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Sunday, April 30, 2006

It's a Fish Eat Fish World

I'm not afraid of a more competitive global economy - we'll get our share on a level playing field:

Lessons in Darwinism for the western world, by Geoffrey Moore, Commentary, Financial Times: Successful companies have long acknowledged the parallels between natural selection in ecosystems and competitive successes in free markets – in no small part because their stakeholders have enjoyed such happy outcomes. In the west, however, that may be about to change.

Like European enterprises in the 19th century, US companies have enjoyed “home field advantage” throughout the 20th century. They dwelt in the most vibrant economy, drew upon the most mobile and best-educated workforce, enjoyed the most plentiful sources of capital and sold in the most attractive market for goods and services. If a company wanted to be significant, it had to win in the US market...

Now we are into the 21st century and it is already clear that home field advantage is crossing the Pacific. In this century, China and India look to be the great canvases upon which economic successes will be painted. ...

If Americans and Europeans want to win in the 21st century, we must learn to play better in away games. As this new world dawns, we are beginning to experience the dark side of natural selection, the perspective of those selected against, rather than for. This is Darwin ... wielding the sharp, pointed stick of failure. Interestingly, it is failure – most dramatically the threat of extinction – that drives evolution, not success. Successful species do not mutate: they ... breed until such time as they consume all the free resources in the ecosystem and only then do they begin to mutate... That time is now.

To accept this challenge is to deal with Darwin. And in spite of US culture’s somewhat problematic relationship with evolutionary thinking, ... I am relatively optimistic about America’s ability to step up. I am not so optimistic, however, about Europe’s prospects. One great obstacle to dealing with Darwin is the sense of entitlement, and this seems ... to make adaptive change impossible. France’s youth are convinced they are entitled to well-paying jobs. Italy’s citizens take it as a matter of national pride that Alitalia exists, irrespective of its ability to compete. Germany’s unions believe they are entitled to more, not less, compensation and benefits. The Swedes believe Darwinism is a scandal that socialist institutions are meant to redeem.

The problem with all the above is simple: Darwin does not care. ... it rewards what works and penalises what does not. ... We must ... establish sustainable competitive advantage from within our own ranks. This is still a work in progress but at least it is a work under way. Denying the need for such change, or waiting for political institutions to resolve the issue, are all losing gambits...

    Posted by on Sunday, April 30, 2006 at 06:06 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (20)


    John Kenneth Galbraith's Contributions to Economics

    This is from Stanley Brue's The Evolution of Economic Thought, 5th ed., Chapter 19, The Institutionalist School, pgs 407-412. It is a non-technical, easily readable description of some of Galbraith's main contributions to the field of economics:  

    JOHN KENNETH GALBRAITH

    John Kenneth Galbraith (1908-2006) was born in Canada and studied at the Universities of Toronto and California. His experience has included the post of chief economist for the American Farm Bureau Federation, high positions with the U.S. government during World War II, membership on the board of editors of Fortune magazine, ambassador to India during the Kennedy administration, professor of economics at Harvard University, and chairman of the Americans for Democratic Action. Galbraith is also a novelist and an expert on Far Eastern art.

    Taken as a whole, Galbraith's major writings constitute both an attack on neoclassical economic thought and an analysis of modern capitalism. Nearly all of the characteristics of the institutionalist school apply to his many works.

    Continue reading "John Kenneth Galbraith's Contributions to Economics" »

      Posted by on Sunday, April 30, 2006 at 10:54 AM in Economics | Permalink  TrackBack (1)  Comments (11)


      Average and Recent Quarterly Real GDP Growth

      To construct the following graphs, I averaged real GDP growth, quarter to quarter from 1947:Q2 to 2006:Q1 separately by quarter. Thus, in the following graph, the bars show the average growth rate (annualized) for the first quarter, second quarter, and so on. I was surprised to see that growth typically declines during the year:

      Growth1a43006

      A plot of the average pattern since 1947 against the four most recent quarters shows the pattern is not atypical, but it is exaggerated:

      Growth2a43006

      Note: Most recent are 2005:Q2=3.3%, 2005:Q3=4.1%, 2005:Q4=1.6%, 2006:Q1=4.7%, the average values are in the previous graph.

      Average real GDP growth over the last four quarters is 3.41%. The average growth rate over all quarters since 1947:2 is 3.36%. Thus, the average growth rate over the last four quarters is average.

        Posted by on Sunday, April 30, 2006 at 01:23 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (11)


        Working Longer Hours

        Why are you working so many hours? Because you know more than your boss:

        Working Into the Night, Pindyck and Rubinfeld (pg. 605): Job market signaling does not end when one is hired. Even after a few years of employment, a worker will still know more about his abilities than will the employer. This is especially true for workers in knowledge-based fields such as engineering, computer programming, finance, law, management, and consulting. Although an unusually talented computer programmer, for example, will be more skilled than his co-workers at writing programs that are efficient and bug-free, it may take several years before the firm fully recognizes this talent.

        Given this asymmetric information, what policy should employers use to decide promotions and salary increases? Can workers who are unusually talented and productive signal this fact, and thereby receive earlier promotions larger salary increases?

        Continue reading "Working Longer Hours" »

          Posted by on Sunday, April 30, 2006 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (23)


          Feldstein Comments on the Economic Report of the President

          Martin Feldstein comments on two chapters of the Economic Report of the President, Chapter 1 on "The Year in Review" and Chapter 6 on "The Capital Account Surplus."  Here's a sample of his comments:

          Viewed in this way, the Report’s comment that the increase in energy prices contributed to the growth of consumer spending (page 28) seems very strange. Higher energy prices reduced real incomes and that per se depressed real consumer spending.

          He finds contradictions in the report such as both increases and decreases in government spending somehow stimulating economic growth:

          The Report’s discussion of the impact of government spending is also puzzling... The chapter notes first (page 33) how much federal government purchases and transfers contributed to GDP growth, implicitly assuming no crowding out of other spending. But it then concludes (page 34) that “Future outlays are projected to shrink ... The shrinking of the Federal Government’s claim on resources should allow private economic activity more room to grow.”

          In discussing Chapter 6 he says:

          This chapter provides an unusual but useful approach to discussing the current international situation... Instead of focusing on the trade imbalance or the current account deficit, it frames the discussion in terms of capital flows. ... But there is little discussion of why the large volume of international saving comes to the United States... Nor is there an examination of what could eventually end the current account imbalance. Most surprisingly, there is almost no mention of the dollar exchange rate and its role in shaping the current account deficit. ...

          The only way to shrink the U.S. trade deficit ... is a substantial decline of the dollar. ... Although no one can be sure of just how large such a dollar decline must be, experts ... estimated ... that it would take a trade-weighted dollar decline of between 20 percent and 40 percent to rebalance the U.S. current account. ...

          He concludes by disagreeing with the administration's claim that the U.S. cannot solve the trade deficit problem on its own:

          [I]t is not correct to assert that “no one country can reduce its external imbalance through policy action on its own. Instead, reducing external imbalances requires action by several countries.” ... No action in other countries is needed for the U.S. to reduce its trade deficit. ... While such policy responses would be good for the countries involved, they are not a requirement for the U.S. to reduce our trade deficit. That is up to us.

          Here's Feldstein's analysis which is forthcoming in the Journal of Economic Literature:

          Continue reading "Feldstein Comments on the Economic Report of the President" »

            Posted by on Sunday, April 30, 2006 at 12:15 AM in Budget Deficit, Economics, International Finance, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (2)


            Saturday, April 29, 2006

            A Sad Day

            John Kenneth Galbraith has, sadly, passed away. This is from the Wall Street Journal:

            Famed Economist John Kenneth Galbraith Dies,  Associated Press: John Kenneth Galbraith, the Harvard professor who won world-wide renown as a liberal economist, backstage politician and witty chronicler of the affluent society, died on Saturday night, his son said. He was 97. Galbraith died of natural causes...

            Continue reading "A Sad Day" »

              Posted by on Saturday, April 29, 2006 at 10:14 PM in Economics | Permalink  TrackBack (1)  Comments (9)


              Opening the Fistfuls of Treasury Bills

              The question of why developing countries continue to invest in U.S. Treasuries when other investments would yield a higher rate of return, and how long before that changes, is revisited:

              Are Poor Nations Wasting Their Money on Dollars? By Eduardo Porter, Economic View, NY Times: It's often argued that foreigners funnel their money into the United States because it is a great investment. But for many countries, plowing money into the United States these days is not all that compelling a deal.

              Tbills42906

              Poor nations are financing much of the United States' current account deficit. They are losing money in the process, and as the losses mount, they will be tempted to do something better with their cash.

              Continue reading "Opening the Fistfuls of Treasury Bills" »

                Posted by on Saturday, April 29, 2006 at 07:49 PM in Economics, International Finance | Permalink  TrackBack (0)  Comments (1)


                The Economics of Estate Taxes

                What have economists learned about estate taxes? Here's a summary of some of the research on this issue from Wojciech Kopczuk for the NBER Reporter:

                Estate Taxation, by Wojciech Kopczuk, NBER Reporter: Taxation of estates and inheritances is one of the most controversial issues in tax policy. While this type of taxation is viewed by some as an integral part of a system that guarantees equality of opportunities, others describe it as a "death tax" and argue that it is both inherently unfair to levy a tax at death and that it is particularly costly to do so, highlighting its adverse effect on wealth accumulation, discrimination against savers, negative consequences for the survival of small businesses, and a multitude of avoidance opportunities.

                From an economist's point of view, estate taxation touches on a wide array of important topics. It is a form of a tax on capital. It is heavily progressive, with U.S. federal tax rates currently approaching 50 percent and exceeding 70 percent in the past. It is closely tied to the propagation of inequality and the impact of redistribution. It affects the intergenerational mobility of wealth. Its impact and its cost depend on the presence and nature of a bequest motive. How individuals plan for leaving an estate depends also on their acceptance and attitudes toward their own death, thus providing a natural place for looking for examples of the importance of psychological considerations. The U.S. estate tax is nominally a tax on individuals, but its incidence depends on family structure and interrelationships. The tax has been dubbed a "voluntary tax," highlighting that tax avoidance and administration issues are also very important.

                Continue reading "The Economics of Estate Taxes" »

                  Posted by on Saturday, April 29, 2006 at 10:34 AM in Academic Papers, Economics, Income Distribution, Politics, Taxes | Permalink  TrackBack (1)  Comments (17)


                  Gorbachev: Chernobyl, not Peristroika, Caused Soviet Union Collapse

                  Mikhail Gorbachev talks about about the relationship between Chernobyl and changes in the Soviet Union under his leadership:

                  Turning Point at Chernobyl, by Mikhail Gorbachev, Project Syndicate: The nuclear meltdown at Chernobyl 20 years ago this month, even more than my launch of perestroika, was perhaps the real cause of the collapse of the Soviet Union five years later. Indeed, the Chernobyl catastrophe was an historic turning point: there was the era before the disaster, and there is the very different era that has followed. ...

                  The Chernobyl disaster, more than anything else, opened the possibility of much greater freedom of expression, to the point that the system as we knew it could no longer continue. It made absolutely clear how important it was to continue the policy of glasnost, and I must say that I started to think about time in terms of pre-Chernobyl and post-Chernobyl.

                  The price of the Chernobyl catastrophe was overwhelming, not only in human terms, but also economically. Even today, the legacy of Chernobyl affects the economies of Russia, Ukraine, and Belarus. Some even suggest that the economic price for the USSR was so high that it stopped the arms race, as I could not keep building arms while paying to clean up Chernobyl.

                  This is wrong. My declaration of January 15, 1986, is well known around the world. I addressed arms reduction, including nuclear arms, and I proposed that by the year 2000 no country should have atomic weapons. I personally felt a moral responsibility to end the arms race. But Chernobyl opened my eyes like nothing else: it showed the horrible consequences of nuclear power, even when it is used for non-military purposes. One could now imagine much more clearly what might happen if a nuclear bomb exploded. According to scientific experts, one SS-18 rocket could contain a hundred Chernobyls.

                  Unfortunately, the problem of nuclear arms is still very serious today. Countries that have them – the members of the so-called “nuclear club” – are in no hurry to get rid of them. On the contrary, they continue to refine their arsenals, while countries without nuclear weapons want them, believing that the nuclear club’s monopoly is a threat to the world peace.

                  The twentieth anniversary of the Chernobyl catastrophe reminds us that we should not forget the horrible lesson taught to the world in 1986. We should do everything in our power to make all nuclear facilities safe and secure. We should also start seriously working on the production of the alternative sources of energy. The fact that world leaders now increasingly talk about this imperative suggests that the lesson of Chernobyl is finally being understood.

