tragicomedy of perverse incentives, corporate welfare, and inefficiencies. American and European agricultural policies are also killing the agricultural sectors of developing countries, and this has lead to the near-abandonment of the Doha round of WTO negotiations.

America is poised to lose much of its automobile industry anyway; the only question seems to be whether we let it happen now or in a few years when the pill may be easier to swallow. So, without having studied it in depth, this deal looks great for Americans; less good for S. Koreans. Still, I tend to believe than in normal circumstances any reduction in trade barriers will bring a net gain to society, so I'd like to see this pact pass. But it's another reminder that not all "free trade" is truly free.

My hope? Deals like this will eventually force the U.S. and E.U. to abandon their own agricultural subsidies and open their markets to exports from the developing world. This would be helpful on so many levels: it could provide good jobs and strong industries to the countries that need them the most (esp. in Africa and S. America), it could eliminate a great source of waste and inefficiency in American and Europe, it could further the passage of Doha, and give the West more credibility when it talks about markets and liberty to the rest of the world.

Will that happen? I doubt it. But that's what I'd like to see.

UPDATE: Dr. Oatley posted a short video in October that highlights some of relevant points about the politics of farm subsidies. It is here

Saturday, December 13, 2008

An Easily-Answered Question

. Saturday, December 13, 2008

Alex Tabarrok finds this question remarkable: "can market transactions generate institutional arrangements that impair the market economy?" That question was asked in 2006 by Richard Wagner, one of Tabarrok's colleagues at George Mason University. I guess the point was the question foresaw the current financial crisis (Wagner mentioned the securitization of debt earlier in his question), but students of IPE should be well aware of market transactions that can end up causing more damage than good: large volatility in capital flows, especially from the developed to less-developed countries, often generate boom-and-bust cycles that can decimate entire economies. Countries that borrow in foreign currencies sometimes leave themselves open to currency crises that have similarly devastating effects.

I'm not sure why Tabarrok (or Wagner) should be surprised that the result of market transactions can sometimes "impair the market economy". In my mind, a quick glance at history demonstrates that Wagner's question is easily answered in the affirmative.

Friday, December 12, 2008

Italy is so Cheesy!

. Friday, December 12, 2008

From Mankiw

The WSJ reports:
The world is bailing out banks and car companies. Italy is coming to the rescue of parmigiano cheese.

In an effort to help producers of the cheese commonly grated over spaghetti, fettuccine and other pastas, the Italian government is buying 100,000 wheels of Parmigiano Reggiano and donating them to charity.

Though demand for parmigiano is strong in Italy and abroad, producers have been struggling for years to make money, putting the future of Italy's favorite cheese at risk.
An economist might suggest letting a few producers fail, so supply shrinks, prices rises, and the remaining producers become more profitable. In fact, that same logic might apply to some other industries as well.

Not looking pretty for tomorrow...


Senate abandons auto bailout

It may get ugly in 8.5 hours when the US markets open.

Thursday, December 11, 2008

It's Not All Work here on the Hill

. Thursday, December 11, 2008

Wednesday, December 10, 2008

The Great Adjustment (a continuing series)

. Wednesday, December 10, 2008

China's exports dropped significantly in November, but their imports fell by an even greater margin, so their current account surplus expanded. This is likely due to the fact that many of China's imports are inputs for production rather than finished goods for consumption. This was reflected by a sharp drop in China's producer price index.

World Bank Report


The World Bank issued a forecast Tuesday. At first glance, the report is pretty pessimistic:

The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

Even more troubling, several economists said, there is no obvious engine to drive a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

Drezner thinks this report is actually an optimistic assessment, and I tend to agree. He gives 6 reasons but in my mind it can be summed up in one: the causes of the crisis are not only not resolved, they seem to be getting worse: credit is still frozen, and current account imbalances all over the world seem to be expanding rather than tightening. "Who adjusts?" is still the relevant question, and so far the answer from every country is "You first". There's a little bit of chicken going on, and the longer that game lasts, the more damage can be done.

Elsewhere, Krugman says (and Cowen agrees):

A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.

And that's unfortunately very easy to see happen.

Tuesday, December 9, 2008

Treasuries Go Negative

. Tuesday, December 9, 2008

Yesterday, 3-month T-bills traded slightly negative, while 4-week bills traded at 0.0% interest. In other words, investors were willing to accept a small negative return rather than risk larger losses elsewhere. This is good news for the government's balance sheet, but what does it mean for investors? A few things:

1. Confidence is exceptionally low.

2. Investors alluvasudden have a negative time preference for money.

3. Expectations about future inflation indicate that investors expect a dollar to be worth more in the future than it is today. In other words, bond markets expect deflation.

