Friday, January 30, 2009

What A Difference a Decade Makes

. Friday, January 30, 2009

Last week, I wrote this:

We should also expand the role and capabilities of the IMF, just in case it becomes necessary to bailout a fairly large country (e.g. Great Britain?).

Today, we learn that Japan has agreed to loan $100bn to the IMF, and the Fund is also considering issuing bonds for the first time in its history. This sudden need for extra cash has not arisen because the Fund is short, but because it expects to be dealing with bigger problems in the future than it has in the past:

The IMF isn't in danger of running out of money, said deputy managing director John Lipsky, though the fund has made commitments to lend about $50 billion in recent months to Pakistan, Iceland and a clutch of Eastern European countries, and is talking to others.

But the organization has wanted for months to double its lending ability to about $500 billion from $250 billion, to bolster confidence that it could handle other borrowers amid the crisis.

Asked whether Western European countries, outside tiny Iceland, might turn to the IMF for loans if the crisis worsens, Mr. Lipsky said, "in the current circumstances, the right approach is 'never say never.'" The IMF's executive board is expected to discuss potential new sources of funding next month.

10 years ago, in the wake of the Asian Financial Crisis, Japan tried to establish the Asian Monetary Fund to directly compete with the IMF by providing loans to needy Asian countries with fewer strings attached. The effort was scuttled by the US, but many observers saw that moment as the beginning of the end of IMF relevance. Now, Japan is the one shoring up the IMF so it will have the resources to stabilize more and larger countries (presumably, so those countries will be in a position to buy Japanese export goods). The fact that the IMF is looking for hundreds of billions more funding is a bad sign; it indicates to me that the IMF has updated its beliefs and now thinks it might have to step in and bail out a major economy. In any case, the IMF is making a push for renewed influence, and nobody seems to be stepping in their way.

Once again, it appears that the New Economic Order is gonna look a lot like the Old Economic Order.

UPDATE: Emmanuel pointed out in the comments that this is somewhat old news (from mid-November). I missed it the first time around, and apparently the Wall Street Journal did as well.

Wednesday, January 28, 2009

Payback Time

. Wednesday, January 28, 2009

Whew! And I thought the World Economic Forum would be boring this year. Instead, in separate appearances today, Russian President Puppetmaster Prime Minister Vladimir Putin and Chinese Premier Wen Jiabao took turns blasting the U.S.'s role in the current economic crisis:

The premiers of Russia and China slammed the U.S. economic system in speeches Wednesday, holding it responsible for the global economic crisis.

Both focused on the role of the U.S. dollar, with China's Premier Wen Jiabao calling for better regulation of major reserve currencies and Russia's Prime Minister Vladimir Putin calling over-reliance on the dollar "dangerous." ...

Mr. Wen's comments came just days after U.S. Treasury Secretary Timothy Geithner accused China of manipulating its currency for economic gain. The Chinese premier gently, but firmly warned that if Washington and Beijing chose confrontation, both would be losers.

It is certainly true that a confrontation between Washington and Beijing would turn ugly very quickly, but I was heretofore unaware that the proximate cause of the economic crisis was lax regulation of the dollar. All this time I thought that the relative strength of the dollar (esp. to the RMB and ruble) led to a structural misalignment that inflated financial markets and led to excessive risk-taking (and that the Chinese were actively complicit in this arrangement). Now I'm being told that the problem is that the dollar hasn't been "regulated" enough, although I'm not sure exactly what that means. Neither Russia nor China want the dollar to slip, and the dollar has held its value or increased against almost all of the world's currencies in recent times. So what are they talking about?

Once again, I think that these sorts of statements, like Mr. Geithner's from the other day, are best read as cheap talk intended for domestic political audiences; Mr. Wen and Mr. Putin both face political pressures at home which will only be exacerbated by the economic crisis. For them, scapegoating the U.S. is an easy and popular way to galvanize support. Of course, the same is true in the U.S., so I don't expect the Obama administration to curtail public denunciations of Chinese policies any time soon.



For some reason Pravda, the former mouthpiece of the Soviet Union (now nationalist tabloid hack rag), decided to outright steal one of my previous posts, without permission. They were kind enough to give me my own byline, although I sort of wish they hadn't.

I posted a screen shot for proof, as i expect them to pull the actual article down. And if I come down with a nasty case of Polonium-210 poisoning, you'll all know why.

(Credit to Dr. Oatley for finding it.)

Tuesday, January 27, 2009

The Real Exchange Rate and the Current Account, 1992-2008

. Tuesday, January 27, 2009

I realized this a.m. that I should have titled this post, "The Bigger Picture".

This graph plots the real exchange rate on a trade-weighted basis (right axis) and monthly goods and services balance in current dollars (left axis) from January 1992 to January 2008. One sees little evidence of a relationship between the real exchange rate and the current account adjustment. If anything, the relationship appears perverse. Indeed, the dollar weakened in real terms on a trade weighted basis between 2002 and 2008. Yet, between 2002 and 2007 the current account deficit widened. It's only since early 2007 that the current account has narrowed. I might also point out that the strengthening of the dollar in the 1990s had little impact on the current account, which remained largely stable until 1998. Maybe this is evidence of a very long lag between exchange rate change and the current account adjustment. Or maybe the two just are not tightly connected causally.

A Thousand Words


Left vertical axis: total U.S. exports, seasonally adjusted, in millions USD (source: BEA)
Right vertical axis: value of U.S. dollar vs. a basket of major foreign currencies (source: St. Louis Fed)

Something about Dr. Oatley's analysis below didn't seem right to me. Have a look at the graph above. Obviously, one graph doesn't prove or disprove anything, but a first glance at recent history seems to indicate that U.S. exports and the value of the dollar are negatively correlated. In other words, as the value of the dollar declines, exports rise. Or, in the language of the post below this one, it seems that the demand for U.S. good is sufficiently responsive to price changes -- i.e. demand is sufficiently elastic -- to produce an increase in exports as the value of the dollar decreases.

Now whether a dollar devaluation would lead to a net benefit to the U.S. is an open question, because (as Dr. Oatley pointed out) a weakening dollar also means a decline in relative national income. But with the economy in less than full employment, it seems that a moderate weakening of the dollar could generate some welfare gains by spurring the utilization of presently dormant resources.

Like I said, one graph doesn't prove or disprove anything. But this is one piece of evidence showing that demand for U.S. goods is not strongly inelastic. And if that's the case, then U.S. policymakers are acting rationally to seek a moderate devaluation of the dollar in order to boost employment. Unfortunately, if it's rational for the U.S., it's also rational for other governments, and a series of competitive devaluations will lead to even greater economic ruin.

(This says nothing about the capital inflows -- made necessary by running a current account deficit -- which helped fuel the dot com and subprime bubbles. Perhaps more on that later.)