                    Posted by on Saturday, April 29, 2006 at 12:05 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (17)


                    Friday, April 28, 2006

                    Pfaff: Europe Should Reject U.S. Crony Captitalism

                    William Pfaff says French college students were correct to reject U.S. market capitalism. I am going to let this speak for itself:

                    Why Europe should reject U.S. market capitalism,  William Pfaff, Commentary, IHT: The specter of Anglo-American market capitalism dominated France's student unrest in March and April, and motivated popular rejection in France a year ago of the proposed new European Union constitution. ...

                    Advocates of the new model capitalism, and the globalization project that goes with it, like to present it as an expression of historical necessity, rooted in classical economics and embodying irrefutable laws. ... Those who do not conform to the rules of modern market capitalism, and do not offer the human sacrifices of lost employment and diminished living standards that the market demands, will fall by the wayside of history. This is simply untrue, although most of those who say it undoubtedly believe it.

                    Continue reading "Pfaff: Europe Should Reject U.S. Crony Captitalism" »

                      Posted by on Friday, April 28, 2006 at 07:39 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (14)


                      Evolution of the World Distribution of Income

                      This is from Xavier Sala-i-Martin's home page. It's a Macromedia animation showing changes in the distribution of income over time for the world and for various countries. You can also compare countries:

                      Click to download, then open the file. The graphs used in the animation are from "The World Distribution of Income (2002)."

                        Posted by on Friday, April 28, 2006 at 04:39 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (32)


                        Retiring Baby Boomers and Stock Prices

                        Wharton finance professor Jeremy Siegel says the retirement age will need to be increased to age 74 if we shut ourselves off from the rest of the world, but only need rise to age 68 if we fully embed in the global economy. This is his answer to the question "Will stock and bond markets collapse as retiring baby boomers start liquidating assets?":

                        A Boomer Bust?, BusinessWeek Online: My interest in population and stock prices was piqued 8 to 10 years ago. An expert named Harry Dent used to say that everything about stock movements can be explained by population. I thought that sounded crazy. But as I gave speeches around the country, that was the most asked question I got. What happens when boomers retire and sell their assets? Are there enough people to absorb all that wealth?

                        I believe that over the next 50 years, the aging population is the most critical issue facing developed world. Life expectancy vs. retirement were 1.6 years apart in 1950, when they were 69 vs. 67. Today, that gap is 14.5 years. This trend can't continue.

                        Continue reading "Retiring Baby Boomers and Stock Prices" »

                          Posted by on Friday, April 28, 2006 at 03:01 PM in Economics | Permalink  TrackBack (0)  Comments (24)


                          Economic Freedom and Oil Prices

                          I'll be curious to hear what you think about this Economic Letter from the Dallas Fed, particularly this statement:

                          Oil prices are rising—not because the world is running out of oil but because the bulk of reserves are in countries where market incentives cannot work fully or in the hands of monopolists who may be exercising their power by restraining investment.

                          The claim is that a large factor in expaining high oil prices is lack of economic freedom which limits the ability of major oil producing countries to bring supplies to the marketplace. Here's the paper:

                          Running on Empty? How Economic Freedom Affects Oil Supplies, by Stephen P. A. Brown and Richard Alm Economic Letter, Federal Reserve Bank of Dallas, Vol. 1, No. 4, April 2006: Oil prices have marched upward in recent years, ending nearly two decades of relatively cheap energy. ... (Chart 1). In April 2006, oil reached an all-time high of more than $75 a barrel, measured in current dollars.[1]

                          In explaining today's high oil prices, many analysts point to surging demand from China, India and other rapidly industrializing countries and cyclical growth in U.S. consumption. When added to existing demand from Europe, Asia and elsewhere, these increases have outstripped any gains in global production and reduced excess capacity to near zero. The analysts expect economic development to continue apace in China and India, with their appetites for oil growing as fast as or faster than their economies.[2]

                          Are we running out of oil? The question always arises when oil prices spike. Some experts—including Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy—argue that world oil production is at or near its peak and prices will just continue to rise, perhaps toward $200 a barrel or more...

                          Continue reading "Economic Freedom and Oil Prices" »

                            Posted by on Friday, April 28, 2006 at 01:01 PM in Economics, Market Failure, Oil | Permalink  TrackBack (0)  Comments (20)


                            Fed Watch: Read His Lips

                            Tim Duy with a Fed Watch:

                            Read His Lips, by Tim Duy: Bernanke & Co. want to pause. They want to pause badly. We were supposed to have figured it out when the minutes of the last FOMC meeting were released, and when the point about an imminent pause was reiterated by San Francisco Fed President Janet Yellen. Financial market participants, however, seemed unwilling to fully accept that a pause would soon come – at least that is the story told by the rebound in expectations for a June rate hike reported by David Altig. So Bernanke came to the table yet again to make clear that we should NOT expect the Fed to keep blindly raising rates:

                            The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives.

                            So much to think about in that little paragraph. But first, a recap of some central features of the Fed’s expectation of economic activity in the back half of this year:

                            1. A cooling housing market will weaken household’s resolve, or at least their ability, to sustain the recent pace of consumption expenditures.
                            2. Continued job creation and solid investment spending, however, will cushion the economy from the negative impacts of a housing induced consumption slowdown.
                            3. Strong productivity growth and intense competition will hold inflation and inflation expectations in check even as the economy edges up against capacity constraints. The capacity constraints should ease later this year as the economy slows under the force of point #1 above.

                            Given that this is how the Fed expects the economy to evolve in the back half of this year – an expectation based on the lagged effects of monetary tightening already in place – policymakers want to hold up at 5% to see if this indeed is how the economy evolves. The trick for the Fed watcher is to determine how incoming data will affect the Fed’s outlook.

                            My sense is that market participants (me included) have been somewhat underestimating the Fed’s resolve to bring policy to at least a plateau (again, refer to the flip-flopping in the fed funds futures market). For example, recent inflation data and rising energy prices appear to be having less of an impact on policy than I might have guessed. In retrospect, the lack of response is not such a mystery: There is simply nothing that the Fed can do about last month’s inflation. The point of inflation targeting is not to shift policy for every move in a lagging indicator. The point is to shift policy in response to changes in the central bank’s forecast of inflation. For the FOMC, the forecast for future inflation hinges more on the forecast for demand growth than on the lagged impacts of past inflation.

                            Continue reading "Fed Watch: Read His Lips" »

                              Posted by on Friday, April 28, 2006 at 01:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (5)  Comments (28)


                              Feldstein: U.S. Needs a More Competitive Dollar as Soon as Possible

                              In this Wall Street Journal commentary, Martin Feldstein argues that the dollar needs to depreciate, or become more competitive to use his terminology, and that it is possible for this to happen without stoking the inflation fires. The two main reasons for hoping the dollar will decline against other currencies, he says, are to prevent an even larger and potentially more problematic fall later and more importantly, to stimulate net exports to ensure continued economic expansion in the face of decline in other sectors such as housing:

                              The Dollar at Home -- and Abroad, by Martin Feldstein, Commentary, Wall Street Journal: For more than a decade, under Democrats and Republicans, Washington has emphasized that "a strong dollar is good for America." It's time to change the message. We need a strong dollar at home and a competitive dollar abroad: i.e., an exchange rate that will make American goods more attractive to foreign buyers and that will cause American consumers and firms to choose American-made goods and services. The administration has called for such a competitive dollar relative to the Chinese yuan. But while that bilateral exchange rate is important, it is responsible for only a fraction of our trade deficit. The overall international value of the dollar must be more competitive if we want to shrink our enormous trade imbalance and limit the rise in our debt to the rest of the world. ...

                              These two goals -- strong at home, competitive internationally -- are compatible in practice. With an appropriate monetary policy, we can shift to a competitive level of the dollar without raising the future rate of inflation. Consider what happened in the '80s, the last time that the dollar fell sharply. In April 1985 the dollar began a decline, falling ... a total of 37% by the beginning of 1988. Although the price of imports rose sharply, the overall inflation rate did not increase. ... Between 1985 and the start of 1988, while the dollar fell 37%, the inflation rate averaged only 3.1%. Although a decline in oil prices contributed to this lower rate of inflation, the core rate of inflation that excludes energy prices also fell. That's not a guarantee that a dollar decline now wouldn't raise inflation, but it shows that it is possible...

                              Continue reading "Feldstein: U.S. Needs a More Competitive Dollar as Soon as Possible" »

                                Posted by on Friday, April 28, 2006 at 12:42 AM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (27)


                                Paul Krugman: The Crony Fairy

                                Paul Krugman looks at the return of cronyism and the consequences of valuing "loyalty and personal connections over competence":

                                The Crony Fairy, by Paul Krugman, Commentary, NY Times: The U.S. government is being stalked by an invisible bandit, the Crony Fairy, who visits key agencies by dead of night, snatches away qualified people and replaces them with unqualified political appointees. ... That, at least, is how I interpret the report on responses to Hurricane Katrina that was just released by the Senate Committee on Homeland Security and Governmental Affairs.

                                The report points out that the Federal Emergency Management Agency "had been operating at a more than 15 percent staff-vacancy rate for over a year before Katrina struck" — that means many of the people who knew what they were doing had left. ... But the report says nothing about what caused the qualified people to leave and who appointed unqualified people to take their place. There's no hint that, say, President Bush might have had any role. So those political appointees must have been installed by the Crony Fairy.

                                Rather than trying to fix FEMA, the report calls for replacing it with a new organization, the National Preparedness and Response Agency. As far as I can tell, the new agency would have exactly the same responsibilities as FEMA. But "senior N.P.R.A. officials would be selected from the ranks of professionals with experience in crisis management." I guess it's impossible to select qualified people to run FEMA; if you try, the Crony Fairy will spirit them away and replace them with Michael Brown. ...

                                O.K., enough sarcasm. Let's talk about the history of FEMA.

                                In the early 1990's, FEMA's reputation was as bad as it is today. It was a dumping ground for political cronies, headed by a man whose only apparent qualification ... was that he was a close friend of the first President Bush's chief of staff. FEMA's response to Hurricane Andrew in 1992 perfectly foreshadowed Katrina: the agency took three days to arrive on the scene, and when it did, it proved utterly incompetent.

                                Many people thought that FEMA was a lost cause. But Bill Clinton ... appointed qualified people to lead the agency ... and within a year FEMA's morale and performance had soared. For the rest of the Clinton years, FEMA was among the most highly regarded agencies in the federal government.

                                What happened to that reputation? The answer, of course, is that the second President Bush returned to his father's practices. Once again, FEMA became a dumping ground for cronies, and many of the good people who had come in during the Clinton years left. ...

                                In other words, the Crony Fairy is named George W. Bush. ... And bear in mind that Mr. Bush's pattern of cronyism didn't change after Katrina. For example, he appointed Julie Myers, the inexperienced niece of Gen. Richard Myers, to head Immigration and Customs Enforcement — an agency that, like FEMA, is supposed to protect us against terrorism as well as other threats. Even at the C.I.A., the administration seems more interested in purging Democrats than in improving the quality of intelligence.

                                So let's skip the name change for FEMA, O.K.? The United States will regain effective government if and when it gets a president who cares more about serving the nation than about rewarding his friends and scoring political points. That's at least a thousand days away. Meanwhile, don't count on FEMA, or on any other government agency, to do its job.

                                Previous (4/25) column: Paul Krugman: CSI Trade Deficit.
                                Next (5/1) column: Paul Krugman: Death by Insurance.

                                  Posted by on Friday, April 28, 2006 at 12:15 AM in Economics, Politics | Permalink  TrackBack (2)  Comments (5)


                                  Income Distribution and Trade Policy

                                  This continues the material from Chapter 9 of Krugman and Obstfeld's International Economics, "The Political Economy of Trade Policy." This section is on the relationship between trade policy and the distribution of income [continues from here]:

                                  Income Distribution and Trade Policy

                                  The discussion so far has focused on national welfare arguments for and against tariff policy. It is appropriate to start there, both because a distinction between national welfare and the welfare of particular groups helps to clarify the issues and because the advocates of trade policies usually claim they will benefit the nation as a whole. When looking at the actual politics of trade policy, however, it becomes necessary to deal with the reality that there is no such thing as national welfare; there are only the desires of individuals, which get more or less imperfectly reflected in the objectives of government.

                                  How do the preferences of individuals get added up to produce the trade policy we actually see? There is no single, generally accepted answer, but there has been a growing body of economic analysis that explores models in which governments are assumed to be trying to maximize political success rather than an abstract measure of national welfare.

                                  Continue reading "Income Distribution and Trade Policy" »

                                    Posted by on Friday, April 28, 2006 at 12:06 AM in Economics, International Trade, Policy, Politics | Permalink  TrackBack (1)  Comments (1)


                                    Thursday, April 27, 2006

                                    Should We Hold Our Noses and Talk?