1 is definitely true, 2 is definitely false. i've been harping on 3 recently but even if it is true, why not just hold cash? Anybody got a better explanation? Is this being driven by large investment institutions who have to balance budget sheets and cash (for some reason) won't suffice? I'm really at a loss.

Sunday, December 7, 2008

Who Adjusts, II

. Sunday, December 7, 2008

Update (Back date?): This post by Brad Setser nicely links the current mess to the broader current imbalance and exchange rate arrangements in Asia.

Somehow I missed Paulson's last trip to China in connection with the Strategic Economic Dialogue. While achieving little, it did reveal a bit of information about how the Chinese government is thinking about the global recession and global imbalances. When asked about the appropriate policy response, Zhou Xiaochuan, governor of China's central bank, said "The United States should speed up domestic adjustment, raise its savings rate and reduce its trade and fiscal deficits." (HT to Kaylan).

Discouraging but not surprising news, really. Discouraging because adjusting global current account imbalance is less painful if China expands than if the US contracts. Thus, the Chinese position implies a more-painful-than-necessary adjustment path. Unsurprising because China's position reflects its interests as a large creditor. As Wang Qishan, China's deputy prime minister, put it, the United States should stabilize its economy as soon as possible to "ensure the safety of China's assets and investments in the U.S." This sounds somewhat like the advice another large country often offers emerging market governments, though that country rarely is so brash as to admit that the advice is offered to safeguard American assets.

The IHT article also contains a terrific non sequitur: "During his campaign for president, Barack Obama often accused China of manipulating its currency, but ... his choice for Treasury secretary, Timothy Geithner, has lived in China and speaks Mandarin."

Saturday, December 6, 2008

Revisiting Microfinance

. Saturday, December 6, 2008

Tim Harford has an excellent article on the subject in FT:

This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?

There is also a discussion of the battle for the soul of microfinance, with commercial interests on one side and charitable interests on the other. Many of the results discussed in the article are similar to those found by Karol Boudreaux and Tyler Cowen earlier this year:

For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such life saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative— such as no doctor’s visit for a child or no school for a year— is much worse.

In other words, microfinance may be a force for good, but not in the ways popularly imagined.

Thursday, December 4, 2008

How Iceland Imploded

. Thursday, December 4, 2008

Illustrated. I still haven't heard any good plan for getting Iceland back on its feet.

Europe Coordinates


The ECB, Bank of England, and Swedish Riksbank all slashed interest rates today. The Bank of England's rate is now the lowest since 1951, and matched with the lowest rate in its 314-year history. Sweden dropped its rate by a record 175 basis points. France announced a stimulus plan.

The effectiveness of these actions is still to be determined, of course. But greater coordination by central banks and governments will be necessary to get the global economy moving again. These sorts of actions are a step in the right direction.

Lagged Effects of the International Credit Crunch on Latin America


The Latin American Shadow Financial Regulatory Committee (CLAAF), a group of economists from Latin America that includes former finance ministers and central bank governors, released a statement after meeting today in Washington, estimating that Latin American governments will need roughly $250 billion just to repay maturing debt and support budgets in 2009. 

The Financial Times reports:
The statement described a marked deterioration of the region’s economic prospects in the past few months caused by a flight to high quality assets and the freezing up of international credit. The region would suffer from a sharp slowdown in the world economy and falling export prices, it said.

Unless credit found its way to the region, the economists said governments would be forced to choose between two unappetising alternatives: painful fiscal adjustment that would reinforce the downturn or distortive measures, such as import restrictions and capital controls.

“In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable, seriously undermining the basis of the global co-operative system that emerged in the aftermath of World War II [that] allowed for unprecedented rates of growth of trade and incomes and a reduction in global poverty.”
Although Latin America has not been directly affected as a result of the liquidity and credit crises that have affected the American and global economies over the past year, as detailed previously on this blog, the future may see indirect effects as Latin American nations may be "crowded out" of international credit markets as Western nations expand their borrowing and run large fiscal deficits. 

How Low Will It Go?!


The price of oil tumbled further today, settling at $43.67, it's lowest close in nearly four years.

So the question is, how much lower will it go?

Wednesday, December 3, 2008

Who Adjusts?

. Wednesday, December 3, 2008

Funny how the world works. I was talking (or at least trying to) about contemporary global imbalances in class today, with a particular focus on the question of the relative merits of adjustment via contraction in the US and adjustment via expansion in the surplus countries, especially China. Reading the FT tonight I come across Martin Wolf's nice summation:

"Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."

Of course, pointing out what ought to happen to get the world economy through this crisis in reasonable shape does not mean it will in fact happen. I am particularly skeptical about China's willingness to embrace this path. "Asked whether China might pursue economic policies aimed at saving the world, Mr. Lou said that the country’s leaders had a narrower focus. “China can only save herself..."