Canard Pekinois


Update: Link to the IMF WEO fixed.

Emmanuel-across-the-pond and my co-blogger Will have been discussing the dollar-renminbi exchange rate and current account adjustment. They both seem to accept (along with Congress and the Obama administration) that a devaluation of the dollar will correct the current account deficit. I think this conclusion is wrong. Moreover, I think that only political economy analysis can help us understand why the political elite are obsessed with the exchange rate. As we shall see, it has nothing to do with current account adjustment.

Correcting the US current account deficit with a dollar devaluation is like trying to eliminate a deficit in your household budget by cutting your hourly wage. Although it could work, it's a bad idea because it makes you poorer. It is a doubly bad idea because it might not work, either. Let's focus on why an hourly wage cut might eliminate the deficit in your household budget. Then we can think about the conditions that determine whether it will work.

  • i. price elasticity of demand for your labor: One might think that cutting your hourly wage would merely reduce your income. Yet, businesses might demand more of your labor at this lower wage so that total hours worked rise more rapidly than your hourly wage falls so that at the end of the (longer) work day you have higher total income. Hence, household earnings (exports) rise by cutting your hourly wage (devaluing).
  • ii. price elasticity of your demand for consumption goods: Because everything you buy is now more expensive relative to your hourly wage, you consume less. Moreover, because your demand is highly sensitive to rising prices, the fall in the quantity you demand is greater than the price increase. Hence Quantity times Price yields a smaller total expenditure bill than at the prior real wage. Hence, household expenditures on goods from the outside (imports) fall.
Thus, with the right elasticities, you can balance your household budget by cutting your hourly wage. Your total earnings rise and your total expenditures fall. Yet, if demand by the world for your labor and yours for goods are price inelastic, then cutting your hourly wage just makes you poorer. If your demand for goods is inelastic (maybe you spend all of your income on food, shelter, and health care), you fall deeper into deficit.

Devaluing the dollar therefore makes us poorer. It might eliminate our current account deficit if demand for US imports and exports is highly price elastic. Or if demand is price inelastic, it could push us deeper into deficit. So, the question is, how price elastic is the demand for US imports and exports? The preponderance of evidence suggests that the answer is, "not very." To quote a relevant summary: "...price elasticities tend to be quite small...Thus, an exchange rate depreciation would weaken the trade balance as its negative effect on the terms of trade would outweigh its positive effect on trade volumes" (The IMF WEO linked above, at page 95). Devaluing the dollar will make us poorer and is more likely to worsen than improve the current account position. Devaluing thus seems to be a doubly bad idea.

All of which raises the political economy question: why does Congress want the Obama administration to implement a policy that will make us all poorer? I'll answer this in the next post. Until then, let me say that I think Congress' focus on the exchange rate misleads the public. I'll leave it to individual readers to decide whether the deception is intentional.

Monday, January 26, 2009

Blogging Gets More Cachet

. Monday, January 26, 2009

William Easterly, development economist extraordinaire, has started a new blog. Self-recommending of course, but but from the looks of the first post, it's immediately a must-read.

And it's hosted on NYU's web site (complete with disclaimer). To my knowledge, this is the first time a university has hosted a blog. I wonder if he gets funding for it...

Just sayin'.

Financial Crisis' First Casualty?


News agencies are reporting that the Icelandic ruling coalition resigned on Sunday, thus incapacitating the government, "three months after the collapse of the country's currency, stock market and several major banks, and following months of public protests."

Iceland's financial system and currency collapsed in October following a series of bank failures, forcing the International Monetary Fund to intervene.

Iceland sought IMF help after its government was forced to nationalize three banks to head off a complete collapse of its financial system. Trading on the country's stock market was suspended for nearly a week, and inflation jumped to more than 12 percent.

The IMF announced in November it would pump about $827 million into the Icelandic economy immediately, with another $1.3 billion coming in eight installments. Iceland's Nordic neighbors -- the governments of Finland, Norway, Denmark and Sweden -- announced they would lend Iceland another $2.5 billion.
I believe this is the first direct government casualty as a result of the ongoing financial crisis, although one could argue that the American elections in November could also count as a casualty. I won't officially count it, as I think there are too many other reasons to point to that caused the collapse of Republican rule.  

Will mentioned Great Britain as another possible future candidate in an earlier post. Are there any other governments that could fail? Are there any other financial systems that could unravel?

Why Adjust?


Teutonic Knight, a commenter at Seeking Alpha (where some IPE at UNC posts are syndicated) asks a very good question apropos of this post:

What is the real motivation or perceived benefits to the U.S. of asking to Chinese to re-evaluate the Yuan upward? If say the Yuan is up another 15% (not a hugh magnitude in my view to begin with) then the "cheap" Chinese household goods may just rise 10 to 15% in price.

China and the United States have had a trade imbalance for quite a long time. In theory, when one country (the U.S.) imports more goods from a country (China) than it exports to it, the value of the currency of the importing country (the dollar) sinks relative to the value of the currency of the exporting country (the yuan). At least, this is supposed to happen when the value of currencies is allowed to float. If the value of the dollar sinks relative to the yuan, then imports from China to the U.S. become more expensive, while exports from the U.S. to China become less expensive. Therefore, exports from the U.S. should rise while imports from China should fall. The price mechanism prevents countries from running persistent trade deficits that can have adverse long-run effects on employment.

In the real world version of this example, China has subsidized its exports to make them cheaper, and has then used the proceeds from the trade imbalance to buy U.S. Treasuries and other dollar-denominated assets, thus propping up the dollar and making Chinese imports even more attractive to U.S. consumers. For a long time, the U.S. was more than happy to oblige, because this made it possible for us to extend cheap credit to businesses and consumers without generating a lot of inflation. The U.S. was running at or near full employment, so there seemed to be little short-run downside. China was content with this state of affairs because it allowed them to employ millions of its impoverished citizens in labor-intensive exporting industries, thus raising standards of living for the most people in the shortest amount of time.

However, everyone knew that in the long run this trade imbalance was unsustainable. This is why people like Nouriel Roubini have been predicting a currency crisis in the U.S. for several years now: eventually the dollar was going to have to fall. According to Roubini and others, the bigger the trade imbalance became, and the larger the U.S. national debt grew, the more painful the inevitable transition was going to be. A gradual adjustment is always preferable to a sudden shock, so the U.S. has been cajoling the Chinese to let the yuan rise against the dollar in stages. The Chinese have done this, but the U.S. has been concerned that the process is going too slowly. The Chinese have been reticent to move too quickly and forego the employment gains in their exporting sector.