                                    This isn't about economics, at least not directly, but it's a serious treatment of an important and timely topic. This is Guillaume Parmentier, "director of the French Centre on the United States (CFE) at the Institut Français des Relations Internationales" on how western powers should deal with Iran and its nuclear ambitions:

                                    How to avoid a transatlantic rift over Iran, by Guillaume Parmentier, Commentary, Financial Times: A painful conclusion must be drawn from the Iran controversy: two Gulf wars have taught Middle Eastern rulers ... that if Iraq had possessed nuclear weapons, Saddam Hussein would probably still be in power. ...

                                    Continue reading "Should We Hold Our Noses and Talk?" »

                                      Posted by on Thursday, April 27, 2006 at 02:11 PM in Economics, Policy | Permalink  TrackBack (0)  Comments (20)


                                      Bernanke Testimony on the Economic Outlook

                                      First, here's a video and link to a text version of his prepared testimony:


                                      Download RealPlayer if the video is not playing above.

                                      The Fed is continuing to communicate the meaning of a pause in rate hikes should it occur, indicating that the Fed is looking to pause once incoming data on expected growth and inflation support such a move. Repeating what Tim Duy said
                                      in a recent Fed Watch:

                                      Continue reading "Bernanke Testimony on the Economic Outlook" »

                                        Posted by on Thursday, April 27, 2006 at 09:56 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (57)


                                        Mankiw: Trade Pigovian Taxes for Permanent Income, Dividend, and Estate Tax Cuts

                                        Greg Mankiw has an idea to solve the political impasse on the budget deficit:

                                        Greg Mankiw's Blog: A Comeback for Pigou?: In the past few days, I have run across a couple of articles (here and here), admittedly in relatively minor places, arguing for higher Pigovian taxes, such as a tax on gasoline or a tax on carbon. ... Pigovian taxes both produce government revenue and correct a market failure arising from an externality like pollution. I have long thought that Pigovian taxes are underused.

                                        How about this for a political compromise?

                                        The Democrats say they want more environmental protection. The Republicans say they want to make permanent the recent cuts in income, dividend, and estate taxes. Everyone says they want a smaller budget deficit. We can achieve all of these objectives by agreeing to higher Pigovian taxes, such as taxes on gasoline or carbon. The Republicans concede that government revenue will be higher than it is under the President's proposed budget, and the Democrats concede that the President's tax cuts on income, dividends, and estates will be permanent.

                                        Please don't post a comment saying how politically naive this is. I know it is. But I bet I could convince a majority of the American Economic Association to sign on!

                                        It depends. These taxes are a good idea in isolation since they solve market failure problems, so if we get to ignore political realities there is no need to trade one tax for another, Pigovian taxes can be imposed on their own merits. So yes, I will sign on to correct market failures through the imposition of Pigovian taxes.

                                        But if I am forced to trade these taxes for other policy changes that I do not agree with on both efficiency and equity grounds, then the details of the tradeoff become important. What size changes are we talking about? Would it be better to use the revenues to, say, offset the negative consequence of pollution rather than to reduce other taxes? In addition, the difficulty for me comes with being asked to trade a Pigovian tax that both Republicans and Democrats can agree, or ought to agree is needed on efficiency grounds for policies that Democrats disagree with. In such a trade, it's hard to see what Republicans have given up. Are Republicans opposed to efficient markets?

                                          Posted by on Thursday, April 27, 2006 at 12:33 AM in Economics, Environment, Market Failure, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (17)


                                          iTunes, iPods, and Product Tying Arrangements

                                          In Industrial Organization, which is not my main area, there is a concept known as tying. Tying is any requirement that two products be purchased in some combination. Pure bundling, e.g. textbooks and study guides, is one form of tying, but it is a more general concept than that. For example, a customer may be asked to purchase a second product, often through a specific contract, that a first product is useless without. A copy machine contract could require the use of a particular brand of paper or that the machine be serviced by their personnel. An automobile owner could be required to purchase a particular brand of parts, oil etc. or have the warranty voided. In other cases products are designed to thwart interchangeability, e.g. vacuum cleaner replacement bags with unique sizes, so tying can be accomplished through a variety of means.

                                          Without getting into the specifics, tying can be used to price discriminate, protect a monopoly (e.g. require PC users to use a particular software such as IE), or to protect goodwill, i.e. if a customer is allowed to use inferior parts, the product may gain a reputation of inferiority. A copy machine fed low grade paper might jam often dmaging its reputation for reliability.

                                          Courts do not always allow tying arrangements, but they are not always illegal either. The issue in this New York Times Economic Scene column by Austan Goolsbee of the University of Chicago is tying between iTunes and iPods. Is there an argument that the economic benefits of tying exceed the economic costs so that tying should be allowed? The focus here is on the ability of tying contracts to grant market power as a means of encouraging innovation, much the same as the argument for patents, and the goodwill argument that untying the two would lead to code leaks that would allow hackers to break the security features and denigrate the product:

                                          In iTunes War, France Has Met the Enemy. Perhaps It Is France, by Austan Goolsbee, Economic Scene, Ny Times: The French take pride in their revolutions, which are usually hard to miss — mass uprisings, heads rolling and such. So, with the scent of tear gas in the air this past month from the giant protests against a youth labor law, it was easy to overlook the French National Assembly's approval of a bill that would require Apple Computer to crack open the software codes of its iTunes music store and let the files work on players other than the iPod. While seemingly minor, the move is actually rather startling and has left many experts wondering (as ever): What has possessed the French? ...

                                          The move may signify a willingness to question the patents, copyrights and trade secrets of other successful products as well, like electronics, pharmaceuticals, even fast food. Might we soon see a French legislator demanding to know if it is fair that customers of the French fast-food chain Quick cannot get its signature burger, Le Giant, with McDonald's special sauce? ... French politicians have abandoned one of the guiding principles of antitrust economics: penalize companies that harm consumers, not the ones that succeed by building better products.

                                          Antitrust authorities normally follow well-established procedures when considering such moves. They weigh the loss to consumers of not being able to play iTunes songs on other players against the damage that forcing iTunes to open might have on innovation. France's own Competition Council did a similar analysis in 2004 and ruled that Apple's refusal to share the iTunes codes did not harm consumers. The legislature paid no mind to such analysis and seems not to have considered innovation at all. Therein lies the danger.

                                          Apple largely created the online market for legal music. The record labels' own attempts flopped embarrassingly. Until iTunes, virtually no one paid for online music. Since then, iTunes has sold more than one billion songs. Its success comes largely from two crucial innovations.

                                          First, Apple's music store is simple and works extremely well with the iPod. Find the music. Click "Buy It." Drag the files onto the iPod icon. That's it. ... Further, iTunes keeps getting better. Apple has added video capability, celebrity play lists, exclusive music, the ability to convert home movies into iPod format, and many other features — all free.

                                          Second, iTunes has lots of music. Largely because of the innovative iTunes FairPlay copy protection and digital rights management software, Apple persuaded major record labels to let them sell much of their best content online. The combination of simplicity and variety proved a huge winner.

                                          If the French gave away the codes, Apple would lose much of its rationale for improving iTunes. ... it continues to add free features to iTunes because it helps sell iPods. Opening the codes threatens that link. Apple would need to pay for iTunes features with profits from iTunes itself. ... Innovation would slow.

                                          Even worse, sharing the codes could make it easier for hackers to unravel Apple's FairPlay software. Without strong copy protection, labels would not supply as much new music. Indeed, Apple argues that sharing the codes could make the pirates' job easy enough to wipe out the legal market. ...

                                          Sharing the iTunes codes would undermine the two innovations that Apple used to create the online market for legal music in the first place. With France accounting for only 5 percent of iTunes sales, Apple would probably shut down iTunes in France rather than give up the codes. ... Before declaring pre-emptive war on iTunes, however, perhaps the French would do best to remember a lesson from 1789. Sometimes the very people calling for revolution are the ones who end up losing their heads.

                                            Posted by on Thursday, April 27, 2006 at 12:24 AM in Economics, Market Failure, Policy, Regulation | Permalink  TrackBack (0)  Comments (9)


                                            Time to Build

                                            When we last heard from Ken Rogoff, he was worried about being replaced someday by robots programmed with artificial intelligence, "pocket professors" as he called them. In his latest installment for Project Syndicate, he urges developing countries to begin using their accumulated reserves to make much needed investments in infrastructure. Because risks have diminished over time, these reserves can be used to build a foundation for sustained future growth instead of being placed in Treasury Bills as a hedge against risk:

                                            A Time to Build, by Kenneth Rogoff, Project Syndicate: ...With today’s global economy in the middle of a sustained and increasingly balanced expansion, ... should governments, especially those that are endlessly building up dollar reserves, ... start thinking about how to build up their roads, bridges, ports, electric grids, and other infrastructure? Has the time come to start laying the groundwork to sustain future growth, especially in poorer regions that have not yet shared in today’s prosperity?

                                            Don’t get me wrong, I am not arguing for fiscal profligacy. But the balance of risks has shifted over the past few years. ... and sound economic policy is just as much about capitalizing on good times as avoiding bad ones. Economic gurus at places like the World Bank have developed a ridiculously long list of steps that countries should take to raise their growth rates (the so-called “extended Washington Consensus”). Like maintaining good health, it is not enough to concentrate on a single component. But if there is one area where obvious opportunities exist, and where policy can really make a difference, it would have to be infrastructure investment.

                                            India’s infrastructure problems are legendary, with airports and railroads that are comically inadequate. However, aside from a few countries – including China, of course, but also Spain – low infrastructure spending is epidemic. Even the United States has infrastructure that is hobbled by neglect, with collapsing bridges and a dangerously overburdened electrical grid. Land-rich Brazil, too, is a case study in the consequences of under-investment. ... Russia, despite Siberia’s massive oil and gas riches, isn’t even investing enough to support healthy growth in its energy industries, much less human development in the country’s impoverished areas (including hapless Siberia).

                                            True, government infrastructure spending is often wasted. My hometown of Boston recently managed to spend an astounding $15 billion dollars to move a few highways underground. And that so-called “Big Dig” looks like a model of efficiency next to many of Japan’s infamous bridges to nowhere.

                                            But there are ways to waste less. Transparency in procurement works wonders. So, too, does private sector involvement. The Nobel laureate economist William Vickrey argued tirelessly in favor of privately financed toll roads. Private oversight can often produce better and more efficient construction, and, in theory, toll roads help alleviate traffic congestion. (Ironically, Vickery died while sitting in a traffic jam.) Even China, which has added more than 50,000 kilometers of roads and dozens of airports over the past five years, makes use of private financing.

                                            True, countries that have not cleaned up their fiscal act, such as India, must not recklessly plunge ahead ... without counterbalancing reforms to ensure sustainability. Fiscal prudence and stable inflation rates are cornerstones of today’s relatively healthy global economic environment. But for countries that have scope to invest more, particularly those that are holding a surfeit of precious development dollars in idle US Treasury bills, the time may be ripe to reassess the balance of risks.

                                            The IMF is absolutely right to remind ministers each April of downside risks. Countries’ need for better infrastructure is no license to throw prudence out the window. But when the world’s finance ministers ... also need to look at the opportunities.

                                            I think this is a good idea as well. Speaking of the IMF, Anne Krueger will be stepping down as deputy managing director in August. Ken Rogoff is rumored to be on the shortlist of candidates to replace her:

                                            US reviews shortlist for IMF job, by Krishna Guha, Financial Times: The US is reviewing a shortlist of candidates to succeed Anne Krueger, who yesterday announced she would be stepping down as first deputy managing director of the International Monetary Fund in August. ... The process of finding a successor to Ms Krueger ... is well advanced. John Lipsky, vice-chairman of JPMorgan investment bank, and Ken Rogoff, a professor of economics at Harvard university who was once director of research at the IMF, are understood to be on the shortlist, along with at least one other highly rated candidate...

                                            Update: Andrew Glyn of Oxford University gives contrary advice in the Financial Times where he says not to be complacent about the chances of a financial collapse: Finance’s rise threatens economic stability, by Andrew Glyn, Commentary, Financial Times:

                                            ...the past decade has seen the least volatile output growth of any decade since 1950. Does this refute the argument that the rise of finance threatens greater economic instability? Such a conclusion would be too complacent. Stable economic conditions themselves encourage greater risk-taking. Financial innovation may have thickened the financial elastic. But it is becoming more and more tightly stretched. Who can be confident that it will not snap?

                                              Posted by on Thursday, April 27, 2006 at 12:15 AM in Economics, International Finance, Policy | Permalink  TrackBack (0)  Comments (10)


                                              The Political Economy of Trade Policy

                                              For those of you either opposed to or in favor of free trade, I thought I would try to help the debate along by looking at the welfare and political arguments for and against open borders. This material is from Chapter 9 of Krugman and Obstfeld's International Economics, "The Political Economy of Trade Policy." For example, after talking about the advantages of free trade, the chapter states:

                                              Although economists often argue that deviations from free trade reduce national welfare, there are, in fact, some theoretical grounds for believing that activist trade policies can sometimes increase the welfare of the nation as a whole. ... We need to realize that economic theory does not provide a dogmatic defense of free trade, something that it is often accused of doing.