Monday, December 1, 2008

Happy Birthday!

. Monday, December 1, 2008

The U.S. recession is one-year old today, according to the NBER.

Fixing the Food Shortage in Malawi


Saturday, November 29, 2008

Ending the Food Crisis

. Saturday, November 29, 2008

Paul Collier says it's possible, but only if we get over our aversion to large-scale corporate farming, end domestic farm subsidies in the first world, and accept genetically modified food. This, he says, will allow us to capture scale returns, alleviate the supply-side shortages, and give farmers in the developing world competitive access to Western markets. These three policy actions can directly address the central cause of food shortages:

The root cause of high food prices is the spectacular economic growth of Asia. Asia accounts for half the world's population, and because its people are still poor, they devote much of their budgets to food. As Asian incomes rise, the world demand for food increases. And not only are Asians eating more, but they are also eating better: carbohydrates are being replaced by protein. And because it takes six kilograms of grain to produce one kilogram of beef, the switch to a protein-heavy diet further drives up demand for grain.

The two key parameters in shaping demand are income elasticity and price elasticity. The income elasticity of demand for food is generally around 0.5, meaning that if income rises by, say, 20 percent, the demand for food rises by 10 percent. (The price elasticity of demand for food is only around 0.1: that is, people simply have to eat, and they do not eat much less in response to higher prices.) Thus, if the supply of food were fixed, in order to choke off an increase in demand of 10 percent after a 20 percent rise in income, the price of food would need to double. In other words, modest increases in global income will drive prices up alarmingly unless matched by increases in supply.

In recent years, the increase in demand resulting from gradually increasing incomes in Asia has instead been matched with several supply shocks, such as the prolonged drought in Australia. These shocks will only become more common with the climatic volatility that accompanies climate change. Accordingly, against a backdrop of relentlessly rising demand, supply will fluctuate more sharply as well.

These supply shocks can be ameliorated by an overhaul of the regulatory regime and encouragement of technological improvement that, Collier says, will match increased demand with increased supply, thus keeping prices down. The entire article is interesting, and strongly challenges many first- and third-world ideologies and romanticisms. It is also a good object lesson in the the Law of Unintended Consequences.

Tuesday, November 25, 2008

Graduating Soon?

. Tuesday, November 25, 2008

Monday, November 24, 2008

Tyler Cowen on Fiscal Stimulus

. Monday, November 24, 2008

Over at Marginal Revolution, Tyler Cowen nicely breaks down what a massive fiscal boost can and cannot accomplish:

I feel like I am repeating myself, but since the topic is so much in the news, let's give it another go. A massive fiscal policy could:

1. Generate some investments which are worthwhile on their own terms. LaGuardia really does need another runway.

2. If the broader monetary aggregates are falling, because of either a credit crunch or a liquidity trap, a fiscal boost can keep aggregate demand from deteriorating. Note that this is distinct from bringing about a recovery; it is limiting further downside.

3. A fiscal boost can provide a beneficial "sunspot" in a multiple equilibrium model, thereby moving everyone to the higher output equilibrium.

4. If spending needs to fall, a fiscal boost can postpone this fall. Postponing this fall may be a good idea to prevent immediate economic destruction. But then the fiscal policy is not really bringing about recovery. In fact the fiscal policy is (optimally, perhaps) hindering the pace of adjustment and recovery. Fiscal policy makes the downturn less severe but it also prolongs the adjustment process.

You'll note that only under #3 does a massive fiscal boost in fact bring about an economic recovery. But I do not believe that #3 is better for anything than a few good days in the stock market nor do most people rely on #3 in making the case for fiscal policy.

You might also try #5:

5. The economy needs a boost to aggregate demand and since monetary policy isn't working any more, fiscal policy has to step in. This is usually followed by drawing a graph with two or three curves on it.

This makes sense if it is reworded to be more precise and to be some combination of #2 and #4. But still, a huge fiscal boost will not bring recovery because a big chunk of the problem requires real economic adjustments (the simple graph obscures this). The economy needs to adjust out of housing, out of so much consumption, and out of various classes of associated risky assets. Those are some pretty massive adjustments and along the way lots of major banks become zombie banks. A massive fiscal boost won't get us over those problems.

Just to recap: Because of #1 and #2, you might think that a massive fiscal boost is a good idea, compared to the alternatives. But you should not argue that a massive fiscal boost will bring about or drive an economic recovery. It is tempting to cite #5 to justify the fiscal boost but the bottom line is some mix of #2 and #4.

Sunday, November 23, 2008

Latin America and the Financial Crisis

. Sunday, November 23, 2008

Many of you are well aware of the popular phrase, "When America sneezes, the rest of the world catches a cold." This was especially true for Latin America, when any small sniffle used to send ripple effects throughout the region. 