Now that the U.S. is well below full employment, the matter has become more urgent: we need the dollar to decline some in order to boost our exporting industries and spur employment. Despite interest rates close to zero, the dollar has actually gained value against many of the world's currencies since last Fall. Unfortunately, China is facing a slowdown as well, and they want to keep their employment levels from slipping, so they want to keep the yuan from rising much more in the short run.

And that's basically the state of things right now. It appears that we may be at an impasse. Structural adjustment is needed, but the U.S. is hesitant to force that adjustment through tariffs or capital controls, and China is hesitant to let the yuan fall much further.

Of course, this simplistic explanation ignores all other countries besides China and the U.S., and all other currencies besides the yuan and dollar. The full story is much more complicated, as Russia moves to devalue the rouble, France gets concerned about the shocking weakness of the British pound, and the Japanese yen rises against all major currencies, leading to rising unemployment in the Land of the Rising Sun. In a global recession, nearly all countries are incentivized to devalue their currencies in order to boost employment and stave off deflation. But such competitive devaluation can have devastating consequences for the global economy.

Sunday, January 25, 2009

What Happens in Davos...

. Sunday, January 25, 2009

This year's World Economic Forum meetings in Davos, Switzerland will be more somber than in recent years:

Not long ago, at the annual gathering of the World Economic Forum in Davos, Switzerland, Richard Fuld Jr. of Lehman Brothers held forth on the state of the global economy before mesmerized journalists and cowering subordinates while other Wall Street stars mingled after-hours with the likes of Claudia Schiffer, the German supermodel.

As business, government and nonprofit leaders trek up the peak made famous by Thomas Mann's novel, but now better known for the gabfest that begins Tuesday, star power no longer is in.

Politicians, not corporate titans, are poised to be the big draw this year, echoing the broader power shift away from the free market as one government after another tries to prop up its sinking economy.

Google is cutting back on the lavishness of their parties, as is Citigroup. AIG won't be attending at all, and neither will past attendees Brangelina and Bono. Still, it's hard to cry for Davos when "cutting back" means hiring a less expensive helicopter to shuttle you around:

Of course, when it comes to economizing at Davos, everything is relative. At BB Heli, which provides helicopter service to Davos, business is still strong, but more passengers are opting for a single-engine helicopter rather than the faster twin-engine model, said Marcus Baumann, the general manager. So instead of paying 9,800 francs for the 45-minute flight, the cost is cut to 4,900.

A Person Needs a Face; A Tree Needs Bark


Emmanuel from the mighty IPE Zone blasts me on two fronts: first for defending macroeconomists from Wilkinson, and second for not appreciating the importance of reputation to the Chinese (as recounted by Wikipedia, but two can play that game: the title of this post was taken from here). The first has nothing to do with second in my mind, but his combination of the two is intended to call my IPE chops into question. Emmanuel's argument sums up to, in Lolcatspeak, "Ur doin' it wrong".

I, too, am familiar with Cohen's writings on the US/UK IPE divide. And I, too, am fully aware of what he means by the "economism" of some American IPE types. Indeed, the primary reason why I am in IPE instead of economics proper is because I think that the utility of modern Econ is lessened by its, er, "stylization" of the world, and I'm sympathetic to arguments that make that point (that's not what Wilkinson was doing, however, and not really what Emmanuel is doing either). Anyway, I've got no horse in the UK vs. US debate, so I'm not hashing that out here. Emmanuel is surely right to point out that an economist might look at Geithner's quotes and conclude that he is merely restating the obvious. A political economist should look deeper, if she can. Geithner's statements were clearly intentional, so let's do what Emmanuel hasn't and read the subtext while considering the context.

James Fallows, a man with a hundred times more awareness of Chinese culture than Emmanuel or I (or Wikipedia), says that the Chinese aren't "manipulating" the yuan, they are "managing" it. Emmanuel pointed out Paulson's recent similar semantic two-steps. Well, you say "po-TAY-to" and I say "po-TAH-to" but Geithner's point isn't substantively refuted. In fact, nobody is arguing that Geithner is wrong, only that he would have done better to keep his trap shut.

But who was Geithner's audience? Whose reputation was Geithner concerned with? Given the fact that he was speaking during his confirmation hearing in the U.S. Senate, his first audience was clearly domestic: he was speaking to the U.S. Congress and their constituents, and vague quasi-protectionism was a pretty major aspect of the recent election. Geithner was trying to indicate that Obama is committed to helping American workers, and considers Chinese jiggering of the RMB to boost (Chinese) domestic employment at the expense of US employment to be "unfair" to American workers. As I mentioned in my last post, this is a long-running theme in the US. The Obama administration has more direct lines of communication with the Chinese than a Senate confirmation hearing, so Geithner's rhetoric was clearly intended for domestic consumption. Felix Salmon fleshes the point out more clearly here.

Despite all that, surely Geither knew that the Chinese would be listening, which is probably why he said things like "the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home." In other words, the first priority is to boost domestic demand in China, not to duel over currency valuations. Once again, this is a pretty noncontroversial statement: everyone agrees that Chinese domestic demand needs to grow with the rest of the economy. Geithner also strongly indicated that the Obama wants to work with, and not against, the Chinese. More than once, Geithner mentioned that Obama seeks more policy coordination and cooperation with the Chinese rather than less. In any case, neither Geithner nor Obama have indicated that they are prepared to take any retaliatory action against the Chinese (much to Emmanuel's chagrin, I'm sure!), so Geithner's comments are best read as cheap talk for the benefit of domestic audiences.

Were some Chinese feathers ruffled by the bluntness of Geithner's comments? Surely. Were Chinese policymakers aware of the proper context, meaning, and intent of Geithner's remarks? Undoubtedly. Are both governments using the incident to shore up domestic support? Unquestionably. Are more reasonable and substantive discussions between Chinese and American policymakers occurring behind closed doors? Indubitably. Does this represent any sort of change in the US/China relationship? I see no economic, political, sociological, or anthropological reason to think so.


Image created using the LOLcat builder.

Saturday, January 24, 2009

Are Economists Completely Clueless?

. Saturday, January 24, 2009

Will Wilkinson asks the question, in a series of posts. A highlight:

When I see Delong more or less indiscriminately trashing everyone at Chicago, or Krugman trashing Barro, etc., what doesn’t arise in my mind is a sense that some of these guys really know what they’re talking about while some of them are idiots. What arises in my mind is the strong suspicion that economic theory, as it is practiced and taught at the world’s leading institutions, is so far from consensus on certain fundamental questions that it is basically useless for adjudicating many profoundly important debates about economic policy. One implication of this is that it is wrong to extend to economists who advise policymakers, or become policymakes themselves, the respect we rightly extend to the practicioners of mature sciences. There is a reason extremely smart economists are out there playing reputation games instead of trying to settle the matter by doing better science. The reason is that, on the questions that are provoking intramural trashtalk, there is no science.