                                              Another reason for presenting this material is to give a better sense of how economists approach these questions and present them in undergraduate classes, and to show that we may not be as closed-minded on the trade issue as many of you assume. Here are some arguments for and against free trade:

                                              Chapter 9 The Political Economy of Trade Policy

                                              In 1981 the United States asked Japan to limit its exports of autos to the United States. This raised the prices of imported cars and forced U.S. consumers to buy domestic autos they clearly did not like as much. While Japan was willing to accommodate the U.S. government on this point, it was unwilling to do so on another - a request that Japan eliminate import quotas on beef and citrus products - quotas that forced Japanese consumers to buy incredibly expensive domestic products instead of cheap imports from the United States. The governments of both countries were thus determined to pursue policies that, according to the cost-benefit analysis developed in Chapter 8, produced more costs than benefits. Clearly, government policies reflect objectives that go beyond simple measures of cost and benefit.

                                              In this chapter we examine some of the reasons governments either should not or, at any rate, do not base their policy on economists' cost-benefit calculations.

                                              Continue reading "The Political Economy of Trade Policy" »

                                                Posted by on Thursday, April 27, 2006 at 12:04 AM in Economics, International Trade, Policy, Politics, Regulation | Permalink  TrackBack (0)  Comments (10)


                                                Wednesday, April 26, 2006

                                                Is Reform Possible in France?

                                                I don't lose much sleep worrying over France's future, I assume France will find its way when it's ready to do so and there are plenty of other things to keep me awake at night. But France is a passionate subject for many people as a symbol of the choice
                                                some countries make to trade equity and security for efficiency, or as a symbol of some other great battle of ideas, and pessimism exists about France's future in some quarters.

                                                Is the assumption that France will find its way warranted? Here's an analysis of Frances ability and desire to to roll with the punches. The author, Raphaël Hadas-Lebel, "is a member of the Conseil d’Etat and Professor at the Institut d'études politiques in Paris":

                                                Is France Unreformable?, by Raphaël Hadas-Lebel, Project Syndicate: It all begun a year ago with the French “No” in the referendum on the European Constitution. It continued last fall with the wave of violence in the suburbs. Now, France has again brought itself ... attention with weeks of street demonstrations against the “contract of first employment” (CFE) proposed ... to address high youth unemployment.

                                                These three sets of events, different as they are, together illustrate several deep-seated characteristics of social life in France. First, France has found it difficult to adjust to the demands of globalization. Beyond ordinary dissatisfaction with economic problems, the failed referendum in May 2005 expressed the rejection by an important part of the French electorate of ... the primacy of economic competition.

                                                In a similar vein, last fall’s explosion of violence in the suburbs reflected the frustrations of ... young people facing the grim prospects that a modern economy offers to those who lack proper training and education. The young are also at the center of the most recent protests, but this time, the disaffected include all strata of French youth, including university graduates. ... [T]hey ... refus[e] to accept a precarious life outside the French model of job security that their parents enjoyed in the context of a profoundly different economy.

                                                There is something very French about all this..., the need for greater labor-market flexibility seems to have been accepted more easily in most other countries. In Spain, under a socialist government, roughly one-third of wage earners are working on temporary contracts; the percentage is even higher for the young. In Italy, greater employment flexibility was introduced ... in 1997, and further strengthened ...[in] 2003.

                                                In Germany too, the coalition agreement ... includes a provision that extends from six months to two years the trial period during which an employee can be dismissed without explanation ... In all these European countries, the new employment laws seem to be accepted as inevitable.

                                                In France, by contrast, the statist tradition – which, as Tocqueville so aptly observed, harks back to the Ancien Régime, and which is equally shared today by both the Gaullist and socialist ideologies – is strongly linked to a marked distaste toward the strictures of economic liberalism. Since the French Revolution, the imperative of equality has often triumphed over the concern for liberty. As a result, the French are enamored with the welfare state in all its manifestations.

                                                Not even the obvious failures of the French social model in today’s environment ... have diminished its public prestige. It would be much more logical to take inspiration instead from the Scandinavian model of “flexisecurity,” ...

                                                So is France unreformable? Certainly not. The country has been transformed profoundly in the recent decades. Whether it is the breakup of public monopolies, such as electricity, gas, telecommunications, and even the post office, or ... pension reform, France has changed much more than is commonly believed. This is particularly true with respect to French companies, which have remarkably adapted to ... international competition.

                                                But much remains to be done: the entire educational system, up through the university level, requires serious reform, and many taboos regarding employment rules, social security, and the functioning of the state must be questioned. What the experience with the CFE shows is not that reform is impossible, but that it cannot be unilaterally imposed. Time must be taken for explanation, consultation, and negotiation. In a society like France, marked by uncertainty about the future and in great need of having its self-confidence restored, the time taken to build consensus and create legitimacy for further reforms will certainly be well spent.

                                                  Posted by on Wednesday, April 26, 2006 at 12:16 AM in Economics, Policy, Politics, Social Security, Unemployment | Permalink  TrackBack (0)  Comments (33)


                                                  Clinton Did It!

                                                  Dean Baker evaluates Bush's inference that Clinton is responsible, in part, for higher oil prices:

                                                  Beat the Press: Arctic Oil Nonsense, by Dean Baker:  ... President Bush claimed today that the country would be producing another million barrels of oil a day, if President Clinton had allowed drilling in the refuge. ... implying President Clinton’s opposition to drilling in the refuge is a major factor behind today’s high oil prices.

                                                  A few simple facts indicate otherwise. First, there is a world market for oil. What matters in determining the price of oil is how much oil is supplied in the world, not how much is supplied in the United States. ... One million barrels is less than 1.2 percent of world oil supply. That is not trivial, but it will not hugely affect the world price of oil.

                                                  The second point follows directly from the first. Iraq’s average oil output is approximately 1 million barrels a day less than it was before the war. ... the same amount that drilling in the refuge might have increased it.

                                                  The third point is that the oil in the Refuge is a temporary fix. According to the Energy Information Agency, it would take approximately 10 years to reach the peak production of 1 million barrels a day. This peak production would continue for approximately 10 years, and then it would trail back down to zero over roughly 10 years. This means that if we had begun drilling in the Refuge the day Clinton took office in 1993, then we would have hit peak production just over three years ago, and we would begin to see a decline in output beginning in 2013. This is not exactly long-term energy security.

                                                  Of course, there is plenty that Clinton can be blamed for regarding energy policy. For example, if he had introduced mileage standards that increased average mileage by just 10 percent, this would save the country 1 million barrels a day of oil consumption ...

                                                  The NY Times also comments on the president's remarks:

                                                  How Not to Cure an Addiction, Editorial, NY Times: During his State of the Union speech last January, President Bush correctly diagnosed America's oil consumption as an addiction. Unfortunately, Mr. Bush is balking at taking the steps to cure the abuse.

                                                  Yesterday, the president told an audience ... that he would try to lower gasoline prices by increasing the supply of oil ... His plan is to refrain from topping off the nation's Strategic Petroleum Reserve, but it ... is nearly full already, so skipping a few deposits won't appreciably affect supply or prices. ...

                                                  Mr. Bush's other recommendations were similarly off point. For instance, he acknowledged that higher prices reflected global demand. But he offered no strategy to combat demand-driven price rises. The obvious solution, to increase fuel efficiency standards for ordinary cars, was not mentioned. ...

                                                  The president made no mention of the Iraq war, which pushes up prices by reinforcing the market's anxiety over political upheaval in oil-producing areas. But he did make another pitch for drilling in protected Alaskan wilderness.

                                                  The alternative energy technologies Mr. Bush emphasized — biofuels, hybrids, hydrogen power — are important and promising. What's missing is a plan to get us from here to there...

                                                  Finally, The Wall Street Journal adds:

                                                  Despite critics' dismissal of the White House moves, the actions -- particularly relaxing clean-fuel standards -- could affect prices, oil analysts said...

                                                  Update: Maybe Dean Baker had an impact:

                                                  TPM: TPM Reader: TPM Reader PON finds this exchange from White House National Economic Council Director Al Hubbard's briefing yesterday on the president's 'Four Point Energy Plan' ...

                                                  Q Just to follow up, though, on one element of that point. The President made the point that had ANWR been approved ten years ago, you'd get about a million barrels a day. Had the Iraq production resumed to the level that had been projected before the war, how much would that contribute today?
                                                  DIRECTOR HUBBARD: I actually don't know the precise answer to that. What's really most important, though, is that we've become less reliable on overseas sources of crude oil and other sources of energy, and more reliant on energy from within our 50 states [sic].

                                                  Q You have no estimate, though, about what Iraqi production could be?
                                                  DIRECTOR HUBBARD: I do not have it.
                                                  MR. HENNESSEY: We can get back to you. DIRECTOR HUBBARD: Yes, we can get back to you with that, or --

                                                  Q That would be useful. I mean, just -- obviously, since the President has chosen one interesting example in ANWR, the Iraq one would be an interesting one to compare it to, whether that would be more or less than a billion -- a million a day.
                                                  DIRECTOR HUBBARD: Yes, we will have to get back to you on that.

                                                  Can I get back to you on that? Can I leave now?

                                                    Posted by on Wednesday, April 26, 2006 at 12:15 AM in Economics, Oil, Policy, Politics, Press | Permalink  TrackBack (0)  Comments (23)


                                                    A Conversation with Pia Orrenius: The Economics of Immigration

                                                    We must be past the onset of diminishing returns to learning anything new about the economics of immigration, but there still seems to be more interest in this topic than I would have guessed and there's always more to learn. This Dallas Fed article follows up Pia Orrenius's commentary in the WSJ and emphasizes issues such as the economic effects of guest workers and the the economic distinction between legal and illegal immigration that haven't been emphasized in recent posts:

                                                    On The Record, A Conversation with Pia Orrenius: The Economics of Immigration, Southwest Economy, Issue 2, March/April 2006, Federal Reserve Bank of Dallas: ...Pia Orrenius, a Dallas Fed senior economist and immigration expert, discusses the economic aspects of the growing number of foreign-born workers, including their effects on the U.S. economy, government budgets, and native-born Americans' jobs and earnings.

                                                    Q: What can you tell us about the size of the immigrant population in the United States?

                                                    A: Immigrants make up about 12 percent of the overall population, which means about 36 million foreign-born live in the United States. The commonly accepted estimate for the undocumented portion of the foreign-born population is 11 million. Immigrants come from all parts of the world, but we’ve seen big changes in their origins. In the 1950s and 1960s, 75 percent of immigrants were from Europe. Today, about 75 percent are from Latin America and Asia. Inflows are also much larger today, with 1 million to 2 million newcomers entering each year...

                                                    Continue reading "A Conversation with Pia Orrenius: The Economics of Immigration" »

                                                      Posted by on Wednesday, April 26, 2006 at 12:06 AM in Economics, Immigration, Policy | Permalink  TrackBack (0)  Comments (3)


                                                      Tuesday, April 25, 2006

                                                      The Politics and Economics of Global Trade

                                                      I think Brad Setser makes good points. The people most opposed to globalization due to the uncertainties it poses for their futures got very little reassurance from Chinese president Hu's trip to the U.S. that things would change, and as importantly, little sense that there is any effort underway in domestic policy circles to address such problems. The only reference to this issue in the White House's five point recovery plan is to beef up the U.S.-Mexico border patrol with agents on ATVs.

                                                      There is some good news for some workers. The courts have forced the Labor Department to extend Trade Adjustment Assistance to service workers, something they have resisted. Daniel Drezner has the report. The court case was about displaced computer programmers and it is puzzling why this change was resisted when it would appear to helpful politically. My understanding is that the Trade Adjustment Assistance program is underutilized, so overuse does not seem to be the issue.

                                                      Here are Brad's comments:

                                                      Bad optics, by Brad Setser, RGE Monitor: Many have noted that the White House botched the stagecraft of Hu's not-quite-a state visit. ... But focusing narrowly on the staging of the not-quite-a state visit I think misses a much bigger point. The "optics" or "visuals" of the entire trip were terrible, and the rhetoric not much better.

                                                      I'll start with China. Hu seemed to spend his entire trip with China's friends in corporate America. The leader of the world's most profitable property company (China's communist party) started out his trip with a visit to America's richest man, and promised to make him even richer (by paying for his software). And the China's top real estate baron proceeded to spend many more hours cavorting with the corporate titans (See this WSJ article) who are the biggest beneficiaries of America's new gilded age.

                                                      China likes to reward its American friends. But rewarding those already "winning" from the US-Chinese relationship isn't going to help those who are not sharing in the benefits created of the current China trade. The alliance between Chinese bureaucratic capitalists, American CEOs and Wall Street bond traders betting on the continuation of Bretton Woods two leaves a lot of folks out.