However, why is it that this time around
not a single bank or financial institution [has gone] bust in the region while the United States and Europe [have] faced [the] collapse of companies and banks with turnover of more than that of the GDP of many of the Latin American countries.

None of the Latin American countries have gone to the IMF for rescue, even as some East Europen countries have done so. While Iceland, situated far from the epicenter (USA) of the financial earthquake collapsed and had to seek rescue from Russia, none of the Latin American countries, which are in the proximity of the earthquake zone have suffered serious damage. There has been no panic summit meetings or rescue packages or nationalization of banks in Latin America.
This is truly a very interesting puzzle. Was the decoupling theory partially right, in that certain regions, rather than the entire world, is no longer completely at the whim of the American business cycle?

From the UN Economic Commission for Latin America comes the finding that:
Compared to previous shocks in the United States economy and the world at large, Latin America and the Caribbean(LAC) is much less vulnerable than in the past, with a current account surplus, sounder public finances, a lower level and better profiles of public and external debt, and larger international financial reserves. Considering the severity of the global shocks, LAC economies are, on average, weathering the crisis significantly better than in the past.
Has Latin America simply insulated itself from external shocks by amassing large amounts of reserves, lowering their debt levels, and implementing sound fiscal and monetary policies? Has the financial crises simply not reached Latin America yet? Has Latin America finally emerged from the Lost Decades (1970-2000)? Over the next few weeks, these are some of the questions I will explore, in a special series on Latin America and the Financial Crisis. 

Back to the Fore: Latin America


Very interesting article from the International Herald Tribune on the new (old) (maybe not so old) battle for influence in Latin America between the US, China and Russia. 

With the United States concentrating its resources and attention in the Middle East and Asia over the past eight years, China has expanded its trade and ties within Latin America. Russia is also scheming for influence in places like Venezuela, Bolivia and Nicaragua. This may be the strategic battleground over the next five to ten years as these three powers try to acquire ever more political and economic clout.

Saturday, November 22, 2008

Another Data Point

. Saturday, November 22, 2008

Blue line: yield on 5-year nominal Treasury bonds

Red line: yield on 5-year inflation-adjusted Treasury bonds

The gap means that markets expect deflation in the short-to-medium run.

(ht: Mankiw)

Friday, November 21, 2008

Gallows Humor

. Friday, November 21, 2008

I don't understand German, but in this case I don't think I need to.

(ht: McMegan)

Am I Freaked Out?


No I'm not. But I'm not happy. Here's a partial list of why:

1. We haven't had sustained deflation yet, but the fact that Core CPI -- excluding food and energy -- dropped by 1% in October rings alarm bells. But that's not the only data point [pdf]: the PPI (Producer Price Index) for finished goods dropped by 2.8% in October following smaller declines in August and September. Yes, that is seasonally adjusted. That is not the core figure (which is still positive) but firms in the energy and commodity sectors still employ people. To some extent CPI usually lags PPI, so it doesn't seem unreasonable to expect future drops in CPI as well.

2. Dr. Oatley advocates thanking the Lord for creating Keynes. I'll do that right after I'm done asking for my unicorn, but I'm a bit more pessimistic regarding the potential gains. As I see it, a drop in aggregate demand isn't the cause of this crisis: the credit crunch is. I can tell a story in which we issue a massive fiscal stimulus package, but citizens don't respond by boosting consumption. Instead they hoard it, anticipating deflation, or mounting unemployment, or foreclosure, or whatever else. Since this is going to be deficit-spending at a time when the government is already massively imbalanced, people should also expect future tax increases, which would also incentivize them to save it. And since credit is still locked up, there's no mechanism for steering those savings towards the businesses who need it. If they don't get cash, those businesses don't expand, unemployment mounts, deflation deepens, and we're spiraling.

There's actually some evidence for my story: Shapiro and Slemrod found that only 20% of people said they would spend their stimulus checks (in 2001 and 2008); the other 80% said they'd use them to pay down debt or boost savings. It's true that people don't always act as they say they will, but in this case Johnson, Parker, and Souleles found that they did (in 2001): each dollar of stimulus spending by the government resulted in roughly 33 cents of increased spending by consumers. Souleles also noted that that number might decrease in the present because the overall balance sheets of American consumers is worse off now than in the past because of declining home values.

I'm not saying it's not worth trying. All I'm saying is that if we can't unfreeze credit markets, it's probably all for naught.

(Not Snarky) Response to Comments


Anonymous left some good comments on my deflation post. Let me reply to two points s/he makes.

"you make the same mistake many economists and all journalists make: deflation is not a decrease in prices. It is a decrease in the money supply (money+credit). The decrease in prices is the result, not the cause, of deflation."