Sadly, there is no one better to listen to.

In a follow-up, he says that it is macro that is embarrassing and unscientific, while micro (esp. applied, experimental micro) is just fine. He'd probably hate IPE scholars the most, if he knew of any besides Drezner. In any case, Wilkinson is basically repeating the old criticism of economists: if you ask one a question, she will always answer "It depends". But the thing is, it really does depend. The Krugman/Barro, DeLong/Chicago bouts are about which historical economic episodes are most analogous to this one, or which assumptions of which models are appropriate for analyzing our current situation, and which are inappropriate. Those questions are the right ones to ask, despite the fact that the answers aren't always clear. There is some room for legitimate disagreement so the lack of consensus is nothing to get worked up about. And anyway, would Wilkinson trusts economists more if there was consensus, but no debate?

As for the "is it science or is it not" canard: I, for one, really don't care. But while we're at it, I'd ask Wilkinson this question: Is physics cleaner at the micro or macro level? How about evolutionary biology? Psychology? Of course there's more complexity -- and thus more room for doubt -- at the macro level. The difference is definitional, so Wilkinson's argument is close to tautological.

In any case, acknowledging complexity and a lack of consensus does not discredit macro studies, just as acknowledging the debate over string theory or the big bang doesn't discredit physics or make it any less scientific.

(All that said, I do think that DeLong and Krugman are being unnecessarily cruel towards Barro and Mankiw and the Chicagoans, even though I think they are substantively more persuasive. This is completely in line with DeLong/Krugman's historical attitudes towards dissenting opinions, and some measure of it is probably for show. I don't think that Barro and Fama have done their best thinking on this particular topic. But that has nothing to do with what Wilkinson is really saying.)



Lots of talk of currency fluctuations lately. Sure, there's the U.S./China spat over the RMB, but the controversies hardly end there:

Russia announced that the rouble, down 30 per cent since July, will be allowed to drop another 10 per cent against the dollar. Then it will try to bring the devaluation to an end.

The fall in sterling, which has halved in yen terms in the past 18 months, brought complaints from European politicians that the undervalued pound was an unfair advantage for the UK over the eurozone.

As for Japan, the 35 per cent fall in its exports last month was doubtless worsened by the 39 per cent rise in the yen against the dollar over the past 18 months, bringing it to a 14-year high. With western economies booming, Japan’s exporters could survive a strong yen. That is no longer the case. Asked on intervention, Japan’s finance ministry said it “should always be thinking about doing what may be necessary”.

What of China? The exchange rate of the renminbi to the dollar has barely budged since its appreciation halted last July. Amid market chaos, this was achieved only with careful management or, pejoratively, manipulation. But according to JPMorgan Chase, it has gained 12 per cent on a trade-weighted basis in the past year.

Nouriel Roubini was one of the only economists to predict an unraveling of the global financial infrastructure. But he predicted that it would occur because of a collapse in the value of the dollar; not because of over-leveraging and dodgy home loans. Indeed, the U.S. could use a decline in the dollar to boost employment in exporting sectors and try to narrow the trade imbalance. But that hasn't happened. Instead, as the financial crisis has spread, smaller countries have flocked to the dollar (and euro) as a source of safety. Countries who rely on exports to boost growth -- like Russia and China -- have tried to keep the value of their currencies low to make their exports cheaper. Meanwhile, the pound is losing a lot of value, which is starting to really bother other European countries who feel that a cheap currency gives Britain an unfair competitive advantage in trade, and Japan has still not recovered from its zombie decade.

What does it all mean? It's possible that currency fluctuations will lead to beggar-thy-neighbor protectionist measures. It's also possible that the U.S. and Eurozone carry greater weight of unemployment and reduced GDP in the short- to medium-run by letting smaller countries ramp up their export-machines. It's also possible that domestic stimulus plans in the U.S. and Europe will simply be an employment subsidy to China and other less-developed export-heavy countries. That might not be the worst thing in the world, except that it prolongs the needed structural adjustments. It might be better for countries to coordinate large fiscal stimulus, and impose some levels of capital controls (a Tobin Tax?) to slow down currency fluctuations and avoid a crisis. We should also expand the role and capabilities of the IMF, just in case it becomes necessary to bailout a fairly large country (e.g. Great Britain?).

What we should not do is start a cycle of devaluation competition or protection for domestic import-competing sectors of the economy. If that occurs, look for nations to call for bounded exchange rate pegs.

Friday, January 23, 2009

Discounting Obama's 'Aggressive Attitude' Toward China

. Friday, January 23, 2009

Some have taken note of Timothy Geithner's comments during his confirmation hearing suggesting that the Chinese are continuing to devalue the RMB to stimulate exports. The U.S. bond market tanked, supposedly fearing Chinese backlash in the form of a sell-off of U.S. Treasuries. Geithner also said that Obama will encourage China to engage in fiscal stimulus to try to boost lax Chinese domestic demand (psst: they're already doing it).

A few have freaked out, expecting a rising of tensions between the two nations that could culminate in a trade war, while one guy in England thinks that would be a good thing, as he expects the Great Salvific Trade War of 2009 as the best mechanism for producing needed structural adjustment.

But Salmon and Drezner both yawned; in the words of Drezner, Geithner merely "said out loud what everyone knows to be true." Salmon called Geithner's remarks "content-free". Still, it's important to notice the change in rhetoric, right?

Wrong. For one thing, this is nothing new from Obama: back in 2007, he cosponsored (with Hillary Clinton) Senate legislation to put tariffs on Chinese goods if they didn't allow the RMB to appreciate. For another, since mid-2006 Secretary Paulson has been harping on China's currency manipulations, most recently last month. The Chinese have shrugged off harsher statements than this for the past three years or more, and I don't see any reason to think that they won't do so now.

Now if Obama actually decides to actually slap tariffs on Chinese goods using the infamous 301 provision, then a few things could happen: China dumps Treasuries and the U.S. dollar sinks; China decides to further subsidize its export industry to offset the tariffs; or the WTO steps in and forces the U.S. to back down or accept tariffs on its own goods. None of these seem very likely to me, since China and America (nee Chimerica) still need each other to balance their supply-and-demand profiles. So put me in the "yawn" camp, until something actually changes.

Tuesday, January 20, 2009

Best Wishes, President Obama, But Low Expectations

. Tuesday, January 20, 2009

Robin Hanson, of the always-excellent Overcoming Bias, issues a challenge:

We've heard a lot of hyperbole about how Bush was the "Worst. President. Ever." and Obama's inauguration is the most exciting in a half century. So to avoid future bias, this is a good time to ask yourself: where do you set Obama's bar? That is, what does Obama have to do for you to consider him a "good" president, or even better than Bush? It is enough for you that he is (part) black and a Democrat? Or does he actually have to do something? Or are those already insurmountable barriers to you?