                                                      Yes, American consumers benefit from cheap Chinese goods. ... China cuts both ways for low-income consumers. Real wage growth for most Americans has stalled; median real compensation growth hasn't kept up with productivity growth. Yes, American homeowners benefit from rising home prices, in part because of cheap Chinese financing. But not all parts of America shared equally in the windfall... And more importantly, rising home prices don't help those who don't (yet) have homes. They actually are worse off.

                                                      I recently saw a graph showing the widening discrepancy between urban and rural income in China. Both are growing... I suspect if you did a similar graph plotting the compensation of the median US manufacturing worker in Ohio against the median wage of a US CEO over time (See Martin Wolf today) or the median compensation (including bonus) of a Wall Street prop bond trader since 2001 the discrepancy would be even more striking. ... the plot with median wages in the service sector, it wouldn't look much different.

                                                      The concentration of US income growth at the top doesn't stem primarily from China's integration in the world economy, or even from China's decision to integrate at what looks to an increasingly undervalued exchange rate. China impacts Europe too, and European CEOs aren't paid quite as much. China didn't force Exxon's shareholders to pay Exxon's CEO nearly $700 million for his services. ...

                                                      But directionally, China's unwillingness to reap the rewards of its own productivity growth through a real appreciation of the currency ((see Menzie Chinn's graph - China may not be formally outside the confidence interval, but the RMB sure looks undervalued to me) isn't helping. ... And talking primarily to the "haves" and "have mores" isn't going to defuse the US political debate over trade with China - particularly if the have-mores don't do more to help those on the losing end of the China trade. ...

                                                        Posted by on Tuesday, April 25, 2006 at 03:42 PM in China, Economics, Income Distribution, International Trade, Policy, Politics | Permalink  TrackBack (1)  Comments (181)


                                                        Martin Wolf: A New Gilded Age

                                                        Martin Wolf asks an important question, why haven't wages kept up with productivity? The work he references has been posted here at one time or another (cites to two papers are at the end), so this may not be news to some of you, but it does a good job of summarizing work on the problem of rising inequality. He also gives three reasons why you should care about this issue even if you are non-egalitarian:

                                                        A new gilded age, by Martin Wolf, Financial Times: Between 1997 and 2001, the top 10 per cent of US earners received 49 per cent of the growth in aggregate real wages and salaries, while the top 1 per cent received an astonishing 24 per cent. Meanwhile, the bottom 50 per cent received less than 13 per cent. Why is this happening? And should non-egalitarians care? The data I have cited come from a remarkable paper from two economists at Northwestern University. The authors ask a simple, but telling, question: if the US economy is becoming more productive, why have most of its citizens not become better off?

                                                        Continue reading "Martin Wolf: A New Gilded Age" »

                                                          Posted by on Tuesday, April 25, 2006 at 02:04 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (11)


                                                          Menzie Chinn on the Budget and Current Account Deficits

                                                          Following up on this post on the "twin deficits", here's Menzie Chinn of econbrowser:

                                                          The Debate over the Impact of the Budget Deficit on the Current Account Deficit, by Menzie Chinn: What does the empirical literature say? In a recent Washington Post article, Treasury Secretary Snow was quoted as follows:

                                                          Speaking to the International Monetary Fund, Snow repeated the U.S. position that ratcheting down big imbalances in trade and capital flows "cannot be anything other than a shared responsibility" because no one country caused them.

                                                          Interestingly, this assertion is much less nuanced than the Treasury Occasional Paper on the subject... That study cited point estimates for the response of the current account to GDP ratio to a a budget balance to GDP ratio ranging from 0.1 (Erceg et al.) to 0.44 (IMF).

                                                          Since the study also cited the 0.13 coefficient Chinn and Prasad (2003), it seems only natural to discuss what Hiro Ito and I have discovered in our updating of these estimates ... in a forthcoming revision of our paper here. The updated point estimate is 0.20 -- for a pooled panel cross section regression... Our fixed effects regression estimates for different sets of countries is presented below:

                                                          responsetab.jpg

                                                          Estimated coefficients on the government budget balance (% of GDP) in the fixed effects regressions. Source: Chinn and Ito, forthcoming revision of Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut"

                                                          The critical estimate for this discussion is the industrial country point estimate of 0.40. The estimate is significantly different from zero at the 10% ... level. Why is this point estimate so different from the pooled panel-time series estimate? The biggest impact likely arises from allowing each individual country to have a different constant, something ruled out in the pooled OLS procedure...

                                                          Is the pooled estimator appropriate? It depends upon the question one is asking. If one wants to know ... the average response for an industrial country's current account balance to changes in the budget balance, assuming a high degree of homogeneity across the countries, then this is the correct number. If, on the other hand, one is interested primarily in how the United States behaves, ... then the fixed effects estimate is more relevant. ... I would assert the empirical evidence -- as opposed to calibration-based results -- is on the side of effects greater than 0.2. ...

                                                          As I have noted elsewhere, when the coefficient is 0.4 (remarkably close to the OECD's Interlink model, and similar to that in other estimated macroeconometric models), 0.4 means that a 6% percentage point swing in the budget balance -- like the one that took place after 2001 -- would result in a 2.4 percentage point swing in the current account balance. Not enough to eliminate the deficit, but certainly enough to make a substantial impact.

                                                          Update: Brad DeLong adds his comments and notes:

                                                          Menzie Chinn critiques the Bush administration's latest Snow job ... Menzie, however, is kind, relative to what the Washington Post did to John Snow. It got medieval on him, by putting this headline atop his argument: "Don't Blame Just Us."

                                                            Posted by on Tuesday, April 25, 2006 at 11:51 AM in Budget Deficit, Economics, International Finance, International Trade, Policy | Permalink  TrackBack (0)  Comments (0)


                                                            The Five Point White House Recovery Plan

                                                            Did you see Josh Bolten's five-point White House "recovery plan"? This is from Time Magazine. Part of the plan is to brag more about the economy. I'll let you make up your mind about whether this will work:

                                                            1 DEPLOY GUNS AND BADGES. This is an unabashed play to members of the conservative base who are worried about illegal immigration. Under the banner of homeland security, the White House plans to seek more funding for an extremely visible enforcement crackdown at the Mexican border, including a beefed-up force of agents patrolling on all-terrain vehicles (ATVs). "It'll be more guys with guns and badges," said a proponent of the plan. "Think of the visuals. The President can go down and meet with the new recruits. He can go down to the border and meet with a bunch of guys and go ride around on an ATV." ...

                                                            2 MAKE WALL STREET HAPPY. In an effort to curry favor with dispirited Bush backers in the investment world, the Administration will focus on two tax measures already in the legislative pipeline--extensions of the rate cuts for stock dividends and capital gains. "We need all these financial TV shows to be talking about how great the economy is..." said a presidential adviser. "This is very popular with investors, and a lot of Republicans are investors."

                                                            3 BRAG MORE. White House officials who track coverage of Bush in media markets around the country said he garnered his best publicity in months from a tour to promote enrollment in Medicare's new prescription-drug plan. So they are planning a more focused and consistent effort to talk about the program's successes after months of press reports on start-up difficulties. Bolten's plan also calls for more happy talk about the economy. ... to trumpet the lofty stock market and stable inflation and interest rates. They also plan to highlight any glimmer of success in Iraq...

                                                            4 RECLAIM SECURITY CREDIBILITY. This is the riskiest, and potentially most consequential, element of the plan... Presidential advisers believe that by putting pressure on Iran, Bush may be able to rehabilitate himself on national security, a core strength that has been compromised by a discouraging outlook in Iraq. "In the face of the Iranian menace, the Democrats will lose," said a Republican frequently consulted by the White House. ...

                                                            5 COURT THE PRESS. Bolten ... believes the White House can work more astutely with journalists to make its case to the public, and he recognizes that the President has paid a price for the inclination of some on his staff to treat them dismissively or high-handedly. His first move ... was to offer the press secretary job to Tony Snow of Fox News radio and television, a former newspaper editorial writer and onetime host of Fox News Sunday who served George H.W. Bush as speechwriting director. Snow ... is the bona fide outsider that Republican allies have long prescribed for Bushworld and would bring irreverence to a place that hasn't seen a lot of fun lately. ...

                                                            Update: CNN reports Tony Snow Likely to Take White House Post

                                                            Update: Flip-flops appear to be part of Bush's new strategy:

                                                            ThinkProgress: Bush Flashback: Using Strategic Oil Reserve To Lower Prices Damages “National Security”: President Bush will order the Department of Energy to stop filling the Strategic Petroleum Oil Reserve “in order to get more fuel on the market and help reduce rising gasoline prices.” In September 2000, then-Gov. George W. Bush criticized President Clinton for proposing to use the strategic oil reserve in response to high prices:

                                                            The Strategic Reserve is an insurance policy meant for a sudden disruption of our energy supply or for war. Strategic Reserve should not be used as an attempt to drive down oil prices right before an election. It should not be used for short-term political gain at the cost of long-term national security.

                                                            Today, Bush did precisely what he criticized President Clinton for five-and-a-half years ago. WSJ report: "Bush moved to temporarily halt deposits to the nation's strategic petroleum reserve to make more oil available for consumers and relieve pressure on pump prices."

                                                              Posted by on Tuesday, April 25, 2006 at 12:40 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (10)


                                                              Immigration, Employment, and Wages

                                                              If you haven't batted the evidence on immigration around enough yet, here's a little more from Pia Orrenius of the Federal Reserve Bank of Dallas. She was a member of the President's Council of Economic Advisers from 2004-2005 and supports a relatively open door policy:

                                                              The Impact of Immigration, by Pia Orrenius, Commentary, WSJ: ...The stereotype of the hard-working immigrant still rings true in our country. Male immigrants have labor force participation rates of 81%, exceeding U.S.-born men's participation rate of 72%. Illegal immigrant men have even higher participation rates -- around 94%... Immigrants have contributed more than half of U.S. labor force growth in the past decade as a result of high immigration rates and their desire to work. ... Economists have noted time and again that the effect of immigration on natives' wages is small.

                                                              Continue reading "Immigration, Employment, and Wages" »

                                                                Posted by on Tuesday, April 25, 2006 at 12:30 AM in Economics, Immigration, Unemployment | Permalink  TrackBack (0)  Comments (43)


                                                                Tierney: Potheads and Sudafed

                                                                It would be fair to say that I don't always agree with John Tierney, but today I do:

                                                                Potheads and Sudafed, by John Tierney, Commentary, NY Times: ...Washington's latest prescription for patients in pain is the statement issued last week by the Food and Drug Administration on the supposed evils of medical marijuana. ... Republican narcs on Capitol Hill, in the White House and at the Drug Enforcement Administration ... [have] been engaged in a long-running war to get the F.D.A. to abandon some of its quaint principles, like the notion that it's not fair to deny a useful drug to patients just because a few criminals might abuse it. The agency has also dared to suggest that there should be a division of labor when it comes to drugs: scientists and doctors should figure out which ones work for patients, and narcotics agents should catch people who break drug laws. ...

                                                                This month, pharmacists across the country are being forced to lock up another menace to society: cold medicine. Allergy and cold remedies containing pseudoephedrine, a chemical that can illegally be used to make meth, must now be locked behind the counter under a provision in the new Patriot Act. Don't ask what meth has to do with the war on terror. Not even the most ardent drug warriors have been able to establish an Osama-Sudafed link.

                                                                The F.D.A. opposed these restrictions for pharmacies because they'll drive up health care costs and effectively prevent medicine from reaching huge numbers of people ... These costs are undeniable, but it's unclear that there are any net benefits. In states that previously enacted their own restrictions, the police report that meth users simply switched from making their own to buying imported drugs that were stronger — and more expensive, so meth users commit more crimes to pay for their habit.

                                                                The Sudafed law gives you a preview of what's in store if Representative Frank Wolf, a Virginia Republican, succeeds in giving the D.E.A. a role in deciding which new drugs get approved. ...[T]he F.D.A.'s biggest fear is that Congress will let the drug police veto new medications. ... Officially, the D.E.A. says it wants patients to get the best medicine. But ... scientists trying to study medical marijuana ... can't get the high-quality marijuana they need because the D.E.A. won't allow it to be grown. ...[A]s long as researchers can't study marijuana, they can't come up with evidence that it's effective. And as long as there's no conclusive evidence that medical marijuana works, the D.E.A. and its allies on Capitol Hill can go on blindly fighting it. ...

                                                                Locking up crack and meth dealers is popular, but voters take a different view of cancer patients who swear by marijuana. Medical marijuana has been approved in referendums in four states that went red in 2004: Nevada, Montana, Colorado and Alaska. For G.O.P. voters fed up with their party's current big-government philosophy, the latest medical treatment from Washington's narcs is one more reason to stay home this November.

                                                                  Posted by on Tuesday, April 25, 2006 at 12:15 AM in Economics, Politics, Regulation | Permalink  TrackBack (1)  Comments (2)


                                                                  Krugman: Will There Be a Dollar Crisis?