Well, yes, except for when it isn't. To invoke quantity theory, PQ=MV. Thus, deflation can occur because M falls more rapidly than Q, or because Q rises more rapidly than M. Hence, deflation is what happens to P as consequence of the relationship between M and Q. In the current instance, concern about deflation is clearly a concern about M falling as a consequence of the credit crunch. In the late 19th century, deflation was a consequence of Q growing more rapidly than M.

In selecting a definition, we want one that incorporates all possibilities. Hence, deflation is a sustained decrease in the general price level caused by a reduction in M relative to Q.

The critic continues: And don't forget who put us in this mess: the Fed and the easy credit.

I know this is the popular take, but I fail to see how this makes sense in an open economy framework. Here's why I am puzzled.

Suppose Greenspan raises interest rates in 2001-02. What happens? It doesn't push us into recession. It merely sucks in foreign capital. Capital inflows appreciate the dollar; the dollar appreciation creates incentive to invest in the non-traded sector (housing). The result: a bubble fueled by foreign capital. Think here of the S&L crisis of the 1980s.

Suppose Greenspan keeps interest rates low, what happens? Less foreign capital gushes in; the dollar appreciates less; yet the inflows fuel a housing bubble.

Seems the choice the Fed faced, therefore, was between a bigger and a big bubble. You blame it for choosing the big one; I think that given its options, it made the right choice.

What we should focus on are those factors that created this choice: fiscal policy. Government dissavings driven by tax cuts and military expenditures and the associated current account deficit created the need to import foreign capital. These inflows strengthened the dollar and financed the bubble. So policy responsibility in my mind lies with Congress (to which the constitution assigns authority over revenue) and the current administration rather than with the Fed.

This is why I am truly puzzled about why everyone blames the Fed and more narrowly Alan Greenspan. Please explain why my read is mistaken.

US Dominance - Fading away?


The US National Intelligence Council just released its latest Global Trends report, and the analysis is far grimmer for the United States then its 2004 report.

According to the Intelligence Report, the world is moving towards multipolarity, with China, India, and Russia in line to challenge US dominance by 2025.  The dollar will continue to decline in prominence as power shifts eastward.

Interestingly, the report finds the worlds biggest security threats will stem from economic concerns - trade and investment disputes, competition for natural resources especially water and energy resources, and strategic technology development.

Now, there is considerable criticism about the track record of NIC report accuracy, especially regarding previous assessments of Japan and Russia.  However, the assessment is interesting in its pessimism.  Multipolarity upsetting the stabilizing effect of US hegemony, nuclear weapons deployed by rogue groups, the inadequacy of the US military in combating irregular warfare methods - seems like the current financial crisis is the least of our worries.

So, all you policy wonks, get to work crafting exit strategies - or at least start trying to find a way to get an EU passport . . . . .

Thursday, November 20, 2008

Word of the Week: Deflation

. Thursday, November 20, 2008

Before Will gets us all freaked out about deflation, we should consider what is it, whether we are in it, and whether we should we care?

What is it: a sustained decrease in the general price level.
Are We in it:
Exhibit 1: The CPI fell by 1 percent in October relative to September. This is the largest decline since February 1947. Wow, that sounds scary.
Exhibit 2: Energy prices fell by 8%; transportation prices (cars) fell by 5.4%; clothes prices fell by 1%. Other prices rose slightly. This is neither general nor sustained.

On balance, no, we are not in deflation. We are seeing relative price changes; energy prices are down (that's good news) and the auto industry just had about its worst month ever.
Yet, we are at the risk of falling into deflation.

Should We Care? Yes
1. Debtors suffer as the real value of their debt rises. Hence, more difficulties to service loans (think about housing price collapses and mortgage foreclosures). Rising debt service problems can harm financial institutions (that's an ironic understatement).
2. Creditors benefit as the real value of their assets rises. Of course, this assumes that debtors continue to pay.
3. Consumers benefit, because things get cheaper every day.
4. Not so good at the aggregate level. If we expect everything to be cheaper next month, we won't buy it this month. If we all defer our purchases in expectation of lower prices in the future, we aggregate demand falls and we produce less--which means we employ fewer people. With less income from lower production, prices fall further, so we push our big purchases off to the future again. And so on and so on. Deflationary spiral, I believe it is called. This is pretty much what happened in 1929-1933.

So yes, we should care. Will's point, I think, is that monetary policy is increasingly of little utility because nominal interest rates are close to zero. I might point out to Will that the good Lord had the sense to create Sir JM Keynes in order to alert us to the utility of fiscal policy in precisely this circumstance.

Department of Ut-Oh (a continuing series)


Back in April, Peter Thiel said "there is no good scenario for the world in which China fails". He got a bit hysterical thinking about the possibility, concluding that a massive world war that effectively destroys human civilization is not outside the realm of possibility. I hope that scenario is too extreme, but the initial point stands: what is bad for China is bad for the rest of the world.