He has a list of things that will likely happen if an average president does basically nothing for the next four years, and asks people to predict whether Obama does more or less, and whether that would make him a good or bad president. Many of the items on his list have relevance to students of IPE or International Relations more broadly.

For my part, my expectations for Obama are low, but that's less a reflection on Obama (I voted for him) as it is a general cynicism with the American political process. It's easy to get caught up in the romance of the moment, but in the end there are more important things than symbolism and pomp-and-show. Of course I'd be happy to be proved wrong; I just don't expect to be.

Saturday, January 17, 2009

More Sweatshop Blogging

. Saturday, January 17, 2009

Matthew Yglesias, of the progressive Center for American Progress, responds to the Kristof op-ed that Dr. Oatley linked to the other day:

Nicholas Kristof writes a depressing column about Cambodian kids who spend their days picking through giant heaps of garbage seeking usable scraps and dreaming of the day when they might be able to work in a sweatshop. I think it’s wrong to say that all consideration of international labor standards is merely aimed at keeping people stuck on the trash heap, but it’s a valuable reminder about the generally limited ability of just saying “no” to things to accomplish what people want. Part of the reason sweatshops exist and attract laborers is that life on the garbage heap is even worse, as is the life of a third world subsistence farmer. If you want to improve things, you need to actually be expanding the set of feasible options, not just arbitrarily closing down one path. And this happens in a variety of fields. Some neighborhoods in DC seem to have the idea that if they put tight restrictions on opening new chain stores or bars and restaurants that this will magically conjure up a diverse mom-and-pop economy. In practice, you get empty storefronts; crowded, mediocre bars and restaurants; and people driving to chain stores in the suburbs.

In both cases, there’s nothing wrong with the objective. But it’s a mistake to think that purely by vetoing stuff you can force the kind of positive action you want. To raise actual labor conditions in the third world, we need to create more prosperity and more economic opportunity not just say “no” to particular forms of bad conditions.

via Will Wilkinson, who adds:

Damn straight. Matt nails it. So why is this line of thought so elusive for so many would-be decent people? I am constantly dumbstruck that so many who profess to care about “social justice” do little more than complain that desperate people have really terrible options and then work to take away the best options.That, of course, is not the intention, but that’s usually how it ends up working, whether the issue is “sweatshops” or “human trafficking.” Some day, more of us will see the devastating irony in the fact that social justice activists spend a lot of their time making things worse for some of the world’s poorest and vulnerable people.

People who oppose sweatshops, or boycott Walmart for selling goods made in those factories, are well-meaning people who are rightfully disgusted by the working conditions in impoverished countries. But policies have consequences, and quite often the unintended consequences may do more damage than good.

Indeed, the story of industrialized capitalism over the past two centuries is that initially conditions for factory workers are harsh (though not as harsh as their next-best options). But over time, the new employment generates higher incomes than would otherwise be possible. As incomes rise, workers are able to "purchase" better options for themselves and their children. School attendance rates rise with incomes, and education and better health lead to higher productivity. More productive workers can demand higher wages and better working conditions, and the situation improves over time. This has been the story for all industrializing countries. It is sometimes tough to watch the transition, and the process never moves as quickly as we would like it to, but the worst thing we can do is stop the progress of economic activity through boycotts or demanding labor and environmental standards that are too high for the local economies to bear.

Friday, January 16, 2009

Deflation Watch

. Friday, January 16, 2009

Consumer prices grew 0.1% overall in 2008, but in the last quarter they dropped 0.7%. In 2007, the inflation rate was 4.1%. Over the last quarter, core CPI (excluding food and energy) fell at an annual rate of 0.3%.

Janet Yellon, President of the San Francisco Fed called these levels "unhealthy" and chided policymakers for not doing more to prevent the onset of deflation.

More here.

Thursday, January 15, 2009

Revenue Sharing in Iraq: When IPE Meets Security Studies

. Thursday, January 15, 2009

Christopher Dittmeier, a fellow graduate student at UNC, recently published an article in Georgetown's Democracy and Society on the issues surrounding the elusiveness of a revenue sharing agreement in Iraq. It's a good look at an important (and under-covered) issue, and it highlights the difficulties of reaching an agreement, despite the importance of such an agreement for the security, stability, and legitimacy of the nascent Iraqi state. It may be found here [pdf].

Chris specializes in the Security Studies side of International Relations (boo! hiss!), but in this case as with many others there is significant overlap with IPE. His article is good illustration of that.

Sweatshops and Trade Agreements


Kristof issues an invitation to soon-to-be-President Obama. Read his editorial here.

Wednesday, January 14, 2009

When Marx Isn't Really Marx

. Wednesday, January 14, 2009

This quote, purportedly written by Karl Marx in Capital, has been making the rounds:

Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism.

Sounds prescient, no? One problem: McMegan investigated the quote and discovered that Marx didn't actually write it. Not only that, but he didn't say anything remotely like it. He predicted just about the exact opposite: the working classes would be forced to live in immiserated slums (not McMansions in the suburbs) until they finally rose up and overthrew their capitalist oppressors. Obviously, this is not the state of things.

If you feel like checking on your own, all three volumes of Capital and many other of Marx's writings may be found here.

Has the Financial Bailout Worked?


The most obvious answer would seemingly be "no". After all, equity markets have not recovered their lost value, and the recession is still spreading throughout the real economy. The Obama administration is planning a $700bn stimulus package to create jobs, and monetary policy has fired just about all its bullets without making too much of a dent.

But a deeper look gives some reasons for optimism. First, the banking industry appears to have been stabilized. There is still some restructuring going on, of course, and that will no doubt continue for quite some time. But the TED spread (a measure of how risky inter-bank lending is perceived to be) is back to relatively low levels, and there are other signs that credit markets have begun to thaw, and we may have escaped a liquidity trap. In short, the TARP program has improved conditions in the banking sector, if only by preventing further collapse.

Of course it is still too soon to tell how everything will play out, but in just two or three months ago we were concerned about the collapse of the entire global financial system, and doomsday scenarios were not considered impossible or even especially unlikely. As we sit now, we are more concerned with getting the real economy moving again, the coming structural adjustment, and trade policy. I do not mean to diminish these other issues, but they are more indicative of a typical -- if deep -- recession than of a Global Financial Armageddon. And keep in mind that TARP has only used about half of the $700bn, which now looks as if it will be repaid to the U.S. Treasury with interest, so there is still some flexibility for the Fed and Treasury as we move forward.

And, as a recent WaPo editorial reminds us, this has benefits for everybody living inside this country, plus many more living outside of it. It's too early to do a celebratory lap, but so far TARP seems to be working.