                                                                  I thought it would be useful to post an example of Paul Krugman's academic work so you can see what is behind his NY Times column and get a better sense of how economists approach these questions.

                                                                  This is a preliminary paper by Krugman (mentioned in his Money Talks column) that he presented at a seminar at Princeton examining whether there will be a dollar crises and if so, how it will affect the economy. It's fairly low tech mathematically compared to most papers in economics and that's one reason I chose it. Here's the Summary and Conclusions explaining what the paper does followed by the entire paper:

                                                                  Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences?

                                                                  The answer to the first question depends on whether there is investor myopia, a failure to take into account the requirement that the dollar eventually fall enough to stabilize U.S. external debt at a feasible level. Although it’s always dangerous to second guess markets, the data do seem to suggest such myopia... The various rationales and rationalizations for the U.S. current account deficit that have been advanced in recent years don’t seem to help us avoid the conclusion that investors aren’t taking the need for future dollar decline into account. So it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar’s value doesn’t make sense, and that value plunges.

                                                                  The case for believing that a dollar plunge will do great harm is much less secure. In the medium run, the economy can trade off lower domestic demand, mainly the result of a fall in real housing prices, for higher next exports, the result of dollar depreciation. Any economic contraction in the short run will be the result of differences in adjustment speeds, with the fall in domestic demand outpacing the rise in net exports. The United States in 2006 isn’t Argentina in 2001: although there is a very good case that the dollar will decline sharply, nothing in the data points to an Argentine-style economic implosion when that happens. Still, this probably won’t be fun.

                                                                  Here's the paper in its entirety (it's longer than a typical post, the original, linked as a pdf, is 33 pages):

                                                                  Continue reading "Krugman: Will There Be a Dollar Crisis?" »

                                                                    Posted by on Tuesday, April 25, 2006 at 12:12 AM in Academic Papers, Economics, Housing, International Finance, International Trade | Permalink  TrackBack (3)  Comments (31)


                                                                    Smart Economist: Trends in Corporate Governance

                                                                    Not too long ago, I posted two Q&As from Smart Economist (Menzie Chinn and Andrew Bernard) along with a new entry where you could submit questions to Fiona Scott Morton on "Consumers and the Internet," and some of you did that. The answers to those questions will be posted sometime today and there is also a new topic that is open for questions:

                                                                    Q&A 4 -  Trends in Corporate Governance: Sir Geoffrey Owen will answer readers’ questions on the latest developments in European corporate governance, on convergence and divergence trends across countries, on changes in the role of shareholders, and on the comparison between corporate governance in Europe and the United States. Would you like to ask a question?

                                                                      Posted by on Tuesday, April 25, 2006 at 12:06 AM in Economics | Permalink  TrackBack (0)  Comments (1)


                                                                      Monday, April 24, 2006

                                                                      We'll Be Watching You

                                                                      Check this out: "Every Breath You Take," by Dean Glenn Hubbard. It's worth it (music video about Bernanke to the tune of "Every Breath You Take" - wmv file). Update: iTunes link (mp4). Update: Source - Columbia Business School Follies - files may have moved to this location.

                                                                        Posted by on Monday, April 24, 2006 at 03:09 PM in Economics, Monetary Policy | Permalink  TrackBack (5)  Comments (7)


                                                                        Money Talks: Our Financial Future?

                                                                        Paul Krugman responds to comments on his latest column:

                                                                        Money Talks: Our Financial Future? The Prognosis Is Grim: Readers respond to Paul Krugman's Apr. 24 column, "CSI: Trade Deficit"

                                                                        Tim Keese, Frankfurt, Germany: Income on foreign investments is accumulative, isn't it? Americans are receiving income on investments in foreign countries made decades ago, and the U.S. current account deficit is relatively new — meaning returns to foreign investors would naturally be lower, but still growing. You have to look at total investments, not just current ones. Or am I missing something here?

                                                                        Paul Krugman: We've been running a current account deficit consistently since about 1980. And back in the day, when the U.S. ran surpluses, they were small compared with the size of the economy. On the other hand, the deficits since 1999 have been huge. By any measure, we're deep in the red now (the official figures say that our net debt is close to $3 trillion) — unless you believe that the current account deficits of recent years are a statistical illusion.

                                                                        Jan Beckedorff, Bethesda, Md.: Please follow up with scenarios of what may happen when the chickens do come home to roost. What will be warning signs? How to defend savings and assets for those not in the wealth class? ...

                                                                        Paul Krugman: The chickens-home-to-roost scenario is actually the hard part, because we have no experience with a country this big and this rich being this deep in deficit. One thing is clear, though: it's really bad for housing.

                                                                        Donna Middlehurst, Chevy Chase, Md.: I'd like to see a companion analysis of the issue of why we're not paying for those budget deficits yet ... Republicans screamed for so many years about the evils of deficit spending. They're strangely silent, but there's also no rattling of the windows to signal an approaching hurricane....

                                                                        Alan Soffin, Doylestown, Penn.: ...You just sketched in the trade deficit as a standing condition, but this reader is not sated. How did we get here? What forces or ideas generated this predicament? Even a hint or two would help.

                                                                        Paul Krugman: I and many other economists are working on that! What seems to have happened is a mixture of several causes. Developing countries in Asia starting building up their dollar reserves after the 1997-1998 crisis; this helped cause low interest rates in the U.S., which started a housing bubble, which led to a sharp decline in U.S. saving, reinforced by the budget deficit, and so on. I'll try to write more about it in the near future; let's see what my Princeton colleagues have to say in today's seminar.

                                                                        Fred Roper, Spencer, Okla.: ...The United States ... has a net surplus in trade in services, the last time I checked. Therefore, the U.S. has a negative in the trade in goods, but a surplus in trade in services and investments. What is the net result of the three put together? ... I would think that with the income the U.S. generates from services and investments that the trade deficit does not tell the whole story of what creates wealth for a country.

                                                                        Paul Krugman: Last year, the U.S. did run a surplus in services, but it was only $57 billion, compared with a deficit in goods of $780 billion. And we also ran a substantial deficit in "unilateral transfers," which includes things like money that immigrant workers send home. The current account deficit, which includes all of this (and the income from US companies abroad, too) was $805 billion. Sorry, there's no comfort in the broader numbers.

                                                                        For those who want to look at the numbers for themselves, a couple of sources:

                                                                          Posted by on Monday, April 24, 2006 at 01:19 PM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (15)


                                                                          The Value of Writing for the General Public

                                                                          I have a lot of sympathy for Greg Mankiw's position about writing for the general public:

                                                                          Greg Mankiw's Blog: E-mail of the Day: On The Optimal Use of My Time: I received this email this weekend:

                                                                          Continue reading "The Value of Writing for the General Public" »

                                                                            Posted by on Monday, April 24, 2006 at 12:36 PM in Economics, Universities | Permalink  TrackBack (0)  Comments (4)


                                                                            The Photo Album

                                                                            This is the part where, after you have been visiting for awhile, the host pulls out the family picture album. I hope you will humor me as I play dad and show pictures of my daughter.

                                                                            Recently, the president visited California and part of that visit was to Sacramento. My daughter drove one of the cars in the motorcade. Here she is lining up beforehand with the car:

                                                                            Amy5

                                                                            Here's the POTUS limo. You can see the podium in the background that will be used for his press conference.

                                                                            Amy7

                                                                            Here's the press conference. If you enlarge the picture, I think you can see the president at the podium, but it's a little blurry and I'm not sure:

                                                                            Amy4

                                                                            And everyone getting onto Air Force one to leave:

                                                                            Amy6

                                                                            I won't make you look at any more. Thanks.

                                                                              Posted by on Monday, April 24, 2006 at 11:07 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (10)


                                                                              Paul Krugman: CSI Trade Deficit

                                                                              Paul Krugman sifts through the clues regarding the causes and potential consequences of our growing trade deficit. When the clues are assembled and evaluated, the crime appears bigger and more problematic than first reported:

                                                                              CSI: Trade Deficit, by Paul Krugman, Deficit Puzzle Commentary, NY Times: Forensics are in. If you turn on the TV during prime time, you're likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.

                                                                              That's more or less what's going on right now among international finance experts. The crime in question is the U.S. trade deficit, which ... reached an amazing $805 billion last year. The mystery is how we've been able to run huge deficits ... with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.

                                                                              Here's the puzzle: the trade deficit means that America is ... spending far more than it earns. ... To pay for the excess of imports over exports, the United States has ... borrowed more than $3 trillion just since 1999.

                                                                              By rights, then, the investment income ... that Americans pay to foreigners should be a lot larger than the investment income foreigners pay to Americans. But according to official statistics, the United States still has a slightly positive balance on investment income.

                                                                              How is this possible? The answer, almost certainly, is that there's something wrong with the numbers. ... But depending on ... what's wrong, the U.S. economy either has hidden strengths, or it's in even worse shape than it seems.

                                                                              In one corner are economists who think the official statistics miss invisible U.S. exports ... of intangibles like knowledge and brand-name recognition, which allow U.S. companies to earn high rates of return on their foreign investments. Proponents ... claim that if we counted [this] ..."dark matter," much of the U.S. trade deficit would disappear. ... But ... U.S. companies operating abroad don't, in fact, seem to earn especially high rates of return.

                                                                              Why, then, doesn't the United States seem to be paying a price for all its borrowing? Because according to the official data, foreign companies operating in the United States are remarkably unprofitable, earning an average return of only 2.2 percent a year.

                                                                              There's something wrong with this picture. As Daniel Gros of the Center for European Policy Studies puts it, it's hard to believe that foreigners would continue investing in the United States "if they were really being constantly taken to the cleaners."

                                                                              In a new paper, Mr. Gros argues — compellingly, in my view — that ... foreign companies are understating the profits of their U.S. subsidiaries, probably to avoid taxes, and that official data are ... failing to pick up foreign profits that are reinvested in U.S. operations.

                                                                              If Mr. Gros is right, the true position of the U.S. economy isn't as bad as you think — it's worse. The true trade deficit ... isn't $800 billion — it's more than $900 billion. And America's foreign debt ... is at least $1 trillion bigger than the official numbers say.

                                                                              Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? ... But I have two words for those who place their faith in the judgment of investors...: Nasdaq 5,000.

                                                                              Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, "Why haven't we paid a price for our trade deficit?" is, just you wait.

                                                                              Previous (4/21) column: Paul Krugman: The Great Revulsion
                                                                              Next (4/28) column: Paul Krugman: The Crony Fairy

                                                                                Posted by on Monday, April 24, 2006 at 12:15 AM in Economics, International Finance, International Trade | Permalink  TrackBack (1)  Comments (85)


                                                                                Sunday, April 23, 2006

                                                                                60 Minutes: Bush, Cheney, Rice Told Iraq Had No WMD Program Before War

                                                                                From Think Progress, more evidence that the administration dismissed any evidence suggesting there were no WMDs in Iraq prior to the war, even very good evidence [Update: Another General wants Rummy to go ... developing]:

                                                                                Think Progress: 60 Minutes: CIA Official Reveals Bush, Cheney Rice Were Personally Told Iraq Had No WMD in Fall 2002: Tonight on 60 Minutes, CIA analyst Tyler Drumheller revealed that in the fall of 2002, President Bush, Vice President Cheney, then-National Security Adviser Condoleezza Rice and others were told by CIA Director George Tenet that Iraq’s foreign minister — who agreed to act as a spy for the United States — had reported that Iraq had no active weapons of mass destruction program. Watch it:

                                                                                Continue reading "60 Minutes: Bush, Cheney, Rice Told Iraq Had No WMD Program Before War" »

                                                                                  Posted by on Sunday, April 23, 2006 at 05:57 PM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (1)  Comments (14)


                                                                                  Fed Watch: I Need a Raise to Buy Gasoline

                                                                                  Tim Duy with his latest Fed Watch:

                                                                                  I need a Raise to Buy Gasoline, by Tim Duy: Well, maybe I don’t really need a raise just yet. I live about 4 miles from the office, and a tank of gas lasts me about three weeks of typical in-town driving. And the Department chair would probably just tell me to ride my bike, or use the free bus pass. So, while I may not be seriously looking for a raise just yet, I am willing to bet that most households are starting to get a bit more uneasy than myself. These high gas prices are looking more and more like a permanent situation, not just a temporary blip. Consequently, households will rethink their expectations. Should they seek higher wages to compensate for energy inflation (in addition, of course, to wages gains for rising productivity), or accept a reduced standard of living?

                                                                                  The latter choice, of course, will make households unhappy. And they don’t want to be unhappy. They would prefer that the economy remains strong enough squeeze employers for those extra wages before higher energy costs, not to mention the lagged impact of monetary tightening, become enough of a drain on economic activity, reducing their bargaining power. The race is on, and therein lays the policy dilemma for the Fed. Will the economy slow enough to offset the inflationary impact of higher energy prices in the back half of this year?