Presently we find that many things are bad for China:

Exports constitute nearly 40 percent of China's GDP--far too high a figure. (By comparison, in the U.S., exports account for about 10 percent of GDP most years.) And the global financial slowdown is already taking a terrible toll. Some 10,000 factories in southern China's Pearl River Delta area had closed by the summer of 2008. Gordon Chang, a leading China analyst, estimates that 20,000 more will shutter by the end of this year. In the third quarter of 2008, Beijing also reported its fifth consecutive quarterly drop in growth, and several private research firms expect a sharper slowdown next year. Additionally, unemployment is skyrocketing; in Wenzhou, one of the main exporting cities, about 20 percent of workers have lost their jobs, Reuters recently reported.
Don't forget the $586bn stimulus that China announced last week, which represents ~ 16% of 2007 GDP at the official exchange rate (less in PPP), and the fact that Chinese inflation and real growth rates are falling off. It now appears that if there is a global Great Depression, it may begin in China.

When You Wish Upon a Star...


Apropos of my last post, Greg Mankiw doesn't want a pony for Christmas; he wants a unicorn:

Here is one idea. Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path.

The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation.
In at least one way, Mankiw is wrong: the credibility of the promise to fight deflation isn't paramount. What is paramount is an assured belief that the Fed actually has the ability to effectively fight deflation. At this point, that proposition look tenuous at best, laughable at worst. And so Mankiw concludes:
That's where the prayer part comes in.
All together now: There's no place like home. There's no place like home.

Wednesday, November 19, 2008

Which Do You Want First?

. Wednesday, November 19, 2008

The good news or the bad news?

Good: "Fed vows to fight against deflation"

Bad: There isn't really anything much the Fed can do. The effective Funds rate has been near-zero for a good while now. Oh, and core CPI slipped for the first time since 1982, so we're already experiencing deflation despite the Fed's best efforts. We can only hope it doesn't spiral.

Of course, the Fed can still work to recapitalize banks while the Congress/Treasury engage in massive fiscal stimulus in an attempt to resuscitate the real economy. But that task will be very difficult; the one sector of the economy which had kept us out of a recession was the export sector. Now that sector is slipping fast as well. As Brad Setser says: "Ut-oh".

The problem is that recapitalization of the banks doesn't address the demand-side concerns (unless it frees up cash for cheap debt used for consumption spending). And fiscal stimulus doesn't address the supply-side concerns. Meanwhile, the currency won't depreciate (which would boost exports) because the global demand for dollars has gone back up, while global demand for our exports has gone down. We're getting hit from all sides right now, and it is unclear which policy mix is capable of stemming the tide.

The Crisis from an Historian's Perspective


Niall Ferguson traces the history of the financial crisis here. It is self-recommending, as they say.

The Return of Capital Controls


In a classic essay following the Asian Financial Crisis, Paul Krugman laid out what he called the "Unholy Trinity" (which derives from the famous Mundell-Fleming model)*: it is not possible for a country to have a fixed exchange rate (and thus a stable currency), free capital movement, and an independent monetary policy. Countries may pick two of the three, but must sacrifice one. In recent months, we've seen the collapse of the independence of central banks all over the world. Some countries, especially export-biased countries, have also engaged in exchange-rate manipulation, but generally capital movement has remained free. But in the wake of the current crisis, many countries may decide that it is in their long run interest to accept some capital controls in order to re-establish the strength of their currencies and the independence of their central banks to fight recessions.

Krugman fell short of calling for capital controls in his most recent column, but others have been more vocal. Guillermo Calvo has called for the institution of capital controls in a VoxEU piece [pdf], and Bob Geldorf (!) has called for the institution of the Tobin Tax, a transaction tax on international capital movements. Whether or not we should be listening to Bob Geldorf (!) is certainly up for debate, but other academics (including Krugman and Dani Rodrik, among others) had been openly sympathetic to capital controls before this crisis occurred. Of course, there is still large resistance to capital controls in many of the neoliberal regimes, but if there is going to be institutional changes to the international financial system, some sort of capital controls would likely be the least painful option. No mention of this in the recent G20 statement, of course. But everyone knows that there isn't a free lunch; if you want less volatility, you'll have to accept less flexibility.

*Mundell-Fleming only applies to small, open economies, so it's application to larger OECD countries isn't perfect. But there is still some applicable intuition.

(ht: Dani Rodrik, for Calvo and Geldorf)

Viking Solidarity...


The IMF has approved a $2.1 billion credit for Iceland. This marks the first time since 1976 that a western European country has drawn from the Fund (last to do so was...the UK). The agreement unlocks Iceland's access to an additional $2.5 billion from Norway, Sweden, Denmark, and Finland . Additional money could come from Russia and Poland. None of the Scandinavians would support Iceland until the IMF signed off on the deal.