Saturday, January 10, 2009

Zimbabwe introduces new $50 billion note

. Saturday, January 10, 2009


Zimbabwe's central bank will introduce a $50 billion note -- enough to buy just two loaves of bread -- as a way of fighting cash shortages amid spiraling inflation.

The country's acting finance minister, Patrick Chinamasa, made the announcement in a government gazette released Saturday.

While Chinamasa did not give the date on which the $50 billion and new $20 billion notes would come into circulation, an official at the Reserve Bank of Zimbabwe said the notes would be distributed to all banks by the end of Monday.

Zimbabwe is grappling with hyperinflation, now officially estimated at 231 million percent and its currency is fast losing its value. As of Friday, one U.S. dollar was trading at around ZW$25 billion.

When the government issued a $10 billion note just three weeks ago, it bought 20 loaves of bread. That note now can purchase less than half of one loaf.

Realizing the worthlessness of the currency, the RBZ has allowed most goods and services to be charged in foreign currency. As a result, grocery purchases, government hospital bills, property sales, rent, vegetables and even mobile phone recharge cards are now paid for in foreign currency, as the worthless Zimbabwe dollar virtually ceases to be legal tender.
Under these circumstances, most, if not all, consumers would flock to hold and do business only in foreign currency. Their domestic currency can not hold its value, so these people would do best by refusing to hold any Zimbabwean currency and instead try to pay for goods and services using foreign currency (if they can get their hands on any of it) or turn to bartering.

This reminds me of hearing stories about Argentinean grocery stores in the 1990's. Shop owners stopped labeling the prices of grocery items on the shelves because by the time a customer would pick up the item and walk it to the counter to pay, the price would have gone up. Customers would walk in, literally, with a bag of money and try their best to grab the item and run to the counter before it went up in price. 

It is difficult to watch this situation develop in an extremely poor, African country. With more than 80% of the working age population unemployed, one of the lowest standards of living in Africa, a dysfunctional government and economic system and rampant hyperinflation, how can people survive? The vast majority of these people do not have access to foreign currency and can not find work to try to earn even the most modest of wages. This is where a modern economy spirals backwards into the realm of a 16th century barter economy. This is painful to watch. How can any of this be possible in the 21st century?

Friday, January 9, 2009

Foggy Thoughts on Decoupling

. Friday, January 9, 2009

Daniel Drezner on the "known unknowns" of the impact of the financial crisis on international relations:

The tight coupling of the global economy caused export-dependent economies to face significant downturns because of the collapse in demand from the OECD nations. These governments will respond to the current crisis by creating the trade equivalent of currency reserves - that is to say, creating a protected space of demand for national champions. The most direct way to do this will be to boost domestic demand while restricting competition from foreign producers. As states plan to expand their fiscal policy, it should be relatively easy - via procurement rules and concentrating expenditures on non-tradable goods - to target new government spending towards domestic firms.

This kind of decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements. It would also, however, be sure to reduce overall economic growth even further. It would also reduce whatever constraints economic interdependence has placed on aggressive action in world politics.

This is, essentially, what Emmanuel and I have been arguing about. He sees decoupling-through-protectionism as a net positive because it would correct imbalances. I see it as a net negative because it seems sure to reduce overall economic growth. In any case, I don't see that decoupling is inevitable, or even especially likely. It certainly has not occurred to this point in the crisis.

I also remain skeptical that it is "obvious," as Drezner says, that the free market model is in peril and that China will benefit (in relative terms) from the financial crisis. I keep hearing that mantra a lot, but I've to hear a strong, persuasive theoretical case as to how (or even why) this shift will occur. As far as I can tell, the new economic order looks a lot like the old economic order: the international community (esp. Europe) waits for the U.S. to make the first move, the old international institutions (e.g. IMF) get back some of the importance they'd lost in the wake of the Asian financial crisis, the global recession knocks down the petrostates by a peg or two, and China steps back a bit to focus on domestic pressures. Most commentators agree on these points even as they say that the old economic order is over, and the new economic order will be massively different. When asked about details of the new order, or the mechanism by which the world economy will move to it, they generally "don't have the foggiest idea" despite being certain of the inevitability of the shift.

Emmanuel may be correct in saying that the only way to get the needed adjustment is through renewed protectionism; Drezner may be correct in saying that renewed protectionism is somewhat likely, but not profitable; Rodrik may be right that a new world economic order is inevitable. All these things remain to be seen. But for my money, the new economic order is going to look a lot like the old economic order, and the needed structural adjustments will come in spite of, not because of, targeted government interventions into the economy. I'll try to say more about that last point later.

Thursday, January 8, 2009

Piracy Update!

. Thursday, January 8, 2009

The US Navy announced today that it has put together a maritime force to battle pirates off of the coast of Somalia. 

The unit -- called Combined Task Force 151 -- is a spinoff of an existing force in the region that addressed a range of security issues, such as drug smuggling and weapons trafficking, as well as piracy.

The Gulf of Aden links the Indian Ocean and the Red Sea. About 20,000 oil tankers, freighters and merchant vessels pass along the crucial shipping route each year near largely lawless Somalia.

The United States is among at least 20 countries that are trying to combat piracy in the region, including Russia, India, Germany and Iran. In December, German sailors foiled an attempt by pirates to hijack an Egyptian cargo ship off the coast of Yemen, according to the German Defense Ministry, and the European Union launched its first naval operation to protect vessels. That came just days after China revealed its own plans to patrol the Horn of Africa's volatile coastline.

Task Force 151 is an outgrowth of Combined Task Force-150, which was created to conduct security operations at the beginning of Operation Enduring Freedom -- the U.S. effort in Afghanistan. The task forces are part of the Combined Maritime Forces, which includes naval ships and other assets from more than 20 nations.
If you're interested in pirates, a new book by Peter Leeson, a George Mason economics professor, will hit bookshelves near you very soon. The book, titled "The Invisible Hook: The Hidden Economics of Pirates" looks extremely interesting. An article by Leeson is forthcoming in the New York University Journal of Law and Liberty. Here is the abstract:
Can criminal profit-seeking generate socially desirable outcomes? This paper investigates this question by examining the economics of pirate tolerance. At a time when British merchant ships treated black slaves as slaves, some pirate ships integrated black bondsmen into their crews as full-fledged, free members. Enlightened notions about equality did not produce pirate tolerance, however. I argue that pirate self-interest seeking in the context of the criminally-determined costs and benefits of pirate slavery was responsible for pirates’ progressive racial practices. Analogous to Adam Smith’s invisible hand, whereby legitimate persons’ self-interest seeking can generate socially desirable outcomes, among pirates there was an “invisible hook,” whereby criminal self- interest seeking produced a socially desirable outcome in the form of racial tolerance.