                                                                                  The expectation of Bernanke & Co., at least last Tuesday, was that the economy would ease back toward potential for the remainder of this year, reducing inflationary pressures. This was made clear in the minutes of the last meeting:

                                                                                  Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy.

                                                                                  Given the amount of tightening already in the system, most are becoming uneasy with blindly hiking away, especially considering the emerging evidence of a housing slowdown. Still, they recognize a need to hold inflation expectations in check, and that means a clear willingness to hike rates should inflationary pressures heighten unexpectedly. As I said last week, however, market participants were misinterpreting this vigilance for rate hike guarantees. The minutes disabused traders of that notion:

                                                                                  Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary.

                                                                                  San Francisco Fed President Janet Yellen reiterated that theme with a speech the same day as the minutes were released. Most importantly, she provided us with her null hypothesis:

                                                                                  First, real GDP growth currently appears to be quite strong, but there is good reason to expect it to slow to around its potential rate as the year progresses. If it does, the degree of slack should remain within range of full employment and have little effect on inflation going forward. Although inflation is in the upper portion of my comfort zone, it appears to be well contained at present, and my best guess for the future is that it will remain well contained…Moreover, this desirable trajectory appears to be within reach at a time when the Fed's key policy interest rate—the federal funds rate—is close to a neutral stance, one that neither stimulates the economy nor restrains it.

                                                                                  She also explains how incoming data will affect the path of policy:

                                                                                  This phrase—"policy will be data dependent"—is all the rage right now in policy circles, but I think it's worth a moment to clarify what I mean when I use it. To me, it means that we should interpret the implications of incoming data for our forecast and evaluate whether resulting changes in the forecast call for a change in the policy path.

                                                                                  In other words, data should be read as to whether or not it changes the Fed’s view of output or inflation in the second half of this year.

                                                                                  But, the best laid plans of mice and men are so often unraveled by those small details. OK, perhaps not that small – markets were whipsawed by an ugly CPI report for March. FOMC hawks probably said a collective “I told you so.” For a minute by minute look at the fed funds action last week, you absolutely need to head to macroblog. Maybe inflation isn’t under control after all?

                                                                                  The CPI report itself, in my opinion, put the June rate hike back in play. And the surging oil prices further raises the stakes. I can confidently say that neither event was expected by the Fed. If they were expected, Yellen would not have gone out of her way to reinforce the minutes. All things considered, I would not be surprised to see upcoming Fedspeak sound more hawkish than the most recent minutes. And if the next CPI report supports the contention that the inflation is on a higher potential than previously thought, we will move from “possibility” to “probability” on a June rate hike.

                                                                                  The case for a June hike will be further supported if consumer spending looks to be holding steady, rather than easing back as the FOMC expects. The fate of consumer spending, however, depends on the path of income growth. Recall the close correlation between real personal consumption expenditures growth and real disposable income growth:

                                                                                  The two sharp deviations between the growth rates, in 1999-2000 and from roughly January 2005 onward, reflected the impact of rising energy costs. Arguably, households saw these episodes as temporary phenomena. Rather than adjusting spending growth downward, they held maintained spending patterns and drew down the saving rate (these periods often reflect the two sharp slides in saving rates).

                                                                                  Presumably, with saving rates hovering just south of zero and higher interest rates putting pressure on the ability/willingness to borrow, households will be looking to resolve this gap by adjusting spending downward (which makes them unhappy), or seeking additional wage compensation. The Fed appears to be expecting the former, that households will pull spending growth back in line with income growth. Alternatively, and just as well, that the gap closes due to productivity induced income growth.

                                                                                  But buying stuff is fun! And what good is a real wage increase if it can’t be matched by a real spending increase? Saving is boring. These, of course, are just alternative ways to reiterate that betting against the consumer is a dangerous play. Given that “resource utilization” gaps have closed, workers may be more eager to seek higher wages in the face of rising energy costs than we have seen in the last few years.

                                                                                  This latter scenario is not what the Fed is expecting, of course. Again, if they were expecting it, they would not be so eager to announce the end of the rate hike cycle is near. But the CPI report, with its jump in core inflation, and the fresh gains in energy prices will reinforce the positions of the FOMC’s more hawkish members while challenging the doves to revisit their outlook for the second half of the year.

                                                                                    Posted by on Sunday, April 23, 2006 at 11:11 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (14)


                                                                                    Does Fox News Change Votes?

                                                                                    Does Fox news affect voting behavior? In August Alan Krueger, writing in his New York Times Economic Scene column, said:

                                                                                    A new study by Stefano DellaVigna ... and Ethan Kaplan ... ask[s] whether the advent of the Fox News Channel ... affected voter behavior. They found that Fox had no detectable effect on which party people voted for, or whether they voted at all. … Thus, the introduction of Fox news did not appear to have increased the percentage of people voting for the Republican presidential candidate. A similar finding emerged for Congressional and senatorial elections...

                                                                                    But Chris Dillow at Stumbling and Mumbling finds an updated version of the paper that comes to a different conclusion. Chris says "I find this new NBER paper depressing." Here's the abstract of the paper (an earlier version is included below for comaprison):

                                                                                    Continue reading "Does Fox News Change Votes?" »

                                                                                      Posted by on Sunday, April 23, 2006 at 10:43 AM in Economics, Politics | Permalink  TrackBack (1)  Comments (2)


                                                                                      The Real McCain?

                                                                                      Paul Krugman says John McCain is not a moderate:

                                                                                      It's time for some straight talk about John McCain. He isn't a moderate. He's much less of a maverick than you'd think. And he isn't the straight talker he claims to be.

                                                                                      Last week, Jonathan Chait disagreed with the claim McCain isn't a moderate, though he agrees McCain is not a "straight talker":

                                                                                      Continue reading "The Real McCain?" »

                                                                                        Posted by on Sunday, April 23, 2006 at 08:27 AM in Economics, Politics | Permalink  TrackBack (1)  Comments (2)


                                                                                        Saturday, April 22, 2006

                                                                                        Myths and Realities of American Political Geography

                                                                                        Here's an interesting paper by Edward Glaeser and Bryce Ward on myths and realities regarding changing political geography over time in the U.S. and the validity of the "red state/blue state" paradigm:

                                                                                        Myths and Realities of American Political Geography, by Edward L. Glaeser and Bryce A. Ward, NBER WP No. 11857, December 2005 [free link to paper] Introduction In the aftermath of the 2000 election, David Brooks wrote in the Atlantic Monthly that America was split into red states and blue states. In red states, people believed in God, watched NASCAR and voted for George W. Bush. In blue states, people ate Thai food, cared about the environment and voted for Albert Gore. The 2004 election, which seemed geographically to be a replay of 2000, only reinforced the perceived value of this framework. Only three states (Iowa, New Hampshire and New Mexico) switched parties between the elections.

                                                                                        In this essay, we revisit America’s political geography and ask what is true and false about the “red state/blue state” framework. We begin by identifying five myths associated with this framework: 1) America is divided into two politically homogenous regions; 2) The two parties are more spatially segregated than in the past; 3) America’s political geography is more stable than in the past; 4) America’s cultural divisions are increasing and 5) America is becoming more politically polarized.

                                                                                        But despite the myths surrounding the red state/blue state paradigm, there are two important truths captured by this framework. America is a country with remarkable geographic diversity in its habits and beliefs. People in different states have wildly different views about religion, homosexuality, AIDS, military policy and wildly different consumption patterns. The distribution of states along all dimensions is continuous, not bimodal.... Moreover, America’s ideological diversity is not particularly new. ... The extent and permanence of cultural divisions across space is one of America’s most remarkable features. While spatial sorting on the basis of income or tastes may seem natural to most economists, the remarkable spatial heterogeneity of beliefs – political and otherwise – presents more of a challenge to the standard Bayesian models of belief formation. For example, in the April 2004, CBS/New York Times poll, twenty-three percent of respondents in Oregon, Washington and California thought that Saddam Hussein was personally involved in the September 11, 2001, attacks. Forty-seven percent of respondents in Texas, Oklahoma and Arkansas had that view. In the 1987-2003 PEW Values surveys, 56 percent of Mississippi residents think that AIDS is God’s punishment for immoral sexual behavior. Only 16 percent of Rhode Island residents share that view.

                                                                                        Using state and county level regressions, we explore a number of different hypotheses about the long run historical causes of differences in beliefs over space. We find little support these cultural differences represent long-standing differences in religiosity or the legacy of slavery.

                                                                                        Instead, our regressions support the idea that Blue State culture reflects primarily the legacy of different ethnicities working together at high densities: the most important historical explanatory variables are the share of the labor force in manufacturing in 1920 and the share of the population that was foreign born in 1920 strongly predict liberal beliefs and voting for John Kerry. ...

                                                                                        The second important truth captured by the red state/blue state framework is that political parties and politicians have had an increasing tendency to divide on cultural and religious issues rather than on economic differences. Again, in historical perspective, cultural politics is not unusual. In the late 19th century, “Rum, Romanism and rebellion” were the core issues that determined the Republican Party. The true aberration was the midtwentieth century era of economic politics...

                                                                                        Here are a few graphs and tables from the paper (click on figures for larger pop-ups):

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                                                                                          Posted by on Saturday, April 22, 2006 at 07:20 PM in Academic Papers, Economics, Politics | Permalink  TrackBack (0)  Comments (7)


                                                                                          The Value of Getting Elected

                                                                                          Why is it that after politicians are elected the value of stock in companies they control rises? What are people expecting will happen?:

                                                                                          Are Rich Politicians Selfless Politicians? by Daniel Altman, Economic View, NY Times: ...Mara Faccio, an assistant professor of management at Vanderbilt University, looked at the cases of 109 capitalists and entrepreneurs who were elected to political office in 47 countries. She chose politicians in two categories: those who owned at least 10 percent of the shares of a publicly traded company (which many economists consider a controlling interest), and those who had been chief executive, president or vice president of such a company.

                                                                                          In a paper published in March in The American Economic Review, Ms. Faccio reported that the politicians' companies experienced a 2.3 percent increase in their share prices, on average, around the time of their electoral victories. If a politician entered the executive branch of government, the effect was larger — up to a 12 percent lift for companies associated with new presidents, prime ministers and other top officials. "The results suggest that the politician is acting in the interest of the company," Ms. Faccio said in an interview by telephone. "And the effects were much larger in countries with high corruption." ...

                                                                                          There could be a celebrity effect. If I own a restaurant and become president, maybe more people want to eat there and profits rise. But the variation across countries according to corruption suggests other forces are at work. The paper lists "preferential treatment by government owned enterprises (such as banks or raw material producers), lighter taxation, preferential treatment in competition for government contracts, relaxed regulatory oversight of the company in question or stiffer regulatory oversight of its rivals, and many other forms" as potential reasons for the change in the value of the stock. The NY Times article also discusses whether wealthier politicians are more independent but does not reach any definitive conclusions.

                                                                                            Posted by on Saturday, April 22, 2006 at 05:32 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (1)


                                                                                            Are Unemployment and Capacity Utilization Measures Irrelevant for Monetary Policy?

                                                                                            John Tamny writing in the NRO Online says:

                                                                                            ...inflation is a monetary phenomenon that occurs exclusive of economic growth...

                                                                                            This is wrong. When money grows at the rate of economic growth, all else equal, it is not inflationary. The reason is simple. Money is needed for transactions. As the economy grows, we buy more stuff so we demand more money. Supplying money to meet that extra demand is not inflationary - the money supply can grow at the rate of output growth without inflation. See Nouriel Roubini and David Backus and their derivation of the equation (inflation = money growth - output growth) and discussion of Friedman's money growth rule for more. It is true that an increase in money growth increases inflation one to one if output growth is unaffected and I think this is what Tamny has in mind. But as Roubini and Backus note:

                                                                                            As Milton Friedman put it: "Inflation is always and everywhere a monetary phenomena." It's only after you think about that sentence for a while that you realize it's not as informative as it first sounds.

                                                                                            I don't particularly care for Tamny's analysis either where it is argued that globalization makes measures of capacity utilization and unemployment irrelevant for monetary policy decisions. The article does not distinguish between excess domestic capacity, e.g. restarting an existing factory in the U.S., and building a new factory in in the U.S. or a foreign country. In one case, production can be brought online fairly quickly, in the other there are substantial time lags. There is really no thought given to concepts of the short, medium, and long run and how that might differentially affect inflationary pressures, e.g.:

                                                                                            Domestically, it has to be remembered that as opposed to being static, capacity is ever changing. Be it through the expansion of existing plants, the introduction of robotics, or innovation that expands output from existing facilities, capacity is a fluid concept that should not be measured in terms of the here and now. ...