Iceland reached agreement in principle with the IMF in late October; Great Britain (and perhaps the Dutch as well) apparently refused to support the agreement at the IMF Executive Board until the Icelandic government agreed to guarantee the deposits that British residents had made in Icesave, an Icelandic internet bank that disappeared when the government nationalized its parent, Landsbanki.

The government finally agreed to guarantee these deposits on Sunday. "It was made clear to us that the IMF package and the $3.9 billion of loans from other countries would not be forthcoming unless we cleared the Icesave dispute," said Urdur Gunnarsdottir, a spokeswoman for Iceland's foreign ministry.

This would seem to be yet another instance in which governments use the IMF to protect the interests of private creditors at home (rather than the financial position of the borrowing country). This may be the first time, though, that the private creditors are individual depositors rather than large financial institutions.

Tuesday, November 18, 2008


. Tuesday, November 18, 2008

I talk about pirates (click on pirates for a very cool map) in my intro course in connection with the public goods hegemons provide--seas safe for commerce.

NPR had a nice piece on the rising incidence of such incidents. The shocker: "this is really the best thing Somalis have going for them economically. Piracy and ransom this year will exceed more than $50 million — it's Somalia's largest income-earner."

Blaming the Victims?


Help us, pleeeeez. While clearly we wouldn't be here without the financial crisis, the fact that we are here offers an opportunity. Naomi Klein calls this the shock doctrine: use a crisis to force change.

"The executives said the need for help stemmed from the current financial turmoil, and not from poor management."

Chris Dodd said "the executives’ discomfort for coming to Congress to ask for money was “only exceeded by the fact that they are seeking treatment for wounds that are to a large extent self-inflicted. No one can say they didn’t see this coming. These companies have been struggling for years. I support action as a way to minimize the possibility of a destabilizing event in the economy.”

Dodd is, to some extent, blaming the victim. The Execs are, to some extent, shirking responsibility.

What say you? It's your money. To help think about the impact of saying no, here's a good discussion of the jobs linked to the auto industry (thanks Elizabeth).

And by the way, don't expect the Volt to save GM's hide.

Sunday, November 16, 2008

G20 Results

. Sunday, November 16, 2008

Read summaries here, here here, here or here, ou ici.
Read the communique here.

Saturday, November 15, 2008

What do Summiters Eat?

. Saturday, November 15, 2008

The official menu [at Friday night's pre-summit meal] included fruitwood-smoked quail, thyme-roasted rack of lamb and baked Vermont brie with walnut crostini, along with three wines.

Comments reflect public outrage: "The insensitivity of the Bush White House, even in its last days, never ceases to amaze me. ..According to news reports last night, they serve a wine costing about $300 a bottle? Now, I'm all in favor of wine with dinner, it's a healthy, civilized drink -- but $300 a bottle? There are a wide range of perfectly acceptable wines in the $15-$25 range. But how typical, at a time when many Americans are scaling back, when there are many who go to bed hungry each night, both here and abroad, the Bush Administration spends $300 a bottle on wine."

Right, like world leaders will drink $15 wine...and are the Dems really moins

Friday, November 14, 2008

Two quick reads...

. Friday, November 14, 2008

Gordon Brown calls on governments to resist protectionism--hear that Nancy, Harry, and Barry?
The Economist provides a very nice overview of issues at play in the weekend summit. I think they discuss the issues in reverse order of importance, but oh well...

Thursday, November 13, 2008

Problems, Proposals, and Positions

. Thursday, November 13, 2008

Lots of posts this weekend on the G20 Summit, the timing of which dovetails nicely with current focus of my IPE class. Here is some background reading.

The Problem at Hand and some proposed solutions. (This is an ebook; I don't expect you to read it all).

Position Taking
Concise overview of EU position.
But then there is the Gordon Brown complication.
The so-called BRIC countries: Brazil, Russia, India and China.
The United States.
And of course the president-elect Obama complication.

Why we should aim high (Mallaby on why we need a bigger IMF).
Why we should have low expectations.

...and this is my other brother Darryl


The international community urgently needs an international institution to coordinate the naming of international bodies. The task is urgent because effective international cooperation depends in part upon the names we give to international bodies. Governments have proven that they are unable to efficiently name these bodies on their own.

The G20 Summit, scheduled for Washington, DC this weekend, illustrates the nature of the problem. Which G20 is summitting? The G20 that coordinates positions of developing country agriculture exporters and acts as a negotiating block in the WTO? Nope, not that one. The summitting G20 is the one that "promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability." Left to themselves, therefore, governments have assigned the same name to two international bodies with different memberships and completely different purposes.