Buying Hearts and Minds


Mike Munger, political science professor at The School Which Will Not Be Named, recently points to a new NBER working paper [pdf] by Berman, Shapiro, and Feiter that claims that while money may not buy love, it still has other uses. Abstract:

Rebuilding social and economic order in conflict and post-conflict areas will be critical for the United States and allied governments for the foreseeable future. Little empirical research has evaluated where, when, and how improving material conditions in conflict zones enhances social and economic order. We address this lacuna, developing and testing a theory of insurgency. Following the informal literature and US military doctrine, we model insurgency as a three-way contest between rebels seeking political change through violence, a government seeking to minimize violence through some combination of service provision and hard counterinsurgency, and civilians deciding whether to share information about insurgents with government forces. We test the model using new data from the Iraq war. We combine a geo-spatial indicator of violence against Coalition and Iraqi forces (SIGACTs), reconstruction spending, and community characteristics including measures of social cohesion, sectarian status, socio-economic grievances, and natural resource endowments. Our results support the theory's predictions: counterinsurgents are most generous with government services in locations where they expect violence; improved service provision has reduced insurgent violence since the summer of 2007; and the violence-reducing effect of service provision varies predictably across communities.

It's not entirely clear that the relationship is causal, and as Blattman notes the sample is fairly small and focuses on one of the best-run programs in Iraq, but this is still encouraging news. It has long been alleged that one of the reasons why extremist groups like Hamas and Hezbollah retain such followings is that they do a very good job of providing services to local populaces. If the U.S. or other governments can compete, then perhaps we can do better with butter than with guns.

Breaking: Entire U.S. Economy Ceases to Exist


NBC says that USA Today says that the U.S. economy is due to shrink 202% in '09. I mean, I know things are bad, but I didn't know that the U.S. economy is not only going to produce exactly nothing in 2009, but we are also going to destroy roughly half of our national assets for no apparent reason.

It should be said that this gaffe was entirely on NBC. USA Today actually had it right.

(ht: Jane Galt)

BOE sets a record!


This is a fascinating little fact

The Bank of England on Thursday cut its benchmark interest rate by half of a percentage point to try to bolster the deteriorating economy amid calls for more government action.

Britain’s central bank reduced the rate to 1.5 percent, the lowest level since the creation of the central bank in 1694, and economists expect Britain to follow the United States in reducing the rate to close to zero by the second quarter of this year. 
Lowest since the creation of the bank in 1694?! I found that really surprising and interesting. Holy guacamole!

American debt don't taste too good anymore


With the interest in China over the past week or so on this blog, this excerpt from today's NY Times caught my eye: 

The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.
Now this development is not that big of a deal in the short run, as demand for Treasury's is at an all-time high and yields on everything from 4-week to 3-month Treasury's have gone negative over the past month. So a short run Chinese pullback from purchasing US debt may very well be usurped by increasing demand and a strong market for the extremely safe asset. 

However, in the medium term (say 12-18 months from now), this development may indeed hurt the United States. As China pulls back (forecasts show that China’s foreign reserves will increase by $177 billion this year, down sharply from an estimated $415 billion last year) and continues to pull back, and the markets rebound in the medium term, demand will shift from the debt markets to equities or whatever new instruments are in vogue at that time. This would drive up the interest rates that investors would demand for Treasury's, thus making it more expensive for the US to borrow. Interesting development to watch for over the next 12-36 months.

Tuesday, January 6, 2009

On the (De)Merits of Liberal Illiberalism

. Tuesday, January 6, 2009

Economic infidel Emmanuel (hey, he asked for it) fulfilled his promise to further explain his support for a low-level trade war between the U.S. and China. It's a long post, summoning Adam Smith and Jesus Christ among other luminaries, but I feel it is short on persuasion. For one thing, in my last post I proposed two scenarios for achieving a re-balancing of accounts: the first is Emmanuel's trade war; the second, a mix of currency revaluations (i.e. the RMB strengthening against the dollar) and domestic policies to encourage domestic spending in China (e.g. social welfare spending). If the real problem is as Emmanuel sees it, then the second scenario attacks the problem head-on by addressing the factors causing the account imbalance; instigating a trade war doesn't address the problem at all except by slowing overall economic activity. This proposed cure seems much worse than the actual disease, especially from the Chinese point of view. Emmanuel didn't speak to my question directly, but his post indicates that he prefers the war nonetheless. I remain unconvinced, as I hope to explain below.

I certainly agree that the current trade regime between the U.S. and China is not "free". But Emmanuel points out several ways in which the trade policies are illiberal, complains about them, and then proposes more illiberalism as a counterweight! He's proposing illiberalism as a liberalism-in-disguise. It's a sort of Wouldn't it make more sense to advocate for China to allow the RMB to appreciate, the U.S. to let the dollar depreciate (we've been trying our damnedest!), and for China to weaken its system of export subsidies in favor of policies likely to stimulate domestic spending (e.g. some version of an EITC or something)? In past posts (and later in the one under discussion), Emmanuel has been sympathetic to those views, so why has he jumped on the protectionist bandwagon now?

Emmanuel correctly points out that there is a social justice aspect to this. But it's not clear that it cuts always and only in the direction that he intends. If a trade war ensues, the first thing to happen will be a somewhat major rise in unemployment (above and beyond the jobs lost to opportunity costs), especially among the already-poor in China. And if employment drops, it will be difficult for China to boost domestic consumption. The necessity of boosting Chinese domestic consumption is the central issue here, as I think Emmanuel and I both agree. So if Obama starts a trade war with China, the Chinese people lose jobs and become poorer, domestic consumption falls further, and Chinese welfare has dropped. Where's the social justice in that? Perhaps the statistical account imbalance has lessened, but at great cost in welfare.

Emmanuel similarly complains about zombie corporations, and cites the Japanese experiences of the past decade or so. I have that experience in mind as well, but I don't understand how propping up inefficient local industries through mercantilism is supposed to decrease the number of zombie firms. Indeed, the opposite is likely to be true, as the U.S. has already seen (viz.: the Big Three automakers, and the U.S. steel industry). Creating more domestic protections -- through subsidy or import tax -- will further soften the underbelly of American industry, and prolong the adjustment Emmanuel is seeking.

He is similarly wrong about America's debt obligations. While American debt is certainly not negligible, it's also not extreme. American debt levels as a percentage of GDP are somewhat middle-of-the-road for OECD countries. Japan, Italy, France, Greece, Belgium, even Germany (!) all have higher debt-to-GDP ratios than the U.S., which is right around the OECD mean. Of course, the U.S. debt level is sure to go up in the next few years, but the point is that there is still some wiggle room before the debt burden becomes unmanageable. One other not-insignificant point is that all of the U.S. debt is dollar-denominated, which makes servicing that debt much easier, especially over long time horizons.