                                                                                            Regarding capacity utilization and assumptions about U.S. companies reaching arbitrary limits, it should be remembered that ... U.S. companies ... access the world for capacity, making any domestic capacity measures irrelevant.

                                                                                            When there is excess demand and there is no excess capacity remaining, the fact that factories can be built, expanded, or modernized either in the U.S. or in foreign countries does not mean there will be no upward pressure on prices in the interim and the Fed needs to account for this as it sets policy.

                                                                                            If there is instantly accessible excess world capacity, it would be true that excess demand would not be inflationary, but that isn't the case. There aren't modern but idle factories in China and India or other countries that can be opened instantly once firms serving U.S. markets begin to affected by capacity constraints. It takes time to move or start production offshore and in the meantime, excess demand will be reconciled by rising prices. Even if there are idle foreign factories, supply chains to the U.S. are not as easy to restart as for domestic firms with excess capacity. So, while unskilled labor is abundant in the world:

                                                                                            Indeed, with the continued penetration of 100 million-plus workers from the former Soviet Union, China, and India into the labor force, the notion of coming labor shortages seems pretty farfetched. ... The developed economies of the world will surely access these additions to the labor force, making the point about tight labor markets in any one part of the world moot.

                                                                                            Just having lots of labor isn't enough. Labor must have the proper skills for the particular production activity undertaken and the factories, management, etc. all have to planned and put into place before production is possible. In the meantime, prices must rise to temper excess demand.

                                                                                            It may be true that the long-run response of the world economy to excess demand is faster than it once was due to globalization and that may affect the degree to which the Fed will want to tighten to avoid inflation as measured by a standard medium run target. But adjustment is by no means instantaneous - it still takes substantial time to alter the global mix of production. Thus, even with globalization, inflation can arise in response to excess demand in the short and medium runs as the global economy responds to the demand shock, and measures of domestic capacity utilization and unemployment remain important signals for monetary policy makers regarding the existence of potential inflationary pressures.

                                                                                              Posted by on Saturday, April 22, 2006 at 01:52 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (24)


                                                                                              Revisiting the Beveridge Curve

                                                                                              This Economic Letter from the San Francisco Fed uses the Beveridge curve relating vacancy and unemployment rates to examine how the efficiency of job matching has changed through time. The research finds that "...the speed and effectiveness of the job-matching process deteriorated in the 1970s through the early 1980s and then improved" with the onset of the great moderation in the mid-1980s due, perhaps, to a decline in the geographic mismatch of jobs and workers1:

                                                                                              Job Matching: Evidence from the Beveridge Curve, by Rob Valletta and Jaclyn Hodges, Economic Letter, San Francisco Fed: Conditions in labor markets are largely reflected in the number of jobs employers want to fill (job vacancies) and the number of people seeking jobs (the unemployed). Over the business cycle, for example, job vacancy rates and unemployment rates generally exhibit negative co-movement, with high vacancies and low unemployment when the economy is growing and vice versa when the economy is contracting. Beyond that short-run relationship, ... positive co-movement of the vacancy and unemployment series over longer time periods reflects changes in the speed and effectiveness of job matching.... When the job-matching process is slow, perhaps due to changes in the amount of necessary job reallocation across geographic regions or industries, both unemployment and vacancies can coexist at high levels, representing underutilized labor resources.

                                                                                              This Economic Letter examines the evidence on long-term shifts in the speed and efficiency of job matching in U.S. labor markets by using the so-called Beveridge curve. The Beveridge curve is an empirical measure of the relationship between the job vacancy rate and the unemployment rate. Changes in the job-matching process suggested by movements in the Beveridge curve ... have not been extensively analyzed... In this Economic Letter, we utilize new data from the U.S. Bureau of Labor Statistics (BLS) to construct a long-term vacancy series and corresponding estimates of the Beveridge curve. We find that declining dispersion of economic growth across geographic regions helps explain improvements in the job-matching process since the mid-1980s and reinforces existing depictions of improved performance of the U.S. aggregate labor market in the 1990s (for example, Katz and Krueger 1999).

                                                                                              Forming the empirical Beveridge curve

                                                                                              ...Figure 1 displays the U.S. Beveridge curve based on the ... vacancy rate series and age-adjusted unemployment rate series for selected periods between 1960 and 2005.

                                                                                              The Beveridge curves in this figure exhibit a typical counterclockwise adjustment pattern around recessions (1960-61, 1981-82, and 2001), as vacancies rise more quickly than unemployment falls during the recovery phase. The outward shift in the Beveridge curve between the periods 1960-69 and 1979-85, as identified by Abraham (1987), is clearly evident, as is a substantial inward shift between 1979-85 and 2000-05. This pattern suggests that the speed and effectiveness of the job-matching process deteriorated in the 1970s through the early 1980s and then improved.

                                                                                              Regional mismatch

                                                                                              One leading explanation for these movements in the Beveridge curve is changes in the dispersion of employment growth across regions.

                                                                                              Continue reading "Revisiting the Beveridge Curve" »

                                                                                                Posted by on Saturday, April 22, 2006 at 02:34 AM in Economics, Methodology, Unemployment | Permalink  TrackBack (0)  Comments (4)


                                                                                                Intelligently Designed Clues Point to Evolution

                                                                                                The intelligent designers were really good at hiding signs of their participation in creation. To throw us off track, they left all sorts of clues making it appear incontrovertible that humans had evolved over millions years:

                                                                                                Evolution's case evolves, by Ann Gibbons, Commentary, LA Times: It's been a tough month for creationists. On April 6, evolutionary biologists announced the discovery of a fossil of Tiktaalik roseae, a giant fish whose fins were evolving into limbs when it died 375 million years ago. This scaly creature of the sea was in transition to becoming a land animal, the discoverers wrote in Nature.

                                                                                                A day later, molecular biologists reported in Science that they had traced the origin of a key stress hormone, found in humans and all vertebrates, back 450 million years to a primitive gene that arose before animals emerged from oceans onto land.

                                                                                                Both teams of scientists stressed that their findings contradicted creationists — and demonstrated how small, incremental steps over millions of years could indeed produce complex life... But even as they were touting their results as yet another validation of Charles Darwin's theory of evolution, biochemist Michael Behe, a leading advocate of "intelligent design," dismissed the hormone discovery as "piddling."

                                                                                                As if in response to Behe's challenge, paleoanthropologists raised the stakes last week ... In the journal Nature, a team of researchers ... found an "intermediate" member of the human family that they say unambiguously fills the gap in the fossil record between two early types of human ancestors. Australopithecus anamensis was a creature the size of an orangutan that walked upright in the Rift Valley of eastern Africa about 4 million years ago...

                                                                                                The team found the species in a mile-deep stack of sediment in northeastern Ethiopia, which has become the Comstock Lode of human evolution. Across 11 separate layers, researchers unearthed several types of early human ancestors, with the anamensis bones sandwiched between layers containing two other species — Australopithecus afarensis, the species whose most famous member was the diminutive skeleton Lucy that lived 3.2 million years ago; and the 4.4-million-year-old Ardipithecus ramidus. ...When researchers compared the teeth and bones of these various human ancestors, they saw a clear path from primitive to modern. ...

                                                                                                  Posted by on Saturday, April 22, 2006 at 01:32 AM in Science | Permalink  TrackBack (0)  Comments (2)


                                                                                                  Time for a Trade?

                                                                                                  I don't know anything about Susan Schwab, the administration's choice to replace Rob Portman as U.S. trade representative, but the New York Times has a definite opinion:

                                                                                                  So much for those trade talks, Editorial, The New York Times: A good U.S. trade representative needs two things. As the quarterback of America's efforts to break down trade barriers, he or she must command respect abroad. Robert Zoellick and Charlene Barshefsky did well on that count when holding down the job.

                                                                                                  The other important quality is access to the president. If other countries know that the U.S. trade representative has the political ear of the president and the often cranky Congress, they are more likely to bargain in good faith... Mickey Kantor was a close political pal of President Bill Clinton, which helped make up for the fact that he came to the job without much trade experience. Ditto for Rob Portman, the job's present occupant.

                                                                                                  Decent U.S. trade representatives can make do with one of the two qualities. ... Susan Schwab, the woman Bush has nominated to succeed Portman, has neither asset. That lack does not bode well for the crucial trade talks that are now under way at the WTO.

                                                                                                  Schwab is a competent technocrat. She spent some time in academia, and was on the staff of John Danforth when he was a Missouri senator. She joined the Bush administration last year as a deputy at the trade office. She doesn't have Portman's congressional credentials, or Kantor's access to the president. Nor does she have Barshefsky's trade reputation or Zoellick's international clout.

                                                                                                  She takes the job at a time when global trade talks to reduce agricultural subsidies are floundering. Her appointment has given Peter Mandelson, the European Union trade chief who looks for every excuse he can find to avoid ending Europe's odious farm subsidies, the perfect out: He can blame his paralysis on America for changing quarterbacks in the middle of the game. In the end, the most important byproduct of Bush's much-discussed White House shake-up may be the torpedoing of any real progress in these critical trade negotiations.

                                                                                                    Posted by on Saturday, April 22, 2006 at 01:23 AM in Economics, International Trade, Politics | Permalink  TrackBack (1)  Comments (7)


                                                                                                    The Price of Silence

                                                                                                    This commentary explains that bribery by publishers of scandal sheets is nothing new. It also suggests that if you are going to bribe people by threatening to publish scandalous stories about them, be sure to mind your manners:

                                                                                                    New York's school for scandal sheets, by Mark Caldwell, Commentary, IHT: A lot has been said lately about Jared Paul Stern, the contributor to The New York Post's Page Six gossip column who is accused of trying to extract $100,000 or so from a billionaire. Something that hasn't been mentioned, though, is how relatively puny his alleged misdeeds are when considered against the history of New York journalism. ...

                                                                                                    Consider the 1840s, when New Yorkers buried their noses in a series of short-lived scandal sheets with names like The Weekly Rake. Their items were juicy, and their intentions were purely larcenous. An example from an 1842 Rake: "Is there a man in town that requested another to shave his legs? Why did he make such a strange request??"

                                                                                                    This wouldn't make news today, but it did then, and The Rake was after more than dirt. "We have received a detail of the whole affair," the item continued. "Shall we publish it??" Bald-faced blackmail, surely, ... clearly intended to propel the victim posthaste on his hairless legs to the office, cash in hand.

                                                                                                    Then there's Colonel William d'Alton Mann... In 1891, after fighting at Gettysburg, ... he moved to New York and took over a weekly, Town Topics. With all the excess of the Gilded-Age robber baron, he turned it into a scandal sheet of a brazenness never equaled since.

                                                                                                    Mann built a network of paid spies - disgruntled servants, musicians who played at balls for the rich and famous. They bore tales of flea infestations at the Metropolitan Opera; drunken dowagers; a young Alice Roosevelt drinking and listening to dirty jokes.

                                                                                                    Sometimes names were included, but for truly awful revelations, Mann concocted a new kind of item. It reported binges, adulteries and brawls in lavish detail, but without identifying the participants. Then, immediately following, a short item announced a harmless wedding, a dinner or a seasonal move to the country - naming the participants in the outrage just reported.

                                                                                                    This delighted readers in the know, fended off libel prosecutions - and enabled Mann to engineer a huge blackmail scheme. Whenever something particularly explosive sailed over the transom, he dispatched an agent, who confronted the guilty with proof of their misdeeds and gave them a choice: Mann wouldn't publish the article if they paid in cash, bought ads in Town Topics or invested in its junk stock.

                                                                                                    The humiliation wasn't over, though. Paid off, Mann replaced the canceled takedown with coverage so boot-lickingly adulatory as to be tantamount to a public receipt for hush money. ... Mann acquired a Manhattan brownstone, a mansion in New Jersey, and an island in the Adirondacks (the best that Stern's critics have been able to dig up thus far is a nice wardrobe and a modest-looking house in the Catskills). The New York elite loathed Mann...

                                                                                                    Nothing could stop him, it seemed, until he ran up against the young Emily Post, years before she became the nation's etiquette doyenne. Post's husband, Edwin, had a chorus girl as his mistress. When Mann's inevitable agent showed up to apply the screws, Edwin apparently decided Emily was scarier than the colonel, and told her the truth.

                                                                                                    Unfazed, she sent him to the district attorney, who set up a sting and arrested the agent... The ensuing press frenzy lasted nearly a year, ending in a sensational 1906 perjury trial, throughout which the colonel remained coolly defiant.

                                                                                                    Acquitted, Mann went back to a somewhat chastened Town Topics. His trial was a watershed; blackmail and extortion became an occasional sideline rather than the gossip industry's raison d'etre. Even the great tabloid wars of the 1920s and 30s, between The Daily News and Hearst's Daily Mirror, observed rules of decorum at which Mann in his heyday would have sneered. ...

                                                                                                      Posted by on Saturday, April 22, 2006 at 01:19 AM in Economics | Permalink  TrackBack (0)  Comments (0)