A name's purpose is to differentiate. This is why the old (Bob) Newhart Show always got laughs from the line, "Hi, I'm Larry. This is my brother Darryl, and this is my other brother Darryl. It's also why we laugh upon learning that George Foreman has named all five of his sons George.

Our laughter arises from the recognition that the failure to pick names that differentiate creates confusion. Consider the confusion associated with calling a G20 Summit. Which governments should attend? Do Brazil and China--members of both--send their trade or finance ministers? What agenda items should these officials prepare to discuss? Where should they go? The potential for wasteful travel (and unecessary greenhouse gas emissions) and confused and unproductive meetings is apparent. This is inefficient--very high transactions costs. This is no way to run the world.

A new international organization could eliminate such confusion (reduce transactions costs) by ensuring that each international body has a unique name. In addition, this new IO might encourage greater creativity in names. International civil servants could create alternatives to the popular "G-followed by a number" (G4; G5, G7 G8; G20, G20, G77, etc) or equally popular "Roman-numbers-appended-to-existing-names" (e.g., Bretton Woods II). If the civil servants lacked the requisite creativity, they could just keep a ledger to ensure that in a world of infinite "G-followed by a number" possibilities, each group is assigned a unique "G-followed by a number" name.

The need for this initiative grows more pressing each year as governments expand the range of issues subject to international cooperation. Without action, current confusion will grow exponentially. Eventually, government officials will routinely show up at the wrong place prepared to discuss the wrong issues. We must act now.

Wednesday, November 12, 2008

How Many Jobs at Risk?

. Wednesday, November 12, 2008

You'll likely hear the following a lot over the next few weeks (months?).
A failure at GM, which represents about half of the U.S. auto industry, could eliminate 2.5 million jobs and $125 billion in personal income in the first year.

  • "Michigan Gov. Jennifer Granholm said ...that one in 10 American jobs are supported by the auto industry and that if it collapsed, ""there would be a ripple effect throughout the nation."
  • Majority Leader Harry Reid, D-Nev., said "...he would try to pass emergency legislation to help save millions of jobs supported by the auto industry."
The estimated job losses resulting from a GM bankruptcy filing (which seems increasingly likely) come from a study by the Center for Automotive Research. CAR's estimated job losses rest on the following assumptions:

Production by the big three in year 1 following bankruptcy: 0
Production by all foreign producers in year 1 of bankruptcy: 0

That's right; these estimated job losses rest on the assumption that bankruptcy by any of the big three causes the complete cessation of auto production by all producers, American and foreign brands, in the first year of filing. The extent to which that assumption is reasonable thus determines the extent to which the forecast job losses are reasonable.

Here's the full quote from the CAR report:
"We assume that domestic production by international automakers in the United States would be seriously affected by a major contraction of the Detroit Three automakers for at least a period of one year due to the high likelihood of many U.S. supplier company insolvencies. In fact, we assume in our 100 percent contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the U.S.) by the international producers also falls to zero" (page 3).

Tuesday, November 11, 2008

What's Good for GM is Good for America, Right?

. Tuesday, November 11, 2008

Update: My estimates of wages are not far off, but I just found more complete estimates here.

239,341: The number of people employed by the "big three" auto companies
$25 billion: the amount of money US taxpayers have loaned to the big three.
$x billion: The amount of additional money Nancy Pelosi, Harry Reid, and PE Obama would like to loan to the big three.
$104,453 + 4178x: The amount of government lending per current big three job.
$29,376: Annual salary for entry level worker under 2007 UAW contract (excluding benefits and bonuses).
$58,500: Annual salary for experienced worker under 2007 UAW contract.

So, if my math is correct, what we propose to offer as a bridge loan could pay all big three workers their entire wage for two full years. And then what?

One last number:
113,000: The number of people employed in the US by foreign auto companies. Do they get a handout too?

Quid Pro Quo


"The struggling auto industry was thrust into the middle of a political standoff between the White House and Democrats on Monday as President-elect Barack Obama urged President Bush ... to support immediate emergency aid. Mr. Bush indicated ... that he might support some aid and a broader economic stimulus package if Mr. Obama and Congressional Democrats dropped their opposition to a free-trade agreement with Colombia."

Monday, November 10, 2008

Tourism Trouble in the Caribbean?

. Monday, November 10, 2008

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



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?

Saturday, November 8, 2008

"The Box": The New Pencil

. Saturday, November 8, 2008

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.

Thursday, November 6, 2008

New Macroeconomics: Same As Old Macroeconomics

. Thursday, November 6, 2008

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.

Wednesday, November 5, 2008

Recession's Biggest Winner: Walmart?!

. Wednesday, November 5, 2008

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

International Political Economy at the University of North Carolina: 2008




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