So we agree on the need for structural adjustments in both the U.S. and China, but we disagree on the mechanism. Emmanuel seems to think that adjustment is best achieved through a trade war, whereas I think that a trade war will prolong the adjustment period by propping up national champions and zombie firms. And, as Bhagwati is fond of saying, it's much easier to enact protectionist measures in bad times than it is to retract them in good times: once interests are entrenched, they tend to stay entrenched (see, e.g., the U.S. Farm Bill). To me, a better policy would be keep trade open, lower the existing barriers to trade, make the playing field equal for producers of Chinese domestic goods, and boost the American export sector through greater currency parity. This could lessen the pain of the transition by not killing aggregate economic activity.

Is my option politically feasible? Emmanuel seems to think not; that only a trade war can force the Chinese and American governments to take the necessary steps. This is not obvious to me, and in fact it seems more likely that the opposite is true: if the U.S. puts up tariffs, the Chinese may respond with even greater export subsidies, or even greater currency manipulation. In fact, the recent pattern of Chinese behavior indicates this as the most likely outcome. And if that happens, then what? I'd rather work for actual liberal policies rather than illiberal liberal ones, even if the changes are incremental rather than drastic. In my view, a small positive change is preferred to a large negative change any day of the week. I fear that Emmanuel's approach is one step forward, two steps back.

Sunday, January 4, 2009

Should We Hope For More Protectionism?

. Sunday, January 4, 2009

Emmanuel at IPE Zone says that a trade war between China and the U.S. might not be such a bad thing after all:

I will have more on why a trade war could be a potentially welcome development as the US and China wage a tit-for-tat strategy of faulting each others' trade practices and launching sanctions. Unlike conventional economists who view protectionism as an unambiguous bad or anti-globalization types who view trade as little more than the work of Satan, there is more to it than that. As always, the IPE Zone is less about pleasing either crowd than about forging ahead with fresh thinking on various problematiques. Yes, a trade war may just be the thing to remedy global economic imbalances currently roiling globalization. All we need is an Obama-induced escalation. Watch this space.

I will, but color me skeptical. There's a reason "conventional economists" are frightened of a trade war: it distorts economic activity, increases inefficiencies, carries the deadweight loss of the tax and of the lost scale returns, and so reduces output. In the midst of the worst global economy since the Great Depression, that seems to be the last thing we should be seeking. Additionally, the Chinese economy is heavily dependent on exports; if that system collapses suddenly rather than gradually, then it seems inevitable that social welfare will decrease sharply, and the brunt of it will be felt by the Chinese.

Emmanuel seems to think that these negative prospects will be out-weighed by an improvement in "global economic imbalances". But will they? Let's go through the logic. Suppose the Chinese government -- now facing a potentially severe domestic recession -- is facing two policy choices: attempting to rebalance their economy by boosting domestic consumption, or instigating a trade war with the U.S. to protect local industries. In the first scenario, the Chinese government could let the value of the RMB rise relative to the dollar; this will hurt exporting producers, but will make imports relatively cheaper. If coupled with a shift in subsidies from export industries to domestic consumption programs (e.g. direct subsidies to Chinese consumers, through unemployment insurance or some other social welfare plan) then domestic consumption might be boosted while the balance-of-payments gap narrows. The shift from an extremely export-biased economic model to a more balanced model would not be without some pain, of course, but that adjustment is going to have to happen eventually anyway.

In the second scenario, the Chinese and Americans end up in a trade war. Because 40% of the Chinese economy is in exporting industries, national income falls precipitously while unemployment rises. This lessens domestic demand for goods in China, and the Chinese economy slips into a deep recession. The value of the RMB slips further, making imports even more expensive and diminishing local demand further. The current account surplus narrows, but only because overall economic activity has decreased. In this scenario, spiraling is a very real danger.

Both scenarios lead to the re-balancing Emmanuel seeks, but the second seems to entail much more pain. And this pain wouldn't remain local; it would trickle down throughout all the export-biased economies in Asia. All to say, I have no idea what Emmanuel has in mind, although I'm very interested in finding out.

Saturday, January 3, 2009

The New Economic Order: Same As the Old Economic Order

. Saturday, January 3, 2009

Dani Rodrik:

It will be a watershed year, ushering a new world economic order--with the disorder most likely coming first. I just don't have the foggiest idea what this new order will look like.

It will be a time when we will all have to change our tune and have to think out of the box. I for one will worry more about growth in the advanced countries than in the developing world, will be warning against the dangers of protectionism, will be singing the praises of the IMF (if its recent actions and pronouncements are a guide), and will fret about too much state intervention. Changing times require changing lines...

Rodrik is certainly not the first to predict a "new world economic order". All sort of talking heads, pundits, economists, political scientists, and politicians have been saying the same. Like the others, Rodrik is short on details ("I just don't have the foggiest idea" is a typical comment). But Rodrik is one of the smartest and most intellectually-honest international economists working, not a soundbyte-seeking talking head or politician, so his pronouncements are certainly worth noting. If he thinks a new economic system is in the cards, then I'll take the notion seriously.

But I don't understand his basis for making such a claim. In the same post he says "the crisis has demonstrated the deep divisions within Europe—on everything from financial regulation to the requisite policy response" and concludes that the best that we now can hope for Europe is that they don't "undermine" the policy actions of the United States. Rodrik also says that China's influence on the global order is likely to decline as they shift their focus to domestic concerns, and that the I.M.F. has been and will continue to be one of the biggest players in this crisis. Meanwhile, falling gas prices signifies a decrease in influence for the energy-exporting countries (e.g. Iran, Venezuela, Russia) that had recently been flouting the U.S. and the 20th-century economic institutions.

So... the influence of China, Russia, and Europe declines and the influence of the U.S. and I.M.F. increases. How does this represent an over-throw of the old economic order?

To be sure, some tweaks to the system will be made on the margin. Perhaps some sort of international banking standards (such as reserve requirements) will be enacted, but these were not the primary cause of the crisis. Perhaps some sort of Tobin tax is put in place to prevent future Iceland-like implosions (although I doubt it). Perhaps greater regulation of ratings agencies will be put into place, but that would likely happen at the domestic, rather than international, level. What else do you want? Replacing mark-to-market accounting practices? Mandating maximum leverage levels? Again, these things may have exacerbated the crisis, but they didn't cause it.

In any case, marginal tweaks to the system do not a New World Order make. Indeed, it seems most likely that the most significant changes to the international financial system in the next year will be the changes made to the domestic financial structure of the U.S. And if that is true, then how can it be said that the age of the liberal international economic order is coming to a close?

International Political Economy at the University of North Carolina: January 2009




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